• Incoterms 2020: Importance in International Trade & Changes

    Incoterms 2020

    What are Incoterms?

    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 Incoterms, which stands for ‘International Commercial Terms’. It not only helps buyers and sellers clarify their doubts regarding foregin trade contracts, but also carries business arrangements smoothly. Some of these Incoterms apply to any mode of transportation and some of them apply only to transportation across sea & inland waterways.

    Why are Incoterms used?

    Incoterms are definitions and interpretations of commercial terms that are internationally accepted. It means that 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.

    Who publishes Incoterm rules?

    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 in favor of the buyer and seller & is is expected to be in effect until December 2029.

    Where are Incoterms used?

    The incoterms are used by buyers and sellers to define their respective roles in the ownership, risk, and responsibilities in an international trade transaction process, 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.

    How Incoterms help in International Trade?

    The role of incoterms in international procurement and trade 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 additional benefits for those involved in international business in incoterms 2020. 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) delivery term an optional provision has been introduced that allows the buyer to direct the carrier to issue an onboard Bill of Lading to the seller.

    Types of Incoterms

    There are 11 types of Incoterms as per the rules published in 2020 in export, out of which four are waterway rules while the remaining seven can be used in case of any mode of transport.

    So here we go with the latest list of incoterms 2020 series:

    Rules for any transport mode

    EXW Incoterms

    EXW or Ex works means where the delivery of goods happen at the place of business of the seller, and so the freight, shipping & most of the costs incurred during transit are the responsibilities of the buyer.

    Incoterms Explained - EXW

    FCA Incoterms

    Free Carrier means an arrangement, where the responsibility of delivering the goods to a place nominated by the buyer lies with the seller, and thereafter all risk and cost bearing responsibility is on the buyer.

    Incoterms Explained - FCA

    CPT Incoterms

    Carriage Paid to, is a little more specific than FCA, where 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.

    Incoterms Explained - CPT

    CIP Incoterms

    CIP stands for Carriage & Insurance Paid to, wherein the seller has to bear the cost of transport as well as transit insurance of the goods up to a point selected by the buyer.

    Incoterms Explained - CIP

    DAT Incoterms

    Delivered At Terminal 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.

    Incoterms Explained - DAT

    DAP Incoterms

    Delivered At Place like DAT, this also requires the seller to deliver the goods at the place selected by the buyer. However, the DAP shipping terms mean that the responsibility of unloading lies with the buyer. Also, the DAP terms involve custom clearance proceeding - which is again a shared responsibility between both the parties.

    Incoterms Explained - DAP

    Note: Delivery Duty Unpaid is not in action in incoterms 2020, the closest term that describes the functions of DDU Incoterms is DAP Incoterms.

    DDP Incoterms

    Delivered Duty Paid terms is where the seller delivers the goods to the buyer cleared for import and ready for unloading at the named place of destination. It means, all risks and charges up to that point lie with the seller.

    Incoterms Explained - DDP

    Rules for sea and inland waterway only

    FAS Incoterms

    Free Alongside Ship 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.

    Incoterms Explained - FAS

    FOB Incoterms

    Free On Board means, an arrangement specifying 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 on to a vessel.

    Incoterms Explained - FOB

    CFR Incoterms

    Cost and Freight specifies that the seller delivers the goods and bears the cost up to the point of docking of the ship at the destination and the unloading of goods. Also, the CFR customs clearance proceeding is a shared duty between parties, meaning each party has to take care of these proceedings for their respective country.

    Incoterms Explained CFR

    CIF Incoterms

    CIF stands for Cost Insurance and Freight. Under the 2020 rule, the seller is responsible for the insurance coverage till the arrival port, beyond which the risk and insurance becomes buyer’s responsibility.

    Incoterms Explained - CIF

    Note: The Incoterms rules are not a mandatory requirement, as there are no policies or rules enacted by the government, these are the rules agreed by the parties to the contract.

    Incoterms Coverage

    Incoterms define terms of the transfer of ownership and risk of goods which are being dealt in. Accordingly, in the case of EX Works 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.

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