Incoterms 2020
The new Incoterms 2020 have been published on the 1st of January this year. However, the original Incoterms were published in 1936 and have been creating updates to throw back the changes to the global trade environment. It is vital for all the trade parties to understand well the Incoterm changes and how they are effective in global supply chains. In the fact that both Incoterms 2010 and Incoterm 2020 seem to be complicated, it is authoritative that buyers and sellers should understand well how they and their roles in along the supply chain.
And what are Incoterms anyway? To put it easy and understandable, Incoterms are terms of sale that buyer and seller agree to during international transactions. Both government and legal authorities across the world accept these terms. Understanding Incoterms is an essential part of international trade as it states tasks, costs, and risks that are associated by both the buyer and the seller.
When do the Incoterms state? As we have seen before, the Incoterms define clearly which costs, tasks, and risks are associated with both the buyer and the seller. Therefore it states when the seller’s costs and risks are transferred to the buyer. Also, it’s good to note that all rules do not apply to all cases in international procurement. Some inscribe any mode or mode of transport
Divisions of Incoterms
Incoterms 2020 are classified into four groups. These rules are grouped based on the fees, risk, responsibility for formalities, and issues concerning import and export.
Group C
Group c is the main carriage and here, the seller concludes a transport contract with the forwarder and takes the costs. Also, it is in this case where the seller takes the responsibility of conducting export clearance. Also, the buyer is responsible for all matters occurring after loading costs in connection to transporting, and other events.
Group D
Group D is the Arrival, and it is assumed that the seller is compelled to deliver the goods to specific destinations. This group involves Incoterms such as DAP, DPU, and DDP
Group E
This is the departure group and the seller presents the goods to the buyer at the point of delivery. The seller is not constrained either to customs or clearance and does not take the risk and the costs of loading. This group has only Incoterms EXW.
Group F
This is the main carriage but unpaid. Here, the seller is to perform export clearance. The seller does not incur costs on transport and insurance. This group has Incoterms FCA, FAS, and FOB.
Commonly used Incoterms by buyers
In total, there are 11 Incoterms to choose from. But if you are an importer, there are some Incoterms which work in your favor. As a buyer, you need to choose the Incoterm that gives you control over shipping costs. Choosing the best Incoterm can be challenging as the decision will rely on many factors such as the relationship with the sellers and the available resource. Often, there are three commonly used Incoterms:
FOB: Free on Board
In this Incoterm, the exporter leaves the prepared goods at the port of origin, ready for international export. At this point, the seller is assumed to have taken care of all formalities and paperwork. You as the buyer will be responsible for hiring the international transport service. Through this, you’ll have control over all expenses and coordination of the cargo delivery to the final destination. The advantage of using FOB incoterm is the flexibility it equips you with. You will be the one to decide on the shipping route and times.
EXW: Ex Works
This is another Incoterm option for buyers. However, you need to be extra careful while using this term. You should only use it if you are familiar with the import laws of the country. Also, your freight forwarders should be available to curb complications. If you are not comfortable or familiar with this Incoterm, you should avoid it. In that case, the right thing to do is to have goods to be delivered at the shipping point, where you can work with the agent of your provider so that they can deliver to the final destination.
DAP: Delivered at place
This Incoterm lets you import goods at cheaper prices and it includes few responsibilities and risks in general for the buyer. However, the main disadvantage is that you won’t have much control over the ocean freight. Having the right to decide allows you to save costs.
The friendly Incoterm for the buyer
While purchasing goods from an overseas supplier, you should always consider payment terms, risks, and transfer of risk. This aids working capital, and cash flow management. Besides, it saves more of your time as it reduces the time for end payment. Moreover, it minimizes the risk that may arise when things go wrong. Therefore, DDP is the most favorable and friendly shipping term for the buyer, if the intention is to simply collect the product on the buyer’s doorstep.
Final thoughts
If you are a domestic importer, you may wonder why you need to understand Incoterms too. Incoterms are rules published by the international chamber of commerce (ICC) and they play major roles in international procurement. Incoterms are voluntary terms to determine the responsibilities of importers and exporters through sale contracts for national trade. They nearly correspond to the U.N. conversation about international sales of goods contract.
As a buyer, you should understand Incoterms, knowing that these terms don’t apply to all international procurement cases. You should also note that Incoterms only helps to set standards but doesn’t relate in any way with the rules for title transfer or any other essential factors. DDP is the friendliest Incoterm that every buyer should understand and adhere since it keeps you away from the damage responsibilities for all of the main freight.
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