INCOTERMS® 2020 - AN EFFECTIVE TOOL TO REDUCE INCONSISTENCIES IN GLOBAL TRADE
BANKING FINANCE|June 2021
INCOTERMS® is an acronym derived from international commercial terms. These standard trade terms listed under INCOTERMS® provide a universal meaning to buyers and sellers around the world.
R Narayanan

They're used in sale contracts to make sure that the buyer and seller know and understand their individual responsibilities as to:

  • Who is responsible for the cost of transporting the goods, including insurance, taxes and duties?
  • Where the goods should be picked up from and transported to?
  • Who is responsible for the goods at each step during transportation?

Presently, INCOTERMS® is being revised and published at the beginning of the decade by the International Chamber of Commerce (ICC). The latest version of INCOTERMS® came into effect from 1st January 2020 in the name of INCOTERMS® 2020. Incoterms® 2020 is a registered trademark of ICC.

History of INCOTERMS®: One of the main agenda of the International Chamber of Commerce (ICC) after its creation in 1919 was to facilitate International Trade. In the early 1920's ICC conducted a study on the commercial trade terms used by merchants across 13 countries and it was limited to six commonly used terms in these countries. In 1923 the results of the study were published and it highlighted the disparities in interpretation of the six commercial trade terms.

In the year 1928, a second study was initiated in order to identify the discrepancies in the inaugural survey. The scope of the second study was expanded to identify the various trade terms used in more than 30 different countries. The findings of these studies led to the publication of the first version of the INCOTERM® rules. The terms included FAS (Free alongside Ship), FOB (Free on Board), C&F (Cost and Freight), CIF (Cost, Insurance and Freight), Ex Ship and Ex Quay. This served as a global guideline to international trade and the beginning to Incoterms.

The Second World War delayed the revision of INCOTERMS® rules and the same was issued in 1953. It included three new trade terms useful for non-maritime transport. The new rules included were DCP (Delivery Costs Paid), FOR (Free on Rail) and FOT (Free on Truck). The second revision in Incoterms rules were published by ICC in 1967 which aimed at resolving the misinterpretations of the previous version. Two more trade terms: DAF (Delivery at Frontier) and DDP (Delivery at destination) were introduced in the third revision.

The advancements in air travel which led to movement of goods through air necessitated the next revision and the fourth version of the Incoterms® was published in 1974. This version saw the introduction of a new term FOB Airport (Free on Board Airport).

The sudden spurt in containerized freight traffic and adoption of new documentation processes created the need for the next revision. The Fifth edition of Incoterms® published in 1980 saw the introduction of a new trade term FRC (Free Carrier…Named at Point), which allowed the goods to be delivered at a reception point on the shore like the container yard.

In 1990 the ICC came up with a complete revision of the Incoterms® rules which simplified the Free Carrier term by dropping the rules for specific modes of transport such as FOR, FOT and FOB Airport and instead introduced a new general term FCA (Free Carrier…at Named Point) to replace them.

The Subsequent revision of 2000 was introduced taking into account the amended customs clearance obligations. In order to comply with the same, the License, Authorisations and Formalities section of FAS and DEQ were modified.

The Incoterms® 2010 version brought about consolidation in the D-family of rules by deleting the rules of DAF, DES, DEQ and DDU (Delivered Duty Unpaid). It also permitted adding of new rules DAT (Delivered at Terminal) and DAP (Delivered at Place).

The most recent and the latest revision by ICC in this line is the Incoterms® 2020 which came into effect from 1st January 2020. This consists of 11 distinct rules which can be used based on the mode of transport.

Clearly, the Incoterms® rules have been regularly updated by the ICC keeping in pace with the developments taking place in the international trade.

Importance of Incoterms®:

1. Reduce Risk: The use of INCOTERMS® in an international trade contract reduces and / or removes the inconsistencies in language by providing all parties involved the uniform definition of specific terms within a trade agreement. This helps in elimination of the risk of problems arising during shipment since all parties clearly understand their responsibilities in performing the trade under the given contract.

2. Simplifies the negotiations involved in International Commerce: Buyers across the world want to know the landed cost of the goods they wish to buy which is the final price inclusive of shipping and taxes before they finalize the contract. But the seller may not be able to provide the same as tariffs and taxes vary widely throughout the world. But the usage of INCOTERMS® makes it easier to calculate the final cost of the goods and promotes transparent delivery system.

3. Ensures common understanding of Obligations: Incoterms® help in avoiding the confusion created by various interpretations of the rules followed in different countries. They specify the exporting seller's and importing buyer's obligations regarding carriage, risk and costs. They also help in establishing the basic transport and delivery terms.

Information from Incoterms®: Incoterms® rules when used in international trade transactions basically provide three basic pieces of information. They are:

1. Transfer of Risk: Incoterms® define at which place the risks of cargo loss and damage is transferred from the seller to buyer during the transport operations

2. Division of Costs: Incoterms® provide information about how the costs resulting from the transport operations are shared between the buyer and seller. For eg, Cost of dispatch, carriage & delivery, Customs clearance for export and import, Insurance etc.

3. Documents: Incoterms® define who will provide the required documents in order to complete the trade transaction like transport documents, proof of delivery, certificate of inspection, Insurance etc.

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