Freight transportation inside the UAE is easy because the seven Emirates are connected and can be traveled smoothly. However, delivering items from the other side of the world, such as China or the United States, might be complicated since not everything about the regulations is entirely clear. Like who would be responsible for what. That is why international trade rules, known as Incoterms, are established. These terms help avoid misinterpretations caused by different national laws, trade conventions, and terminology.
Before engaging in any overseas business deal or signing any international shipment contract for shipping your products to/from the UAE, you should be familiar with the Incoterms. Incoterms govern the responsibilities of both the exporter and the importer. Understanding them helps prevent potential mistakes and even legal issues.
What are Incoterms?
Incoterms are a collection of terminology that control international trade by describing commercial transactions between an exporter and an importer. The International Chamber of Commerce (ICC) established the Incoterms in 1936 to offer a more efficient regulatory structure.
There are 11 international trade terms that apply to all countries. Each includes instructions on risk transfer, the delivery location, and the paperwork, and establishes who is responsible for paying the shipping and insurance costs, the seller or the buyer of the Cargo. It might seem difficult at the beginning. However, after our simple categorization of the International trade terms, you will get a solid knowledge of the Incoterms and their importance in Emirati businesses.
All Incoterms - Simplified
There are four groups of Incoterms: C, D, E, and F. Each rule defines the liabilities, risks, and expenses of cargo transit between the seller and the buyer. We donate terms by a three-letter phrase. We list them below:
Group E (Terms corresponding: EXW)
Ex Works (EXW): The incoterm EXW implies the least responsibility of the seller. It states that the buyer must pick up products at the seller's location in the country of dispatch (factory, warehouse, etc.) The buyer assumes responsibility for the cargo as soon as the products are loaded into the cargo vehicle. As a result, the buyer bears all costs and risks from the seller’s location to the buyer’s location, including customs and loading. If the buyer wants the seller to take other actions, this must be stated in the contract of sale of goods.
Group D (Terms corresponding: DDP, DAP, DPU)
Unlike Group E, the shipper/seller of the items is liable for costs and risks in Group D of terms, which refers to delivery. The seller must bear all expenditures and accept responsibility for risks during the full delivery process - until the products are delivered to the designated location in the country of import.
Delivered Duty Paid (DDP): The seller assures delivery of the items to the buyer's country's destination at an agreed-upon location or point in the importing country. The sender of the goods is also liable for customs procedures and tax payments. Thus, DDP assumes the responsibility of the seller for the whole shipment, including cargo preparation for loading, cargo damage, and formalities. But the seller is not required to unload the products. Once the goods arrive at the buyer's selected destination. The buyer's responsibilities then begin.
Delivery at Place Unloaded (DPU): This Incoterm, denotes that the seller is responsible for unloading and delivering the goods to the terminal or unloading location. Until the items are handed over at the buyer's chosen location, the seller is liable for all risks and costs. Customs procedures and taxes, on the other hand, remain the buyer's duty.
Delivered at Place (DAP): The seller's role in a DAP agreement is to deliver the items to a pre-agreed-upon location, incurring all risk and covering all transportation expenses. the buyer is liable for import customs procedures and other fees. Also, unloading is the buyer's responsibility. As a result, the exporter is not liable for the goods throughout the unloading procedure.
In summary, the seller who delivers does not unload cargo in DAP and DDP, but the seller unloads freight in DPU. The buyer who imports clear customs in DAP and DPU, whilst the seller clears customs in DDP.
Group F (Terms corresponding: FCA, FAS, FOB)
According to the agreements, the seller must supply the products for transportation in line with the buyer's instructions. The seller bears all expenses and risks until the products are shipped from the port of export. After that, the responsibility is assumed by the recipient of the goods.
Free Alongside Ship (FAS): The seller should deliver the cargo to the shipping port chosen by the buyer. Until the goods are delivered to the ship, the seller bears responsibility and pays all costs. The buyer is responsible for export and import customs procedures. Once the goods have been delivered and unloaded at the ship, the risk is transferred from the supplier to the buyer.
Free On Board (FOB): The seller must go one step farther than FAS with the FOB incoterm and ensure that the items are loaded onto the ship that the buyer specifies in the contract. The seller's risk is over once the goods are on board the ship. The seller pays for local transportation to the port of loading, and the export customs formalities. The buyer is responsible for both international and local shipping in the country of import.
Free Carrier (FCA): The seller is responsible for export clearance and delivery of goods to the carrier at the stated site of delivery under FCA Incoterms. If the cargo is damaged or lost before the items are delivered, the seller is liable. the risk transfers to the buyer When the cargo is handed to the carrier.
Group C (Terms corresponding: CFR, CIF, CPT, CIP)
In contrast to group F, in Group C, the seller has responsibility for additional costs—up to the port located in the country of import. But, risk duty is taken by the recipient; Except for CIF and CIP agreements, the seller must insure the goods.
Carriage Paid To (CPT): In the Carriage Paid To (CPT) incoterm, the exporter is responsible for all charges up to a predetermined point, such as a warehouse, airport, or port terminal. the seller bears the cost of shipping and is not responsible for the cargo insurance or safety. The risk is transferred when the items are delivered to the carrier, another responsible person, or a warehouse selected by the carrier.
Cost and Freight (CFR): The sender of the goods bears all transportation costs to the port of entry into the country of import. The seller pays for export customs procedures. The recipient pays for the local transportation in his country to transfer the cargo from the destination port to the appropriate delivery point. Insurance is the buyer's responsibility. When the seller delivers the items onboard the ship, the risk is transferred from the seller to the buyer.
Carrier and Insurance Paid To (CIP): The seller's responsibility is to clear the items and deliver them to a predetermined location while covering delivery fees. Unlike CER, the seller pays for cargo insurance costs until the goods arrive at the destination port or another delivery location specified in the contract. The exporter must provide cargo insurance. The risk transfers to the buyer When the goods arrive at the designated location and are ready for unloading.
Cost, Insurance, and Freight (CIF): CIF and CIP Incoterms are similar, with the exception that CIP is used for all modes of transportation, whereas CIF is exclusively used for marine freight. This also implies responsibility for CIF transfers to the buyer at the origin seaport from the time the cargo is on the ship, whereas responsibility for CIP transfers at the agreed-upon location in the origin country.
International trade may be done via different types of transportation, but sea transport is the most common mode. As a result, some of the terms are solely applicable to sea cargo. They are FAS, FOB, CFR, and CIF.
Why Using Incoterms is Advantageous for UAE Businesses?
We have discussed the Incoterms, risk transfer details, the delivery location, the paperwork, and who is responsible for paying the shipping and insurance costs. Now, let's look at why using Incoterms is advantageous for UAE businesses.
To begin with, one of the primary benefits of Incoterms agreements is their clarity. Incoterms are widely used in business contracts to guarantee that the conditions are interpreted consistently, saving time and money that might otherwise be lost due to misunderstandings.
In addition, they provide a convenient method for all businesses. The simple terminologies assist carriers and buyers in understanding different circumstances related to global shipments.
Furthermore, the incoterms help buyers and sellers determine who pays expenses at each stage of the shipment. Companies leverage this advantage to avoid misconceptions in different commercial transactions.
Which terms to use if you are located in Dubai?
The use of Incoterms depends on the concluded contract. In closing, carefully weigh your pros and cons for each term condition. The easiest condition for the seller is using EXW, while the most advantageous for the buyer is using DDP.
If you are asking what Incoterms are great for beginner importers in the UAE then the answer is DAT (Delivered at Terminal), DAP (Delivered at Place), and DDP (Delivered Duty Paid) are the best Incoterms for beginner importers.
Choose a reliable logistics partner to make safe deliveries and ensure the cost-effective transportation of your cargo to the required destination. The professional logistics specialists of Vervo Middle east always make sure you are in an advantageous position given your needs and requirements. Call us today to find the most suitable solutions and answer your questions.
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