What are Incoterms?
Incoterms are a set of rules or delivery terms that are designed to standardize international delivery terms. They also act as a contract between sellers and buyers from global markets. If you are new to international business, these rules define tasks, responsibilities, and costs application to international trade. Fundamentally, they dictate the terms of any cross-border business.
Globally recognized, incoterms have streamlined foreign trade contracts by clarifying the obligations of all parties involved (buyers and sellers). Some incoterms apply only to water transportation, whereas others cut across all means of transport.
Key Functions of Incoterms
Incoterms have streamlined international trade in many ways. Here is a summary of the main functions of incoterms in international trade:
- To define cost allocation: which party is responsible for meeting certain costs?
- Division of obligations: which party takes on obligations, and on which route? Risk transfer: which party covers certain risks, and when?
- Customs: which trading partner is responsible for customs clearance?
- Shipping insurance: which party meets insurance costs, and for which part of the journey?
In total, incoterms cover 11 different areas. Fundamentally, incoterms the point at which responsibilities and risks shift from the buyer to the seller.
As mentioned earlier, incoterm rules were created in 1936. Since then, these rules have been subject to a series of updates in the years 1953, 1967, 1976, 1980, 2000, 2010, and until recently, in 2020. 2020’s rules have seen several notable changes such as:
- Renaming of the Delivery at Terminal (DAT) to Delivery and Place Unloaded (DPU)
- Change of the term Free Carrier (FCA). The new provisions allow buyers to instruct carriers to issue a bill of landing with onboard notations to sellers to ensure they respect the terms stipulated in a letter of credit.
- Under the CIP (Carrier Insurance Paid To), sellers can now over-insure their goods by up to 110% of the value of goods defined under Clause A of the international cargo clauses.
A large part of previous rules remains applicable. While it is advisable to use Incoterm 2020 rules wherever possible, some people opt to use previous versions. If you are using an outdated version, however, it is imperative that you clearly state which version you are using, and make sure you remain consistent in all your dealings.
Incoterms are a set of broad rules for exporters and importers. These rules act as a platform for facilitating trade practices and reduce the risks of legal consequences. By understanding and correctly using incoterms, you will be able to transact harmoniously.