Understanding Incoterms 2020: A Complete Guide for Global Trade
Introduction
In the world of international trade, clear communication is crucial. This is where Incoterms come into play. Short for "International Commercial Terms," Incoterms are a set of standardized trade terms created by the International Chamber of Commerce (ICC) that outline the responsibilities of buyers and sellers in international transactions. They clarify who is responsible for transportation, insurance, customs clearance, and other logistical components, reducing the risk of misunderstandings and disputes.
The latest version, Incoterms 2020, came into effect on January 1, 2020, replacing the previous 2010 version. In this blog, we’ll break down what Incoterms are, the changes introduced in Incoterms 2020, and provide a detailed explanation of each term, helping you understand how to use them correctly in your global trade operations.
What Are Incoterms?
Incoterms are a set of 11 rules that define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. They are globally recognized and used by buyers, sellers, exporters, importers, and freight forwarders to outline who is responsible for transportation costs, insurance, and duties, as well as where the risk is transferred from the seller to the buyer.
Each Incoterm specifies:
Where the goods are to be delivered.
Who arranges and pays for transport.
Who is responsible for insuring the goods.
Who handles customs procedures.
At what point the risk of loss or damage transfers from seller to buyer.
Key Changes in Incoterms 2020
Before diving into each Incoterm, it's important to note some of the key updates that Incoterms 2020 brought:
DAT Becomes DPU: The term "Delivered at Terminal (DAT)" was renamed "Delivered at Place Unloaded (DPU)" to emphasize that the destination can be any place, not just a terminal.
FCA and On-Board Bills of Lading: There’s now an option for the seller under Free Carrier (FCA) to obtain an on-board bill of lading, which is crucial for sellers under letters of credit.
Insurance Coverage Levels: Incoterms 2020 provide more clarity on the levels of insurance required under Cost, Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP). CIF retains the minimum cover (Clause C), while CIP now requires a higher level of insurance cover (Clause A).
Own Transport Option: Incoterms 2020 recognize situations where the buyer or seller may use their own means of transportation, rather than contracting a third party.
The 11 Incoterms Explained
Incoterms 2020 are divided into two categories: Incoterms for any mode of transport and Incoterms for sea and inland waterway transport only. Let’s break down each one:
Incoterms for Any Mode of Transport
EXW (Ex Works):
Seller's Responsibility: The seller makes the goods available at their premises (factory, warehouse, etc.). The buyer is responsible for all costs and risks associated with transportation.
Buyer’s Responsibility: The buyer handles everything from loading the goods at the seller’s location to transporting them to the final destination, including export duties and insurance.
Use Case: Suitable for domestic transactions or when the buyer has full control over the transportation process.
FCA (Free Carrier):
Seller's Responsibility: The seller delivers the goods, cleared for export, to the carrier or another party nominated by the buyer at the seller’s premises or another named place.
Buyer’s Responsibility: The buyer takes over once the goods are handed to the carrier, handling transport, insurance, and import duties.
Key Update: Allows for an onboard bill of lading, even when the goods are delivered to the carrier before loading on a vessel.
CPT (Carriage Paid To):
Seller's Responsibility: The seller pays for carriage to the named place of destination but does not assume risk once the goods are handed over to the first carrier.
Buyer’s Responsibility: The buyer assumes all risks once the goods are in transit and handles insurance if needed.
CIP (Carriage and Insurance Paid To):
Seller's Responsibility: The seller pays for carriage and insurance to the named place of destination. The insurance must be at the higher coverage level (Clause A of the Institute Cargo Clauses).
Buyer’s Responsibility: The buyer assumes the risk after the goods are handed over to the first carrier and may need to arrange additional insurance.
DAP (Delivered at Place):
Seller's Responsibility: The seller is responsible for delivering the goods to the named place of destination, but the buyer is responsible for unloading.
Buyer’s Responsibility: The buyer handles the unloading, import clearance, and associated costs.
Use Case: Common when the seller can control most of the transportation but prefers the buyer to handle local clearance.
DPU (Delivered at Place Unloaded):
Seller's Responsibility: The seller delivers the goods, unloaded, at the named place of destination. The seller assumes all costs and risks up to the point of unloading.
Buyer’s Responsibility: The buyer handles import clearance and any further transportation.
Key Change: DPU replaces DAT to emphasize delivery can be at any place, not just a terminal.
DDP (Delivered Duty Paid):
Seller's Responsibility: The seller is responsible for delivering the goods to the buyer's location, paying all costs and duties, including import customs duties.
Buyer’s Responsibility: The buyer only needs to unload the goods.
Use Case: Ideal when the seller wants full control over the supply chain up to the buyer’s premises.
Incoterms for Sea and Inland Waterway Transport
FAS (Free Alongside Ship):
Seller's Responsibility: The seller delivers the goods alongside the ship at the named port of shipment. The buyer is responsible from that point onward.
Buyer’s Responsibility: The buyer arranges loading, ocean freight, insurance, and import duties.
Use Case: Commonly used for bulk cargo or heavy equipment.
FOB (Free On Board):
Seller's Responsibility: The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment.
Buyer’s Responsibility: The buyer assumes risk once the goods are loaded on board and covers the rest of the journey.
Use Case: Often used in maritime shipping, especially for containerized goods.
CFR (Cost and Freight):
Seller's Responsibility: The seller pays for the transport to the named port of destination but does not assume risk once the goods are on board the vessel.
Buyer’s Responsibility: The buyer assumes risk after loading and is responsible for insurance and import duties.
CIF (Cost, Insurance and Freight):
Seller's Responsibility: The seller pays for the cost of goods, insurance (at minimum cover), and freight to the named port of destination.
Buyer’s Responsibility: The buyer assumes the risk once the goods are loaded onto the ship and is responsible for import clearance.
Use Case: Common in bulk shipping where the seller provides basic insurance coverage.
Conclusion
Understanding Incoterms 2020 is crucial for any business involved in international trade. They define who is responsible for what, and at which point the risk transfers from the seller to the buyer. Using the correct Incoterm ensures clarity in your transactions, minimizes disputes, and helps both parties understand their obligations clearly.
At CargoLink&Trade, we specialize in helping businesses navigate the complexities of global trade, including the correct application of Incoterms. Whether you’re shipping goods across borders or need advice on risk management, our expert team is here to support you every step of the way. Stay informed, stay compliant, and ensure your international shipments are managed with precision and care.
