Incoterms 2020: Top Ingredients for International Trade
August 13, 2020
Table of Contents
If you’re doing international business you probably came across Incoterms. These are standard terms for the trade of goods beyond borders.
What you may not know is that these have been updated. Are you familiar with Incoterms 2020?
This article covers:
- Incoterms meaning
- What they are
- Why they are so important for international trade
- Whom they concern
- What’s new with Incoterms 2020
Let’s start with a useful video from the US International Trade Administration that explains them in greater detail!
What are Incoterms?
The Incoterms are the world’s essential terms of trade for the sale of goods for export. Whether you are packaging and labelling a shipment for freight transport, preparing a certificate of origin at a port, or filing a purchase order, the Incoterms Rules are there to support you.
The Rules offer specific guidance to entrepreneurs participating in the import and export of goods on a daily basis. For this reason, they are important both for domestic and international trade.
They are globally recognised. This means they help businesses understand one another and clarify the exact terms of their arrangements.
What does “Incoterms” mean?
“Incoterms” is an acronym for international commercial terms. It is a trademark of The International Chamber of Commerce (ICC), which is registered in various countries.
The ICC’s mission is to foster open markets and encourage global economic prosperity through commerce and trade. The Rules facilitate trillions of dollars in global trade each year.
- the obligations of the buyer and the seller in the transaction;
- when the risk passes from seller to buyer;
- how to allocate costs between the buyer and the seller.
Some history on Incoterms Rules
Since it was founded in 1919, ICC has committed itself to the facilitation of international business. ICC developed Incoterms in 1936 and reviews them regularly to conform to changing trade practices.
Incoterms 2020 are the 9th edition and they were released in September 2019, the centenary anniversary of the ICC. The previous ones were released in 2010. There have been eight revisions from the first set of Rules, from 1957 to 2010, almost every 10 years.
What about Incoterms 2021? And Incoterms 2022?
Incoterms 2021 or 2022 cannot be found because they do not exist. The last reference is 2020.
The older version of Incoterms could be used. They are still valid for those who agree with the other part to use them.
The idea of ICC was to create a common ground between all the different practises and legal interpretations between businesses worldwide.
Incoterms 2020 is defined as a transaction point where the risk of damage to the goods, or the risk of loss (of the goods) shifts from the seller to the buyer.
Why are they important?
Although other clauses for global trade exist around the world, such as the Harmonised Tariff Schedule of the United States, Incoterms Rules have a global reach. Similarly, Rules do not take into account trade terms codified for national purposes, such as the “less than truckload shipping” (LTL) rule of the United States.
Unlike national trade policies, Incoterms Rules are universal, providing clarity and predictability to business.
Globally recognized, they avoid misunderstandings in foreign trade contracts by clarifying the obligations of buyers and sellers.
They do not only guide importers and exporters but also lawyers, transporters, insurers and all the apparatus involved in the trading market.
Whom do Incoterms Rules concern?
Parties involved in domestic and international trade often use them as a shorthand in order to help understand one another and the exact terms of their business agreements.
Some apply to any mode of transport; others apply strictly to transportation across the water.
These Rules are accepted by governments, legal authorities, and practitioners all over the world for the interpretation of the most commonly used terms in international trade.
The Incoterms do not represent a complete contract for the buyers and the sellers. They become a part of the contract.
How to use Incoterms
This is the structure that should be used:
“[The chosen Incoterm® rule] [Named port, place or point] Incoterms® 2020”
- FCA Incoterms: “FCA Berlin Incoterms® 2020”
- DDP Incoterms: “DDP Rotterdam Incoterms® 2020”
If the year is not specified, then the current one should be considered. For instance, Incoterms 2010 until the 31st December 2019. While Incoterms 2020 starting from January 2020.
If the two parts agreed on a year different from the last version, that should be stated.
- DAP Incoterms: “DAP Melbourne Incoterms® 1990”
- EXW Incoterms: “EXW Cape Town Incoterms® 2010”
Main Differences Specific to a Country
The guidelines cover most countries in most scenarios. For instance, customs procedures are much more relaxed at porous borders, like within the EU.
The three other exceptions likely to affect shipments are: importing into the UK requires a Deferment Account, exporting from India includes a withholding tax, and the US is the only country that requires a Customs Bond.
The Incoterms Rules
The seven Rules for Any Mode of Transport
EXW – Ex Works (insert place of delivery)
FCA – Free Carrier (Insert named place of delivery)
CPT – Carriage Paid to (insert place of destination)
CIP – Carriage and Insurance Paid To (insert place of destination)
DAP – Delivered at Place (insert named place of destination – they require the seller to deliver the goods to the buyer when they are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the destination agreed)
DPU – Delivered at Place Unloaded (insert of the place of destination)
DDP – Delivered Duty Paid (Insert place of destination).
Note: the DPU Incoterms replaces the old DAT, with an additional requirement. The seller is responsible to unload the goods from the arriving means of transport.
The four Rules for Sea and Inland Waterway Transport
FAS – Free Alongside Ship (insert name of the port of shipment)
FOB – Free on Board (insert named port of shipment)
CFR – Cost and Freight (insert named port of destination)
CIF – Cost Insurance and Freight (insert named port of destination)
What they Do Not Cover
Incoterms are most often included in the contract of sale. Still, they do not:
- Identify the goods being sold nor list the contract price;
- Address all the conditions of a sale;
- Reference the method nor timing of payment negotiated between the seller or the buyer;
- Specify when a title, or ownership of the goods, passes from the seller to the buyer;
- Specify which documents must be provided by the seller to the buyer to boost the customs clearance process at the buyer’s country;
- Address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery (the goods), nor dispute resolution mechanisms.
Differences between Incoterms 2010 and 2020
- The Incoterms FCA (Free Carrier) now provides the additional option to make an onboard notation on the Bill of Lading prior loading of the goods on a vessel.
- The costs now appear centralized in A9/B9 of each Incoterms rule.
- CIP now requires at least an insurance with the minimum cover of the Institute Cargo Clauses (A) (All risk, subject to itemized exclusions).
- CIF requires at least a minimum insurance cover of the Institute Cargo Clause (C) (Number of listed risks, subject to itemized exclusions).
- The Incoterms Rules Free Carrier (FCA), Delivered at Place (DAP), Delivered at Place Unloaded (DPU) and Delivered Duty Paid (DDP) now take into account that the goods may be carried without any third-party carrier being engaged, namely by using its own means of transportation.
- The rule Delivered at Terminal (DAT) has been changed to Delivered at Place Unloaded (DPU) to clarify that the place of destination could be any place and not only a “terminal”.
- The Incoterms 2020 now explicitly shifts the responsibility of security-related requirements and ancillary costs to the seller.
Advantages and Disadvantages
The greatest advantage of Incoterms Rules is the standardisation of international trade. This is a great advantage that made trade much more simple for buyers, sellers and logistic companies.
Negotiating trade terms between different nations was very hard before the Incoterms Rules. Furthermore, this saves time and especially money, which would have been spent on lawyers.
There are two other advantages. The first is that they are easily understood, regardless of the country and the language. The second is that an international body is in charge of them. The ICC updates and clarifies them regularly.
The difference in preference of buyers and sellers is the main disadvantage. Buyers and sellers might make different choices according to what is convenient for each of them.
For instance, buyers might choose FOB since they understand the shipping better than the counterpart. On the contrary, the seller might prefer CIF for the exact same reasons.
In these cases, there is a clear advantage on one of the two parts. The issue does not involve the terms themselves but a negotiation might take place anyway.
How to get them
Incoterms® 2020 is available on ICC’s new e-commerce platform ICC Knowledge 2 Go in both print and digital formats.
The 2020 edition is available in no fewer than 29 languages — from Estonian and German to Pashto and Spanish.
The print format is available for €45,00 and the e-book is available for €40,00.
Updates since COVID-19
ICC is committed to helping small businesses impacted by COVID‑19.
Whether you are looking for new ways to go global or interested in finding a neutral framework for your contractual relationships without the cost of a lawyer, the International Chamber of Commerce (ICC) has a variety of dedicated digital tools to support and guide small businesses in the face of the worst health and economic crisis of our time.
To help SMEs, ICC is also offering a range of essential digital business resources, for free or at a 50% discounted rate.
How CONNECTS can help members with international trade
The Incoterms are particularly helpful for entrepreneurs and their businesses.
If your company works at an international level, you might also be interested in reading our article about nearshoring and how it can help improve your business.
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