• Incoterms: Importance in International Trade & Changes in 2020

    Incoterms 2020

    The uniqueness of each region and country influences the local dialect. This is true even among English-speaking countries. We all know how a lorry in the UK is called a truck in the US. However, the International Chamber of Commerce (ICC) has made sure that no such ambiguity exists when it comes to business. With this in mind, it came up with ‘international commercial terms’, also known as Incoterms.

    Who determines Incoterms?

    The ICC first compiled a list of Incoterms way back in 1936. The 100-year-old organisation has been updating it over the decades to make sure they remain relevant with changes in trade practices. Over the past few decades, there has been a revision of Incoterms coinciding with the first year of each decade: 1990, 2000, 2010. The latest version (Incoterms 2020) is expected to be in effect until December 2029.

    Where are Incoterms used?

    Incoterms are used by buyers and sellers to define their respective roles in the ownership, risk, and responsibilities throughout the process of the sale of goods, including their shipping. These rules are also accepted by governments, international organisations, and legal authorities across the world, which makes it easier to implement the same in case of any dispute or settlement.

    Why use Incoterms?

    Incoterms are definitions and interpretations of commercial terms that are internationally accepted. They are meant for use in contracts for the sale of goods. In international trade, Incoterms help define the responsibilities of the parties in terms of costs and risk. The shipping documents must, therefore, clearly state the Incoterms relevant to the transaction. For the ICC, maintaining the Incoterms chart is one way of facilitating international trade.

    Why are Incoterms important in international trade or exports?

    The importance of Incoterms in international trade and exports cannot be overemphasised. It is like a universal business language that is understood and accepted by everyone around the world. It reduces inconsistencies in language by standardising specific terms. It enables parties to use the international supply chain and reduces the chances of unfair trade practices by bringing more clarity to export transactions.

    Incoterms 2020 – differences with Incoterms 2010 and key changes

    Incoterms 2020, the latest version, is available in print as well as the digital format in ICC’s new e-commerce platform. It will become applicable from 1st January 2020 and will apply to all contracts entered into after that date, unless the contract says anything to the contrary.

    As expected, there are some changes to the Incoterms. These become obvious when we compare the 2010 version with the latest one:

    • DAT ( Delivered at Terminal) has been changed to DPU (Delivery at Place Unloaded), removing the terminal reference and making it more general.

    • The insurance required under CIP (Carriage and Insurance Paid to) has been increased in Incoterms 2020.

    • Details of the precise allocation of costs between the buyer and the seller have been enhanced.

    • Incoterms 2020 addresses transport security and its costs, which was not mentioned earlier.

    • Situations, where the buyer or seller used their own transport instead of using a third-party carrier, were not considered until now. This has now been addressed.

    • Under Free Carrier (FCA) an optional provision has been introduced that allows the buyer to direct the carrier to issue an onboard Bill of Lading to the seller.

    Incoterms 2020 explained in terms of transport and risk/ownership

    Incoterms 2020 continues to have 11 rules, out of which four are waterway rules while the remaining seven can be used in case of any mode of transport.

    Rules for any transport mode

    • Ex Works (EXW) is where the delivery of goods happen at the place of business of the seller, and the shipment is the responsibility of the buyer.

    • Free Carrier (FCA) in this arrangement, the responsibility of delivering the goods to a place nominated by the buyer lies with the seller.

    • Carriage Paid to (CPT) is a little more specific than FCA, here the seller bears the cost of transportation to the place nominated by the buyer, and the risk of the goods transfer only when it reaches that point.

    • Carriage & Insurance Paid to (CIP) is where the seller has to pay for the cost of transport as well as transit insurance of the goods up to a point selected by the buyer.

    • Delivered At Terminal (DAT) in this arrangement, all costs up to the point of delivery to a nominated terminal have to be covered, and the unloading of the goods at the terminal is the responsibility of the seller.

    • Delivered At Place (DAP) like DAT, this also requires the seller to deliver the goods at the place selected by the buyer. However, here the responsibility of unloading lies with the buyer.

    • Delivered Duty Paid (DDP) is where the seller delivers the goods to the buyer cleared for import and ready for unloading at the named place of destination. All risks up to that point lie with the seller.

    Rules for sea and inland waterway only

    • Free Alongside Ship (FAS) is where the seller places the goods with other non-containerised cargo and the risk transfers to the buyer when the goods are delivered at the destination port and unloaded.

    • Free On Board (FOB) arrangement signifies that the responsibility of the seller is to deliver the goods at the port of shipment and the risk transfers to the buyer once the goods are loaded to a vessel.

    • Cost and Freight (CFR) indicates that the seller delivers the goods and bears the cost up to the docking of the ship at the destination and the unloading of goods.

    • Cost Insurance and Freight (CIF) is where the seller insures the goods until their arrival at the port, beyond which the risk and insurance become the buyer’s responsibility.

    Another way of understanding Incoterms is in terms of the transfer of ownership and risk. Accordingly, in the case of EXW, the buyer is responsible for all carriage. In FCA, FAS, and FOB, the buyer arranges the main carriage. In DAT, DDP, and DAP, it is the seller who arranges the main carriage while the risk passes after the main carriage. Lastly, in CFR, CIF, CPT, and CIP, the seller arranges the main carriage, but the risk passes before the main carriage.

    Raghav Khajuria
    Raghav Khajuria
    Leads Marketing activities for Drip Capital.
    6 min read