International Commercial Terms (Incoterms) refer to the globally-recognized set of standards or regulations used to import and export goods. They were introduced by the International Chamber of Commerce (ICC) to help importers and exporters understand parties responsible for every aspect of the shipping process, such as preparing certificates of origin, packaging and labeling of shipment, and completing purchase orders. Buyers and sellers need to agree on the various Incoterms they would wish to apply to a transaction to know the extent of their responsibilities, risks, and costs. The ICC published the latest Incoterms on January 1, 2020, to help prepare businesses by making them competitive in global trade.
Incoterms 2020 and International Trade Regulations
The buying and selling of goods in the global trade system are often complicated with various risks, costs, and responsibilities. The ICC introduced Incoterms to guide traders who import and export goods globally. It published the first Incoterms regulations in 1936 and updated the latest edition in 2019 to ensure that buyers and sellers comply with international trade regulations. Incoterms 2020 provides daily guidance to individuals participating in the global export and import trade to ensure they use the correct terms while conducting transactions (ICC, 2020). They can be used in any mode of transport, such as Carriage and Insurance Paid (CIP), Carriage Paid To (CPT), Delivered at Place Unloaded (DPU), Delivery Duty Paid (DDP), Delivered at Place (DAP), Ex Works (EXW), and Free Carrier (FCA). Incoterms regulations for waterway delivery include Cost and Freight (CFR), Cost, Insurance and Freight (CIF), Free Alongside Ship (FAS), and Free on Board (FOB). Incoterms 2020 are not law but optional rules governing sales contracts and delivery of goods between the seller and the buyer. They do not affect the transport contract and any other sales right or property transfer.
Incoterms Rule You Should Use
The Incoterms 2020 contain a comprehensive introduction that guides users to select the relevant Incoterms rule while conducting their sale transactions. The introduction describes the use and purpose of the Incoterms rules, the role of the carrier, awareness measures while using variants of the Incoterms 2020 rules, and the concepts of risk and delivery. It also examines the relations of contracts that supplement the sale contract, the best practices individuals should adopt while consolidating the Incoterms rules into trade contracts, and the distinction between Incoterms 2020 and Incoterms 2010. According to Davis and Vogt (2021), the latest Incoterms rule contain expounded explanatory notes that enable users to understand the regulations in international trade. The explanatory notes also help individuals to accurately interpret Incoterms 2020 rules to avoid making costly misapplications or misinterpretations while navigating through the rules for buying and selling goods. For instance, organizations that sell their products globally often use DAP. The sellers prepare export documents, arrange the insurance, and pay the shipping costs. The buyers or recipients pay customs and import costs.
Value Incoterms Bring to an Agreement
Incoterms reduce risk during transactions by ensuring that all parties can maintain their international trade obligations. However, sellers and buyers in different locations may encounter language barriers while conducting business transactions. Connotations of terms can also make it challenging for parties in different geographical areas to understand each other since they may not reflect their interests. For instance, one country can consider tariffs as charges imposed by the local government. In contrast, another country can define tariffs as fees, taxes, and surcharges imposed by the local, state, and federal governments. Kim (2019) argued that Incoterms promote languages harmony by providing all parties with the same description of certain terms within their trade contracts. Therefore, they reduce the risk of encountering challenges during shipment by helping parties understand their respective roles and responsibilities under the given trade agreement.
The International Chamber of Commerce updates Incoterms every ten years to reflect changes in the global supply chain. Incoterms vary in responsibility between buyers and sellers since they both need to use Incoterms correctly depending on the type and nature of transport employed. Therefore, Incoterms change and variance in responsibility ensures that sellers and buyers can maintain compliance with changing laws and regulations of international trade. Incoterms prevent individuals from incurring potential fines and penalties imposed on parties engaging in unlawful business practices in global trade (Vogt & Davis, 2020). Therefore, understanding how Incoterms vary enables all parties involved in international trade to avoid disrupting the flow of goods and damaging their business reputation. Incoterms ensure timely payment of goods and services since they define the procedural and monetary aspects of all global shipping practices. Parties can also gain and maintain a competitive advantage in the global supply chain when they use Incoterms correctly while carrying out transactions.
Advantages of Using Free on Board (FOB) Contracts
Free on Board (FOB) contracts provide the best cost-effective shipment solutions that many buyers can afford. It facilitates the safe passage of goods and does not have hidden extra costs during the entire shipping process. Buyers can select their freight forwarder, thus leading to more flexibility and control of the terms, cost, and freight shipping planning. FOB is a standard contract accepted globally by many sellers and buyers (Srivastava, 2020). Sellers can recover their goods even while they are in transit when the buyers cannot clear payment before picking the merchandise. Buyers have control of the shipping documents since they select the transport carrier. They have a right to keep the payment documents for the transportation of goods. FOB contracts facilitate the clearance of customs. They give suppliers the responsibility of obtaining the relevant clearance papers at the port under FOB. Therefore, buyers can save a significant amount of time, money, hassles, unnecessary efforts, and complications associated with shipping goods. The sellers also know the destination of the goods and can dispatch them correctly to ensure that the buyers receive them.
Relevant Information for Companies Using Incoterms
Globalization has led to increased imports and exports of goods and services globally. Companies that engage in the import or export trade encounter Incoterms daily. They need to know that Incoterms are significant while signing contractual terms and obligations for global trade. According to ITA (2020), each Incoterm rule should clarify the risks, tasks, and costs that sellers and buyers should incur while conducting transactions. Incoterms determine parties responsible for shipping costs, customs clearance, insurance costs, transport costs, import costs, and liability of goods on transit. Incoterms are updated every ten years, and the sellers determine the type of Incoterms to use. Companies should mention them in their terms and conditions so that customers can know if they are responsible for certain aspects, such as incurring customs costs. The Incoterms should be described in a manner and language that consumers can understand what they mean. Companies must also know that not all carriers support every Incoterm. Therefore, they should always check with every carrier they engage in shipping their goods to various destinations.
In conclusion, the use of Incoterms in international trade enables buyers and sellers to understand their role and responsibility in the global supply chain network. Incoterms also help importers and exporters to navigate the international shipment processes by determining parties liable for the carriage, cost, and risk of transporting goods until they arrive at their intended destination. FOB provides the seller with the responsibility of clearing goods for export, while the buyer covers the risks and cost of transit.
Davis, J., & Vogt, J. (2021). Incoterms® 2020 and the missed opportunities for the next version. International Journal of Logistics Research and Applications, 1-24.
ICC (2020). Incoterms 2020. International Chamber of Commerce, Paris, France. Accessed from https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/
ITA (2020). Know Your Incoterms. The International Trade Administration, U.S. Department of Commerce, Washington, DC. Accessed from https://www.trade.gov/know-your-incoterms
Kim, S. M. (2019). A Study on the Major Changes in the Incoterms® 2020. Law Journal, 67, 259-287.
Srivastava, A. (2020). Standard Trade Terms. In Modern Law of International Trade (pp. 51-78). Springer, Singapore.
Vogt, J., & Davis, J. (2020). The State of Incoterm® Research. Transportation Journal, 59(3), 304-324.