Our Container Blog

 

 

 

Incoterms 2020

Incoterms 2020: Navigating International Trade with Confidence

Table of Contents

Overview of Incoterms

In the dynamic world of international trade, Incoterms serve as a universal language, clarifying the roles and responsibilities of buyers and sellers in delivering goods. Published by the International Chamber of Commerce (ICC), these terms streamline transactions by outlining who is responsible for the shipping process, including transport costs, risk of loss or damage, and customs clearance.

Each Incoterm represents a specific set of obligations for both parties, promoting transparency and mitigating potential disputes. Whether you're a seasoned exporter or new to global trade, understanding Incoterms is crucial for successful and efficient transactions.

Incoterms 2020 vs 2010

While Incoterms 2020 is the current standard, it's important to be aware of the key changes introduced compared to the 2010 version. Some notable updates include:

  • DAT (Delivered at Terminal) has been replaced by DPU (Delivered at Place Unloaded). This change provides more flexibility for the delivery location, allowing for any place of unloading, not just a terminal.
  • Increased insurance coverage under CIF and CIP: The minimum insurance coverage required under these terms has been increased to better protect buyers.
  • Clarity on the use of own transport: The rules now explicitly address situations where buyers or sellers use their own means of transport.
  • Enhanced security requirements: The terms now include provisions for addressing security-related risks in the supply chain.

Detailed Breakdown of Incoterms

1. EXW – Ex-Works

  • Seller’s Responsibilities: Makes the goods available at their premises (factory, warehouse, etc.).
  • Buyer’s Responsibilities: Handles all aspects of transportation, including export clearance, loading, and insurance.
  • Ideal Use: Domestic transactions or when the buyer has extensive experience in export procedures.
  • Example: A local artist selling a painting to an international buyer who will arrange for pickup and shipping.

2. FCA – Free Carrier

  • Seller’s Responsibilities: Delivers the goods, cleared for export, to the carrier specified by the buyer at a named place.
  • Buyer’s Responsibilities: Handles main carriage, import clearance, and insurance from the named place of delivery.
  • 2020 Update: Allows for an onboard Bill of Lading, providing more flexibility for the buyer.
  • Ideal Use: Suitable for multimodal transport or when the buyer prefers to control the shipping arrangements.
  • Example: A manufacturer shipping goods to a buyer's freight forwarder at their warehouse.

3. FAS – Free Alongside Ship

  • Seller’s Responsibilities: The seller delivers the goods alongside the ship at the named port of shipment and clears them for export.
  • Buyer’s Responsibilities: Handles loading onto the ship, sea freight, insurance, and import clearance.
  • Ideal Use: Commonly used for bulk cargo shipments.
  • Example: A coal exporter delivering coal to the quayside for loading onto the buyer's vessel.

4. FOB – Free On Board

  • Seller’s Responsibilities: The seller delivers the goods on board the vessel at the named port of shipment and clears them for export.
  • Buyer’s Responsibilities: Handles sea freight, insurance, unloading at the destination port, and import clearance.
  • Ideal Use: Frequently used in containerized shipping.
  • Example: A furniture manufacturer shipping goods to a buyer in another country, with the buyer responsible for the main sea freight.

5. CFR – Cost and Freight

  • Seller’s Responsibilities: The seller delivers the goods on board the vessel and pays for the freight to the named port of destination. Once the goods are on board, the risk transfers to the buyer.
  • Buyer’s Responsibilities: Handles unloading, import clearance, insurance, and any further transport at the destination.
  • Ideal Use: This is suitable when the seller has connections with shipping lines and wants to offer a competitive freight rate.
  • Example: A textile exporter shipping fabric to a buyer, including the cost of sea freight in the price.

6. CIF – Cost, Insurance, and Freight

  • Seller’s Responsibilities: Similar to CFR, the seller provides minimum insurance coverage for the goods during transit.
  • Buyer’s Responsibilities: Handling unloading, import clearance, and further transport at the destination.
  • Ideal Use: Suitable for buyers who want the seller to arrange basic insurance coverage.
  • Example: An electronics manufacturer shipping goods overseas, including the cost of freight and insurance in the price.

7. CPT – Carriage Paid To

  • Seller’s Responsibilities: The seller delivers the goods to the carrier and pays for carriage to the named destination. Risk transfers to the buyer when the goods are handed over to the first carrier.
  • Buyer’s Responsibilities: Handles import clearance, unloading, insurance, and any further transport at the destination.
  • Ideal Use: Versatile for various modes of transport, especially when the seller has preferred carriers.
  • Example: A machinery exporter arranges and pays for transportation to the buyer's warehouse in another country.

8. CIP – Carriage and Insurance Paid To

  • Seller’s Responsibilities: Similar to CPT, the seller provides minimum insurance coverage for the goods during transit.
  • Buyer’s Responsibilities: Handles import clearance, unloading, and any further transport at the destination.
  • Ideal Use: Offers buyers additional protection with basic insurance coverage arranged by the seller.
  • Example: A pharmaceutical company shipping temperature-sensitive products, with the seller providing insurance coverage during transit.

9. DAP – Delivered at Place

  • Seller’s Responsibilities: Delivers the goods, ready for unloading, to the named place of destination. The seller bears all transport costs and risks until that point.
  • Buyer’s Responsibilities: Handling unloading, import clearance, and further transport.
  • Ideal Use: Convenient for door-to-door deliveries.
  • Example: An online retailer shipping a package directly to a customer's home address.

10. DPU – Delivered at Place Unloaded

  • Seller’s Responsibilities: The seller delivers and unloads the goods at the named place of destination. The seller bears all costs and risks, including unloading.
  • Buyer’s Responsibilities: Handles import clearance and any further transport after unloading.
  • Ideal Use: Suitable when the seller can unload the goods at the destination.
  • Example: A construction materials supplier delivering and unloading bricks at a construction site.

11. DDP – Delivered Duty Paid

  • Seller’s Responsibilities: Delivers the goods, cleared for import, to the named place of destination. The seller bears all costs and risks, including import duties and taxes.
  • Buyer’s Responsibilities: Minimal responsibilities, typically only taking over the goods at the destination.
  • Ideal Use: A full-service option for buyers who want a hassle-free import experience.
  • Example: A luxury car manufacturer delivering a car directly to a customer's home, handling all import procedures and taxes.

Choosing the Right Incoterm

Selecting the most appropriate Incoterm depends on various factors, including:

  • Type of goods: The nature of the goods (e.g., perishable, fragile, hazardous) may influence the choice of Incoterm.
  • Transportation mode: Different Incoterms are more suitable for specific modes of transport (e.g., sea, air, road).
  • Buyer's and seller's experience: The experience level in international trade can impact the willingness to take on responsibilities.
  • Risk appetite: The parties' risk tolerance will influence their choice of Incoterm, as some terms allocate more risk to the buyer or seller.
  • Cost considerations: The Incoterm chosen will impact the overall cost of the transaction, so it's important to consider the associated costs.

It's recommended to consult with a freight forwarder or legal expert to determine the best Incoterm for your specific situation.

Common Mistakes to Avoid

  • Not specifying the Incoterms version: Always specify the Incoterms version (e.g., Incoterms 2020) to avoid confusion.
  • Using incorrect Incoterms for the mode of transport: Ensure the chosen Incoterm is compatible with the planned transportation method.
  • Failing to define the place of delivery clearly: Specify the exact location for delivery to avoid misunderstandings and disputes.
  • Overlooking insurance requirements: Ensure adequate insurance coverage is in place, especially when the buyer is responsible for it.
  • Not understanding the transfer of risk: Clearly understand when the risk of loss or damage transfers from the seller to the buyer.

Glossary

  • Bill of Lading: A document issued by a carrier acknowledging receipt of goods for shipment.
  • Carrier: A party that transports goods.
  • Customs clearance: The process of fulfilling import/export formalities with customs authorities.
  • Export clearance is the process of obtaining permission from the exporting country's customs authorities to ship goods out of the country.
  • Freight forwarder: A company that arranges the transportation of goods on behalf of shippers.
  • Import clearance is the process of obtaining permission from the importing country's customs authorities to import goods into the country.
  • Insurance: Coverage against loss or damage to goods during transit.

FAQs

Can Incoterms be modified?

Yes, Incoterms can be modified by mutual agreement between the buyer and seller, but any changes should be clearly documented in the contract.

Are Incoterms mandatory?

No, Incoterms are not mandatory, but they are widely used and provide a standardized framework for international trade.

Which Incoterm is best for me?

The best Incoterm depends on your specific circumstances. It's recommended to consult with a professional to determine the most suitable option.