Incoterms is the shorter version of International Commercial Terms. These specific terms are used throughout international commercial transactions. They are three-letter trade terms used to clearly communicate the risks, costs, and tasks associated with international transportation and the delivery of goods.
A basic understanding is just the start when it comes to Incoterms. If you plan to import and export goods internationally, it's a good idea to gain a strong understanding of what Incoterms are, why they are used and what they mean. For quick reference guides, infographics, and downloadable handouts click here.
While Incoterms 2010 and Incoterms 2020 are the most recent versions, Incoterms actually dates back to 1923 when the first work published by the ICC was issued. The first known version of Incoterms wasn't published until 1936, however.
Since 1936, the Incoterms rules have been amended several times. They were amended for the first time in 1967, again in 1976, and starting in 1980, they were amended about every decade.
Just as differences in language and trade centuries ago caused the Phoenicians to come up with the standard alphabet we have today, the differences in trade and legal practices caused the set of rules called Incoterms to become industry standard.
https://www.history.com/news/who-created-the-first-alphabet
The rules were put in place to help prevent misunderstandings and disputes. Litigation was rather common due to misunderstandings and Incoterms help to create an easier set of rules for all international importers and exporters to easily understand.
Incoterms are the terms of sale defining many things, such as the arrangements for payment and handling of goods. They cover the entire transition from the second the goods leave the seller's door until they arrive at the buyer's final destination.
Incoterms Do:
Incoterms Don't:
It's important to understand what Incoterms do and don't do or you could think you're covered when you're not. A good freight forwarder or customs broker in Canada will ensure you are protected and will know how to properly use Incoterms, along with what they mean.
The two main categories for Incoterms published in 2010 are currently used for international and domestic contracts. This set of Incoterms was the first to be used in this way and the new groups were created with the goal of simplifying the creation of contracts and making obligations to buyers and sellers clearer.
However, the 2010 Incoterms were replaced on January 1, 2020 with the new Incoterms 2020.
The most current revision consists of 11 Incoterms. The changes include:
While previous versions of Incoterms can still be used, it's not preferred. Those not using Incoterms 2020 rules must define which version of Incoterms will be used before negotiating the sales contract. In addition, you will need to ensure documentation is correct all throughout the transaction.
Incoterms 2020 Rules are split into two groups; Incoterms for any mode of transport and Incoterms for sea and inland waterway transport only.
Group #1 - Any Mode of Transport
Group #2 - Sea and Inland Waterway Transport
As a buyer, you want to consider Incoterms before the sales contract is negotiated. If you don't use Incoterms, you could be putting yourself at risk when it comes to the supplier. Without using Incoterms, you may run into shipment complications or the supplier may take advantage of you.
While using Incoterms helps to make it easier to avoid misunderstandings and disputes, there are some exceptions to the typical Incoterms rules. Most countries and most circumstances will be about the same. However, the United States requires a Customs Bond, the UK requires a Deferment Account, and if you plan to export from India, you'll need to pay a withholding tax. Keep these differences in mind when importing from or exporting to these three countries.
Incoterms make it easier to negotiate the sales contract, but they don't cover property rights, breach of contract, or possible force majeure situations. It's best to include these in the sales contract. Incoterms also does not assign any responsibility for arranging cargo insurance, except the C terms.
Some Incoterms are more commonly used than others. It's best to understand the most commonly used Incoterms to ensure you know what to expect when negotiating a sales contract. If you're hiring a freight forwarder or customs broker, it's a good idea to ensure they understand more than just the most commonly used Incoterms.
This incoterm means the seller is responsible for creating the goods available at the premise of the seller. It also means the buyer will take on full responsibility, risk, and cost when the goods leave the seller's premises.
Two common misunderstandings of EXW terms are that the shipper is responsible for completion of the Export Declaration and that the shipper is responsible for loading the goods on to the collection vehicle. In both cases, this is the responsibility of the buyer. If the buyer wishes for the shipper to make these arrangements, then they should select FCA terms.
Very commonly used, FOB means the seller is responsible for delivering the goods and loading them onto the ship at the port. FOB also means the seller is responsible for the costs, including terminal handling charges, and the risk is transferred to the buyer as soon as the goods pass the railing of the ship.
Delivered Duty Unpaid simply means the seller is responsible for the safe arrival of the goods to a specific destination. The buyer will be responsible for the import duties.
The buyer will name the carrier and the seller is responsible for delivering the goods to the carrier and the agreed delivery point. The seller will also be responsible for the costs associated with the delivery, along with the cost of loading the cargo and the risk associated with loading the cargo.
Each revision to the Incoterms rules aims to make it easier and clearer when negotiating sales contracts between buyers and sellers. Understanding the responsibilities of both parties helps to ensure disputes are minimal and misunderstandings don't happen. The changes found in Incoterms 2020 rules helps to reduce the risk of legal complications.
It's best to have a copy of the ICC's Incoterms 2020 Rules book and use an experienced customs broker or freight forwarder for all your international shipping needs.
Understanding the Incoterms revisions matters when you plan to import or export goods. Even if you plan to hire a customs broker or freight forwarder to handle your international shipping needs, it's best to have a basic understanding of what Incoterms are and how they work.
Make sure you take the time to learn the changes for the Incoterms 2020 rules and any other version you plan to use. If you have questions about Incoterms or you need a logistics partner to help you, Cole International is ready to become your international shipping partner. Contact us today and find out how we can help make importing and exporting goods easier.
https://www.coleintl.com/cole-resources/international-commercial-terms.php
Incoterms. it's what we do.
Suggested Articles on Freight Forwarding:
Freight Forwarding: A Complete Guide
International vs. Domestic Freight Forwarding: Understanding the difference
Hiring a Freight Forwarder in Canada? 4 things to consider
9 Tips for Choosing a Freight Forwarder in the USA