A Comprehensive Guide to Incoterms 2020

International Commercial Terms, commonly known as Incoterms, are a set of standardized trade terms used in international transactions to clarify the obligations, risks, and costs associated with the delivery of goods from the seller to the buyer. Incoterms provide a common language for traders, shippers, and logistics providers, and help avoid misunderstandings and disputes.

Incoterms are regularly revised to reflect changes in global trade practices and technology, with the latest version being Incoterms 2020. In this blog post, we'll provide a comprehensive guide to Incoterms 2020, including what they are, how they work, and the main changes introduced in the latest version.

What are Incoterms 2020?

Incoterms 2020 is the latest version of the Incoterms rules, published by the International Chamber of Commerce (ICC) in September 2019. The Incoterms 2020 rules define the obligations of buyers and sellers in international trade, including the delivery of goods, transfer of risk, and payment of costs.

Incoterms 2020 is a set of 11 terms that can be divided into two categories based on the mode of transport used: Incoterms for any mode of transport and Incoterms for sea and inland waterway transport.

Incoterms for any mode of transport are:

1. EXW - Ex Works
2. FCA - Free Carrier
3. CPT - Carriage Paid To
4. CIP - Carriage and Insurance Paid To
5. DAP - Delivered at Place
6. DPU - Delivered at Place Unloaded
7. DDP - Delivered Duty Paid

Incoterms for sea and inland waterway transport are:

1. FAS - Free Alongside Ship
2. FOB - Free on Board
3. CFR - Cost and Freight
4. CIF - Cost, Insurance, and Freight

Each Incoterm defines the obligations of buyers and sellers in terms of delivery, risk transfer, and cost responsibility. It is essential to choose the right Incoterm for each transaction to avoid misunderstandings, delays, and additional costs.

Main Changes in Incoterms 2020The Incoterms 2020 rules introduced several changes compared to the previous version, Incoterms 2010. Some of the main changes are:

1. Arranging for Transport: The term FCA has been updated to include an option for the buyer to instruct its carrier to issue a transport document with on-board notation to the seller.
2. Security-Related Requirements: The rules now require that security-related requirements, such as customs-related security filings or additional security-related costs, be addressed in the sales contract.
3. Costs: The division of costs between the buyer and seller has been revised to reflect modern commercial practices. For example, the seller is now responsible for the cost of obtaining any pre-shipment inspection required by the buyer's country.
4. Insurance: The insurance coverage requirements for CIP and CIF have been aligned with Institute Cargo Clauses A.

Here is an explanation of each Incoterm defined in Incoterms 2020:

1. EXW - Ex Works: The seller makes the goods available at their premises and the buyer is responsible for loading the goods onto a carrier and paying for all transport costs and risks from that point onwards.
2. FCA - Free Carrier: The seller delivers the goods, cleared for export, to the carrier designated by the buyer at a specified place. The buyer is responsible for all costs and risks from that point onwards.
3. CPT - Carriage Paid To: The seller delivers the goods to the carrier or another person nominated by the seller at a specified place. The buyer pays for the transport to the destination, as well as any necessary insurance.
4. CIP - Carriage and Insurance Paid To: The seller delivers the goods to the carrier or another person nominated by the seller at a specified place. The seller also purchases insurance on behalf of the buyer for the goods during transit.
5. DAP - Delivered at Place: The seller delivers the goods to a specified place, but is responsible for all costs and risks until the goods are unloaded at the destination.
6. DPU - Delivered at Place Unloaded: The seller delivers the goods to a specified place, but is responsible for all costs and risks until the goods are unloaded at the destination.
7. DDP - Delivered Duty Paid: The seller is responsible for delivering the goods to a specified destination, paying all necessary costs, and clearing the goods for import.
8. FAS - Free Alongside Ship: The seller delivers the goods to the port of shipment, alongside the vessel. The buyer is responsible for loading the goods onto the vessel and paying for all transport costs and risks from that point onwards.
9. FOB - Free on Board: The seller delivers the goods, cleared for export, onto the vessel nominated by the buyer at the port of shipment. The buyer is responsible for all costs and risks from that point onwards.
10. CFR - Cost and Freight: The seller delivers the goods onto the vessel nominated by the buyer at the port of shipment. The seller is responsible for the cost and freight necessary to bring the goods to the named port of destination.
11. CIF - Cost, Insurance, and Freight: The seller delivers the goods onto the vessel nominated by the buyer at the port of shipment. The seller is responsible for the cost, insurance, and freight necessary to bring the goods to the named port of destination.

It is important to note that Incoterms define the obligations of the buyer and seller in terms of delivery, risk transfer, and cost responsibility. The choice of Incoterm depends on a variety of factors, such as the mode of transport used, the delivery location, and the level of risk the buyer and seller are willing to accept. 

Conclusion

In conclusion, Incoterms 2020 is a vital tool for international trade, providing a common language and standardized rules for buyers and sellers. It is essential to choose the right Incoterm for each transaction, taking into account the mode of transport, delivery location, and cost responsibilities. The latest version of Incoterms, Incoterms 2020, introduced several changes to reflect modern commercial practices, and it is essential for traders and logistics providers to keep up-to-date with the latest rules and changes.