INCOTERMS 2020: Your Guidelines For More Efficient Trading
Valid from 1 January 2020, the eighth version of the Incoterms 2020 is now available.
It is impossible to imagine logistics without the Incoterms rules, which have existed since 1936 when the International Chamber of Commerce (ICC) published the first version in Paris. Since 1980 Incoterms have been revised every ten years.
Incoterms (International Commercial Terms) - international rules in a dictionary format that provide unambiguous interpretations of the most widely used trade terms in private foreign trade, primarily with respect to francs - the place of transfer of responsibility from the seller to the buyer.
International trade terms are standard terms for international sales contracts, which are defined in advance in an internationally recognized document, in particular in a standard sales contract developed by the International Chamber of Commerce.
Within the scope of their regulation, Incoterms mainly regulate:
- what obligations each party to the contract must assume for its journey;
- what costs each contracting party must bear for its journey;
- who covers which risk.
Incoterms glossary: which clauses exist?
There are Incoterm clauses which can be used for any type of transport route and those which are only valid for sea transport.
In addition, the clauses are divided into groups:
- E (Ex),
- F (Free),
- C (Carriage),
- and D (Delivered).
It marks the respective status at the time of delivery of the goods. For example, E stands for Ex Works and defines basic obligations such as cost and risk assumption for the buyer or seller.
The Incoterm groups and the clauses that belong to them can be found in the following glossary:
E Group (Ex Works)
In the E-Group there is only one clause which regulates collection at the factory:
EXW - Ex Works
This collection clause states that the buyer collects the delivery directly from the factory. It is the seller's responsibility to pack the items beforehand. All other costs, obligations, and risks are transferred to the buyer from the moment of collection.
Attention: in some countries, only the sellers are allowed to take care of export licenses. The EXW-clause assigns the export to the buyer, but it may not be possible for the buyer to export the goods. You should therefore find out about all the formalities before you decide to use the EXW clause.
F-group (Free ...)
In all F-Group clauses, the buyer bears the costs of the main transport. The seller is only responsible for the delivery until it is handed over to the carrier, after which the risk is transferred to the buyer.
FCA - Free Carrier
The FCA clause stipulates that the seller is responsible for packaging, an inspection of the goods, and delivery to a place of delivery specified by the buyer. From the moment the goods are handed over to the main carrier, all obligations are transferred to the buyer.
FCA now also offers the possibility of adding an endorsement to the Bill of Lading before loading the goods onto a vessel.
FAS - Free Alongside Ship - for maritime transport only
The seller must pack, check, and clear the goods. His obligations are fulfilled as soon as the delivery alongside the ship has arrived at the agreed port. From that moment on the buyer is responsible for the rest of the voyage.
FOB - Free On Board - only for shipping traffic
This clause is similar to the previous FAS clause, except that the delivery is fulfilled only when the goods have arrived on board the vessel.
C-group (Carriage ... / Cost ...)
For all clauses in this group, the seller bears the main part of the transport costs. With the handover of the delivery, the seller passes the responsibility for the goods to the buyer.
CPT - Carriage Paid To
The seller packages the goods and clears them for export. He delivers them to the point of transfer and bears all costs incurred until there: packaging, an inspection of the goods, shipping, export charges.
CIP - Carriage and Insurance Paid to
The CIP clause corresponds to the previous CPT provision. In addition, the seller shall take out insurance for the entire transport route.
CFR - Cost and Freight - only for shipping
Under this clause, the seller is responsible for packaging and transport costs until the delivery has arrived on board the vessel.
CIF - Cost Insurance Freight - only for shipping
This provision is similar to the CFR clause. The only difference is that the seller is responsible for ensuring the transport of goods.
As regards insurance cover, changes have been made to the CIF and CIP clauses. The use of the CIF clause maintains the previous regulatory content of the standard position of the (C) "Institute Cargo Clause", which provides for minimum cover for certain loss events, such as major average, fire, stranding, an accident involving means of transport, seaquake, etc.
If, on the other hand, the CIP clause is used, the seller will in the future be responsible for the insurance cover in accordance with (A) "Institute Cargo Clause", which provides the most comprehensive insurance cover according to the all-risk principle.
Note: the contracting parties are still free to contractually agree on a lower or higher level of insurance cover.
D group (Delivered ...)
The special feature of the D-Group is that the seller is responsible for both costs and the risk of transport.
DAP - Delivered At Place
The seller delivers the order to the place of delivery and makes it available to the buyer there unloaded. In doing so, he bears the costs for the export, but not for the import in the destination country.
New in 2020: DPU - Delivered at Place Unloaded
Also in this clause, the seller delivers to the agreed place of delivery and unloads them there directly. The seller bears the unloading costs.
DDP - Delivered Duty Paid
The DDP clause obliges the seller to bear all customs costs in addition to the transport costs. This applies to both import and export. He delivers the goods to the agreed place but does not have to unload them.
Note: for transactions outside the European Union, the EXW and DDP clauses are not suitable and therefore not recommended. This is because neither import nor export obligations which are assumed in the case of EXW or DDP can be fulfilled without prior registration for e.g. VAT purposes in the respective country.
More efficient trading
To carry out successful business deals and have an overview of all the processes, many companies choose to use digital platforms and software that facilitate and help manage workflows.
For example, TRADE.EASY can help you monitor all your international trade activities: from business management to logistics, cash flow, accounting, and much more. It will help you save time staying efficient and concentrating on your turnover.
It is important to understand that Incoterms are not laws and do not oblige you to follow them. They are more like guidelines for those selling or buying goods. In the end, it is up to both parties to agree on conditions of delivery and payment and sign the contract.
For more check out our list of top 10 business management software.