Incoterms 2020 deconstructed: A comprehensive guide for importers and exporters

In the dynamic world of global trade, where goods traverse borders and cultures, clear communication and well-defined responsibilities are paramount to success. Misunderstandings can lead to costly delays, disputes, and damaged business relationships. To navigate this complexity, businesses rely on a universal language of trade: International Commercial Terms (Incoterms).

Acting as the standardized framework for international commerce, Incoterms¹ provides clarity and certainty for both buyers and sellers, minimizing the potential for confusion and ensuring smooth, efficient transactions. This comprehensive guide will delve into the intricacies of Incoterms, equipping you with the knowledge to navigate the global marketplace with confidence.

1. What are Incoterms?

Incoterms are a set of 11 predefined rules published by the International Chamber of Commerce (ICC) that clarify the responsibilities of buyers and sellers in international trade. These rules clarify the responsibilities of buyers and sellers in international trade transactions, ensuring everyone is on the same page when it comes to:

• Transfer of Responsibility: Incoterms precisely define the point at which responsibility for the goods shifts from the seller to the buyer. This clarity is crucial for determining liability in case of loss or damage during transit.
• Cost Allocation: It clearly outlines who bears the costs associated with various aspects of the shipment, including transportation, insurance, and customs clearance. This helps avoid disputes and ensures transparency in financial transactions.
• Risk Management: Incoterms specify which party assumes the risk of loss or damage to the goods during transit. This allows both buyers and sellers to manage their risks effectively and make informed decisions about insurance coverage.

While Incoterms are essential for clarifying key aspects of international trade, it's also important to recognize their limitations. They don’t cover every aspect of a sales contract, including areas such as:

• Address All the Conditions of a Sale: Incoterms focuses primarily on the delivery aspects of a transaction, not the broader contractual terms.
• Identify the Types of Goods Being Sold Nor List the Contract Price: These details are typically outlined in the sales contract itself.
• Reference the Method Nor Timing of Payment: Payment terms are negotiated separately between the buyer and seller.
• Specify When Title, or Ownership of the Goods, Passes From the Seller to the Buyer: This is usually determined by the sales contract or applicable laws.
• Specify Which Documents Must be Provided by the Seller to the Buyer to Facilitate the Customs Clearance Process in the Buyer's Country: While some Incoterms imply certain documentation requirements, the specific documents needed may vary depending on the countries involved and the nature of the goods.
• Address Liability for the Failure to Provide the Goods in Conformity with the Contract of Sale, Delayed Delivery, or Dispute Resolution Mechanisms: These aspects are typically covered in the sales contract or through separate agreements.

2. The 11 Incoterms 2020: A detailed breakdown

The latest version of Incoterms, Incoterms 2020, includes 11 distinct terms categorized based on the mode of transport. This categorization reflects the practical realities of international trade, where the chosen mode of transport significantly influences the responsibilities, costs, and risks associated with delivering goods. By grouping Incoterms according to transport mode, the ICC provides a clear framework for buyers and sellers to select the most appropriate terms for their specific needs and circumstances.

Rules for any mode of transport

These Incoterms apply to any mode of transport, providing a versatile framework for various international trade scenarios. Whether you're shipping by road, rail, air, or a combination of modes, these terms offer clarity and define responsibilities throughout the journey.

• EXW (Ex Works): The seller makes the goods available at their premises, with minimal responsibility. The buyer assumes responsibility for loading, transportation, and all other costs and risks.
• FCA (Free Carrier): The seller delivers the goods to a carrier appointed by the buyer. The seller is responsible for loading the goods at their premises or delivering them to the carrier's designated location.
• CPT (Carriage Paid To): The seller pays for carriage to the named destination, but the risk transfers to the buyer when the goods are handed over to the carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also obtains cargo insurance, covering the goods during transit.
• DAP (Delivered at Place): The seller delivers the goods to the named place, ready for unloading. The buyer is responsible for unloading and any import clearance.
• DPU (Delivered at Place Unloaded): The seller delivers the goods to the named place and is responsible for unloading. The buyer is responsible for import clearance.
• DDP (Delivered Duty Paid): The seller delivers the goods to the named place, cleared for import, with all duties paid. This places the maximum obligation on the seller.

Rules for Sea and Inland Waterway Transport

These Incoterms are specifically designed for sea and inland waterway transport, reflecting the unique requirements and practices of maritime shipping.

• FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at the named port of shipment. The buyer is responsible for loading and all subsequent costs and risks.
• FOB (Free on Board): The seller delivers the goods on board the vessel at the named port of shipment. The buyer is responsible for all costs and risks from that point onward.
• CFR (Cost and Freight): The seller pays for carriage to the named port of destination, but the risk transfers to the buyer when the goods are on board the vessel.
• CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also obtains cargo insurance.

3. Choosing the right Incoterm

Selecting the most appropriate Incoterm for your international trade transaction depends on several factors:

• Nature of the Goods: The characteristics of your goods play a significant role in Incoterm selection. Perishable goods may require specialized handling and temperature-controlled transport, influencing the choice of Incoterms like CIP (Carriage and Insurance Paid To) to ensure adequate insurance coverage. Fragile items might necessitate secure packaging and careful handling, making DAP (Delivered at Place) a suitable option where the seller handles most of the transport.
• Mode of Transport: The chosen mode of transport (sea, air, road) influences the applicable Incoterms and the associated costs and risks.
• Level of Control: The buyer and seller need to determine their desired level of control over the shipment, with some Incoterms offering more control to the buyer and others to the seller.
• Risk Tolerance: The risk appetite of each party should be considered, with some Incoterms placing greater responsibility and risk on the buyer and others on the seller. Assess your willingness to assume responsibility for transportation, insurance, and potential issues during transit.
• Costs: Each Incoterm has associated costs, and it's vital to understand how these costs are allocated between the buyer and seller. Analyze the cost implications of each Incoterm, considering factors like freight charges, insurance premiums, and customs duties.
• Documentation and Customs Clearance: Incoterms influence the documentation required for international shipping. Certain Incoterms, like DDP, require the seller to handle import clearance, while others, like EXW, place this responsibility on the buyer. Ensure you understand the documentation requirements and customs procedures associated with your chosen Incoterm, especially when shipping to Vietnam or other countries with specific regulations. This includes understanding the necessary shipping documents, customs declarations, and potential import/export licenses. 

4. DHL Express: Your partner in international trade

Navigating the complexities of Incoterms can be challenging, but DHL Express is here to help. Our team of experts can provide guidance on Incoterms and assist you in choosing the most appropriate terms for your international transactions, including shipping to Vietnam or anywhere else in the world.

With our extensive global network and comprehensive international shipping services, we can support businesses operating under any Incoterm. Our deep understanding of the Incoterms 2020, customs regulations, and documentation ensures smooth and efficient clearance of your goods, no matter where they're headed. Whether you're shipping worldwide or focusing on specific trade routes, we'll handle the logistics so you can focus on what you do best – growing your business.

Mastering Incoterms: Your key to seamless global trade 

Incoterms are essential for facilitating clear communication and efficient transactions in international trade. By understanding and correctly applying the Incoterms 2020 rules, businesses can minimize risks, avoid disputes, and streamline their global trade operations. Familiarize yourself with these crucial terms and seek expert advice when needed to ensure your international shipments are handled smoothly and efficiently.

Looking ahead, it's important to note that the next iteration of Incoterms, Incoterms 2024, is on the horizon. While the exact details are yet to be finalized, it is expected that Incoterms 2024 will continue to address the challenges and complexities of international trade, taking into account emerging technologies, environmental concerns, and changes in global supply chains. The new rules may provide more clarity on the use of digital documentation, incorporate sustainability and environmental considerations, and address issues related to e-commerce and cross-border trade. Stay informed about these updates and seek expert advice to ensure your business remains compliant and competitive in the ever-evolving landscape of international trade.

Ready to take your international trade to the next level? Create a DHL Express business account today and let our expertise guide you through the complexities of global shipping.