Final answer:
Incoterms define the respective duties of sellers and buyers in international trade, including who is responsible for shipping, insurance, duties, and managing customs clearance, thus preventing misunderstandings and disputes.
Step-by-step explanation:
Incoterms, short for International Commercial Terms, are a set of rules published by the International Chamber of Commerce (ICC) that define the duties of sellers and buyers involved in international trade. These terms are recognized globally and are used to make terms of trade clear for both parties. Each Incoterm specifies the seller's and buyer's obligations, including who is responsible for the goods at each point of the delivery process, who pays for shipping, insurance, and tariffs, and who is responsible for managing customs clearance.
For example, under the FOB (Free On Board) term, the seller must load the goods onto the ship chosen by the buyer, clear the goods for export, and then the risk passes to the buyer once the goods are on board the vessel. In contrast, with the DDP (Delivered Duty Paid) term, the seller is responsible for delivering the goods all the way to a destination in the buyer's country, paying all import duties and taxes, and clearing the goods through customs. Therefore, Incoterms play a vital role in international trade by preventing misunderstandings and disputes about shipping responsibilities.