Incoterms 2020: Introduction For Traders

What are Incoterms 2020?

Incoterms is short for international commercial terms. These were first published by the International Chamber of Commerce (ICC) in 1936. The ICC publishes updates to the Incoterms every once in awhile and the latest overhaul to the Incoterms was published in 2019, effective in 2020. The latest set of terms are referred to as Incoterms 2020. These are used to allow traders to better understand the allocation of costs, responsibilities and obligations when doing business with each other. In the latest version, there are 11 Incoterms. These are Ex-Works (EXW), Free Carrier (FCA), Carriage Paid To (CPT), Cost and Insurance Paid (CIP), Delivered At Place (DAP), Delivered At Place Unloaded (DPU), Delivered Duty Paid (DDP), Free Alongside Ship (FAS), Free On Board (FOB), Cost Insurance Freight (CIF) and finally Cost and Freight (CFR). FAS, FOB, CFR & CIF can only be used when transportation is by sea or inland waterway. The rest of the terms can be used for any mode of transport.

Download our Incoterms 2020 summary chart Incoterms 2020 Chart

What do Incoterms not do?

Incoterms do not define title transfer, revenue recognition, currency of trade, block and brace standards or quality standards.

What is the most customer friendly Incoterm?

Shipping DDP places the greatest responsibility on the seller and the lowest responsibility on the buyer. However, this option can create extensive complexity for traders, because it will require the exporter in a foreign country to be familiar with the import formalities and procedures in the importing country. The exporter may also not have a legal entity in the importing country. The importer is protected from risk since delivery is on complete upon the seller presenting the cargo ready for unloading at the buyer’s facility however, if the shipment is time sensitive to the buyer, then any delays in carriage or Customs clearance can result in negative consequences for the buyer in the production line or in meeting delivery deadlines to end customers.

Shipping DDP places the greatest responsibility on the seller and the lowest responsibility on the buyer.

What are the differences between Incoterms 2010 and 2020?

Incoterms 2020 are effective from 1st January 2020. There are 2 important differences between the two versions.

  1. The Delivered at Terminal (DAT) rule has been replaced by DPU.
  2. The level of insurance cover under CIP has been increased.

Traders should note that the new rules only affect contracts entered after the effective date if the year version of the Incoterms is left unspecified at the time of formalizing a trade agreement. Otherwise, the version of Incoterms in force at the time of signing any contract or the version specified in the contract, remains the version governing existing contracts.

Incoterms can be modified in contracts to suit trader’s preferences. However, doing so will create legal complexities in the event something should go wrong since the courts will have to make judgements taking into account the non-standard modifications made.

Incoterms can be modified in contracts to suit trader’s preferences. However, doing so will create legal complexities …

Which is the best Incoterm to use?

Many exporters and importers who are unfamiliar with the finer points of executing international trade may have difficulty in choosing an appropriate Incoterm to use.

When trying to determine the best term of trade, the following questions should be considered:

  1. How involved is the exporter willing to be in terms of arranging transport?
  2. Does the exporter have a legal entity capable of acting as an importing in the destination country?
  3. Does the exporter or importer have an existing contract with a transportation provider than can provide better rates than the current spot rate?
  4. Is the exporter familiar with the export and import procedures in both countries?
  5. Is insurance cover necessary and who is in a better position to arrange for cost effective coverage?

These questions will present traders with the information they need to select a suitable term of trade.

Download our Incoterms 2020 summary chart Incoterms 2020 Chart

Let’s look at the Incoterms in a little more detail:

EXW Incoterms

EXW puts the most responsibility on the buyer. The buyer will have to pick up the cargo from the seller’s premises and handle everything from that point on, including arranging for pre-carriage, export Customs clearance, arranging for main carriage, etc. Some traders like EXW because they believe it allows them to recognize revenue at the earliest possible instance. However, Incoterms do not define revenue recognition rules. This is the best Incoterm to use if the buyer wants to handle everything for a shipment without seller’s interference or support.

  • Export clearance: Buyer
  • Freight costs: Buyer
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport: Any mode
  • Delivery point: At seller’s facility or named place

FCA Incoterm

FCA requires the seller to do a little more work than EXW. Delivery can be at the seller’s warehouse or another chosen point. If the point of delivery is at the seller’s warehouse, the seller will have to load the cargo onto the buyer’s collecting vehicle. However, the buyer will still have to make most of the other arrangements like main carriage and import Customs clearance. The seller will be the exporter of record at origin. Hence, the is an Incoterm to use when the buyer wants to arrange main carriage and requires the seller to be the exporter of record. Under the 2020 version of the terms, FCA specifies that if required, the buyer must request the carrier to issue an on-board B/L to the seller.

  • Export clearance: Seller
  • Freight costs: Buyer
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport: Any mode
  • Delivery point: Seller’s facility or named place

CPT Incoterm

CPT requires the buyer to pay for carriage to the first carrier or agreed delivery point. Seller will clear Customs at origin as the exporter. This rule is suitable if the seller has access to cheaper transportation rates. The point of delivery must be specifically tied down in the sales contracts. This rule is a favourite among traders since it generally allows earlier revenue recognition since delivery is made early. However, it must be mentioned (again) that Incoterms DO NOT specifically define revenue recognition principles.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport: Any mode
  • Delivery point: Handing over the carrier

CIP Incoterm

This rule is similar to CPT, but in this case the seller must also purchase insurance. This rule is suitable if mandating sufficient insurance of the cargo is a concern. Many traders use CIF instead of CIP. However, CIF is a maritime transport only term while CIP can be used for any mode of transportation. The level of insurance cover under CIP is more comprehensive than CIF. Like CPT, many businesses like CIP since it supports an argument for early revenue recognition.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Buyer
  • Insurance: Buyer for seller’s benefit
  • Mode of transport: Any mode
  • Delivery point: Handing over to the carrier

DAP Incoterm

This rule requires the seller to arrange for pre-carriage, main carriage and sometimes on-carriage. The seller however, will not be importer of record in the destination. The seller is not responsible for unloading the cargo at the named place. This term is suitable if the seller has access to better transportation rates than the buyer.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport: Any mode
  • Delivery point: Named place

DPU Incoterm

This term is similar to DAP. However, when DPU is used, the seller must also ensure that the cargo is properly unloaded as the place of delivery. This rule is suitable when the cargo is of a nature that requires special handling for unloading that the seller is better equipped to manage.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport: Any mode
  • Delivery point: Named place

DDP Incoterm

DDP is effectively a door-step delivery arrangement and the only Incoterm that requires the seller to be the importer of record in the destination. However, it does not require the seller to unload the goods at the destination. This term is suitable when the seller prefers to handle everything up to the door of the buyer and when the buyer has the necessary equipment to unload the cargo at his/her facility.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Seller
  • Insurance: Nil
  • Mode of transport: Any mode
  • Delivery point: Named place

 FAS Incoterm

In FAS, delivery is made when the cargo is placed on the wharf alongside the vessel. Use of this term is uncommon, although it may still be relevant when the cargo consists of large and heavy machines or automobiles. The seller must carry out export clearance procedures while the buyer is responsible for import clearance activities.

  • Export clearance: Seller
  • Freight costs: Buyer
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport: Ocean or waterway
  • Delivery point: Alongside vessel

FOB Incoterm

FOB considers delivery to be made when cargo is loaded onto the vessel. However, since the condition of containerized cargo cannot be ascertained at the time of vessel loading this Incoterm should not be used for containerized cargo. Buyers should use FOB when they want to arrange for their own main carriage and on-carriage.

  • Export clearance: Seller
  • Freight costs: Buyer
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport:Ocean or waterway
  • Delivery point: On board vessel

CFR Incoterm

Similar to FOB terms, CFR considers delivery to be made when cargo is loaded onto the vessel. On that note, this term should not be used for cargo that is shipped in containers. This term may be suitable for bulk non-containerized cargo that the seller wants to arrange main freight for.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Buyer
  • Insurance: Nil
  • Mode of transport:Ocean or waterway
  • Delivery point: On board vessel

CIF Incoterm

Similar to CFR, CIF considers delivery to be made when cargo is loaded onto the vessel which makes this term also unsuitable for containerized shipments. Traders may find this term suitable when they are dealing with non-containerized bulk commodities. In this term the seller has to arrange for freight.

  • Export clearance: Seller
  • Freight costs: Seller
  • Import clearance: Buyer
  • Insurance: Seller for buyer’s benefit
  • Mode of transport:Ocean or waterway
  • Delivery point: On board vessel

Incoterms Chart

Download our Incoterms 2020 summary chart Incoterms 2020 Chart

Incoterms 2020 Detail Chart v6

References

This Post Has One Comment

  1. Hello,
    I need to take a moment to thank you for helping me understand the Incoterms and Congratulate you on the blog! It’s one of a gem! Would love to read more of you on the same.

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