ICAT Blog: Article Understanding Incoterms® 2020

Incoterms® – what exactly are they and what should you know?

What are Incoterms^®?

Developed in 1936 by the International Chamber of Commerce (ICC), Incoterms^®—officially known as international commercial terms—are a universal set of rules and guidelines that help facilitate global trade. These trade terms were created to make international trade easier and less costly by splitting up responsibilities throughout each phase of the freight being moved from the seller to the buyer.

Since being introduced in 1936, there have been 9 revisions to the Incoterms^® rules. As global trade evolved, the rules were revised in 1957, 1967, 1976, 1980, 1990, 2000, 2010, and most recently in 2020.

What are the core functions of Incoterms^®?

There are many parties involved when it comes to global trade, from importers and exporters to transporters and insurers. The core functions of Incoterms^® are to:

• Summarize the obligations of the buyer and the seller in a trade transaction
• Establish when risk passes from the seller to the buyer under each set of rules
• Outline how costs are allocated between the buyer and the seller

How are the Incoterms^® rules categorized?

Incoterms^® are subdivided into two categories based solely on the method of delivery. The larger set of seven rules can be utilized regardless of the mode of transportation and the smaller set of four rules are only applicable to sales that solely involve transportation by water where the condition of the goods can be verified at the point of loading onto a ship. Therefore, those four rules cannot be used for containerized freight, other combined transportation methods, or for transport by road, air or rail.

What does each rule mean?

Rules for Any Mode of Transport:

• EXW – Ex Works: Goods are ‘delivered’ and risk transfers to the buyer when the seller places the goods at the disposal of the buyer at a named place.
• FCA – Free Carrier: Goods loaded arrive and are delivered. The risk transfers either when the goods are on the buyer’s transport or when the seller’s transport at the named ‘place.’
• CPT – Carriage Paid To: Goods are delivered and risk transfers when loaded on board main carriage arranged by the seller. Buyer assumes risk for shipment when loaded on board main carriage arranged by the seller.
• CIP – Carriage and Insurance Paid to: Goods are delivered and risk transfers when loaded on main carriage arranged by seller and all-risk insurance naming the buyer as insured. Buyer assumes risk for shipment when loaded on board main carriage arranged by the seller.
• DPU – Delivered at Place Unloaded: Goods are delivered and risk transfers when goods arrive and are unloaded at the named destination.
• DAP – Delivered At Place: Goods are delivered and risk is transferred when goods arrive at named destination available for unloading.
• DDP – Delivered Duty Paid: Goods are delivered and risk transfers when goods arrive and import customs cleared at the named destination available for unloading.

Rules for Sea and Inland Waterway Transport:

• FAS – Free Alongside Ship: Goods are delivered and risk transfers when goods are placed alongside the ship at the named port.
• FOB – Free On Board: Goods are delivered and risk transfers when goods are loaded on board the vessel.
• CFR – Cost and Freight: Goods are delivered and risk transfers when loaded on board main carriage arranged by the seller. Buyer assumes risk for shipment when loaded on board main carriage arranged by seller.
• CIF – Cost, Insurance and Freight: Goods are delivered and risk transfers when loaded on main carriage arranged by seller and the FPA insurance names the buyer as insured. Buyer assumes risk for shipment when loaded on board main carriage arranged by the seller.

What were some of the biggest changes to the recent Incoterms^® rules?

• The name of the DAT rule changed to DPU (Delivered at Place Unloaded);
• All costs were categorized so they are listed in one place to make it easier to identify;
• The level of insurance cover was moved from Clause C to Clause A for both CIF and CIP terms;
• The seller and buyer can arrange their own transportation instead of arranging a third-party transportation provider when using FCA, DAP, DPU, and DDP; and
• All transport-related security arrangement must be made for transportation to the destination.

Incoterms^® can be confusing. Our subject matter experts at ICAT Logistics are here to assist with all your global logistics needs and answer any questions you may have regarding international trade and the rules that come with it.

Resources:

• Incoterms Rules (International Chamber of Commerce)
• Understanding Incoterms (Xeneta)
• Incoterms (Wikipedia)