29 April 2021 • 15 min read
Incoterms 2020: Changes That you Need to Know
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International Chamber of Commerce released Incoterms 2020. Know about the rules for your business, importance in international trade, and all the main updates and changes.
If you are in the import-export business, chances are you have heard of Incoterms rules. The International Chamber of Commerce (ICC) defines Incoterms rules as “the world’s essential terms of trade for the sale of goods”, which “provide specific guidance to individuals participating in the import and export of global trade on a daily basis”. Since their introduction in 1936, the Incoterms rules are updated every 10 years. The latest update was carried out in September 2019, following which the ICC released Incoterms 2020. These came into effect on January 1, 2020.
This blog throws a light on what Incoterms 2020 means for importers, exporters and international trade. It will cover the following subjects:
- What are Incoterms
- A short history of Incoterms
- Why Incoterms are important to international trade
- The 11 Incoterms currently in use
- Incoterms 2020: The key changes
- Things to remember when using Incoterms in your business
What are Incoterms?
Incoterm is an acronym for International Commercial Terms. The Incoterms rules are a globally recognised set of standards for the delivery of goods by all modes of transport (road, rail, air and sea). They are the terms buyers and sellers involved in international and domestic trade agree on. They are recognised by governments and legal authorities across the world.
The Incoterms rules are the creation of experts brought together by the ICC. The ICC describes itself as “an institutional representative of more than 45 million companies in over 100 countries with a mission to make business work for everyone, every day, everywhere”. The Incoterms rules are a trademark of the ICC and are registered in multiple countries, including the United States, the United Kingdom, Australia, China and India.
History of Incoterms
The ICC was created in 1919, the year after the end of World War I. Its purpose was to create what global trade sorely lacked at the time: a system of rules to govern trade. The process started with an exercise in understanding the trade terms used by merchants then. The first findings, published in 1923, covered just six terms from 13 countries and reported discrepancies in interpretations. After more studies, the ICC published the first Incoterms rules in 1936, again with just six terms. These rules were not revised till 1953, primarily because of World War II. When the revised list was published, it had three additional terms. More revisions followed and that is how Incoterms 2020 came to be.
Importance of Incoterms in International Trade
It is important for importers and exporters to familiarise themselves with the Incoterms rules, especially those associated with their business. This is because:
- Incoterms rules are universal and hence provide clarity and predictability to businesses
- They state precisely and clearly what responsibilities, costs and risks lie with the seller and the buyer
- They guide sellers and buyers on how to initiate and complete a range of transactions including packaging and labelling a shipment for freight transport, filing a purchase order, and preparing a certificate of origin
11 Incoterms Currently in Use
The Incoterms rules provide globally accepted definitions and rules of interpretation for common commercial terms. These terms are better known by their three-letter acronyms. There are currently 11 Incoterms in use. Some apply to all modes of transport while some are specific to a particular mode. These are the 11 rules briefly explained:
- EXW (Ex-works): This means that the seller makes the goods available at a specified location, usually the seller’s factory. The buyer is responsible for onward transportation of the goods and bears the cost for the same.
- DAP (Delivered At Place): The seller is responsible for delivering the goods to a designated place.
- FOB (Free on Board): The seller completes delivery when he loads the goods on a ship specified by the buyer at a named port. Hence, the seller is “free” of responsibility once the goods are “on board” the ship. Any liability for damage or loss thereafter passes to the buyer. This rule applies to goods transported by sea or inland waterway.
- FCA (Free Carrier): The seller delivers the goods to a carrier or an agent nominated by the buyer at the seller’s premises or another specified location.
- FAS (Free Alongside Ship): The seller delivers the goods alongside the ship (on a barge or quay, for example). The buyer must load the goods on the ship. This rule applies only to sea transport.
- CFR (Cost and Freight): The seller delivers the goods on a ship at the designated port and pays for cost and freight to bring the goods to the port.
- CIF (Cost, Insurance and Freight): The seller delivers the goods on the ship at the named port and pays for cost, freight and insurance to transport the goods to the port.
- CPT (Carriage Paid To): The seller delivers the goods to a named place and pays for carriage to that place.
- CIP (Carriage and Insurance Paid To): The seller delivers the goods to a named place, pays for both carriage and insurance of the goods to that place.
- DPU (Delivered At Place Unloaded): The seller delivers the goods at a designated place and unloads them, bearing the risks and costs of both. This is the only rule that requires the seller to unload the goods to complete delivery. The buyer takes care of any import clearance charges, taxes and duties.
- DDP (Delivered Duty Paid): The seller bears the maximum responsibility here as he arranges for carriage and delivery of goods at a named place, and pays for import clearance as well as any duties and taxes that might apply.
Incoterms 2020: The Key Changes
These are the key updates in Incoterms 2020 that differentiate it from Incoterms 2010:
- DPU replaces DAT: The term DPU (Delivered at Place Unloaded) has been added to the rules, replacing DAT (Delivered at Terminal). This change was necessitated by demands for delivery not just at a terminal but at a particular site, such as a factory.
- Insurance cover under CIP and CIF: Incoterms 2020 provides for different levels of insurance cover under CIP (Carriage and Insurance Paid) and CIF (Carriage Insurance and Freight). The CIP rule now demands a higher level of insurance cover that is compliant with the Institute Cargo Clauses (A) or similar clauses. 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.
- Precise allocation of costs: Incoterms 2020 provides greater clarity on cost allocations under article A9/B9 of the rules. This was based on feedback about rising disputes due to lack of clarity – for instance, sellers complained of back charged terminal handling charges due to ships changing their pricing.
- Enhanced security: Amid growing demand for greater transport security for freight, including mandatory screening of containers, Incoterms 2020 provides more detailed security obligations. These can be found under articles A4 for carriage and A7 for export/import clearance. Security-related cost allocations can be found under article A9/B9.
- Transport arrangements: Incoterms 2010 assumed the transportation of goods between the buyer and seller is carried out by a third party. The revised rules take into consideration the fact that the buyer and seller might use their own vehicles to transport the goods. Thus, Incoterms 2020 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.
- Bill of Lading: The FCA (Free Carrier) rule 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. In the past, ships are known to have refused to issue a bill of lading if the goods were received not directly from the seller but from an intermediary (say, a truck).
Using Incoterms 2020 in your business
While you can continue to use Incoterms 2010, the ICC recommends using the latest version of the rules. If you plan on making the switch, here’s what you must look out for:
- Identify the Incoterms applicable to your business and read up on them
- Make sure to mention the Incoterms edition (2010, 2020) you are using in your sales contracts to avoid misunderstandings at a later date
- Check the updated costs for each relevant field (security, insurance, etc) as these could impact your overall expenses
- Read the rules to know exactly where the transfer of risk and loss lies
- Buy a copy of the Incoterms 2020 book from the ICC. You can buy it here. Look out for fake versions, as the ICC warns
- You can also check out the Incoterms 2020 app for a greater understanding of the rules and for the latest news, events and training opportunities
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