Understanding Incoterms and Their Impact on International Trade
What Are Incoterms? Published by the International Chamber of Commerce (ICC), Incoterms define the responsibilities of buyers and sellers in international trade, including:
- Who bears costs
- Who bears risks
- Handling of documents
What Do Incoterms Not Cover? They do not represent a sales contract between a buyer and a supplier. For example, they do not cover pricing details, exact payment details, or details of quality.
Most Common Terms of Incoterms:
- EXW: Buyer takes full responsibility
- DDP: Seller takes full responsibility
Customs Procedures: These are official processes goods go through when crossing borders. Objectives include:
- Enforcing trade rules
- Collecting duties
- Ensuring product safety
TARIC is a multilingual, integrated tariff system used in the EU. When goods are imported into the EU, TARIC helps determine:
- What customs code to use (based on the Harmonized System)
- What duties/taxes apply
- What licensing or restrictions must be followed
Anti-Dumping: Refers to actions taken when a foreign company exports goods to another country at a price lower than their normal value—often below the cost of production or below what they charge in their home market. This is considered “dumping.” We can define an anti-dumping duty as a penalty imposed on suspiciously low-priced imports, to increase their price in the importing country and protect local industry from unfair competition.
Temporary Importation: Means that goods may be used in the community without payment of duty or VAT under certain conditions and re-exported afterward in the same state as they were in at import. The customs authorities may require an inventory supporting the declaration.
Harmonized System (HS): A system to classify and describe a product for all people and which tariffs are applied. Combined Nomenclature (CN) is the same but in Europe.
Rebus Sic Stantibus: A principle that allows a state to not fulfill its obligations in case of a fundamental change of circumstances.
Horizontal Merger: Two companies in the same industry and in the same stage of production (competitors). Reasons include:
- “Killing” your competitor
- Scale economies
- Increasing market share
- Territorial expansion
Examples include Google-YouTube and Facebook-Instagram.
Vertical Merger: Two companies in the same industry but at different stages of production. Client & Supplier. A forward merger is from raw to consumer to save the margin, while a backward merger is from consumer to raw to control the supply chain.
Concentric Merger: Two companies within the same industry but not direct competitors combine forces. You share clients, distributions, and moments of sale. For example, a golf seller of sticks and balls.
Conglomerate Merger: Buying companies in other sectors to diversify risk.
Three Ways Competition is Protected:
- Merger Control: There is authority that supervises, monitors, and decides if a merger can go ahead or not; it can be restricted or forbidden in Spain.
- Cartel Practices: Two companies that are supposed to be competing put agreements on the table (fixing prices, trying to eliminate another competitor, delaying certain investments).
- Abuse of Dominant Position.
Boilerplate Clause: Standard clauses in contracts, usually found at the end (e.g., governing law, confidentiality, force majeure). Not specific to one deal; reused frequently.
Abusive Clause: Unfair terms in contracts (especially adhesion/consumer contracts) that are not negotiated. If found abusive, the term is void and has no legal effect.
Duty to Disclose: In contract law, parties must share material facts with each other during negotiations. This is crucial in insurance, fiduciary contracts, or where the law requires it.
Due Diligence: General meaning: Reasonable precautions to avoid risks. Specific meaning: Investigating a business before transactions like mergers or acquisitions. This may be legal or voluntary.
Pacta Sunt Servanda: Latin for “Agreements must be kept.” In international law, treaties must be respected in good faith. In civil law, it means contracts bind the parties as law.
Prescription / Statute of Limitations: Legal time limit to bring a claim or prosecute an offense.
- Acquisitive: Gain property by long possession
- Extinctive: Lose the right to sue after a time
- Criminal: Liability or punishment expires over time
Preemptive Right: The right to buy something before others.
- General: Property, tenants, governments, etc.
- Company Law: Shareholders can buy new shares first to maintain ownership percentage.
Undue Influence: When one party unfairly pressures another into a contract.
- Actual: Must prove real threats or pressure
- Presumed: Power imbalance assumed unless proven otherwise (e.g., parent-child, lawyer-client)
Reshoring: Bringing business back to the home country.
Nearshoring: Moving business to nearby countries.
Friendshoring: Shifting to politically allied or trusted nations.
NDA (Non-Disclosure Agreement): A contract to protect confidential information shared between parties. It prevents unauthorized sharing or use of sensitive information.
Harmonized System (HS): A global system for classifying goods used by customs authorities. It determines duties and import/export requirements.
Combined Nomenclature (CN): The EU’s classification system based on the HS. It is used for tariffs and trade statistics.
Burden of Proof: The obligation to prove a fact in court.
- In criminal law, it’s on the prosecution.
- In civil law, usually on the party making a claim.
In Dubio Pro Reo: Latin for “When in doubt, for the accused.” A principle in criminal law: if guilt isn’t proven beyond doubt, the defendant must be acquitted.
Temporary Importation: Allows goods to enter a country without paying duties, provided they will be re-exported within a set period (e.g., for events, repairs, etc.).
Risk Analysis (Customs): Used by customs to identify risky shipments (e.g., fraud, smuggling). Low-risk goods move quickly; high-risk goods receive extra checks.
Anti-Dumping & Duties: When foreign products are sold below market value, harming local industry. Anti-dumping duties are extra taxes imposed to offset this unfair advantage.
Transit Procedure: A customs regime allowing goods to pass through one or more countries without paying duties until they reach the final destination.
Forum Shopping: A litigant’s practice of searching for the most favorable court to hear their case when several courts have concurrent jurisdiction over the matter.