What are incoterms?
Incoterms is an acronym for ‘international commercial terms’. These are a set of terms defined by the international chamber of commerce every ten years with the latest incoterms 2020 released this year. These terms form the backbone of commercial trade and the formalities involved in it. Traders, lawyers, trade councils all over the world promote these terms to increase uniformity in the way trading is done.
These terms are usually three-word acronyms that help precisely define trade aspects. Such terms, therefore, allow the traders and other parties to get a clear idea about the risks, liabilities, and costs applicable to them while handling a package from the seller to the buyer. This removes ambiguity from terms and clearly defines what is expected of the traders. The rules govern how traders, exporters, buyers, sellers will function in over 180 countries and in more than 30 languages.
Incoterms are readily accepted around the world. Lawyers and trade commissions speaking different languages can understand each other in matters related to trade via incoterms. This significantly smoothens trade procedures.
Why is it necessary to stay updated about incoterms?
Incoterms were first published in 1936. Since then, nearly every ten years they have been revised. Likewise, the new incoterms that were released by the ICC this year also referred to as incoterms 2020, contain a few alterations and additions from the incoterms set released in 2010.
The buyer and the seller both have a responsibility to use the latest and correct incoterms for transactions. These are rules set up by international business training and should be continuously reviewed to provide clarity to users.
Staying updated about incoterms can help improve trade capability because of following factors-
- Knowledge regarding every rule and regulation gives buyers, sellers, and middlemen, clarity in the trade thereby reducing conflict that may arise owing to misunderstanding or nonuniformity.
- Using proper incoterms, international trade can be standardized beyond geographical and language barriers. This reduces the chances of disruption in trade due to misunderstandings and can strengthen a company in the international trading field.
- With every iteration, the incoterms become more fitted to the terms of that specific decade. A trader must thus learn about the same to escalate his or her trade efficiency.
- International trading has different rules depending on location. Incoterms standardizes these rules and hence gives traders, who are aware of the latest standardizations, a way to smoother trade practices with foreign parties.
The new incoterms 2020 is the 9th edition of incoterms since 1936.
Incoterms 2010 vs Incoterms 2020: Revisions And Their Importance
The main changes of incoterms 2020 are tabulated as follows.
|Incoterms 2010||Incoterms 2020|
|FOB (Free on Board) did not allow sellers to get a bill of lading||Availability of Bills of Lading by introducing FCA (Free Carrier) in place of FOB|
|Less secured shipping with high risks||More security while shipping to avoid risks|
|DAT (Delivered at Terminal) introduced meant the place of delivery had to be a terminal||DAT Incoterm changed to DPU (Delivered at Place Unloaded) to include generalization|
|Insurance coverages of CIF (Carriage Insurance and Freight) and CIP (Carriage and Insurance Paid to) were the same||Insurance points are clarified in CIF and CIP Incoterms rules|
|3rd party transport was assumed||Provisions to allow for own transport rather than assuming 3rd party transport|
Here’s why ignorance is not bliss for a trader to not be updated about the revisions in Incoterms.
Bills of Lading
According to the latest incoterms, FOB (Free on Board) should be avoided for container shipments. The seller, even though he or she does not have control of the goods after they reach the port, has to take all the risks of transport and even take care of the loading risks plus handling charges. This creates a liability for the sellers as they cannot control the way a product is treated during transport but have to pay if there is damage.
Incoterms 2020 identifies this risk for the seller and moderates it by employing FCA (Free Carrier). This means that once the seller delivers the container to the carrier based on conditions agreed upon both by the buyer and seller, the carrier can issue the seller a complete bill of lading. This lets the seller know about the state of the goods and act accordingly.
DAT (Delivered at Terminal) has changed to DPU (Delivered at Place Unloaded)
Many goods may need to be transported from the ports they have been unloaded at. The goods, therefore, have a separate place of unloading and a different place of delivery. Incoterms 2010 failed to acknowledge this fact. And only had provisions for DAT.
To accommodate that structure DAT has been changed to DPU according to incoterms 2020. This differentiates between the various places a product has to go while shipping. Thus the latest incoterms take into account the travel routes the products take and generalize the whole approach of delivery location by defining it specifically.
These new incoterms boost the trade security of the whole transaction. If anything goes wrong, the payments made under the terms reduce the damage brought to the firms.
Compared to incoterms 2010, this is a substantial upgrade in security measures, incorporated incoterms 2020. Protecting the cargo is a lot more important than the bit of price hike due to these payments.
For example, for transporting goods to the destination, sellers must comply with a specific amount included in the CPT (Carriage Paid to). This is done to safeguard the goods and minimize losses if something goes wrong.
Use of transportation vehicle
New Incoterms 2020 clarifies the position of transport companies in the whole structure. These third-party transporters will be commissioned to move the goods from the seller to the buyer. All the necessary details of commission and payment for the carriage are to be arranged by the buyer.
Insurance under CIF (Carriage Insurance and Freight) and CIP (Carriage and Insurance Paid to)
Insurance is necessary to safeguard goods travelling across continents on aeroplanes or even through freights. The incoterms 2010 called these provisions CIP and CIF (where CIF was similar to CIP but used specifically for freight containers transporting goods over long distances).
This insurance is applicable for sellers who would deliver the products to destinations around the world. It can be used to pay for carriers.
CIP transports a limited number of goods. And mostly these goods are finished manufactured products in small quantities. Thus safeguarding them requires greater insurance coverage. The International chamber of commerce via incoterms 2020 does just that by making sure higher insurance coverages are taken by the seller to transport goods under CIP coverage.
Lower risk exists in transporting goods via cargo freights. Also, mostly raw materials and other goods in bulk are transported using this method. Therefore the cost of transport is comparatively cheaper and thus the CIF insurance coverage remains unchanged.
Buyers and sellers must decide about what kind of insurance is required for the products to be shipped and if at all any kind of insurance is necessary at all. If yes then what value should it be of.
While some of the terms reduce the risks of buyers, others are present to ensure better security for the products being shipped. Redefined insurance rates help to reduce damage. This also results in a revision of the structure of the product transport and delivery chain according to the new incoterms 2020.
Using older terms may not only create confusion and misunderstandings among the involved traders but also severely affect the trade. With every iteration, the incoterms become more suited to the requirements of that particular decade. So using the latest incoterms in place of the older alternatives guarantees that traders get the best opportunity to carry out their dealings.
Therefore, standardizing the definitions of different terminologies and staying constantly updated about them not only smoothens professional interaction for a trader but also helps him make more profits in the long run.