Incoterms 2020: Changes In The Rules of The Exports Game
Incoterms are a type of language that is accepted and used by all parties involved in an international transaction. They all use an internal code, so if you are not familiar with it, chances are you will miss out on a lot of information.
Incoterms are terms that have been devised, drafted and reviewed by the International Chamber of Commerce, which regulates the costs and responsibilities of buyers and sellers in international sales since 1936. These are not compulsory, but they can be instrumental in ensuring mutual understanding.
Where to find Incoterms?
Firstly, Incoterms can be found in price lists, so that potential international clients (leads) are aware of the costs and real risks from the get-go. If they are interested, they will request an offer or budget which should include the corresponding Incoterm.
The Incoterm must also be present in the proforma invoice, final invoice, purchase agreement and letter of credit, should this be the payment method agreed upon by the parties. And, of course, they are essential in the transport documents that certify deliveries, such as CMR, B/L, AWB or CIM.
That is why you need to have a very good understanding of each Incoterm if you are exporting goods. Otherwise, a poorly negotiated contract due to the misuse of an Incoterm could cost you dearly. Would you want the success of your business to rely on a lack of training?
What are the changes in Incoterms 2020?
Incoterms are reviewed every 10 years in order to adapt them to the reality and needs of international trade procedures.
The latest update, published on January 1, 2020, features the following main changes:
- DAT (Delivery at Terminal) is replaced by DPU (Delivery at Place Unloaded)
Goods must be delivered unloaded at any point in the destination country which has facilities for the unloading of the goods, not only at a terminal.
DPU is the only Incoterm in which the goods are unloaded at the place of destination.
The duties and functions of both terms are exactly the same as those of the previous version.
- Different minimum insurance coverage in CIP and CIF
The CIF Incoterm (Cost, Insurance and Freight), which is mainly used in commodity trading, still recommends that the seller takes out cargo insurance with minimum coverage corresponding to Clause “C” (Institute Cargo Clauses).
As for the CIP Incoterm (Carrier and Insurance Paid To), it now requires a higher level of coverage. The seller should take out a comprehensive transport insurance in favor of the buyer, that is, one that is compliant with Clause “A”, which covers all risks.
In both cases, however, a different level of insurance cover may be agreed upon.
- Possibility of issuing a B/L “on board”
Previously, problems would arise when the payment method was a letter of credit and one of the requirements was the delivery of the Bill of Lading (B/L) with the notation “on board.” In the FCA Incoterm, the seller is not responsible of international transport and therefore lacks the necessary B/L to receive said payment.
In Incoterms 2020, the buyer may instruct the carrier to issue a B/L on behalf of the seller with an “on board” notation, which specifies that the goods have been loaded aboard the ship.
- Transport security and customs clearance requirements are included
This is the first time that the release of goods in transit is mentioned, and the security recommendations or permissiveness of Incoterms 2010 have now become an obligation.
Furthermore, the party that is not liable is under the obligation to supply any information related to transport security to the liable party.
- Possibility to decide whether or not to hire transport
In the Incoterms 2020 FCA, DAP, DPU and DDP, buyer and seller may arrange their own transport rather than using a third party.
- Changes that facilitate the use and understanding of the Incoterms 2020
There is a new classification in which, for example, DPU comes after DAP. This makes sense, given that in DAP goods are delivered ready for unloading, whereas in DPU they are delivered unloaded.
The new explanatory notes include more detailed content and graphics than the guidance notes of the previous version. There are also more accurate instructions on how to choose the most suitable Incoterm for each case, thus preventing misuse.
You should now have a better understanding of how to use Incoterms 2020.
Remember that, if you want to export, CLAK will help you translate the necessary documents to close a sale, as well as making the lives of your clients easier and guaranteeing their utmost satisfaction.
Do not let change and progress stop you. Move forward, export and succeed!