International Trade (Intl Trade) 101: Incoterms 2020 - What are Incoterms Purpose, Scope,, Key Changes in Incoterms 2020

What This Is

Incoterms (International Commercial Terms) are standardized rules for the delivery of goods in international trade. They clarify the responsibilities of buyers and sellers, reducing misunderstandings and disputes. For example, a Chinese exporter sells a shipment of electronics to a US importer under Incoterm FOB (Free on Board) Shanghai. The exporter bears the costs and risks until the goods are loaded onto the vessel at the Shanghai port. The importer then takes over the costs and risks from that point on.

Key Terms & Rules

• Incoterms 2020: A set of 11 standardized rules for the delivery of goods in international trade, published by the International Chamber of Commerce (ICC).
• FOB (Free on Board): The buyer bears the costs and risks from the point of loading onto the vessel at the seller's premises.
• CIF (Cost, Insurance, and Freight): The seller bears the costs and risks until the goods are delivered to the buyer's nominated port of destination.
• EXW (Ex Works): The buyer bears all costs and risks from the seller's premises.
• UCP 600 (Uniform Customs and Practice for Documentary Credits): A set of rules governing Letter of Credit (LC) transactions globally.
• LC (Letter of Credit): A payment guarantee issued by a bank on behalf of the buyer, allowing the seller to receive payment upon presentation of compliant documents.
• DPU (Destination Port Unloaded): The seller bears the costs and risks until the goods are unloaded at the destination port.
• DAT (Delivered at Terminal): The seller bears the costs and risks until the goods are delivered to the terminal designated by the buyer.
• DAP (Delivered at Place): The seller bears the costs and risks until the goods are delivered to the buyer's designated place of delivery.
• FCA (Free Carrier): The seller bears the costs and risks until the goods are handed over to the carrier nominated by the buyer.

Step-by-Step Process

1. Identify the Incoterm: Determine the Incoterm agreed upon by the buyer and seller in the sales contract.
2. Determine the Responsibilities: Clarify the costs and risks borne by each party based on the chosen Incoterm.
3. Classify the Goods: Use the Harmonized System (HS) codes to classify the goods being traded.
4. Obtain the Necessary Documents: Ensure the seller provides the required documents, such as the commercial invoice, bill of lading, and certificate of origin.
5. Verify the Documents: Confirm that the documents comply with the terms of the LC and the Incoterm.

Common Mistakes

• Mistake: Confusing CIF and CIP, assuming they are interchangeable.
• Correction: CIF refers to the seller's responsibility for costs and risks until delivery to the buyer's nominated port of destination, while CIP (Carriage and Insurance Paid To) extends the seller's responsibility to include insurance coverage.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account transactions involve payment without a LC, but the buyer still bears the risk of non-payment.
• Mistake: Misusing "free on board" with air freight.
• Correction: FOB is typically used for sea or inland waterway transport, while for air freight, FCA (Free Carrier) is more commonly used.

Exam / Certification Tips

• Key Distinctions: Understand the differences between FOB, CIF, and CIP, as well as the implications of each.
• LC Types: Familiarize yourself with the different types of LCs, including confirmed and unconfirmed, and their implications.
• Incoterm Allocation: Be able to allocate the costs and risks between the buyer and seller based on the chosen Incoterm.

Quick Practice Scenario

A Chinese exporter sells a shipment of electronics to a US importer under Incoterm FOB Shanghai. Who bears the costs and risks from the point of loading onto the vessel at the Shanghai port?

Answer: The US importer bears the costs and risks from the point of loading onto the vessel at the Shanghai port.

Last-Minute Cram Sheet

• Incoterms 2020: 11 standardized rules for delivery of goods in international trade.
• FOB: Buyer bears costs and risks from loading onto vessel at seller's premises.
• CIF: Seller bears costs and risks until delivery to buyer's nominated port of destination.
• EXW: Buyer bears all costs and risks from seller's premises.
• UCP 600: Rules governing LC transactions globally.
• LC: Payment guarantee issued by bank on behalf of buyer.
• DPU: Seller bears costs and risks until goods are unloaded at destination port.
• DAT: Seller bears costs and risks until goods are delivered to terminal designated by buyer.
• DAP: Seller bears costs and risks until goods are delivered to buyer's designated place of delivery.
• FCA: Seller bears costs and risks until goods are handed over to carrier nominated by buyer. Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock. CIF and CIP are not interchangeable. Open account transactions involve payment without a LC, but the buyer still bears the risk of non-payment.