In September 2019, the International Chamber of Commerce (ICC) published Incoterms 2020, which have come into effect since January 2020. Since 1936 when the Incoterms rules were first introduced, the ICC has updated the rules every 10 years. Incoterms 2020, the eighth revision following Incoterms 2010 (seventh revision), will be in effect for 10 years until 2029.
Aiming to become a 4PL service provider, Samsung SDS is closely paying attention to any changes in the global trade environment. In this sense, it is worth to look at what impact the newest edition of the Incoterms rules will have on the logistics business. There are largely 8 changes made to the new version. Although the changes are not so significant, experts say that the new Incoterms 2020 are more user friendly than the previous version.
This white paper explains in detail what Incoterms are, how they were created, differences between Incoterms 2010 and Incoterms 2020 as well as what implications Incoterms 2020 will have in global trade.
2. Understanding Incoterms
What are Incoterms?
Incoterms, the ICC rules for the use of domestic and international trade terms, are a set of 11 individual rules which define the responsibilities of sellers and buyers for the sale of goods in international transactions. Each three-letter rule clarifies the risks, costs and insurance tasks to be borne of sellers and buyers in these transactions.
For example, in any transactions, there are a seller and a buyer as well as a delivery of goods. In order to execute the transaction, the seller and the buyer need to agree on things like the place of delivery of goods, who carries the cost of transport, and who takes responsibility on the damage or loss of shipments during transport. If it’s a global trade deal, they have to agree on a lot more things. And if there’re no international rules widely accepted as a global standard, each party would interpret trade terms differently, which leads to more uncertainties in transactions. In international trade, in particular, because laws, practices and systems vary by country, it’s even harder for parties from different countries to reach an agreement, which often causes trade disputes.
To reduce the uncertainties and difficulties stemming from the different interpretations of the rules in international trade transactions, there was a growing need for global standards. This is how the ICC published the first edition of Incoterms in 1936.
However, Incoterms do not cover all aspects of trade transactions – e.g. the duties of banks or carriers, dispute settlements, tariffs, payments, etc. Simply put, Incoterms specify obligations of the seller and the buyer in a transaction.
3. Incoterms 2010
Understanding Incoterms 2010
As mentioned earlier, the changes in the latest revision are not as significant as expected. Thus, it might be helpful to understand Incoterms 2010 first before we look at Incoterms 2020. The table below shows 11 rules defined in Incoterms 2010. Seven of them can be used for all modes of transport and the other four terms are applicable to sea and inland waterway transport only.
Just by looking at the rules, which are three-letter acronyms, it’s hard to figure out what exactly each one means. To ensure a better understanding, it may be useful to see the following five basic principles of the rules first.
- In each rule, it’s the seller who is responsible for costs and risks.
- At the end of each rule comes with a named place.
- In Group F, it is the buyer’s responsibility to arrange and pay for the main carriage.
- In Group C (CFR, CIF, CPT, CIP), although the seller arranges main carriage, risk passes before main carriage. Also, the seller must contract for carriage and pay all costs up to the arrival point in the destination country.
- In rules with letter “I” (CIP, CIF), freight insurance has to be arranged and paid for by the seller.
Keeping these 5 principles in mind, let’s briefly look at Incoterms 2010.
As described in Figure 2, Incoterms 2010 have 11 rules which can be divided into those for any transport modes and those for sea & inland waterway only. To go through each rule briefly, in EXW, once the seller makes the goods available at the specified place, the buyer is responsible for all the costs and risks afterwards. Usually, sellers are responsible for export clearance. However, in case of EXW, it’s done by the buyer. In FCA, transfer of costs and risks takes place when the seller delivers the goods to the carrier nominated by the buyer at a named place.
Under the FAS term, the seller bears all the costs and risks up to the point the goods are placed alongside the buyer’s vessel. Under the FOB term, it is up to the point the goods are loaded on board the vessel. The CPT term means that the seller delivers the goods to the carrier nominated by him (the same as in FCA) but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. The CIP term is the same as CPT with the exception that the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during the carriage. In CFR, risk transfers from the seller to the buyer once the goods have been loaded on board. However, the seller arranges and pays for transport to a named port. CIF term is the same as CFR with the exception that the seller also has to procure insurance against the buyer’s risk of loss or damage during the carriage.
The three rules in Group D look similar but have some small differences. DAT is the only Incoterms rule that requires the seller to unload the goods once they arrive at the terminal. DAP is similar to DAT but the seller is not responsible for unloading and the destination place doesn’t have to be a terminal. Under DDP, the seller takes responsibility for import clearance and payment of taxes and/or import duty in addition to the responsibility required under DAP. As such, Incoterms 2010 define 11 standard trade terms the costs, risks and obligations of buyers and sellers in international transactions.
4. Incoterms 2020: 5 Main Changes
To find out more about Incoterms 2020, visit Cellologistics.com and download the white paper.