Incoterms® 2020 — Revised Rules for International Shipping

Introduction

When the International Chamber of Commerce delineate responsibilities to buyers and sellers Incoterms is shorthand for “International (ICC) updated its list of international shipping and dictate each party’s obligations throughout Commerce Terms,” and they are developed terms — commonly referred to as Incoterms the shipping process. and maintained by the International Chamber — in 2010, the international shipping world of Commerce (ICC), located in Paris, France. looked vastly different than it does today. Because of Incoterms, buyers and sellers have The first series of Incoterms, adopted in 1936, Global eCommerce, which in 2019 is projected a clear understanding of what constitutes provided a common understanding of specific to exceed $3.53 trillion, was valued at $572 “delivery,” for example, and which party is trade terms. responsible for unloading a vehicle, and who is billion. Today global digital trade is growing liable for certain payments. This avoids costly Since then, the terms have undergone seven faster than goods trade or foreign direct mistakes and misunderstandings. separate updates, with the most recent changes investment, with more than half of the world's set to take effect January 1, 2020. After that, the population now using the internet, according to next update is scheduled for 2030. the Congressional Research Service. Overall, the global retail market in 2010 totaled $14 trillion. "Simply put, Incoterms are hugely important In 2019, that figure is$25 trillion. for anyone selling or moving goods abroad," explained Deepesh Patel, editor of Trade Finance Clearly, change happens quickly in today’s Global. "So, whether you're an importer or global marketplace, so when the ICC exporter, freight forwarding company, trade announced its Incoterms® 2020 update, financier, credit insurer, or law firm, it's likely the changes were intended to reflect the that you use Incoterms to govern trade." current world order. According to analysis by The Paris-based International Trade Finance Global, a marketing partner of As much as Incoterms clarify and simplify the the ICC United Kingdom, the revised Incoterms Chamber of Commerce has shipping process, choosing the correct term reflect today's complex global supply chains, maintained the globally is critically important. Each Incoterm carries the importance of eCommerce, and the recognized list of Incoterms specific implications for transportation and evolution of digital commerce. since 1936. delivery, unloading, customs liability, risk, and cost, among other things. Failure to assign the But what exactly is an Incoterm? correct code could result in significant clearance Essentially, Incoterms set “the rules of the road” delays, added costs, and prolonged disputes. for international commerce and ensure that businesses all over the world abide by the same definitions and processes. Incoterms carefully

In addition, the choice of Incoterm will affect other aspects of the shipping process. Logistics solution, ability to consolidate, mode of transport, and compliance issues may all be affected by the choice of Incoterm and the rules associated with that term.

As the following discussion will make clear, each Incoterm is crafted to address a unique set of conditions. Therefore, it's critically important for a shipper to ensure the proper term is selected. And that begins with a basic understanding of Incoterms and their role in the shipping process.

(Please note that the information included in this report is intended as a basic overview of Incoterms. For more detailed information, please refer to the International Chamber of Commerce's official Incoterms® 2020 materials, which can be accessed via the agency's website.)

The List — Incoterms® 2020

terms, Delivered at Place (DAP) and Delivered at EXW is regarded as favorable to the seller Terminal (DAT), essentially consolidated the four since the buyer bears the bulk of responsibility.

eliminated terms into two. (Note: The DAT term However, buyers may find EXW advantageous

has been renamed DAP — Delivered at Place — since they are free to use their own logistics

in Incoterms® 2020.) provider, which may be more economically

efficient than using the seller's provider. According to analysis provided by Trade Finance Global, the current list is divided into two X FCA: Free Carrier

categories based on mode of transport: This means that the seller is responsible for

packaging and loading goods onto a truck Group One: Incoterms that apply to any at its transport hub or port. The seller is mode of transport: also responsible for export clearance of the

X EXW: Ex Works Every business involved in goods at the port or terminal. The buyer is This term describes situations in which then responsible for everything else: international trade should the seller (or shipper/supplier) of goods − Shipping the goods acquire a copy of the is responsible for packaging and leaving “Incoterms® 2020” publication, the goods at their factory or place of − Unloading the goods at the buyer's manufacture. port or terminal available through the − Transporting the goods to the end The buyer (or consignee) is then responsible International Chamber destination or warehouse of Commerce. for everything else: Once the goods have been loaded and cleared − Loading goods onto transport for export by customs and the shipment is The International Chamber of Commerce has − Transporting goods to a port or terminal accepted, responsibility shifts from the seller to included 11 Incoterms in its 2020 revisions, − Shipping the goods the buyer to arrange shipment and delivery to which matches the number included in the 2010 the end warehouse or customer. − Unloading the goods at the buyer's port version. Worth noting, Incoterms® 2010 reduced or terminal the number of terms from 13 to 11 by including two new rules for use irrespective of mode of − Transporting the goods to the end transport. To accomplish this, four entries were destination or warehouse deleted and two were added. The two new

X CPT: Carriage Paid To insurance to cover against the buyer’s risk conveyance, at the named place. Risk

of loss of or damage to the goods during transfers from the seller to the buyer when This Incoterm goes into more detail than FCA the carriage. the goods have been unloaded, and the and specifies that the seller bears the costs buyer has responsibility for import clearance for transporting the goods to the location Effective January 1, 2020, the terms of the and any applicable taxes and duties. requested by the buyer. CPT is common CIP Incoterm require the seller to purchase for large importers who have their own the level of insurance outlined in Clause X DAP: Delivered at Place port agents that can manage the delivery A of Institute Cargo Clauses. This ensures of goods upon arrival in their country. Risk protection against fire, explosion, breakage, DAP is regarded as an extension of DPU passes from the seller to the buyer when theft, washing overboard, the vessel sinking, with the critical distinction that, under DAP, the goods are delivered to the carrier (e.g., and jettison. According to the Mantissa the buyer is responsible for unloading loaded onto the ship at the port of the training provider, this is regarded as a the goods. According to analysis from seller's country). high level of insurance, although parties Investopedia, "Delivered at Place" simply

"may choose to specify a different level means that the seller takes on all the The buyer is then responsible for of insurance to cover within their risks and costs of delivering goods to an everything else: commercial agreement." agreed-upon location. This means the seller is responsible for everything, including − Insuring the goods as they are The seller's risk ends when the goods packaging, documentation, export approval, being shipped have been placed on the ship at the origin loading charges, and ultimate delivery. − Unloading the goods at the buyer's destination. The buyer can pay for additional port or terminal insurance during carriage of the goods. "The buyer, in turn, takes over risk and responsibility as of the unloading of the − Transporting the goods to the X DPU: Delivered at Place Unloaded goods and clearing them for import." end warehouse The DPU Incoterm is a 2020 change and X DDP: Delivered Duty Paid X CIP: Carriage and Insurance Paid To replaces the previous "Delivered at Terminal"

term. This name change was made to clarify DDP is the only Incoterm in which the seller The seller delivers the goods to the carrier that delivery occurs at the destination, which assumes responsibility for the import and or another person nominated by the seller may be at a location other than a "terminal." export clearance process.

at an agreed place. The seller must contract Under DPU, the seller is responsible for for and pay the costs of carriage necessary arranging carriage and for delivering to bring the goods to the named place of destination. The seller also contracts for the goods, unloaded from the arriving

The seller bears all the costs and risks that point, risk transfers to the buyer, and Effective January 1, 2020, the terms of the involved in bringing the goods to the place the buyer assumes responsibility for loading CIF Incoterm require the seller to purchase of destination and has an obligation to the goods and all costs thereafter. the level of insurance outlined in Clause clear the goods not only for export but C of Institute Cargo Clauses. This ensures X FOB: Free on Board also for import, to pay any duty for both protection against fire, explosion, the export and import, and to carry out all This means that the seller delivers the goods vessel sinking, and jettison. According to customs formalities. the Mantissa training provider, this level on board the vessel identified by the buyer of insurance is regarded as "minimal." According to guidance from the ICC, DDP is at the named port of shipment. The risk "suitable for domestic sales, but extreme of loss or damage to the goods passes The risk of loss of or damage to the care should be exercised for international when the goods are on board the vessel, goods passes when the goods are on sales…." This is because a buyer essentially and the buyer bears all costs from that board the vessel. entrusts the customs clearance process to point onwards. the seller, which can be a tremendous leap X CFR: Cost and Freight of faith in the seller's ability to successfully navigate the customs process of the country CFR means that the seller has responsibility to which the goods are being imported. for arranging and paying for delivery of In choosing the DDP terms of services, it's goods to an agreed port. The seller delivers essential for a seller to have full confidence the goods, cleared for export, loaded on board the vessel. in its logistics provider's customs clearance expertise and capabilities. The risk of loss or damage to the goods passes when the goods are on board Group Two: Incoterms that apply to sea and the vessel. inland waterway transport only: X CIF: Cost, Insurance, and Freight

X FAS: Free Alongside Ship This means that the seller has responsibility According to Investopedia, FAS refers to for arranging and paying for transportation situations in which the seller must "arrange to the named port of destination. The seller for the goods to be delivered next to a also contracts for insurance to cover against particular vessel in a particular port in order the buyer’s risk of loss of or damage to the to be ready for transfer to a waiting ship." At goods during the carriage.

Incoterms® 2020 Rules Overview of Responsibilities and Transfer of Risk

Sea/Inland Sea/Inland Sea/Inland Sea/Inland Any Transit Any Transit Any Transport Any Transit Any Transit Any Transit Any Transit Waterway Waterway Waterway Waterway Mode Mode Mode Mode Mode Mode Mode Transport Transport Transport Transport EXW FCA FAS FOB CFR CIF CPT CIP DAP DPU DDP Free Cost, Carriage & Delivered Free on Cost & Carriage Paid Delivered at Delivered Ex Works Free Carrier Alongside Insurance, Insurance at Place Board Freight To Place Duty Paid Ship & Freight Paid To Unloaded At Named Transfer At Buyer's On Buyer's Alongside On Board On Board On Board At Named At Named At Carrier At Carrier Place of Risk Disposal Transport Ship Vessel Vessel Vessel Place Place Unloaded Charges/Fees Packaging Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Loading Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Charges

Delivery to Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Port/Place

Export Duty, Taxes, Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller & Security Clearance Origin Terminal Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Charges Loading on Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Carriage

Carriage Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Charges Insurance Seller Seller Destination Terminal Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Seller Seller Charges Delivery to Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Destination Import Duty, Taxes, Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller & Security Clearance Source: Adapted from information provided by Shipping Solutions®

Incoterms® 2020 — What’s New?

With no outright additions or deletions to the X CIF and CIP insurance clarification. left unaddressed the requirement by some list, with the exception of "DAT" being renamed CIF and CIP are the only terms that financial institutions that a bill of lading be "DPU," it would be tempting to think that specifically address insurance, and until produced on occasions where lines of credit Incoterms® 2020 does not offer any substantive now, each established the same insurance are involved. Going forward, Incoterms® 2020 changes. In fact, the revised rules offer several requirements. In Incoterms® 2020, the CIF address this by adding corrective language significant changes that must be understood and CIP Incoterms have been revised such to the FCA. and implemented. that each now includes explicit and unique X insurance requirements. Important to note, DAP (Delivered at Place), DPU (Delivered Trade Finance Global , working as a partner to the CIF Incoterm remains restricted to sea or at Place Unloaded), and DDP (Delivered ICC United Kingdom, outlines several important inland waterway modes of transport. Duty Paid). The use of these Incoterms changes to Incoterms® 2020 that include: is now permitted to address shipments X Security standards have been clarified. using the purchaser’s or seller’s own X DAT name changed to DPU. Although the When Incoterms® 2010 were released, the means of transport. Previously, it was DAT Incoterm was only introduced with the world was still adapting to the reality of assumed that parties would rely on Incoterms® 2010 release, the ICC felt a name global terrorism and its implications on the third-party transportation. change was necessary to address confusion global supply chain. With ten years of better that resulted over interpretation of the word understanding under its belt, the ICC has "terminal." Going forward, the name has revised each Incoterm by adding security- Use of Earlier Incoterms been changed to Delivery at Place Unloaded, related provisions that delineate specific The ICC stipulates that all contracts entered which is intended to more specifically requirements that must be performed by into after January 1, 2020, must be based on identify the delivery point and loading each party. responsibilities. Incoterms® 2020. However, contracts that were X FCA and FOB bills of lading clarification. executed prior to that date are still effective. Although the FOB Incoterm is intended solely It is essential though for any agreement to for maritime shipments, the ICC determined clearly specify which version of Incoterms Delivered at Terminal that it was being used — incorrectly — for applies (i.e., Incoterms® 2010, Incoterms® 2000, (DAT) has been changed non-maritime shipments. To address this, or any earlier version). the ICC created the FCA Incoterm, which to Delivered at Place dictates that the seller is responsible for Unloaded (DPU). packaging and loading goods onto a truck at the transport hub or port. However, the FCA

Choosing the Right Incoterm

Since an incorrect Incoterm can be quite costly, As a result, the ICC set out to make the rules the ICC advises all parties to read through the ® When the ICC set out to revise Incoterms 2010, easier to understand and implement. Among specifics of each rule. "Even though you're an a foremost objective was finding a way to help other things, the revised rules feature a expert, and even though you may have been facilitate identification of the proper term. "What user-friendly matrix that compares different doing this for 30 years and you know every word we know, what we have always known, is that attributes of each term and provides a detailed of every section," the ICC's O'Connor advises, the rules are very often used not quite correctly," introduction that explains the revisions that "just take a few minutes to sit down and have a Emily O'Connor, the agency's director of trade were made and the nuances of each Incoterm. read through. And for those that aren't experts, investments, said in a podcast discussing we've tried to make it as easy as possible to ® Incoterms 2020. "And what does that mean?" As an example, O'Connor noted that the "FOB," understand. It's worth putting in the time to she continued. "People will frequently choose for "free on board," Incoterm has historically avoid problems down the road." the wrong Incoterms rule for their transaction. been used improperly. The term is intended only They won’t fully know what it means when for maritime shipments where "delivery" occurs Another option is to enlist an experienced they put a three-letter Incoterms rule into their when goods are placed on board the vessel. logistics provider with verified experience contract. They have a general idea, but not quite using Incoterms. A qualified provider will be However, the term has been used on numerous nuanced enough." able to select the ideal Incoterm for each occasions for non-maritime shipments. In those shipment's unique needs and oversee instances, O'Connor explained, point of delivery compliance with all requirements. Important is uncertain since goods are never loaded onto to note though, not every logistics provider a vessel. The ICC attempted to clarify this in offers this expertise, so it's critically important to "What we know, what we 2010 with the creation of the FCA term, and have always known, is that verify a potential logistics partner's qualifications non-maritime shippers were encouraged to and ensure there is a proven record of success the rules are very often select that term. But, uncertainty remained, in using Incoterms. used not quite correctly." particularly in situations that involved bank financing and the need to produce a certain type of bill of lading. —Emily O'Connor, ICC director As a way to alleviate these concerns, the ICC has of trade investments revised the FCA Incoterm and clarified issuance of the bill of lading.

The Right Incoterm for the Right Situation

A few years ago, then-president of the Canadian under FOB. "The buyer couldn't prove that Association of Importers and Exporters Joy the garlic was rotten before it was put on the Nott noted that roughly 90 percent of Canadian vessel," explained international trade lawyer importers and exporters used the FOB — Free Greg Kanargelidis, "and once it was on the on Board — Incoterm for their international vessel, it was their problem, not the seller's." transactions. The problem with this, she With so much at stake then, it's important explained in a Canadian Business article, is the for all parties to take the time to evaluate FOB rule is intended for cargo carried by sea the specifics of each Incoterm before making vessels, while most of Canada's international any commitments. Following is analysis that trade is by truck. "When was the last time you can help guide the choice of Incoterm in saw a truck floating?" she asked. "I don't think certain situations. you have."

This example highlights the confusion that One Canadian garlic importer can exist as buyers and sellers try to identify U.S./Canada learned the hard way about the appropriate Incoterm for their particular Ground Shipping transactions. Canadian Business cites an example the importance of choosing in which a British Columbia importer purchased the correct Incoterm when For purposes of ground shipments traveling 1,000 metric tons of garlic from a Chinese a shipment of rotten garlic between the United States and Canada, exporter and agreed to use the FOB Incoterm. Incoterms choices are generally limited to was determined to be Delivered at Place Unloaded (DPU), Delivered at "the buyer's" and not "the Place (DAP), and Delivered Duty Paid (DDP). seller's" responsibility. The primary difference between these three terms of service is that a DDP transaction places "But the garlic," the article explained, "valued near-full responsibility on the seller, including at more than US$800,000, arrived in Vancouver responsibility for payment of customs, taxes, rotten and unsellable." When the buyer and brokerage fees. DPU and DAP shipments attempted to seek recourse, the seller advised place responsibility for customs-related fees and that since the garlic was fine when it was placed taxes on the importer/buyer. on the ship, all legal obligations had been met

Another option for a U.S./Canada transaction is Ultimately, a business will need to weigh the the Ex Works (EXW) Incoterm, which places the pros and cons and determine its own best bulk of responsibility for the entire transaction course. But the option does exist, especially with on the buyer/importer. While many businesses regard to Canada-bound shipments, to facilitate may wish to retain control over their shipments, the process by entrusting customs and delivery that control also includes responsibility for to an experienced logistics provider. customs compliance. Canada-bound shipments eCommerce may benefit from the The choice, then, really comes down to “duty convenience of having the paid or duty unpaid.” Does it make more sense X According to the U.S. International Trade for a U.S. business to prepay its customers' Administration, an eCommerce retailer's seller manage the customs customs fees and transaction costs at time choice of Incoterm may be affected by process but only if the process of purchase, or is it preferable to have the whether its export sales are primarily is entrusted to an experienced customer pay those costs at time of delivery? business-to-business (B2B) or business- Also, under what circumstances is it preferable to-consumer (B2C). logistics provider. for a U.S. business’s Canadian customer to oversee the importation process as opposed to X For B2B sellers, the following Incoterms having the U.S. business bear responsibility? are recommended: The ICC strongly warns against using the DDP − EXW (Ex Works) Incoterm for international shipments, mainly − CPT (Carriage Paid To) because of the risk of entrusting the seller − CIF (Cost, Insurance, and Freight) with the customs process. In many instances, this can indeed be a risky proposition. But for X B2C online retailers are advised to use: shipments to Canada, a country with which the − CPT (Carriage Paid To) U.S. enjoys a high level of customs cooperation, − CIF (Cost, Insurance, and Freight) the risk may not be as dire. Instead, it is possible to enlist a highly experienced logistics provider − DDP (Delivered Duty Paid) However, with vast experience both in implementing the the buyer must have a high degree terms of the DDP Incoterm and in clearing goods of confidence in the seller's ability to through the Canada Border Services Agency's manage the customs process.

importation process.

Imports to the Exports from the United States United States

X According to Scarborough, an international X As discussed previously, ground shipments brokerage provider, shipments arriving in traveling to Canada may benefit from the the United States via ship most often use the DDP, DAP, DUP, or EXW terms of service. EXW (Ex Works), FOB (Free on Board), or FCA However, shipments that require ocean (Free Carrier). transport will warrant a different approach.

X In each instance, the buyer is responsible X Scarborough suggests that CIF (Cost, for paying for transportation and assumes Insurance, and Freight) and CFR (Cost and most of the responsibility throughout the Freight) are the most widely used for these transaction. "That way, they have control," purposes. Under each term, the seller Alyson Schroer, Scarborough corporate pays for transport and allows the buyer to operations manager, explained in a recent manage the customs process. webinar. "If they need to stop a container at the port of New York and transload it and truck it in as a way to prevent a line from going down, these choices allow the ability to do that." On the other hand, Schroer noted, if a shipment is traveling via DAP, for example, they may not have the "power" to make changes to the transport.

Conclusion

In an August 2019 podcast, Professor Charles autonomous vehicles. The ICC's Emily O'Connor DeBattista of the International Chamber of suggests that Incoterms® 2030 may well include Commerce was asked: "If a goods trader doesn't provisions for the delivery of goods to outer use Incoterms, what would happen?" His answer space. "Free on Moon," she says, may not be was very brief: "You need lawyers." that far-fetched.

He went on to explain that a likely outcome would Note: The Incoterms® Rules are protected by the be insurance contracts that don't reflect actual copyright owned by ICC. Further information on sales contracts, letters of credit that don't align, the Incoterm® Rules may be obtained from the ICC and various gaps in understanding between website. Incoterms® and the Incoterms® logo are parties. "The likelihood is that if there was a trademarks of ICC. Use of these trademarks does dispute, if the market moves against you, if your not imply association with, or approval of our buyer loses interest, then there's likely to be a sponsorship by ICC. disconnect. And then of course, everyone reaches for their lawyers. All of this could be avoided at the start by using Incoterms."

Incoterms exist to facilitate the shipping process and to eliminate confusion about key responsibilities. And as the recently released Incoterms® 2020 make clear, the ICC remains committed to ensuring the shipping rules reflect current practices and "actual" shipping scenarios.

The most recent 2020 update reflects the reality of today's security-focused supply chains and the need to clarify and facilitate selection of the proper shipping terms.

Looking ahead, it remains to be seen if the next generation of Incoterms will take into account innovations including drone deliveries or

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