If you are active in the world of international trade, there is no avoiding the incoterms. The freight industry is governed by a voluntary yet authoritative set of rules known as the Incoterms. Anybody working in this industry will have come across this term at some point, but there is some ambiguity surrounding these rules.
While this term is used like a household name in the shipping industry, not many are aware of the comprehensiveness of Incoterms.
Understanding the exact implications of incoterms on global supply chains is important for importers, exporters and any company undertaking international trade alike. Getting Incoterms wrong can prove to be a very costly mistake to make, especially with them being updated every 10 years.
Incoterms 2020 explained
The International Chamber of Commerce (ICC) originally created and published Incoterms in 1936 to do away with differences in trading practices and legalities between traders around the world. The International Commercial Terms (Incoterms) are a set of standards that determine the responsibilities of buyers and sellers for the delivery of goods by all modes of transport. In simpler terms, the incoterms are the terms that both buyers and sellers agree upon when undertaking international or domestic trade.
The areas that incoterms touch upon are:
- The roles of buyers and sellers and what they have to do
- The costs buyers and sellers are responsible for
Incoterms are revised every 10 years by the ICC and it is advisable to adhere to the latest version for lesser misunderstandings i.e. incoterms 2020. They standardize many aspects of international trade and shipping.
Why are Incoterms 2020 crucial to international trade?
To avoid unnecessary complications during the shipment process, Incoterms serve as the holy grail for importers/exporters alike to refer to and maintain uniformity in operations.
- Incoterms 2020 are universally accepted and provide predictability to the business
- They guide sellers/buyers on how to initiate as well as close transactions and clarify any grey areas in the contract
- They provide clarity on all the updates and help the stakeholders to understand how they apply to global supply chains.
How are the incoterms devised?
It is no easy feat to be in charge of updating and maintaining the incoterms, which are no less than an international standard. This is done by the 13 ICC commissions that consist of experts from the private sector. According to the ICC, “The group is formed by experts from various nationalities chosen for their extraordinary contribution to international commercial law and to the International Chamber of Commerce along the years.”
What do incoterms not cover?
While Incoterms are widely accepted by governments and legal authorities around the world, it is important to note that they are not a replacement for a sale contract. They do not cover challenges and how to deal with them in some cases like:
- Transfer of ownership of goods
- Any breach of contract
- Price and method of payment in the transaction
- Specification of goods sold
- Product liability
Also, Incoterms cannot be used to override any mandatory laws. They are only one part of the whole export contract.
What has changed in Incoterms 2020?
In order to strengthen conditions to better protect parties involved in the trade, help them negotiate better deals and align with the latest changes in the freight industry, six key changes have been made as part of Incoterms 2020.
DAT has been changed to DPU
The most obvious change is shifting from Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU). This change was brought about by demands for delivery to take place at not just a terminal but also at a particular site, such as a factory.
Bill of Lading for FCA shipping
The most significant change is related to the FCA (Free Carrier) rule. It has been revised with a provision that allows the trading parties to agree that the buyer will instruct the ship to issue an on-board bill of lading to the seller once the goods are loaded. The seller will then share this document with the buyer, which satisfies the terms of a letter of credit.
Clear and precise allocation of costs
As opposed to listing costs between buyer/seller at different parts of each Incoterm rule, Incoterms 2020 has consolidated all the costs in one place. The purpose of this consolidation is to provide buyers and sellers with an exhaustive list of costs in one place. It provides greater clarity on cost allocations under article A9/B9 of the rules.
Enhanced security of cargo
Incoterms 2020 provides an expanded set of security obligations to better protect the shipments. Articles A4 for carriage, A7 for export/import clearance and A9/B9 for security-related cost allocations have been revised accordingly.
Revised terms of insurance requirements for CIF and CIP
Incoterms 2020 has been updated to provide different levels of insurance cover under CIP (Carriage and Insurance Paid) and CIF (Carriage Insurance and Freight). The CIP rule now states that a higher level of insurance cover that is compliant with the Institute Cargo Clauses (A) or similar clauses, must be given. Under CIF, which is used in sea trade, Institute Cargo Clauses (C) remains the default level of coverage but the parties involved can opt for a higher insurance cover if required.
Own transport arrangements can be used by seller/buyer
The previous version of incoterms, i.e. incoterms 2010, assumed that transportation of goods is taken care of by a third party. Incoterms 2020 recognizes other scenarios where the buyers/sellers may need to make use of their transport and allows for the buyer’s own means of transport under the FCA rule and the seller’s own means of transport under the DAP, DPU and DDP rules.
Which is best suited for you?
Selecting incorrect Incoterms for the purpose of trade and shipping of goods can result in confusion and costly delays.
If you’re new to the shipping industry, the jargon can seem like a foreign language. Talking to an expert will help you get a clear understanding of the business and protect your bottom line.
Understanding Incoterms is crucial to negotiating better deals with your suppliers. Delving deep into the specifics of the eleven Incoterms will clarify which of them are best suited for your business.
Keeping up with the latest developments in Incoterms, which take place every decade can be confusing but it pays off in the long run. Identifying which Incoterms are correct for your organization and using them wisely, enables you to partner more harmoniously, deliver your goods efficiently and get paid on time.
And who would say no to that?