The nature of international trade changes, and with it, the need to update a fundamental mechanism to facilitate negotiations and contracts: Incoterms. 1 January 2020, these new standards will enter in force. The International Chamber of Commerce is currently giving them the final technical touches. While we still do not have the new text, we do know that the aim is make their application simpler and more practical.
What are Incoterms?
Incoterms came about in 1936 in order to improve negotiations between exporters and importers. They seek to provide perfect understanding between the different parties involved in an international trade action, overcoming hurdles such as language or different laws in different countries.
It should be noted that it is not mandatory to comply with them but are rather standards that parties voluntarily accept regarding freight delivery conditions, liabilities and the costs entailed by the transaction.
Why do Incoterms change?
As one might imagine, international trade has changed a great deal since 1936. Incoterms are renewed to continue meeting needs and trends at all times.
In fact, since they appeared, Incoterms have been updated every decade. Their current version is from 2010, and although the 2020 version will soon be revealed, the latest version does not necessarily replace previous versions. They can still be used, but the version’s date must be specified.
Changes brought by Incoterms 2020
While still awaiting publication, many of the key elements of new Incoterms have already been leaked through the drafting group’s statements. Below are some probable changes:
Elimination of Incoterm FAS
FAS or Free Alongside Ship, is an infrequently-used Incoterm that is not much different from FCA (Free Carrier Alongside). In practise, FAS is only sporadically used in international commodities trade, so the possibility of creating a specific Incoterm for this kind of freight is also being studied. It would entirely replace its use.
Creation of a new Incoterm: CNI
We are surmising that a new Incoterm will be born, called CNI (Cost and Insurance). This would cover a regulatory loophole between FCA and CFR/CIF, since it would include the cost of international insurance at the exporter’s expense but would not include freightage. This would be a group-C Incoterm, meaning that liability for the freight would fall on the purchaser at the outgoing port.
Division of the Incoterm FCA
FCA is the most versatile Incoterm (it encompasses around 40% of international trade transactions). Perhaps for this reason, the possibility of dividing it into two more specific terms is being evaluated, one oriented toward land delivery and the other toward maritime delivery.
Division of the Incoterm DDP
DDP or Delivered Duty Paid, may disappear as such, because its characteristics bear contradictions with the current customs code.
In exchange, its basis would live on in two new Incoterms:
- DTP (Delivered at Terminal Paid): when the freight is delivered at a terminal (port, airport, etc.) inside the purchaser’s country, and it is the vendor who must pay customs fees.
- DPP (Delivered at Place Paid): when the freight is delivered anywhere that is not a terminal, and the seller bears the customs fees. This Incoterm will have greater relevance with the boom in e-commerce.
Elimination of Incoterm EXW
EXW or Ex Works will be eliminated due to improper use and conflicts with the law in certain countries bearing on occupational hazards. Moreover, it can easily be replaced by other, more suitable terms, such as FCA (or one of its new divisions).
Incoterms 2020: seeking ease and unequivocal use
All these changes seek to facilitate putting Incoterms into practise. It is hoped that terminology and wording will also be simplified to correct their use, since many of them are being used incorrectly. In the same fashion, they will be designed with the new realities of the logistical sector in mind, such as e-commerce, transport safety, increased inter-modality, and more.
