Incoterms’ Impact on Cost

In international trade, navigating the complexities of shipping, customs, and costs can be daunting – understanding Incoterms’ impact on cost is next level. One critical aspect that significantly influences the final cost of imported goods is the choice of Incoterms, or International Commercial Terms. These globally recognized terms, established by the International Chamber of Commerce (ICC), delineate the responsibilities and obligations of buyers and sellers in international transactions.

The selection of an appropriate Incoterm not only affects the distribution of risk and responsibilities but also has a direct impact on the landed cost of the product. Let’s delve into how Incoterms can influence the overall landed cost:

What is an Incoterm? Incoterms define who is responsible for various costs incurred during the transportation and delivery of goods, such as freight, insurance, customs duties, and terminal handling charges. (Check out our Incoterms chart of responsibilities here). Each Incoterm specifies these responsibilities at different points along the supply chain, from the seller’s premises to the buyer’s designated location.

Impact on Landed Cost:

Incoterms have an impact on your actual landed cost, and therefore also your profit margins. Ultimately, it comes down to who is responsible for paying fro the services that will impact your landed cost. Some examples below:

• Freight and Insurance Costs: Incoterms such as Cost, Insurance, and Freight (CIF) and Cost and Freight (CFR) place the responsibility for freight and insurance costs on the seller until the goods reach the agreed-upon destination port. Consequently, buyers using these terms may have less direct control over their freight costs. They may have higher landed costs than if they were to use Ex Works (EXW) or Free Carrier (FCA) terms, for example, and they were to shop around for lower freight costs.
• Customs Duties and Taxes: Incoterms like Delivered Duty Paid (DDP) transfer maximum responsibility to the seller, including customs duties, taxes, and clearance fees in the buyer’s country. While this provides buyers with greater predictability in costs, it may result in a higher landed cost due to the seller’s inclusion of these expenses in the product price without strict oversight from the buyer.
• Transportation and Handling Charges: Incoterms dictate who bears the responsibility for transportation and terminal handling charges. Terms like Free on Board (FOB) require the seller to cover these costs until the goods are loaded onto the vessel. Sometimes they may be able to negotiate preferential rates at their home port with volume discounts, potentially reducing the landed cost for the buyer.

In an example, we supported a client who was quoting out multiple scenarios for heavy equipment being imported from Asia.

Selecting the Right Incoterm: Choosing the most suitable Incoterm requires careful consideration of factors such as the desired level of control, risk tolerance, and familiarity with local regulations. It’s essential to conduct thorough negotiations and clearly define the responsibilities and costs associated with each chosen term to avoid misunderstandings and unexpected expenses.

In summary, Incoterms play a pivotal role not only in defining responsibilities between the buyer and seller but also in determining the final landed cost of imported goods. By understanding the implications of each Incoterm on freight, insurance, customs duties, and handling charges, businesses can make informed decisions that optimize their supply chain efficiency and minimize costs. Therefore, selecting the right Incoterm is paramount for achieving the most cost-effective international trade transactions.

For further information on Incoterms and their impact on landed costs, businesses can refer to the official ICC publication on Incoterms or consult with trade experts well-versed in international trade regulations and practices. Understanding and leveraging Incoterms effectively can contribute significantly to the success and profitability of global trade ventures.