How does the new Incoterms 2020 translate into my costs. Is it adding or just shifting between the trading parties? (to disillusion – no unification compliance or self-regulatory effort has resulted in direct cost avoidance or reduction to date). Where and what for do I still get charged? How to hedge my bets on imports, timing, onto the next season.
In any case, Incoterms 2020 ® is no revolution and no drama. Don’t fret on the red-ish tape. In a nutshell, the terms tell how ownership (of goods in trade) and risk (I.e. loss, damage, insurance burden) distribute between a buyer and a seller in a typical international physical goods delivery, which is pursuant to a sales transaction. And yes, carrier is assumed to be third party. Incoterms 2020 update offers a handy grouping of the terms into cost and cargo type buckets, and has explanatory section appended. As with so much from the International trade, written rules are there to relate to for a common understanding. The key is to grow with a solid vendor, nurture a relationship, keep an eye on the production schedule and have feel for the freight market so you don’t miss out on a route update or get burned when it’s tight.
An example: you’ve been shipping FOB China main ports for years now, and you’ve just read there is a better risk / ownership split now under FCA from the new Incoterms, and you dare fine-tune FOB into FCA to get to nominate the carrier yourself or other way around to strip some tele-admin. You start warming the vendor to your idea only to realize that they are at capacity and they don’t really have time to introduce this little much of variability. Their logistics function is bone bare outsource and any layering of instructions is adding noise and errors. The vendor is having their set of preferred carriers (you’ve known for years), so even if you want more (or less) leverage toggling FOB- to FCA-, for them, as exporters, it doesn’t make much sense, or any difference. Rule of thumb takeaway: don’t innovate from overseas. Partner instead.
Incoterms XXXX, the basics (including Incoterms 2020 ®):
The common terms for Ocean are still the following:
- FOB – free on board, bulk of the China outbound shipments (i.e. bulk of EU imports from China) so you can skim the rest.
- FCA – new FCA adding nuance (not much more) to pre-FOB paperwork and stuffing.
- CIF/CFR – often when there is a buyer’s market
- CPT/FCA for some intermodal transport on a through/combined Bill of Lading.
- FAS – for the sake of ‘Ocean/Marine’ consistency – note, this one is not used for containers but for bulk and general cargo.
Rest are not meant for the containerized marine container domain but may appear.
The new terms are not an overnight cutover and not that new, better have the generous understanding that old terms are still used and ‘new’ terms are still being interpreted the same as before.
Be sure that the terms are not a legal bind, but are well into adoption in most parts of the world, including nearly all port-pairs of trade. There is an inter-body stewarding the rules, ICC (that offers all the updates’ guidance and training materials, including proprietary software and printed products. ICC also curates the UCP rules for Documentary credits, essentially the Trade finance rules, a related domain.
Most important of all, be aware, that Incoterms (all versions in use) are stamped or even watermarked on the trade, transport and financing documents – that is on the Commercial and Freight invoices, Bills of Lading and Letters of Credit or Documentaries. Any gaps in understanding can get you in wrong estimates of landed costs, penalties by the banks servicing the LoC’s and discussions with vendors and customs authorities. Generally, customs duties and import VAT (EU perspective) are based on Landed costs (read ballpark CIF/CIF+ amounts but still as per the country customs regulations) so take care and plan accordingly.
To wrap: Don’t get too intense on interpretation of the terms and formalities. Knowledge is power but only so long as practicable. Apart from ICC, there are numerous sources you can consult for technicalities, and although ICC rightly cautions about questionable content and consulting, some of the freight forwarders’ websites for one, offer valuable context to the rules to complement the rules reading.
Wikipedia, as usual, offers a neat run down and an intuitive visuals.