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International Trade Procedures and Documentation

Notes take necessary precautions to minimize their risks associated with particular trade transactions
through careful planning and execution.
The major function performed by Incoterms is to clarify that costs and risks are split between the
exporter or consignor and importer or consignee in a mutually agreed manner by providing the
clarity of financial implications involved in trade deal to both the parties and the same shall be
included in international sales contract to provide it a legal sanctity for future purposes.

Did u know? The process for evaluation of such incoterms dates back to 1936 when the
International Chamber of Commerce conceived the first version of Incoterms for facilitating
international trade. Since then, there have been six revisions of Incoterms and the current
version being used is Incoterms 2000, revised, updated and published in year 2000. Such
revision and updating has taken place in 1953, 1967, 1976, 1980, 1990 and the current
version is 2000. The current version of Incoterms has come into force on 1 January 2000.

2.2.1 Purpose and Scope of Incoterms

The main purposes served by incoterms are:

1. Clarity in interpretation of trade terms and rules: Incoterms are globally recognized and
their interpretation provides an important understanding to the trader intending to get
started in international trade in this era of liberalisation, globalisation, privatisation and
marketisation. Both the exporter and importer are clear about their responsibilities and
obligations with regard to international trade transactions and know the financial
implications of the trade deal.
2. Minimisation of losses: Due to the clarity provided by the Incoterms, international trade
disputes are fewer. It also reduces the transactional cost of international trade, providing
a well-defined mechanism of the responsibilities and obligations. Uncertainties due to
different interpretations of such trade terms in various countries can be avoided or can be
reduced by considerable degree by use of incoterms.

3. Base of contract of sale: Incoterms used in trade deal are the base of that deal. Although;
some people misinterpret it as the base of contract of carriage only but incoterms have
wider connotations with regards to various aspects of trade deals. Their scope is not
limited only to clarify the responsibilities and obligations with respect to carriage or
transport of goods. They help in not only deciding the export price to be offered in
quotation but also in explaining other responsibilities and obligations of exporters and
importers with regard to arrangement of insurance, mode of shipment, customs and
excise clearance, payments of duties, etc. This is the main reason that the International
Chamber of Commerce has clearly underlined and explained that incoterms deal with the
relationship between the exporter and importer in contract of sales and that too in a very
distinct manner.
Incoterms being the base of international sales contract; also help in contracts of carriage
for delivering the goods to the buyers, arranging the insurance for goods and financing
for the exporter. Banks calculate the finances (working capital) required for manufacturing
the goods for trade deal and exclude the amount to be used on transportation, insurance,
duty payment, etc. as incoterms such as DDP may have higher export price quotation due
to various duties and obligations to be performed by the exporter.

4. Documentary evidence: Let us assume the exporter and importer have agreed to the use of
CFR or CIF-based international sales contract. The exporter has problem in sending the
goods via any other means of transport except by ocean transport. If the exporter sends

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