Friday, July 5, 2019

Incoterms Explained Courtesy of a Professional Freight Forwarder

The World of Shipping Acronyms is About to Evolve Again
Shipping News Feature
WORLDWIDE – Incoterms, the shorthand of shipping, the acronyms which, to the initiated, graphically sum up a picture of the status of a consignment and are the common language of the industry. Or are they so common? Like all language, over time the words (or in this case letters) become corrupted, with new unofficial phrases added to the well-worn old timers. Meanwhile changes caused by new technologies or the inception of different facilities which involve the movement of cargo can require additional terms where none existed before.

2019 sees the centennial anniversary of the International Chambers of Commerce (ICC), the body responsible for the preparation and publishing of these internationally identifiable phrases which outline the precise nature of the relationship between Seller and Buyer in any commercial transaction which might involve the necessity to transport goods. The current set of terms was agreed upon a decade ago.

This month liner agency and freight forwarding agent John Good Shipping reminds us that the Incoterms as we know them are due for a revamp. As from 1 January 2020 a new set of terms come into being but, as the industry considers the requirements for the revised terms, it might be best to run through the details as so helpfully explained by the East Yorkshire headquartered company.

What are Incoterms?

Incoterms are a set of international rules set by the International Chamber of Commerce, which relate to the terms of international commercial sales contracts. They’re an essential consideration for importers and exporters as they determine who is responsible for:

  • covering the cost of each part of the international journey
  • the shipment at each part of the international journey
  • arranging transportation
  • ensuring the goods are insured
  • and
  • what documentation is required and who is responsible for this
There are currently 11 different Incoterms, which are divided into four groups, E, F, C and D, depending on the delivery location and who is responsible for covering the cost of each part of the journey. Each category is then further broken down into different types of Incoterms to cover different types of scenarios. Each importer or exporter needs to choose the Incoterms that best suit them and their shipment, so it’s important to be familiar with them. The current set of Incoterms is as follows:

Incoterms Group E – EXW (Ex-Works) – the first basic term. The purchaser of the goods assumes full responsibility for collecting goods at seller’s warehouse and for all subsequent associated risks and costs.

Incoterms Group F – The Seller is responsible for delivering goods to the buyer’s pre-agreed method of transportation. From this point onwards the buyer is responsible for all costs and risks.

FCA (Free Carrier, any means of transport); FAS (Free Alongside Ship, exclusive to shipping) and probably the best known FOB (Free on Board, exclusive to shipping)

Incoterms Group C – The Seller bears responsibility for all costs to the destination port (including international transport), however, when goods are loaded on the means of transport from that point on, risk transfers to the buyer.

CPT (Carriage Paid To, any means of transport); CIP (Carriage & Insurance Paid to, any means of transport); CFR (Cost & Freight, exclusive to shipping and also often called C&F and probably the most common), CIF (Cost, Insurance and Freight, exclusive to shipping)

Incoterms Group D –The seller bears all risks and costs incurred to bring the goods to the destination country, to a point mutually agreed and indicated on the contract of sale (or invoice).

DAT Incoterm (Delivered At Terminal); DAP Incoterm (Delivered At Place); DDP Incoterm (Delivered Duty Paid)

John Good believes that the terms FAS and EXW are expected to be retired. The reasoning is that EXW tends to apply more to domestic trade, and could be considered to go against the EU’s new customs code. FAS is rarely used and no longer deemed a necessary option. This is by no means certain however, in many countries suppliers still insist on selling ex works and, with the growth of barge traffic as road haulage struggles to maintain its green credentials, Free Alongside may well be back in fashion.

DDP is also being retired in its current form, for the same reasoning as EXW. However, the powers that be are thought to be considering splitting it into two different categories as follows:

  • DTP – Delivered at Terminal Paid: The Seller is responsible for all transport-related costs, including customs duties, when goods are delivered to a terminal at the destination (e.g. to the port, airport or transport centre).
  • DPP – Delivered at Place Paid: The Seller is responsible for all transport-related costs, including customs duties when goods are delivered to somewhere other than a transport terminal (e.g. to an address given by the buyer).
FCA Split – FCA is one of the most commonly used Incoterms and the consideration is that it will be split into two different variations – one for land transportation and one for sea.

CNI Introduced – CNI – Cost and Insurance: A brand new Incoterm that’s likely to come into play in 2020. CNI terms dictate that, from the departure port, the exporter has responsibility for cargo insurance, while the buyer is responsible for the risk of transportation. Some say however this has the potential for problems as the insurer has no say in the quality and mode of carriage.

Another very welcome change to Incoterms 2020 is the intention to make them more straightforward and easier to understand, which should help to minimise the risk of misinterpretation. Of course, one of the benefits of using a freight forwarder like John Good is that there is no substitute for experience when it comes to unravelling the web of terms and appropriate documentation etc. when dealing with overseas clients.

Click HERE for a downloadable infographic showing a quick reference guide to remember what each Incoterm means and when responsibility sits with the buyer or seller at each stage of the shipment’s journey.