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Breakdown of 2020 Incoterms® Release

In a previous Links’ “My Incoterms Summary” blog, I introduced Incoterms® (International commercial terms) which are a common set of international trade rules of sale, created by the International Chamber of Commerce (ICC).  In 1936, the 30 ICC countries/members published the Incoterms®.  Now the ICC is comprised of 142 countries and territories and the Incoterms® 2020 version is available in 29 languages.  The ICC represents both the public and private sectors therefore Incoterms® are recognized as explaining global trade to all types of businesses.

The ICC created Incoterms® to guide import and export activities from origin packaging through export customs clearance to import duties and then to final destination unloading.  It is very important to invoke Incoterms® correctly by including in the sales contract the 3-letter Incoterms®, a specific “named place” where the transfer of risk and responsibility occurs, and the applicable Incoterms® ruleset (2010, 2020, etc.).  Sellers and buyers rely on Incoterms® to describe the division of their below responsibilities.  These are explained further in the following paragraphs.

• Trade Obligations (who does what)
• Costs (who pays for what)
• Transfer of Risk (where it transfers between the parties)

You can download a free copy of the new 2020 version wallchart and reference it as you finish reading this blog.

There are 11 three-letter Incoterms® beginning with the letters E, F, C, and D.  These are grouped in a couple of different ways; the transport mode(s) and the “place” where risk is transferred.

• The modes are “sea and inland waterway” and “any mode(s) of transport”. “Sea and inland waterway” mode only applies to transport across a body of water.  Does this mean that Incoterms® can be used for domestic transportation?  Yes, and some countries have done this but it involves an overhaul of the country’s transportation industry.
• Transfer of risk
  • “At Buyer’s Disposal” means the buyer designates the freight carrier that must be used
  • For F and C terms, the place where the risk transfers from seller to buyer is actually when it is “delivered” to an independent 3^rd party freight carrier. Depending on the term, this point is when the goods are handed over to the carrier, at the disposal of the designated carrier, or loaded onto the carrier’s vehicle.
    • If the seller provides transportation itself, a D term should be used
    • If the buyer provides transportation itself, EXW (Ex Works) should be used

The spectrum ranges from EXW where the buyer is mostly responsible for the obligations and costs, to DPU (Delivered at Place) and DDP (Delivery Duty Paid) where these are mostly the seller’s responsibilities.  For EXW, the buyer’s obligations and cost responsibilities start when the transportation process begins at the seller’s origin.  Conversely with DPU and DDP, these responsibilities remain with the seller until very late in the cycle either at import port clearances or unloading at the final destination.  Somewhere in between are the other 8 terms.

Unless otherwise noted, once the goods are transferred to the Buyer, they are responsible for the obligations and cost until the goods are unloaded at their final destination.  Lastly, the responsibility for insurance obligations and cost is negotiable between the two parties.

• EXW (Ex Works) – Seller is only responsible for labelling and packaging at the origin
• FCA (Free Carrier) – The responsibility is dependent on the seller’s delivery location to the Buyer
  • If NOT on the Seller’s premise, the seller’s responsibilities end at the export processes and before loading at the origin
  • If on the Seller’s premise, the seller’s responsibilities end at completing the inland transportation & delivery and before inland unloading.
• FAS (Free Alongside Ship) – The seller’s responsibilities end at unloading at the port terminal and completing the security & terminal handling and before loading onto the ship.
• FOB (Free On-Board) – The seller’s responsibilities end at loading onto the ship at the origin port terminal.
• CFR (Cost & Freight) – The seller is responsible for the goods while in-transit on the ship but not the import port terminal’s handling and unloading.
• CIF (Cost Insurance & Freight) – Same as CFR plus there is an seller clause “C” in the insurance.
• CPT (Carriage Paid To) – The seller’s responsibilities end at the import port terminal’s handling and unloading and before loading onto the final delivery carrier.
• CIP (Carriage & Insurance Paid To) – The seller’s responsibilities end at loading onto the final delivery carrier and before the delivery to the final destination. Plus there is an seller clause “A” in the insurance.
• DAP (Delivered at Place) – The seller’s responsibilities end at the delivery to the final destination and before import duties & customs clearance and unloading at the final destination.
• DPU (Delivered at Place Unloaded) – The seller’s responsibilities end at delivering and unloading at the final destination but not import duties and customs clearance.
• DDP (Delivered Duty Paid) – The seller’s responsibilities end at the delivery to the final destination plus import duties & customs clearance and before unloading at the final destination.

 
Even though Incoterms® are part of the sales contract, that doesn’t mean that the Sales department should be the only team involved in determining the correct Incoterms® for the agreement.  Procurement, Finance, Accounting, and the Import/Export departments should also be involved to ensure there are no interruptions in delivering goods to your customers and to mitigate unnecessary costs.
 
Stay tuned for more blogs that continue to explore the transportation industry and systems.
 
–Jess Kittrell, St. Onge Company
 
Incoterms® and the Incoterms® 2020 logo are trademarks of ICC.  Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.  The Incoterms® Rules are protected by copyright owned by ICC.  Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org. 
 
 

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