International commerce is a complex field. There are many factors to remember from recent issues like ghost shipments, which can compromise the security of goods, to administrative challenges such as language barriers, business responsibilities, and differences in legal frameworks. 

 

These latter issues can cause delays, misunderstandings, and even legal conflicts if not properly managed. Fortunately, there are tools to help prevent such problems, for example, Incoterms. 

 

If you’re unfamiliar with them, or if you do know them but can’t decide which is the right choice, then our next article is for you.

What are Incoterms? 

Whether it’s importation or exportation, both buyers and sellers must comply with a series of regulations and applications. This can take valuable time to navigate. 

 

That’s where Incoterms (International Commercial Terms) come in handy, as they set a common framework that helps all parties understand their responsibilities and avoid confusion.

 

How does this work? Well, Incoterms are a set of standardized trade acronyms that, with only three letters, define who is responsible for customs duties, transportation costs, who handles insurance, where the goods will be delivered, who is responsible if the goods are damaged, the type of transport involved, and other logistic activities. 

Types of Incoterms rules 

As of today, there are 11 Incoterms rules published by the International Chambers of Commerce (ICC), with the latest version released in 2020. We can divide them into two broad groups depending on the mode of transport involved:

For any transport 

These Incoterms can be used regardless of the mode of transport—land, air, sea, or a combination:

• EXW (Ex Works)
• FCA (Free Carrier)
• CPT (Carriage Paid To)
• CIP (Carriage and Insurance Paid To)
• DAP (Delivered at Place)
• DPU (Delivered at Place Unloaded)
• DDP (Delivered Duty Paid)

For sea and inland waterway transport

These are specifically designed for maritime trade, where goods are handed over at a port:

• FAS (Free Alongside Ship)
• FOB (Free On Board)
• CFR (Cost and Freight)
• CIF (Cost, Insurance and Freight)

 

Which Incoterm should you choose?

 

Now, using an Incoterm rule is not a legal requirement, but as your Mexican custom broker would advise you, it is highly recommended. 

 

Having a common language helps significantly reduce misunderstandings between parties. In the event of a dispute, it also makes it easier for authorities to interpret the terms of the agreement and determine responsibilities more objectively. 

 

So, which Incoterm should you choose? To guide your decision-making, consider the following questions:

1.- What type of goods are you planning to ship?

Size, value, sensitivity, and packaging may all affect transport responsibilities. For instance, if you plan to ship high-value goods, regardless of the mode of transport, using CIP (Carriage and Insurance Paid To) can be a smart choice.

This Incoterm requires the seller to provide insurance coverage, ensuring that if anything happens during the journey, the buyer is financially protected. 

If you plan to ship a small cargo with limited value, and you’re looking to minimize your responsibilities as a seller, you might consider using EXW (Ex Works).

In this case, the buyer assumes responsibility for the entire shipping process—from picking up the goods at the seller’s premises to handling transport, insurance, and customs procedures.

2.- Is this an import or an export operation?

Your role as buyer or seller will influence your obligations and, therefore, your decision on which Incoterms to use. 

 

For example, your custom brokers in Manzanillo might suggest FOB (Free On Board) if you’re familiar with local export procedures but want the buyer to take responsibility once the goods are loaded onto the vessel.

3.- What is your budget? 

Consider how much control you’re comfortable with and how much risk you’re willing to assume. A lower budget might lead you to choose terms where the other party handles most of the responsibilities, but this can also mean giving up control over key parts of the logistics process.

One of the most buyer-friendly options is DDP (Delivered Duty Paid). Under this rule, the seller takes care of export procedures, international shipping, import customs, duties, and final delivery to the buyer’s location. The buyer simply waits to receive the goods, making DDP perfect for those who want a hassle-free experience.

On the other hand, if you’re a seller looking to limit your responsibilities and shift logistics onto the buyer, FCA (Free Carrier) is your best option. The seller delivers the goods to the buyer’s designated carrier, and from there, the buyer takes over.

4.- How much do you trust your seller/buyer?

Trust plays a crucial role in choosing the right Incoterms. Ask yourself whether you’re comfortable assigning a large portion of the responsibilities, such as shipping, insurance, or customs clearance, to your business partner.

If you’re unsure about their reliability or experience, it may be safer to retain more control over the process. For instance, choosing Incoterms like EXW (Ex Works) or FCA (Free Carrier) guarantee that you take more responsibility for transportation and customs. 

On the other hand, if you have a trusted partner with proven logistics capabilities, choosing a term, such as DDP (Delivered Duty Paid) or CIP (Carriage and Insurance Paid To), could save you time and effort.

5.- Are there specific trade laws involved? 

Local laws or trade agreements may favor certain Incoterms depending on the region or type of product. It’s essential to consider them, as they could affect the cost structure, customs procedures, and responsibilities for both parties.

Let’s say, for example, that you’re shipping goods to or from countries within a trade agreement like the USMCA (United States-Mexico-Canada Agreement), CPT (Carriage Paid To), or CIF (Cost, Insurance, and Freight) may be more suitable due to favorable terms for freight and insurance coverage. 

But if you’re dealing with a more complex trade route or higher-risk goods, you might want to consider Incoterms that grant you control over transportation and risk management.

Trust your Mexican customs broker to find the best solutions for your business needs. For more information on import and export procedures, feel free to check out our website and blog.