Global shipping is a crucial part of businesses these days; however, as essential as it is, it comes with its own set of complexities. Business owners just stepping into international trade often find themselves clueless when it comes to the technicalities of shipping globally, resulting in significant losses. But with the help of Freight Forwarders, this intricate process can be dealt with smoothly, whether it's customs laws, transportation, tariffs or international trade terms, they make sure everything is taken care of.
In this blog, you will get to know all the details about these terminologies, which are also known as Incoterms. Whether you’re comparing EXW vs FOB or CIF vs DDP, knowing the international trade terms in detail ensures your shipments move smoothly from seller to buyer. From What to Why, let’s explore everything about these international trade terms that you need to know as an importer/exporter.
What are Incoterms?
The widely known term Incoterms stands for International Commerce Terms. Defined by ICC (International Chamber of Commerce) in 1936, these predefined international trade terms are recognised as a global standard. The entire process of shipping responsibilities and management includes several stages and people, such as buyers, traders, sellers, the government, etc. Stages in International Trade are vast, from shipping, insurance, documentation, customs clearance, and risk, etc. this set of rules defines and divides who is responsible for what in the process.
● Purpose of Incoterms
The main purpose of Incoterm is to disseminate a uniform set of language or interpretation that simplifies the commercial terms of delivery of goods.
● What Incoterms Identify
➢ Who pays for the transportation?
➢ At what point is delivery considered complete?
➢ When does the risk of loss or damage shift to the buyer from the seller?
➢ Allocation of roles and responsibilities throughout the shipping stages
● What are the benefits of Incoterms?
➢ Eliminates the chances of any hidden cost or last-minute expenses, such as port handling or local delivery charges
➢ Ensures a uniform and authentic interpretation of commerce throughout the shipping stages
➢ Helps to schedule and plan shipping and other insurance accordingly
➢ Keep a check on customs and trade law compliance
➢ Ensures a prior update of when the risk of loss or damage shifts to the buyer from the seller
Introduction to 11 Incoterms in Incoterm 2020
Incoterms Explained for Beginners
Before we learn about the updates in the Incoterms 2020, it’s essential to know about these terms in detail. Based on the modes of transportation, Incoterm 2020 is majorly divided into two categories:
A. Seven Rules for Any Mode of Transport
B. Four Rules for Sea and Inland Waterway Transport
➢ Seven Rules for Any Mode of Transport: As the name suggests, these Incoterms can be used for any mode of transportation, be it road, rail, air or sea transport.
- EXW
● Stands for: Ex Works
● Risk Transfers at: Seller’s Premises
● Transportation Arranged by: Buyer
- FCA
● Stands for: Free Carrier
● Risk Transfers at: When goods are handed to the carrier
● Transportation Arranged by: Seller
- CPT
● Stands for: Carriage paid to
● Risk Transfers at: Destination port/terminal
● Transportation Arranged by: Seller
- CIP
● Stands for: Carriage and Insurance paid to
● Risk Transfers at: Destination port/terminal
● Transportation Arranged by: Seller (including the insurance)
- DAP
● Stands for: Delivered at the place
● Risk Transfers at: Buyer’s named place
● Transportation Arranged by: Seller
- DPU
● Stands for: Delivered at the place unloaded
● Risk Transfers at: When goods are unloaded at the destination
● Transportation Arranged by: Seller
- DDP
● Stands for: Delivered duty paid
● Risk Transfers at: Buyer’s Premises (post custom clearance)
● Transportation Arranged by: Seller
➢ Four Rules for Sea and Inland Waterway Transport
- FAS
● Stands for: Free alongside ship
● Risk Transfers at: Alongside the vessel at port
● Transportation Arranged by: Seller
- FOB
● Stands for: Free on board
● Risk Transfers at: When goods are on the vessel
● Transportation Arranged by: Seller
- CFR
● Stands for: Cost and Freight
● Risk Transfers at: Destination Port
● Transportation Arranged by: Seller
- CIF
● Stands for: Cost, Insurance and Freight
● Risk Transfers at: Destination Port
● Transportation Arranged by: Seller (including the insurance)
Updates in the Incoterms 2020
Periodic updates in the Incoterms are important to reflect the ever-changing global trade practices. After Incoterms 2010, Incoterms 2020 is the most recent and updated version, and the adapted changes are as mentioned below:
● Replacement of DAT (Delivered at Terminal) with DPU (Delivered at Place Unloaded): The word “Terminal” was reflecting a fixed location, such as a port or airport, confusing, as many shipments are unloaded in places like warehouses, factories, etc. Replacing the word “terminal” with “at Place Unloaded” brought better clarity.
● Different Insurance Cover Between CIF and CIP: (Cost, Insurance & Freight) and CIP (Carriage & Insurance Paid To), both direct the seller to provide insurance. Earlier, with Incoterms 2010, both required Clause C, which is only basic coverage under the Institute cargo clauses. Now, with Incoterms 2020, CIF still requires Clause C, which is suitable for bulk commodity shipping, but CIP requires Clause A, covering all risks and offering a wider coverage.
● “On Board” Bill of Lading Under FCA
With this new update under FCA (Free carrier), sellers are now free to request an on board bill of lading from the buyer’s carrier, once the loading of goods on the vessels is done. Earlier, with Incoterms 2010, this option was not available for the sellers as their responsibility ended before loading the ship.
● Changes in Cost Allocation
The Incoterms 2020 introduced a detailed section for “Cost Allocation” (section A9/B9) for each cost listing rule, which describes which party pays for what in detail. Incoterms 2010 did not have any mention of such a section, which raised many global trade disputes due to unclear cost distribution.
● Betterment in Transport Security
Security concerns like customs security filings, screenings, etc., are one of the major import obligations to look out for. Incoterm 2020 includes a dedicated section (A4/B4) supporting stricter global security and modern supply chain security practices.
● Allowance to Use Own Means of Transport
Incoterms 2020 allows sellers or buyers to use their company’s own transport, like a truck, trolley, etc., which eliminates the need for outsourcing and promotes flexibility.
Enhanced Presentation and Visuals
With detailed guidance notes and explanatory visuals, Incoterms 2020 allows a better understanding of its uses, risks, and scenarios where each term fits the best. The purpose was to make even complex terms like shipping terms and conditions guide, etc., more accessible for traders who are new to the industry.
