The new Incoterms 2020 have been published on the 1st of January this year. However, the original Incoterms were published in 1936 and have been creating updates to throw back the changes to the global trade environment. It is vital for all the trade parties to understand the Incoterm changes and how they impact global supply chains. Both Incoterms 2010 and Incoterm 2020 can seem to be complicated, but buyers and sellers should understand how to implement them in supply chains.
And what are Incoterms anyway? To make it easy and understandable, Incoterms are the terms of sale that buyer and seller agree to during international transactions. Both government and legal authorities across the world refer to these terms. Understanding Incoterms is an essential part of international trade as it states tasks, costs, and risks that are associated to both the buyer and the seller.
When do the Incoterms state? As we have seen before, the Incoterms define clearly which costs, tasks, and risks are associated with both the buyer and the seller. Importantly it states when the costs and risks are transferred from seller to the buyer. Also, it’s good to note that all rules do not necessarily have to apply to all cases in international procurement, as buyers and sellers can choose to modify the terms beyond the official text.
Divisions of Incoterms
Incoterms 2020 can be classified into four groups. These rules are grouped based on the fees, risk, responsibility for formalities, and issues concerning import and export.
Group C is the “main carriage paid” group and here, the seller hands over risk when the cargo is handed over to the carrier. This group includes Incoterms such as CIF, CFR, CIP & CPT.
Group D is the “Arrival” group, and in this group the seller is obligated to deliver the goods to specific destinations usually in the buyers country. This group involves Incoterms such as DAP, DPU, and DDP.
This is the “Departure” group and the seller presents the goods to the buyer at the point of delivery in the seller’s country. The seller is not required to manage Customs export or clearance and does not take the risk and the costs of loading goods on cargo. This group has only Incoterms EXW.
This is the “main carriage unpaid” group. Here, the seller is to perform export clearance. The seller does not incur costs on transport and insurance. This group has Incoterms FCA, FAS, and FOB.
Commonly used Incoterms by buyers
In total, there are 11 Incoterms to choose from. But depending on whether you are the importer or exporter, there are some Incoterms which work in your favor. As a buyer, you need to choose the Incoterm that gives you control over shipping costs. Choosing the best Incoterm can be challenging as the decision will rely on many factors such as the relationship with the sellers, logistics capability and the available resources. There are three commonly used Incoterms:
FOB: Free on Board
In this Incoterm, the exporter leaves the prepared goods at the port of origin on the vessel, ready for international export. At this point, the seller is assumed to have taken care of all formalities and paperwork. You as the buyer will be responsible for hiring the international transport service. Through this, you’ll have control over all expenses and coordination of the cargo delivery to the final destination. The advantage of using FOB incoterm is the flexibility it equips you with. You will be the one to decide on the shipping route and times.
EXW: Ex Works
This is the Incoterm option for buyers who want to handle everything from the moment they collect the cargo. However, you need to be extra careful while using this term. You should only use it if you are familiar with the export and import laws of the countries involved. Also, your freight forwarders should be available to guide you through complications. If you are not comfortable or familiar with this Incoterm, you should avoid it. In that case, the right thing to do is to have goods to be delivered at the shipping point, where you can work with the agent of your provider so that they can deliver to the final destination.
DAP: Delivered at Place
This Incoterm lets you import goods at cheaper prices and it includes few responsibilities and risks in general for the buyer. However, the main disadvantage is that you won’t have much control over the ocean freight. Having the right to decide allows you to save costs on transport.
What Incoterm is most friendly for the buyer?
While purchasing goods from an overseas supplier, you should always consider payment terms, risks, and transfer of risk. This aids you with working capital, and cash flow management. Besides, it saves more of your time as it reduces the time for end payment. Moreover, it minimizes the risk that may arise when things go wrong. Therefore, DDP is the most favorable and friendly shipping term for the buyer, if the intention is to simply collect the product on the buyer’s doorstep. Of course, when using DDP terms, the buyer will not have control over main freight and this could lead to escalating costs.
If you are a domestic importer, you may wonder why you need to understand Incoterms too. Incoterms are rules published by the International Chamber of Commerce (ICC) and they play major roles in international procurement. Incoterms are voluntarily used terms to determine the responsibilities of importers and exporters through sale contracts for national trade. They nearly correspond to the U.N. conversation about international sales of goods contract.
It is possible to execute a contract with no reference to Incoterms. But doing so is usually not a good idea if both buyer and seller are not thoroughly familiar with the end to end processes.
As a buyer, you should understand Incoterms, knowing that these terms don’t apply to all international procurement cases. You should also note that Incoterms only helps to set standards but doesn’t relate in any way with the rules for title transfer or any other essential factors.