Incoterms® rules 2020: Is Your Organization Ready?

Every industry has its lingo, that way of speaking that's shared by a particular group of people — it's their own personal slang or jargon. The same is true for global trade. One of the most known and important term in the industry is ‘INCOTERMS’. INCOTERM is derived from ‘International Commercial Terms’ or IN CO TERMS.

Incoterms are a set of standard trade definitions abbreviated by three letters that spell-out who is responsible for the shipping, insurance, and tariff on goods. They help both buyers and sellers define who will bear costs and risks at a specific moment, all along the trading cycle. They are commonly used in international contracts and the International Chamber of Commerce copyrights the standards. Most importantly, using a set of standard terms minimizes misunderstandings that lead to disputes.

Today, a list of 11 Incoterms® rules is available. In September 2019, the International Chamber of Commerce (ICC) will unveil the official text of Incoterms® rules 2020 that becomes effective on January 1, 2020.

What's the point?

After they agree on product, prices, guarantee, means of payment and law applicable, sellers and buyers need to agree on transportation. That's where Incoterms come in. Following the 2010 Incoterms® rules update, there are currently 11 terms. They aim at defining who, between buyer or seller, bears the transportation and extra costs (ex: customs clearance fees, loading, taxes), as well as who bears the risks during transportation. The current set of terms are in two groups:

Group One apply to any mode of transport:

• EXW Ex Works
• FCA Free Carrier
• CPT Carriage Paid To
• CIP Carriage and Insurance Paid To
• DAT Delivered at Terminal
• DAP Delivered at Place
• DDP Delivered Duty Paid

Group Two relates to sea and inland waterway transport only:

• FAS Free Alongside Ship
• FOB Free on Board
• CFR Cost and Freight
• CIF Cost, Insurance, and Freight

By integrating Incoterms® rules into global and domestic sales contracts, all parties benefit from a fixed and agreed-to legal frame all over the world. For instance, they could agree that the buyer must pick-up the goods from the supplier by his own means. The contract terms would use the Incoterm EXW. They could also agree that the seller is covering all risks and costs related to transportation, using Incoterms® rule DDP, which would mean that the seller is the one who will include these costs in the price of goods sold. Henceforth every company requesting the delivery of goods between a buyer and a seller is using Incoterms, at a national level and global level.

Using the right Incoterms® rules matters?

It is essential to define prior to a tender which Incoterm best matches the needs of the buyer. Is your company able to handle the transportation? The clearance?

All these questions must be answered before requesting a price quote from a vendor. The selected Incoterm should clearly appear on the tender so that suppliers build their pricing according to the specific Incoterm. This will directly impact the price and the logistics between the seller and the buyer.

Using the right Incoterm also matters if you want your shipment to arrive safely and on time without disagreement between the parties. By using a common language - the Incoterm language - misunderstandings that may occur between parties who speak a different language disappear. It also means that disputes and confusion can be avoided, helping to promote good business relationships with your trade partners so that your shipment arrives safely and on time.

Besides, with a global and unique trade language, compliance risks generated by the misunderstanding of local or national regulations are substantially lowered, if not eliminated.

Why are Incoterms crucial for your global supply chain?

Incoterms should be appreciated as a tool to improve business transactions worldwide. Using them can help prevent disruptions and enhance global supply chain management. They are helping global supply chains to operate smoothly by avoiding bottlenecks over who is responsible for the risks and transportation of purchased goods.

An incorrect understanding of Incoterms® rules can lead to severe miscommunication and unnecessary costs or delays in shipping. For instance, a misuse or misunderstanding of the 11 Incoterms could leave your organization with more financial and customs responsibility than the other party. Besides, if the parties do not agree on who must pay customs, the imported goods could be seized during the importation process for non-payment of duties.

Are you ready for the 2020 update?

Since 1990, Incoterms® rules are revised every 10 years. These amendments are necessary to make sure Incoterms stick as closely as possible to the ever-changing global trade landscape and various laws in force. Incoterms 2020 are expected to strongly affect the habits of importers and exporters. Some Incoterms will disappear, some will be amended, and new ones will be created.

For the first time, China is a member of the ICC. A Chinese representative will take part to the committee in charge of submitting a final version of the 2020 Incoterms® rules, together with representatives from France, England, Germany, USA, Australia, Turkey, etc.. One wish of the ICC is to make Incoterms® rules 2020 easier to understand. The goal is to remove grey areas and provide more clarity to ensure a better understanding, as the committee is well aware of the consequences caused by the misinterpretation of an Incoterm.

Any organization selling or purchasing goods at a global level needs to have a clear and deep understanding of Incoterms® rules. This is the only way to guarantee efficiency and speed in global sourcing and shipping operations. Yet, this requires planning and preparation.

Like so many of the ever-changing trade regulations, the Global Knowledge® team at E2open is following the Incoterms® rules updates as they unfold, and considering the implications of what Incoterms® rules 2020 might mean for our customers. We are ready to adapt any changes into the Global Knowledge® trade content database, which in turn is utilized by the functional areas of our platform for you to prepare orders and shipments using the updated terms.

We’ll be sure you are ready when the time comes.

*Incoterms® rules is a registered trademark, please visit the ICC website for more information