INCOTERMS 2020 Explained: 11 Terms, 5 Changes – American Export Lines
Incoterms® 2020 went into effect January 1, 2020. These set of international commercial terms for shipping, have 11 terms with 5 changes. Incoterms is short for International Commercial Terms.
As global trade shrinks our world, the terms of that trade grow increasingly complex. To simplify that complexity, the International Chamber of Commerce (ICC) created a set of rules – called Incoterms® (which stands for International Commercial Terms) – that govern the way companies do business worldwide. These rules have become the global standard – recognized by the UN trade law commission for handling disputes among trading partners.
International trade has come a long way since the last major change in these rules, in 2010. Hence, the ICC has revised these statutes in its new publication, Incoterms 2020.
If you ship or receive freight anywhere in the world, you owe it to yourself to read these changes. Here are some guidelines that can help you look at Incoterms 2020 and how they impact everything along a product’s journey from seller to buyer.
Are the Older Versions of Incoterms Still Valid?
Even though the stipulations in Incoterms 2020 came into effect on January 1, 2020, earlier contracts that used previous years’ versions of the rules are still valid, as Alexander Robertson points out in a ShippingandFreightResource.com post. So long as both parties to the sale agree on the Incoterms version they will use and state that version in the contract, you are free to choose any version.
A contract must, however, use only one version of Incoterms. Since the new rules clarify the terminology and reflect global changes that have occurred over the past ten years, it makes better sense to write new contracts using Incoterms 2020 as their basis.
Same Terms, Five Updates
Incoterms 2020 still have 11 terms, but the ICC has updated five critical parts of the rules to reflect the changing needs of the market. Changes include:
- Updated terminology
- Increased attention to insurance and security issues
- A balanced treatment of accountability and flexibility.
Expanded International Authorship
Not only has the ICC updated the rules themselves, but they have also expanded the authorship of the rules to include experts from Australia and China, as well as Europe and the United States, reflecting those nations’ increased importance in international trade.
Now, the authors of Incoterms® 2020 represent the United States, Europe, and, for the first time ever, China and Australia. Together, they provide a comprehensive approach to the international aspects of freight agreements.
Defined by Mode of Transportation
These rules use acronyms that translate across international lines, each of which deals with specific aspects of trade.
Seven of the terms regulate all types of transportation. They include:
- EXW (ExWorks): The seller delivers by making the goods available to the buyer.
- FCA (Free Carrier): The seller delivers the goods to a carrier or an agent appointed by the buyer.
- CPT (Carriage Paid To): The seller delivers the goods to a buyer-appointed agent or carrier and also pays for international carriage (transportation).
- CIP (Carriage and Insurance Paid To): The seller delivers the goods to a buyer-appointed agent or carrier, pays for not only international carriage, but for insurance as well.
- DPU (Delivered at Place Unloaded): This term has been updated from its former designation, DAT (Delivered at Terminal). With DPU, the seller delivers the goods by making them available to the buyer by unloading them at a designated place.
- DAP (Delivered at Place): The seller makes the goods available to the buyer at a designated place.
- DDP (Delivered Duty Paid): The seller places the goods at the buyer’s disposal, duties paid ahead of time, cleared for import, and ready to unload at a designated place.
Four of the rules regulate inland waterway and ocean transportation. They are:
- FAS (Free Alongside Ship): The seller delivers the goods alongside a buyer-chosen vessel.
- FOB (Free on Board): The seller delivers the goods onto a buyer-chosen vessel.
- CFR (Cost and Freight): The seller pays for the freight and costs to take the goods to a specific destination and delivers when the goods are on board a buyer-chosen vessel.
- CIF (Cost, Insurance, and Freight): The seller pays for freight, costs, and insurance to get the goods to a specified destination and delivers when the goods are on board a buyer-chosen vessel.
How Have Incoterms Changed from 2010 to 2020?
The changes in the terms make it easier for you and your trading partners to choose the best Incoterms rule for your sales contract. Not only that, but they provide more clarity and flexibility, a game-changer for businesses and carriers in emerging nations as they participate more fully in the global marketplace. Changes include:
- Change in terminology from DAT to DPU: Requiring only a designated place rather than a terminal gives businesses and carriers more flexibility regarding where they unload and load.
- Changes in the FCA terms: With these changes, sellers can more easily receive payments from their buyers’ banks. Sellers must usually provide banks with a bill of lading that indicates that the goods are on board the chosen transport. Unfortunately, carriers often have refused to issue the bills of lading if the goods come from an intermediate mode of transportation rather than the seller. The rule changes allow providers to instruct the carriers to provide them with a bill of lading with an on-board notation.
- Better insurance coverage for CIP: CIP requires insurance coverage from the Institute Cargo Clauses, Clauses A, ensuring that the costs of goods are covered.
- In-house transportation now allowed: To give sellers more options for transporting their goods, the new Incoterms enable sellers to use their own trucks, planes, or ships to deliver their goods. For sellers with their own transportation, this change can cut costs and paperwork, making delivery more efficient.
- Improved security: With the need for extra security for both imports and exports, the ICC has spelled out new, tightened security requirements that govern cash, goods, and documents’ trade terms.
Update Your Policies to Incorporate Incoterms 2020
You need to read over the new stipulations carefully to make sure that invoices are compliant with the new requirements. It is not, however, mandatory to switch over to the new Incoterms, provided both you and your trading partner agree to abide by an older version. Be sure, though, to choose which of the Incoterms you want to use before you draw up a contract.
The changes wrought by Incoterms 2020 do not impact regional regulations, since the new guidelines only apply to international trade.
Transportation terms might vary from shipment to shipment, depending on the conditions. For instance, if you need to ship by sea, your Incoterms may differ from transportation by land. Similarly, if you use your own transportation to transport goods to specific destinations and a third-party shipper for others, a different Incoterm will apply.
Be sure to note within your contract the Incoterm rule you are using. Always list it in standard form: [the chosen Incoterm] [the chosen port or place] [version of Incoterms used, such as “CIF Istanbul Incoterms® 2020″ or “DAP 660 Madison Avenue, New York City, New York, USA Incoterms® 2020.”
Also, if your shipment changes sellers or buyers while it is in transit, that, too, can complicate your contract. Having a comprehensive knowledge of the changes to Incoterms can help you cut through the red tape to find the most economical solution.
Other differences in transportation terms occur due to varying customs regulations, such as customs bonds required at the US borders, deferment accounts for the UK, and withholding taxes for exports from India. US regulations, too, allow businesses that use the FOB Incoterm to deduct their expenses from their factory to the port from their duty payment.
Using the best Incoterm for each shipment can save you plenty of money over time. Once you become familiar with all the new Incoterms’ ins and outs, you can leverage them to cut costs and pass the savings onto your customers.
To learn more about how using all the advantages Incoterms 2020 can save you money and time, or if you have any specific questions about Incoterms 2020, get in touch with our team at Contact Us or Request a Quote today.