Incoterms 2020: A Comprehensive Guide to Global Trade the world of international trade is complex, with buyers and sellers from different corners of the globe working together to exchange goods. A vital aspect of this global exchange is the set of rules known as International Commercial Terms or Incoterms®, which outline the responsibilities, risks, and costs associated with shipping goods.
These terms, published by the International Chamber of Commerce (ICC), have undergone multiple updates over the years to keep pace with the evolving landscape of global trade. The most recent update, Incoterms® 2020, came into effect on January 1, 2020, and it brings several important changes that affect how goods are traded and transported internationally.
These Incoterms® help define the key aspects of the shipping process, including the allocation of costs, responsibilities, risks, and delivery points. By appreciating the nuances of these terms, both parties can avoid confusion and disputes by having a clear understanding of who is responsible for what at every stage of the trade. These terms are legally accepted worldwide, and it is essential that businesses involved in international trade are familiar with them.
Depending on the specific Incoterm®, different responsibilities may be assigned to each party involved in the transaction. It is important to note that not all terms are suitable for every situation. Some apply to all modes of transportation, including road, rail, air, and sea, while others are specifically applicable to sea and inland waterway transport.
The update to Incoterms® 2020 addresses the needs of introducing new rules and clarifying existing ones to ensure smoother international transactions. In this article, we will explain the 11 key Incoterms® used in 2020, which are categorized into two groups: those that apply to all modes of transport and those that are specific to sea and inland waterway transport.
Note: Please visit the ICC (International Chamber of Commerce) website for full overview
and insights on the Incoterms®.
• EXW (Ex Works) – Under this term, the seller makes the goods available for pickup at their premises or another agreed location, such as a warehouse or factory. The seller does not need to load the goods on the buyer’s vehicle or clear them for export. All responsibility and risk shift to the buyer as soon as the goods are made available for collection.
• FCA (Free Carrier) – The seller delivers the goods to a carrier nominated by the buyer at an agreed location. The risk transfers to the buyer once the goods are handed over to the carrier. Under the 2020 update, FCA now allows the issuance of a Bill of Lading with an onboard notation, facilitating smoother shipping processes.
• CPT (Carriage Paid To) – In this case, the seller is responsible for delivering the goods to the carrier and covering the transport costs to the agreed destination. However, the risk transfers to the buyer once the goods are handed over to the carrier.
• CIP (Carriage and Insurance Paid To) – Similar to CPT, but with an added layer of protection. The seller is responsible for transport costs and insurance to cover the risk of loss or damage during transit. However, the insurance cover provided by the seller is typically minimal, and if the buyer requires additional coverage, they must arrange this themselves.
• DAP (Delivered at Place) – The seller assumes responsibility for transporting the goods to the agreed destination. The seller bears all risks and costs up to the point where the goods are made available to the buyer, ready for unloading. The buyer is responsible for unloading and any further costs after that point.
• DPU (Delivered at Place Unloaded) – A new term introduced in the 2020 update, replacing the Incoterm® DAT (Delivered at Terminal). Under DPU, the seller delivers the goods unloaded at a named place of destination. The seller is responsible for all risks and costs up to that point, including unloading.
• DDP (Delivered Duty Paid) – The seller takes on the most responsibility here. The seller delivers the goods, cleared for import, to the buyer’s location. The seller assumes all costs and risks involved, including customs duties, taxes, and import formalities, until the goods are ready for unloading at the destination.
•FAS (Free Alongside Ship) – The seller delivers the goods by placing them alongside the ship at the agreed port of shipment. Once the goods are alongside the ship, the risk shifts to the buyer, who is responsible for the transport costs and any additional risks from that point onward.
• FOB (Free On Board) – The seller is responsible for delivering the goods on board the vessel nominated by the buyer at the agreed port of shipment. From this point, the buyer assumes responsibility for the goods, including the cost of international transportation, insurance, and any additional charges.
• CFR (Cost and Freight) – Under CFR, the seller delivers the goods on board the vessel and covers the cost of transporting the goods to the agreed port of destination. However, the risk transfers to the buyer as soon as the goods are on board the ship.
• CIF (Cost, Insurance and Freight) – This term is similar to CFR, but the seller is also responsible for securing insurance coverage for the goods during the voyage.
In international trade, by specifying which party is responsible for which aspect of the shipping process, Incoterms® help prevent misunderstandings and disputes that could delay shipments and increase costs. Whether it’s about paying for transportation, handling customs procedures, or managing risks, these terms provide a standardized framework that makes it easier to conduct trade across borders.
For businesses engaged in global trade, understanding Incoterms® 2020 is essential to avoiding costly mistakes. They enable buyers and sellers to negotiate terms confidently and ensure they know exactly what their obligations are throughout the shipping process. As the world becomes more interconnected and supply chains become increasingly complex, having clear terms that outline the logistics and legal aspects of trade is more important than ever.
Choosing the right Incoterm® involves analyzing several factors beyond costs and responsibilities. Consider the trade regulations and customs procedures in the buyer’s and seller’s countries, as these can significantly impact the practicality of certain terms like DDP or CIF. Additionally, evaluate the reliability and capacity of the transportation provider. For instance, if your logistics partner has limited capabilities, you might prefer terms that delegate transportation responsibility to the buyer, such as FCA.
Payment terms also play a crucial role. In some cases, Incoterms® like EXW or FOB work well with letters of credit, while others like DDP may be more complex to reconcile with certain financial agreements. Considering these factors ensures a mutually beneficial arrangement that aligns with your trade goals.
Tailoring Terms to Client Needs: Offering flexibility with Incoterms® can set your business apart. For example, international buyers often prefer terms like DDP, where sellers handle all shipping, customs, and duty payments. By simplifying the process for buyers, you make your offer more attractive, particularly in competitive markets.
Streamlining Costs and Risks: Carefully selecting Incoterms® can optimize operational costs. Terms like FOB or FCA, which transfer responsibility sooner, can reduce risks for sellers while empowering buyers to control logistics. Businesses that strategically negotiate Incoterms® can gain an advantage by reducing overheads or aligning supply chain responsibilities with their strengths.
Enhancing Transparency and Trust: Clearly defining responsibilities under an appropriate Incoterm® can help prevent disputes and delays, fostering trust between trading partners. By demonstrating a strong grasp of Incoterms® and proactively offering advice, you position your business as a reliable partner in international trade.
One frequent error businesses make is failing to consider the transportation mode when choosing an Incoterm®. For instance, using FOB for air freight instead of sea freight is inappropriate and could lead to logistical confusion. Always ensure the chosen term aligns with the transport mode.
Another mistake is overlooking hidden costs and risks. For example, sellers using DDP may underestimate import duties or taxes in the buyer’s country, leading to unexpected expenses. Similarly, buyers who choose EXW without sufficient logistics infrastructure may face challenges coordinating pickups and managing risks at the seller's premises. Avoid these pitfalls by conducting thorough due diligence and consulting experts if necessary.
Selecting the right customs brokerage plays a vital role in ensuring the proper selection and execution of Incoterms®. A knowledgeable broker, like Jill L Tolentino Customs Brokerage (JLTCB), understands the complexities of global trade and can guide you in selecting the most suitable Incoterm® for your specific needs.
Customs brokers not only help clarify the responsibilities and costs associated with different Incoterms® but also assist in managing customs compliance, documentation, and risk mitigation. With JLTCB’s expertise, you can avoid costly mistakes, streamline your logistics, and ensure that your goods move smoothly across borders. Partnering with a trusted brokerage is an investment in efficiency and peace of mind for your international trade operations.
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.
At Jill L. Tolentino Customs Brokerage, we specialize in providing expert logistics solutions tailored to help your business thrive. Whether you're importing, exporting, or navigating complex customs regulations, our dedicated team ensures seamless operations and reliable service.
