Incoterms 2020 Explained: 11 Shipping Terms Every Importer Must Know
If global trade were a jigsaw puzzle with pieces including contract negotiating, navigating customs, and shipping logistics, Incoterms 2020 would be the instructions on the puzzle box.
Incoterms 2020: The Importer’s Guide to Unlocking Global Trade
If global trade were a jigsaw puzzle with pieces including contract negotiating, navigating customs, and shipping logistics, Incoterms 2020 would be the instructions on the puzzle box. Incoterms 2020 is a set of rules recognized globally that shed light on buyers’ and sellers’ responsibilities in international trade. Whether you’re new to managing logistics or have years of experience under your belt, understanding these 11 shipping terms will help you optimize both operations and costs, as well as giving you peace of mind.
What Are Incoterms?
Incoterms is short for International Commercial Terms. These are definitions and rules guiding the interpretation of commonly used commercial terms in contracts covering the sale of goods. They were introduced in 1936 by the International Chamber of Commerce, which represents more than 45 million companies in more than 170 countries.
Therefore, Incoterms are meant to function as a common language for all the parties involved in shipping agreements. For example, these standardized codes define which party needs to pay for insurance, duties, and freight, clarifying where risk is transferred from sellers to buyers.
Incoterms are updated as needed, and the last time they were updated was in 2020, to keep pace with the ever-evolving trade environment. These updated rules are called Incoterms 2020.
Why Should Importers Care About Incoterms 2020?
Understanding Incoterms 2020 can help you minimize negative risks in international trade contacts, including unexpected fees, delayed freight shipments, and legal problems.
What if you partner with a transport service provider? They may advise on how to choose the Incoterms rules that work for you. They may also provide services that help you fulfill your obligations under the Incoterms rule you choose. However, delegating these responsibilities does not erase your responsibility, so understanding Incoterms 2020 remains crucial.
The 11 Incoterms 2020 You Need to Know as an Importer
1. EXW (Ex Works)
The seller is responsible for making the goods available at a chosen location, which could be their premises. From that point forward, the buyer is responsible for covering the cost and bearing the risk of transporting the goods. The buyer is also responsible for handling export and import, which may not be practical in international trade. In short, under EXW, the bulk of the responsibility falls on the buyer.
2. FCA (Free Carrier)
The seller is responsible for delivering the goods to the buyer’s vehicle at the seller’s premises or another named location (such as a transport terminal). In case of international trade, export clearance is the seller’s responsibility. FCA may be used for multimodal transport.
3. FAS (Free Alongside Ship)
This Incoterms 2020 rule is used only for maritime transport. The seller is responsible for delivering the goods alongside the ship at a chosen port. Additionally, the seller is responsible for export clearance. From that point forward, the buyer takes all the risk associated with insurance, loading, and shipping.
4. FOB (Free On Board)
As in the case of FAS, FOB is also used only for sea freight. The seller is responsible for loading the goods (bulk commodities or general cargo, for example) onboard the ship and handling export clearance. From the moment the goods are onboard the ship, the buyer takes all the risk associated with insurance, transport, and import.
5. CFR (Cost and Freight)
The seller covers the transport of the goods to the destination port. However, the seller is responsible for the goods only until they are loaded onboard the ship. From that moment, the risk shifts to the buyer, who is also responsible for insurance.
6. CIF (Cost, Insurance, and Freight)
Unlike CFR, in the case of CIF, the seller is responsible for providing minimum insurance cover for transporting the goods to the destination port. However, just like in the case of CFR, the buyer bears all risk once the goods are loaded onboard the vessel.
7. CPT (Carriage Paid To)
This rule applies to all transportation modes, including air freight and multimodal. The seller is responsible for export clearance, for paying the transport to a chosen destination, and for transporting them to the first carrier. The risk shifts from seller to buyer once the goods are handled over to the first carrier.
8. CIP (Carriage and Insurance Paid To)
CIP is similar to CPT, but the difference is that when the CIP rule is chosen, it is the seller who pays for insurance during transit to the named destination.
9. DAP (Delivered at Place)
The transport risk and responsibility, as well as export clearance, fall on the seller. However, the seller is not responsible for unloading the goods at the named destination. It is the buyer who is responsible for import clearance and duties. DAP is commonly used for door-to-door shipping.
10. DPU (Delivered at Place Unloaded)
DPU is similar to DAP in that the seller bears the risk and cost of transport and is responsible for export clearance. However, the difference is that under the DPU rule, the seller is also responsible for unloading the goods at the named destination.
11. DDP (Delivered Duty Paid)
The seller is responsible for bearing all the risk and covering all the costs until the goods are delivered to the buyer’s premises or a named delivery destination or port in case of containerized or multimodal shipments. The DDP Incoterms 2020 rule may seem hassle-free for the buyer; however, the seller may not have the legal ability to clear the goods for import, or may not have the logistics to do so. So, the DDP rule should be chosen with caution.
How Importers Can Choose the Right Incoterm
Choosing the right Incoterms 2020 rule for your business depends on many factors. These include your negotiating skills, risk tolerance, and experience in logistics, on the one hand, and shipment size on the other. If you’re a new importer, Incoterms 2020 DDP or DAP can help simplify the process. If you’re an experienced trader who has strong partners in logistics, FOB may help you save money.
However, regardless of what Incoterms 2020 rule you choose, you should clearly communicate your expectations to your supplier, as well as clarifying the terms in your contract. This means doing all the following:
- Select your business partners wisely: It may sound like a no-brainer, but choosing reliable and trustworthy suppliers, customs brokers, and freight forwarders is essential to preventing costly delays or fines, among others.
- Clarify expectations: During negotiations, state the Incoterms rules you are using—do not assume that your supplier understands the rules.
- Break down costs: Ensure your business partners clarify what’s included in their services and what’s not, to avoid unexpected costs and delays with your freight.
- Consult your insurance advisor: Some Incoterms 2020 rules (such as FAS or FOB) don’t require sellers to provide insurance. Of course, this doesn’t mean risk disappears, so ensure you get expert insurance advice in all cases, regardless of the Incoterms 2020 rule you choose.
- Keep accurate records: The lack of precise documentation can lead to shipping delays, inspections, or fines, as well as making disputes more difficult to settle.
Use Incoterms Knowledge to Navigate Import Success
In the intricate puzzle of global trade, the Incoterms rules are the assembly guide. Understanding Incoterms 2020 will put you on the path to trade success while helping you minimize risk from costly delays or fines.
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