A Comprehensive Guide to Incoterms® 2020 for Businesses

International trade is a complex field requiring extensive knowledge and careful attention. Companies that regularly import and export goods must be familiar with a variety of regulations and agreements to streamline their supply chains efficiently and legally. One of the most critical foundations for international trade is the Incoterms® 2020. These standardized trade terms define the responsibilities of buyers and sellers regarding transport, risk transfer, and customs clearance. This guide will cover everything you need to know about Incoterms®, why they are necessary, and how Gerlach can assist you in smoothly managing your international trade transactions.

Why Are Incoterms® Necessary for My Shipment?

Incoterms® are essential to avoid misunderstandings and disputes in international trade. They clearly and precisely define the responsibilities of buyers and sellers. By applying Incoterms®, both parties know exactly who is responsible for which costs and risks, significantly simplifying the handling of trade transactions. For businesses, this means optimizing their supply chains and avoiding potential legal issues.

A real-life example illustrates this: A British engineering firm exporting its products globally uses the Incoterms® 2020 to ensure its customers in the USA, China, and Brazil know precisely when and where responsibility for the goods transfers. By clearly defining responsibilities, delays and additional costs can be avoided.

Overview of the Eleven Incoterm Clauses

Classification by Type of Transaction

Incoterms® can be classified into two main groups based on the type of transaction:

Group E: Ex Works (EXW)

• The seller makes the goods available at their premises. The buyer bears all costs and risks from the factory.

Group F: Free Carrier (FCA), Free Alongside Ship (FAS), Free On Board (FOB)

• The seller delivers the goods to an agreed location, where the buyer assumes costs and risks.

Group C: Cost and Freight (CFR), Cost, Insurance and Freight (CIF), Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP)

• The seller bears the costs to the destination, but the risk transfers earlier to the buyer.

Group D: Delivered At Place (DAP), Delivered At Place Unloaded (DPU), Delivered Duty Paid (DDP)

• The seller bears the costs and risks to the destination.

Classification by Mode of Transport

Incoterms® can also be classified by mode of transport:

Multimodal Transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP

• These clauses are suitable for all transport modes, including road transport, sea freight, air freight, and rail transport.

Sea and Inland Waterway Transport: FAS, FOB, CFR, CIF

• These clauses are specifically designed for sea and inland waterway transport.

Main and Secondary Functions of Incoterms®

Main Functions:

1. Risk Transfer: Incoterms® clearly define when the risk transfers from the seller to the buyer. This is crucial to address liability issues in case of loss or damage to the goods.
2. Cost Distribution: They specify who bears which costs, including transport, insurance, and customs fees. This helps avoid unexpected costs and simplifies budgeting.

Secondary Functions:

1. Customs Clearance: Incoterms® can determine who is responsible for customs clearance. This is particularly important for international trade transactions, as compliance with customs regulations is vital for smooth processing.
2. Documentation: They specify which documents are required and who must procure them. This contributes to the clarity and efficiency of business transactions.

Key Changes in the 2020 Version

The Incoterms® 2020 introduce some important changes and clarifications:

1. DAT Becomes DPU: The term “Delivered at Terminal” (DAT) has been renamed to “Delivered at Place Unloaded” (DPU) to clarify that delivery can occur at any location, not just a terminal.
2. Insurance Requirements for CIF and CIP: The insurance requirements have been adjusted. For CIP, the seller must provide higher coverage, while for CIF, the coverage remains unchanged.
3. FCA and On-Board Notation: For FCA (Free Carrier), the buyer can request that the seller obtains an On-Board notation on the bill of lading. This facilitates financing by banks, as the buyer receives confirmation that the goods have been loaded.
4. Buyer’s Own Transport: The Incoterms® 2020 now also consider situations where the buyer uses their own transport to collect the goods.

A practical example: A UK-based automotive manufacturer exports vehicles to China and uses Incoterms® 2020 to ensure the vehicles are properly insured and the documentation meets Chinese authorities’ requirements. With the adjustments in Incoterms® 2020, the company can better manage its risks and ensure smoother delivery.

Gerlach: Your Partner for Incoterms® and International Trade

Gerlach, with over 140 years of experience in customs clearance, provides comprehensive support in the application and implementation of Incoterms® 2020. With their expertise and extensive network of experts, they can help companies navigate the complexities of international trade. Whether it’s choosing the right Incoterm clauses, optimizing supply chains, or ensuring compliance with customs regulations, Gerlach is your trusted partner.

Visit their website at Gerlach Customs for more information and to learn how they can support your business.