International Trade: Incoterms 2020
The international movement of goods in a commercial transaction is not without risks: delivery failure, damage or loss may occur and create disputes between the parties. In 1936, for the very first time, the Paris-based International Chamber of Commerce (ICC) published a set of international rules for interpreting the most commonly used commercial terms in foreign trade under the name “Incoterms 1936.” Designated as abbreviations transformed into standardized definitions, Incoterms (International Commercial Terms) are practical and economic tools used universally to simplify international trade procedures.
By referring to one of the ICC Incoterms in their contract, the buyer and seller simply and securely specify their respective responsibilities and obligations. Incoterms help reduce the uncertainty involved in any international transaction: business practices and interpretations differ from one country to another. Moreover, Incoterms standardize practice, determine the point of risk transfer, separate the issue of risk transfer, and allocate costs and responsibilities. Incoterms determine whether the seller or buyer will be responsible for assuming the following responsibilities or costs: transportation costs, insurance costs, associated fees, payment of duties and taxes, obtaining the various import and/or export permits, and any other administrative procedures.
In 2021, there are 11 Incoterms divided into two groups. The first for all modes of transport (EXW, FCA, CPT, CIP, DPU, DAP, DDP), and the second for marine transport only (FAS, FOB, CFR, CIF).
Definitions of Incoterms 2020:
|EXW||Ex Works (… named place of delivery)
|FCA||Free Carrier (… named place of delivery)|
|FAS||Free Alongside Ship (… named port of shipment)|
|FOB||Free On Board (… named port of shipment)|
|CFR||Cost and Freight (… named port of destination)|
|CIF||Cost Insurance and Freight (… named port of destination)|
|CPT||Carriage Paid To (… named place of destination)|
|CIP||Carriage and Insurance Paid to (… named place of destination)|
|DPU||Delivered at Place Unloaded (… named place of destination)|
|DAP||Delivery at Place (… named place of destination)|
|DDP||Delivered Duty Paid (… named place of destination)|
While the Incoterm EXW (Ex Works / … named place of delivery) constitutes the least risk for the seller, the Incoterm DDP (Delivered Duty Paid / … named place of destination) represents the maximum risk for the seller. However, DDP can be a good selling point, since it may easily be used by the seller for sales made in the United States. The proximity of the United States, along with its cultural similarity to Canada, makes it easy to assume all the costs and risks right to the client’s door.
The Incoterm EXW (Ex Works /… named place of delivery) means that the seller delivered the goods when they became available at his or her factory for pick-up by the buyer. The buyer is then responsible for accepting delivery of the goods at the address specified by the seller and for bearing the cost and risk of transport to his or her door, including export and import customs procedures. This Incoterm can be used when specialized equipment is needed to load the goods and the seller does not want to accept the responsibility and related costs.
As shown in the table above, the three letters of the Incoterm are always followed by, “… named place of delivery, … named place of destination.” In all cases, no matter which Incoterm is used, it is essential to specify a location – otherwise, the Incoterm loses its meaning. Moreover, since previous versions of the Incoterms are still in effect, you must indicate, in addition to the named place of delivery/destination, the version of the Incoterms used – 2010 or 2020.
For instance, “DDP 2100 Reverchon, Dorval QC Incoterms 2020” means that the goods will be delivered, duties and taxes paid, at the seller’s expense and risk, from the point of origin to 2100 Reverchon in Dorval, QC.
It is a very common occurrence that an inexperienced importer, who has not mastered the ins and outs of international trade, leaves the responsibility of transportation to the seller. This simplifies the transaction but does not allow for cost control. The Incoterms DPU, DAP and DDP are Incoterms of arrival. Therefore, the seller takes care of everything, namely the risks and costs of transport to the named place of destination. The only one of these Incoterms to include import clearance is DDP. For the other two Incoterms, the buyer must bear the cost and responsibility for customs clearance in the country of import.
However, a more experienced importer, with expertise in international shipping, will make use of his or her knowledge to take the risks and costs related to the transportation of his or her goods and enjoy better control over the costs. The Incoterms of departure are EXW, FCA, FAS and FOB.
This means that there are four Incoterms for which the seller will pay for shipping to an agreed upon location, but the buyer will have to assume the risk. For example, CIF means that the seller will incur the costs of transport to the named port of destination. However, the seller will have delivered the goods once they are placed on the vessel. Therefore, even if the seller pays the shipping costs, the buyer takes the risk from the moment the goods are on the vessel.