Cargo & supply chain insights
As global trade continues to shift in response to geopolitical tensions, volatile changes to tariffs and shifting economic policies, companies face growing complexity in managing tariff exposure, logistics responsibilities and insurance coverage across borders. These changing dynamics are creating risks to current global supply chain strategies.
A recurring point of confusion for importers, supply chain teams and even risk managers involves the intersection of Incoterms and tariffs. While Incoterms are essential for structuring international transactions, it’s important to understand that they do not explicitly address tariffs — but they do assign responsibility for them.
The importance of incoterms
Incoterms, published by the International Chamber of Commerce (ICC), are a set of globally recognized trade terms used in international contracts for the sale of goods. They clarify the responsibilities of buyers and sellers regarding costs, risks and other obligations related to transporting goods internationally.
Each Incoterm rule identifies the tasks, costs and risks to be borne by buyers and sellers in these transactions. While Incoterms address which party is responsible for transportation, risk of loss, insurance and customs clearance documentation throughout the journey of a shipment, they also imply responsibility for:
- Export and import customs clearance
- Duties, taxes and tariffs
- Cost allocation at each stage of the transaction
Incoterms do not specifically mention tariffs. However, they do address who is responsible for paying import duties, taxes and customs clearance, which are the processes through which tariffs are typically applied. Depending on the Incoterm selected, the importer or exporter may be liable for tariffs imposed by the destination country, including those related to preferential trade agreements, retaliatory duties, or sanctions.
In some jurisdictions, the duty costs and tariffs of the goods may be calculated against a specific Incoterm: for example, in India the duty is calculated against the CIF value of the goods, but in South Africa the duty is calculated against the FOB value of the goods.
How tariff responsibility varies across incoterms
Understanding the implications of each Incoterm is essential to managing tariff exposure. A few illustrative examples:
FOB (Free on Board) Port of Export
- Tariff Responsibility: Buyer
- Application: Common in Asia–EU or Asia–Americas trade lanes. The buyer handles customs and pays all duties at destination.
CIF (cost, insurance, freight) Destination Port
- Tariff Responsibility: Buyer
- Application: Often used for bulk commodities or raw materials. The seller handles transport and insurance, but the buyer handles all import-related charges.
DDP (Delivered Duty Paid) Buyer’s premises
- Tariff Responsibility: Seller
- Application: Frequently used in intra-regional trade (e.g., EU–K. post-Brexit). The seller assumes full responsibility for transport, insurance and import clearance, including all tariffs.
Tariff responsibility becomes a material risk factor when countries change rates unpredictably, as seen with the current tariff changes between the U.S. and China, EU carbon border taxes, ASEAN preference programs and retaliatory tariffs in U.S., India and Brazil markets.
The intercompany challenge
When goods move between affiliated entities across borders, such as a parent company shipping to a subsidiary, Incoterms and tariff responsibilities still apply. These are not just internal transfers from a regulatory or insurance perspective; they are treated as commercial transactions subject to:
- Customs valuation rules
- Transfer pricing regulations
- Insurance terms and insurable interest requirements
Best practices for intercompany transfers:
- Treat shipments as real commercial movements with proper invoices and declared values.
- Assign clear Incoterms to establish who handles tariffs, risk of loss and customs obligations.
- Align cargo insurance policies with intra-group shipping activity, including valuation clauses and named insureds.
- Coordinate with trade compliance and tax functions to ensure duties and VAT are accounted for correctly.
Without these controls, companies face risks ranging from customs penalties to uninsured losses or claim denials.
Insurance implications of tariff-linked risk
From a cargo insurance standpoint, how a tariff is treated in documentation can materially impact coverage and claim settlement. Considerations include:
- Valuation: Does your policy insure CIF + duty? Are tariffs included in declared value?
- Claim scenarios: Are duties and taxes recoverable if goods are damaged or lost prior to customs clearance?
- Named insureds: Are both the shipping and receiving entities covered, especially for intercompany trades?
Policies must be structured to reflect the real-world flow of goods and financial exposure, particularly in times of tariff volatility or high-tariff environments.
Practical guidance for risk and supply chain leaders
To manage tariff exposure effectively within global supply chains, companies should:
- Clearly define Incoterms in all trade agreements, including intercompany transfers.
- Ensure cargo insurance coverage reflects tariff-related costs, especially when duties are substantial or volatile.
- Align transfer pricing and customs documentation to withstand scrutiny from regulators.
- Review insurance program structures to ensure all entities and movements are captured globally.
- Coordinate cross-functionally among trade, tax, legal, logistics and risk teams.
Conclusion
Tariffs are a growing component of global trade risk, one that cuts across contractual structuring, financial exposure and insurability. Whether dealing with external suppliers or intra-group transactions, companies must ensure that their Incoterm selections, documentation practices and insurance policies work in harmony.
At Willis, we support clients in building globally integrated cargo and supply chain risk programs that anticipate and adapt to evolving trade dynamics. For help evaluating Incoterms, managing tariff risk, or structuring insurance coverage across jurisdictions, feel free to reach out to our Global Cargo Team.
