Incoterms® (International Commercial Terms) are international trade rules developed and regularly updated by the International Chamber of Commerce since 1936. These aim to clarify the division of responsibilities between buyers and sellers in cross-border transactions. As the form of global trade evolves, the ICC revises the rules every 10 years on average. The latest version is Incoterms® 2020, which took effect on January 1, 2020. Historically, the rules have been revised nine times, in 1957, 1967, 1976, 1980, 1990, 2000, 2010, and 2020, and have gradually been improved to meet modern trade needs such as container transport and electronic documents.
Definition of Incoterms
Incoterms are a set of rules developed by the International Chamber of Commerce to regulate the rights and obligations of buyers and sellers in international trade. They effectively reduce uncertainty and disputes in international trade by clarifying key elements such as the place of delivery, the point of risk transfer, who bears the cost, and the handling of import and export procedures. For companies, mastering and using Incoterms not only optimizes logistics costs but also reduces potential risks and ensures the smooth progress of transactions.
The main functions of Incoterms
Incoterms fulfill three core functions through standardized terminology:
- Division of responsibility: it clarifies which party is responsible for delivery, transport, insurance, customs clearance, etc.;
- Risk transfer: it stipulates the key point at which the risk of damage to the goods is transferred from the seller to the buyer;
- Cost allocation: it defines which party bears the cost of transport, customs duties, insurance, etc.
It should be noted that Incoterms are not law, and their validity depends on the explicit reference by both parties to the contract. They do not cover contractual elements such as transfer of ownership, payment methods, and default handling, which need to be agreed upon separately.
Analysis of the 2020 version of the International Trade Terms Classification
The 2020 version of Incoterms® divides the 11 terms into two categories based on the mode of transport: 7 terms that apply to any mode of transport and 4 terms that apply only to Ocean Freight and Inland Waterway Transport. The following is a detailed introduction to each type of term:
(1) Terms that apply to any mode of transport
- EXW (Ex Works)
- Seller’s responsibility: The seller is only required to make the goods available at its factory or warehouse for the buyer to collect.
- Buyer’s responsibility: After collecting the goods from the seller’s premises, the buyer bears all costs and risks, including transportation, insurance, import and export customs clearance, etc.
- Applicable scenarios: It is suitable for domestic or international trade where the buyer is able to arrange their transportation.
- FCA (Free Carrier)
- Seller’s responsibility: The seller delivers the goods to the carrier nominated by the buyer and arranges export customs clearance.
- Buyer’s responsibility: The buyer is responsible for arranging the transport and bears the subsequent costs and risks.
- Applicable scenarios: Suitable for container transport or goods requiring multimodal transport.
- CPT (Carriage Paid To)
- Seller’s responsibility: The seller pays the freight to the named destination and arranges export customs clearance.
- Buyer’s responsibility: The buyer bears the risk after the goods are delivered to the carrier and is responsible for import customs clearance.
- Applicable scenarios: This is suitable for transactions in which the seller bears the main transportation costs but transfers the risk upon delivery.
- CIP (Carriage and Insurance Paid to)
- Seller’s responsibility: In addition to the CPT responsibilities, the seller is also required to purchase a minimum amount of insurance to cover the risk of the goods in transit.
- Buyer’s responsibility: The buyer bears the risk of the goods after they are delivered to the carrier. If higher insurance is required, additional negotiations are required.
- Applicable scenarios: Suitable for high-value goods or transactions where the seller is required to provide insurance coverage.
- DAP (Delivered at Place)
- Seller’s responsibility: The seller delivers the goods to the designated destination and bears the risks and costs during transportation but is not responsible for unloading and import customs clearance.
- Buyer’s responsibility: The buyer is responsible for unloading, import customs clearance, and subsequent costs.
- Applicable scenarios: This is suitable for transactions where the buyer wants the seller to bear the transport risk but handle the import formalities themselves.
- DPU (Delivered at Place Unloaded)
- Seller’s responsibilities: The seller delivers the goods to the designated destination and unloads them, bearing the risks and costs of transport and unloading, but is not responsible for import customs clearance.
- Buyer’s responsibilities: The buyer is responsible for import customs clearance and subsequent costs.
- Applicable scenarios: This is suitable for transactions where the seller is responsible for unloading, such as delivery at the port.
- DDP (Delivered Duty Paid)
- Seller’s responsibility: The seller bears all costs and risks involved in transporting the goods to the named destination, including transportation, insurance, import and export customs clearance, etc.
- Buyer’s responsibility: The buyer only needs to accept the goods at the destination.
- Applicable scenarios: This is suitable for transactions in which the buyer wants to be completely exempt from liability, and the seller handles everything.
(2) Terms applicable only to Ocean Freight and Inland Waterway Transport
- FAS (Free Alongside Ship)
- Seller’s responsibility: The seller delivers the goods to the quay at the port of shipment and arranges for export customs clearance.
- Buyer’s responsibility: The buyer is responsible for loading the goods onto the vessel and bears the subsequent costs and risks.
- Applicable scenarios: Suitable for transactions involving large quantities of bulk goods or where delivery at the quay is required.
- FOB (Free on Board)
- Seller’s responsibility: The seller loads the goods onto the vessel designated by the buyer and arranges for export customs clearance.
- Buyer’s responsibilities: After the goods are loaded onto the ship, the buyer bears all costs and risks, including transportation and insurance.
- Applicable scenarios: Widely used in Ocean Freight trade, especially for bulk goods.
- CFR (Cost and Freight)
- Seller’s responsibilities: The seller pays the freight to the port of destination and handles export customs clearance.
- Buyer’s responsibilities: The buyer bears the risk after the goods are loaded onto the ship and is responsible for purchasing insurance.
- Applicable scenarios: Suitable for transactions where the seller is responsible for the transportation costs, but the buyer purchases the insurance on their own.
- CIF (Cost, Insurance, Freight)
- Seller’s responsibilities: The seller pays the freight and insurance, transports the goods to the port of destination, and handles export customs clearance.
- Buyer’s responsibilities: The buyer bears the risk of the goods after they are loaded on the ship. If higher insurance is required, additional negotiations are needed.
- Applicable scenarios: Suitable for Ocean Freight trade where the seller is required to provide insurance coverage.
Comparison of Incoterms 2010 and Incoterms 2020
Incoterms 2020 has been updated from Incoterms 2010 in the following main areas:
- Terminology adjustments: DPU (Delivered at the Place of Unloading) replaces DAT (Delivered at the Terminal), and the scope of unloading locations is expanded.
- Insurance requirements: The scope of insurance coverage under the CIP and CIF terms is improved, and the seller is required to purchase insurance with a higher coverage.
- Bill of lading rules: The use of the FCA term in conjunction with a bill of lading that has already been shipped is permitted, which provides greater convenience for letter of credit transactions.
- Safety obligations: The safety responsibilities of buyers and sellers during transportation are clarified, which strengthens the protection of goods.
Key factors in selecting international trade terms
When selecting international trade terms, companies need to consider the following factors comprehensively:
- Transport method: According to the characteristics of the goods and the transport requirements, select the appropriate transport method and then determine the applicable trade terms.
- Cost control: Analyse the cost-bearing situation under different terms and choose the term that is most conducive to cost control.
- Risk allocation: Clarify the responsibilities of the buyer and seller at the point of risk transfer and allocate risks reasonably.
- Customs clearance capabilities: Consider the capabilities and resources of the buyer and seller in terms of import and export customs clearance and choose an appropriate term.
- Industry practices: Refer to the commonly used terms in the industry and follow the practices and customs of international trade.
Summary
Incoterms are an important cornerstone of global trade. They provide a clear and unified set of rules for buyers and sellers, helping companies reduce risks and improve efficiency in the complex international trade environment. The updates to Incoterms 2020 further adapt to the needs of modern trade. Companies should fully understand and use these terms and choose the appropriate trade terms based on their actual situation in order to gain a favorable position in global trade.
