Incoterms 2020: What are they and how do they apply to businesses?

Imports and Exports | | MIC Customs Solutions |

The ICC has issued revisions to its Incoterms, but what exactly are they and how do they apply to global trade?

It has been announced that the International Chamber of Commerce (ICC) has released an update to its Incoterms, this time labelled Incoterms© 2020. These globally recognised trade terms apply to the sale of goods and aim to provide certainty and clarity to business owners who trade.

What are Incoterms?

An abbreviation of 'International Commercial Terms', Incoterms are used so that both parties involved in a trade transaction understand the tasks, costs, risks and responsibilities, as well as the logistics and transportation management requirements.

First applied by the ICC in 1936, they establish common definitions and rules on the sale of goods between trading partners across the globe and define responsibilities for the delivery of goods under sales contracts.

Shippers use them to make it clear who is responsible for shipping, tariffs and insurance on an item and they're protected by ICC copyright.

Together, they make up some of the most widely used parts of a contract in international trade and can have an impact on a company's accounts, operations and compliance.

What are the new revisions?

The ICC periodically revises its Incoterms rules to reflect changes in international trading, and next year will mark such an occasion.​​

Incoterms© 2020 are designed to be more accessible and easier to use. They include more detailed explanatory notes and improved graphics so importers and exporters can clearly see their responsibilities under each Incoterms rule.

This means everyone should be able to choose the most appropriate Incoterms rule for any given transaction from the list published on the ICC's website.

Among the other alterations are:

• Different levels of insurance coverage aligned in Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP)

• Security-related requirements within carriage obligations and costs

• A change for the three-letter name for Delivered at Terminal (DAT) to DPU.

You can read the full update on the ICC's ecommerce platform.

ICC secretary-general John WH Denton said: "Incoterms® 2020 rules make business work for everyone because they help importers and exporters around the world to understand their responsibilities and avoid costly misunderstandings. The rules form the language of international sales transactions, and help build confidence in our valuable global trading system."

Why do we need Incoterms?​

Incoterms are designed to reduce misunderstandings among traders and therefore reduce the need for trade disputes and costly litigation.

Traders can also choose terms that enable them to improve their customer service and ensure they know who is responsible for what charges, as well as to facilitate the drafting of contracts.

How to ensure you adhere to Incoterms

Technically, Incoterms are not a law and so their use is not compulsory. However, they are legally binding if they are used as part of a commercial contract mutually signed by two parties.

If this is the case, then your business must take into consideration the point of delivery when a handover between seller and buyer takes place; transportation costs; export and import formalities, including who arranges them; and insurance costs.

It must also be specified who is responsible for transportation to the port, who has the risk of loss and who is responsible for customs clearance, where appropriate.

Contracts that include Incoterms must also include an express reference to which specific version they refer.

When used correctly, Incoterms can make trade processes much easier and they are therefore well worth looking into.

If you're keen to streamline your company's efficiency and compliance, then you may also want to check out the tailored customs and trade compliance software solutions offered by MIC, which can support both multinational and multiregional customers.