The international economy is developing so rapidly that without common and understandable principles, its regulation would be impossible. That is why there was a need for a universal dictionary and a set of rules—and that is how Incoterms came about.
It is important to understand what Incoterms are in order to know who pays for transport and insurance and who is responsible for duties and fees.
What are Incoterms?
Incoterms are international official rules for world trade that are mandatory to comply with. They greatly simplify negotiations and logistics. Without understanding them, it is impossible to conclude a sale and purchase transaction with international partners.
What exactly do Incoterms 2020 delivery terms regulate?
- Cargo safety issues;
- Distribution of duties and responsibilities;
- Use of documents, including electronic ones;
- Distribution of costs and risks.
In general terms, these rules define the rights and obligations of the parties, as well as the moment when responsibility for the goods is transferred. In case of misunderstandings, the carrier or customer can refer to Incoterms 2020, which will be a strong argument in resolving disputes.
History and development
The history of Incoterms began in 1936. It was then that the International Chamber of Commerce (ICC) first published a set of rules for international transport.
Prior to that, each country had its own rules, which led to misunderstandings and conflicts during negotiations.
The reasons for creating Incoterms were:
- the need for a uniform interpretation of trade terms;
- the growth in the number of export and import operations;
- the emergence of new types of transport and products;
- increased competition.
As transport and goods are constantly improving, the rules also need to be adapted to modern times. In addition, logistics is actively influenced by modern technologies, so the official text of Incoterms 2020 must correspond to the changes taking place in modern trade.
Incoterms are rules developed as a commercial standard, not an international agreement. They do not have to be ratified by each state, but they have a direct impact on the legislation of many countries.
Incoterms now have a century-long history, which ensures their authority. The rules are recognized by most business circles, and the International Chamber of Commerce has thousands of member companies from 140 countries around the world.
Incoterms 2020: key changes and differences
To ensure that the rules meet modern challenges, they are periodically reviewed and updated. This usually happens once every 10 years, so there are several editions of the rules. Some of the most recent ones are from 2000, 2010, and 2020.
The current edition is Incoterms 2020. Even after its approval, the previous versions remain in force. If the contract only specifies “Incoterms,” it refers to the latest edition. However, you should be careful — your partner or supplier may still be working with, for example, Incoterms 2010.
In this regard, it is important to know the differences between Incoterms 2010 and 2020.
What’s new in Incoterms 2020 (compared to Incoterms 2010)
- more clearly spells out safety requirements;
- allows transportation by own (buyer’s) transport;
- expenses for each party are described in more detail;
- insurance requirements are clarified;
- electronic documents are recognized.
However, Incoterms 2020 has not undergone any significant changes. The basic logic—who delivers the goods and where—remains unchanged.
Incoterms groups and conditions
The choice of delivery terms directly affects the final amount of the transaction, as well as the price of the goods. This is the only way to determine who will bear most of the costs of delivering the goods.
How many basic terms does Incoterms contain:
- Group E – “shipment.” The seller does everything: customs clearance, insurance, logistics.
- Group F – “main carriage unpaid.” The goods are transferred at a specific location, and then all responsibility is transferred to the buyer.
- Group C – “main carriage paid.” The buyer pays for transportation only to a specific point.
- Group D – “delivery.” The seller arranges transportation to the final destination in the country of import, but not unloading.
Each group has different conditions. They are designated by a three-letter abbreviation. For example, EXW, FAS, CIF, and DAT. Today, there are 11 such types of conditions.
An experienced logistician can recommend which groups and terms are more suitable for a particular mode of transport and type of goods. A customs broker will help with the tax nuances and customs regulations of the country.
Advantages of using Incoterms in international logistics
If you are familiar with the official text, you will be able to choose favorable terms for yourself when negotiating with a business partner.
Advantages of using Incoterms 2020:
- transparency of trade terms;
- simplification of contracts;
- minimization of disputes;
- facilitation of customs clearance;
- avoidance of unforeseen costs.
Incoterms significantly simplify logistics planning, as they define the areas of responsibility for each party to the agreement. This makes the route more controllable and the terms more understandable.
Conclusion
Incoterms have created a “universal language” for international negotiations that is understood by most participants in global trade. Incoterms groups and terms are universally recognized around the world, including for sales transactions.
Although Incoterms 2020 is a reliable tool, it does not control all the details of a transaction. Some points still need to be discussed further, which is where a reliable customs broker can help. Logistics company specialists are also well-versed in all aspects of transportation and documentation. To save time and avoid customs fines and delays, it is best to trust the professionals.
