International Trade Guide - Incoterms 2020

Since ancient times, as humans began to communicate, we also began to trade with each other - in the form of exchanging services or products. Over time, as the scale increased, it was obviously necessary to fine-tune how well the trade was conducted and how satisfied each bolt involved in the trade was.

Humanity matured in a so-called Free trade at the beginning of the 19th century, which included not only the exchange of services or products between individuals, but also international or global trading. At the beginning of the 20th century, the flow of international trade became so vast that it was necessary to introduce theories and practices to facilitate it as much as possible. The need gave rise for the International Chamber of Commerce (an international non-governmental organization whose basis is to promote the development of international economic cooperation and provide arbitration services for commercial disputes) to develop a kind of international trade guideline called “Incoterms” (International Commercial Terms). The first such guideline was created in 1936 and it changes and improves periodically, along with the development of international or global trade.

At this point, international trade rules fall under Incoterms 2020. To put it simply, this guideline is a kind of list of the specific transactions by which the seller and the buyer establish the specifics of the shipment with each other in order to avoid any contingencies that may arise between businesses - especially when trading on a large scale or distances. The main purpose of Incoterms is to define correctly and as accurately as possible the responsibilities of the supplier and the buyer as well as those of the carrier and facilitate the conduct of global trade. 

At the moment, the International Chamber of Commerce offers 11 such specific deals, or Incoterms, which are divided into two main categories:

Rules for any mode or modes of transport:

• EXW (Ex Works)

• FCA (Free Carrier)

• CPT (Carriage Paid To)

• CIP (Carriage & Insurance Paid To)

• DAP (Delivered at Place)

• DPU (Delivered at Place Unloaded)

• DDP (Delivered Duty Paid)

Rules for sea and inland waterways transport:

• FAS (Free Alongside Ship)

• FOB (Free On Board)

• CFR (Cost & Freight)

• CIF (Cost Insurance & Freight)

Of the given eleven terms, some differ dramatically, some - slightly. The supplier and buyer can choose the best option to their contract and integrate the contract around that term - for more visibility and less miscommunication. It should be noted here that the Incoterms are not specifically contracts, but a mere clarifying clause of obligations provided in it - providing a convenient communication or operational path for each party involved in trade. In other words, Incoterms are 11 internationally known and accepted terms that govern the most convenient form of transaction between a supplier and a buyer.

We can imagine the vertical hierarchy of Incoterms in a horizontal perspective, which is expressed by the obligations of the supplier (A) and the buyer (B), therefore, before considering each rule independently, we need to familiarize ourselves with the responsible and most important stages of their operation. All in all, Incoterms’ main purpose is to clearly define parties’ respective obligations regarding topics such as risk, cost, arrangement of transfer and customs clearance, thereby reducing the potential for legal complications. Hence, the Incoterms establish:

A1/B1 General obligations

A2/B2 Delivery/Taking delivery

A3/B3 Transfer of risks

A4/B4 Carriage

A5/B5 Insurance

A6/B6 Delivery/transport document

A7/B7 Export/import clearance

A8/B8 Checking/packaging/marking

A9/B9 Allocation of costs

A10/B10 Notices

The most important aspects of trade that the supplier and the buyer (including the carrier) must agree on are:

• The place of final delivery of the cargo, where the responsibility for the cargo is removed from the supplier and fully transferred to the buyer.

• Transportation costs - the supplier and the buyer share the costs of the various stages of transportation according to the agreement.

• Responsibility for customs, export and import documentations, formalities and taxes.

• Insurance related to transportation.

Integrating an Incoterm is a very specific process, where the abbreviation of a specific Incoterm, as well as the location and the date must be indicated in an agreement - in accordance with the specifically chosen Incoterm.

Now, we can discuss all Incoterms one by one to better understand in what context they work and which option is more favorable for both the supplier and the buyer.

Let's start with the rules of any mode or modes of transportation - that is, with the rules of any transport except for waterways.

EXW (Ex Works) - The supplier agrees with the buyer on a specific place of delivery of the goods, from which the supplier is relieved of all obligations and the entire responsibility is transferred to the buyer. In this case, the supplier's duties include only delivering the product to a specific location, which does not even include unloading. This rule is as favorable and acceptable as possible for the supplier, but it can become quite problematic for the buyer if they do not anticipate the risks associated with this particular rule of international trade. Under this rule, the place where the consignment is transferred to the buyer is within the supplier's area and jurisdiction, yet the export documentation and future shipment details are entirely the responsibility of the buyer. Therefore, EXW incoterm is more favorable for domestic shipments. However, the supplier is informally but still obliged to assist the buyer in clarifying and obtaining export documentation or other details.

FCA (Free Carrier) - This rule is quite close to the EXW Incoterm above, but is more acceptable to the buyer too, because the supplier can leave the cargo both in his jurisdiction and at another location convenient for the buyer, on a means of transport organized by the buyer. It is also the responsibility of the supplier to prepare and pay the fees of the export documentation, while the buyer is responsible for negotiating with the shipping company and obtaining the bill of lading from them.

CPT (Carriage Paid To) - The same responsibilities and conditions apply to this term as in the case of FCA, however this time the supplier is responsible for covering any costs incurred in delivering to a specific location. In this case, as soon as the supplier hands over the cargo to the carrier agreed with the buyer, he is relieved of responsibility for the quantity or condition of the cargo, although it is their responsibility to cover the costs associated with the carrier to get the cargo to the buyer's jurisdiction. Therefore, one of the main differences from the FCA is that the primary and financial communication with the carrier is the responsibility of the supplier.

CIP (Carriage & Insurance Paid To) - The supplier has the same responsibilities as with CPT, but they also have added insurance costs and the insurance must have a high coverage ratio. Of course, since the Incoterm is not a direct contract, the parties participating in the trade can make amendments and agree on limited coverage. In this transaction, two locations are important - the place intended for the transfer of risk (where the responsibility of the supplier is removed and it passes entirely to the buyer) and the point of final destination (ie, the place where the supplier transfers the cargo to its own contracted carrier).

DAP (Delivered at Place) - In the format of this transaction, it is the responsibility of the supplier to deliver the cargo to a specific location agreed upon by both parties, they also cover any costs of getting the cargo to that location and assume any responsibility related to the condition of the cargo. However, responsibility is transferred to the buyer as soon as the supplier delivers the shipment to the agreed location.

DPU (Delivered at Place Unloaded) - The supplier covers all costs and assumes responsibility for any risk that may arise before the goods are delivered to the agreed location. From this point, the goods may go to the final destination by another or the same transport. The supplier is obliged to arrange the border-related documentation and processes, to unload the product to the buyer's jurisdiction, however, the buyer is responsible for arranging and securing customs clearance and related rights.

DDP (Delivered Duty Paid) - If EXW was tailored to the supplier, DDP is most advantageous to the buyer, because in this type of transaction, it is the responsibility of the supplier to get the product to its final destination, insure any point in the process, export or import, insurance costs and maintain documentation. In two words - the supplier's obligations include everything that needs to be done to make the product ready for unloading at the final destination.

Let's move on to the rules of sea and inland water transportation, which apply only in case of carriage of cargo by water:

FAS (Free Alongside Ship) - This transaction is actually an EXW for the sea and inland water transportation, because under this rule, the supplier has the responsibility to deliver the cargo directly to the ship, and after that - unloading, fees,, risks, insurances, export-import details settlement entirely become the responsibility of the buyer.

FOB (Free On Board) - In case of this transaction, the supplier is responsible for both delivering the cargo to and unloading it on the vessel and correcting the export documentation. The moment the goods are unloaded on the ship, the full responsibility of the subsequent processes is transferred to the buyer.

CFR (Cost & Freight) - A slight difference between this rule and FOB is that it is the supplier's responsibility to cover the costs necessary to get the cargo to the port of shipment. This type of transaction has two important ports of destination - the port where the cargo is handed over to the buyer and the port that is the final destination of the cargo.

CIF (Cost Insurance & Freight) - This rule is quite close to the CFR, although there is one small difference: among other obligations, it is the responsibility of the supplier to cover the minimum costs of insurance. If the buyer needs additional insurance, they must cover this cost on their own.

Conclusion

The above given content is informative in its nature. In order to get into more specifics, it is better to get well-acquainted with the Incoterms guideline compiled by the ICC. At this point, we can acknowledge confidently that the presented rules were developed in order for people and businesses to conduct quicker, more flexible and qualitative trade and avoid unnecessary, excessive issues. Incoterms rules are a list of general obligations that sellers and buyers owe each other under well-recognised forms of sale contract—and one of their main tasks is to indicate the port, place or point of delivery where the risk is transferred. In other words and to narrow it all down, Incoterms is an international trade language and its knowledge opens the way for a buyer as well as supplier from any two points of the world to conduct international trade as smoothly as possible.