Incoterms® 2020 [Importance In Export-Import Business]
If you are involved in international trade and want to know about incoterms® 2020.
You are on the right page!
Incoterms are the most important thing that you need to know before starting the Export import business.
Hello, friends welcome to another fresh article of “Indiancustomc.Info, Here in this I explained the latest incoterms® 2020.
Incoterms are the most important part of the export-import business.
As trade is dynamic and evolving across the globe, the factors related to it have also similar characteristics.
Negotiation in international trade is of immense importance and leads to the formation of contracts.
To benefit from contracts, the terms related to the product, price, delivery, quality, and dispute settlement are well negotiated before a transaction commences.
However, one of the most important terms in a contract is the International Commercial Terms (INCOTERMS) also referred to as delivery terms.
These delivery terms indicate the distribution of risk & responsibility between two trading parties.
Risk and responsibility here refer to the transfer of cost in monetary terms as well as the cost of risk.
Though referred to as delivery terms, these incoterms do not theoretically indicate the place of physical delivery or transfer of ownership.
Incoterms are given by the International Chambers of Commerce and were given for the first time in 1936.
These terms are rules or guidelines and not laws but become legally binding once incorporated into a contract.
The latest revision of INCOTERMS is Incoterms® 2020.
Incoterms in international trade bifurcate the entire transportation chain into three parts i.e.
- Pre-carriage- which is within the exporter’s country.
- Main carriage- which is from the exporter’s country to the importer’s country.
- On-carriage which is within the importer’s country.
Incoterms are most important for the main carriage stage as the goods in transit are out of the bounds of the exporter and importer but with a third party.
Incoterms also indicate the mode of transport which is used.
There are 11 incoterms as per the latest revision of INCOTERMS® 2020 by ICC.
Out of these 11, 7 are Omnimodal incoterms i.e. can be used across all modes of transport, and marine restricted incoterms, to be used only when goods go by sea.
Also Read:- Assessable Value & CIF Value Calculation For Customs.
Various Types Of Incoterms.
As per Incoterms 2020, there are eleven types of Incoterms and these Incoterms are divided into four distinct groups.
- Group E
- Group F
- Group C
- Group D
Group E of Incoterms indicates that the goods shall be made available to the importer at the exporter’s premises; for example, at the factory gate or warehouse of an exporter.
Group F indicates that the exporter must deliver the goods to a carrier that has been appointed by the importer for carrying the goods to the destination.
Group C indicates that the exporter is liable for losses and damages only up to the port of shipment and all losses and damages after the exporter delivery of cargo to the shipping company and any additional cost or charges etc shall be borne by the importer.
Exporter takes the obligation of all risks of losses or damages to the cargo only before the start of a journey of cargo.
Group D indicates that the exporter will be having obligations and responsibility to incur all the costs, charges, and other risks which may be associated in course of the journey from the Exporter County to the importer country.
Incoterms may not be generalized in terms of being beneficial to the exporter or importer.
The benefit of adopting an Incoterm for a contract is dependent on several factors like the nature of the product, export destination, source of export, infrastructure, etc.
In simple terms, the higher the risk, the higher will be the cost charged by the exporter.
The below table depicts the summary of risks and responsibilities of costs and risks shared between an exporter and importer in international trade operations.
| Responsibility & Charges Service | EXW | FCA | FAS | FOB | CFR | CIF | CPT | CIP | DPU | DAP | DDP |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Exporter Warehouse/ Factory / Works Place or Storage at Cargo Origin Point | E | E | E | E | E | E | E | E | E | E | E |
| Manufacturing and Export Packing of cargo (Cargo Origin Point) | E | E | E | E | E | E | E | E | E | E | E |
| Stuffing of Cargo in Boxes & Loading of Cargo on Carrier (Cargo Origin Point) | I | E | E | E | E | E | E | E | E | E | E |
| Pre Carriage or Inland Freight Charges (In Exporter Country) | I | I | E | E | E | E | E | E | E | E | E |
| Terminal Handling along with other charges relating to Port (Port of Departure) | I | I | E | E | E | E | E | E | E | E | E |
| Duties at Departing Port | I | E | E | E | E | E | E | E | E | E | E |
| Loading on Carrier (Departing Port) | I | I | I | E | E | E | E | E | E | E | E |
| Ocean and Air Freight | I | I | I | I | E | E | E | E | E | E | E |
| Unloading on Carrier (Arriving Port) | I | I | I | I | * | * | * | * | E | I | E |
| Port Charges (Arrival Port) | I | I | I | I | I | E | E | E | E | E | |
| Custom Duties and Taxes | I | I | I | I | I | I | I | I | I | I | E |
| Delivery Charges at Final Destination | I | I | I | I | I | I | I | I | I | I | E |
E= Exporter and I= Importer, * to be decided as per the contract between exporter and importer.
Incoterms As Per Different Modes Of Transportation.
Depending upon the mode of transport applied for the main carriage stage, the choice of incoterms also differs.
The Omnimodal incoterms are used across all modes of transport, like Sea, Air, Road, or Rail.
While the marine-restricted incoterms can be used only when the main carriage is by Sea.
In international trade, there are two prime contracts namely, a Sales contract between the importer and exporter and a contract of carriage between the shipper and the carrier.
The shipper may be the exporter or importer depending upon the incoterm in use as per the contract.
Though the Incoterms are rules, they should be selected with utmost care as marine-restricted incoterms if applied to transportation by road or air may not serve the purpose.
Per above figure indicates the incoterms applicable as per modes of transport used for the main carriage.
Applicable Incoterms in Different Modes of Transportation Depending upon the mode of transport applied for the main carriage stage, the choice of incoterms also differs.
The Omnimodal incoterms are used across all modes of transport, like Sea, Air, Road, or Rail.
While the marine-restricted incoterms can be used only when the main carriage is by Sea.
In international trade, there are two prime contracts namely, a Sales contract between the importer and exporter and a contract of carriage between the shipper and the carrier.
The shipper may be the exporter or importer depending upon the incoterm in use as per the contract.
Though the Incoterms are rules, they should be selected with utmost care as marine-restricted incoterms if applied to transportation by road or air may not serve the purpose.
The above figure indicates the incoterms applicable as per modes of transport used for the main carriage.
Summary Of Incoterms And Transfer Of Risk.
Transfer of risk and cost from the exporter to the importer as per the contract is specified in each incoterm.
Incoterms are self-explanatory and are the same across the globe.
Incoterms help in deciding the place where the transfer will take place.
This point can be anywhere in the exporter’s or importer’s country as the incoterm in use.
A summary of all Incoterms with the point where the transfer of risk and cost takes place is enumerated below the table.
| INCOTERM 2020 | Definition and Transfer of Risk |
|---|---|
| EXW | The exporter is responsible to bear the risk and cost of manufacturing and packaging the goods and placing them at the disposal of the importer. The exporter is also responsible for delivering the goods to a place within the exporter’s country. The importer is responsible to bear the risk and cost of the goods right from the time the goods are taken over including all loading, and unloading charges as well as the cost of transportation till the goods reach the importer’s country |
| FCA | The transfer of cost from the exporter to the importer when the goods reach the named place in the importer’s country. While the transfer of risk takes place when the goods are placed on board the vessel in the exporter’s country. Export clearance has to be done by the exporter while import clearance is done by the importer. In addition to the freight and handling cost, the exporter also pays for insurance |
| FAS | The transfer of risk and cost from the exporter to the importer when the goods are placed alongside the ship at the named port by the exporter. The importer is responsible for the goods thereafter. |
| FOB | The transfer of risk and cost from the exporter to the importer when the goods are placed on board the ship at the named port by the exporter. The importer is responsible for the goods thereafter. |
| CPT | Risks shift from exporter to importer once the carrier reaches the named place of destination in the importer’s country. The buyer is responsible for the unloading of cargo and the costs and risks thereafter. |
| CIP | The transfer of cost from the exporter to the importer when the goods reach the named port in the importer’s country. While the transfer of risk takes place when the goods reach the port in the exporter’s country. Export clearance has to be done by the exporter while import clearance is done by the importer. In addition to the freight and handling cost, the exporter also pays for insurance. |
| CFR | Risks shift from exporter to importer once the carrier reaches the named place of destination in the importer’s country and is also unloaded. The buyer is responsible for bearing the costs and risks thereafter |
| CIF | The transfer of cost from the exporter to the importer when the goods reach the named port in the importer’s country. While the transfer of risk takes place when the goods reach the port in the exporter’s country. Export clearance has to be done by the exporter while import clearance is done by the importer. |
| DAP | Risks shift from exporter to importer once the carrier reaches the named place of destination in the importer’s country and is also unloaded. The buyer is responsible for bearing the costs and risks thereafter |
| DPU | Risks shift from exporter to importer once the carrier reaches the named place of destination in the importer’s country and also unloaded. The buyer is responsible for bearing the costs and risks thereafter |
| DDP | The exporter is responsible for all risks till the carrier reaches the named place of destination i.e. doorsteps of an importer. |
I hope now you understand what is Incoterm and why they are impotent in the export-import industry. If anyone has any suggestions or queries please comment in the comment box.
