Incoterms – an abbreviation of international commercial terms – are rules that facilitate fair and consistent global trade. They outline the shipping responsibilities of Buyers (Importers) and Suppliers (Exporters).
The International Chamber of Commerce (ICC) introduced the rules in 1923. Since then, there have been several revisions to Incoterms, the most recent edition being ‘Incoterms 2020’.
Incoterms are recognised by numerous countries that engage in international trade.
At the time of this publication, there are currently 11 Incoterms designed to outline the risks and costs assumed by Buyers and Suppliers in each trade agreement. These are broken into two subcategories:
Incoterms chart – the allocation of responsibility for costs
Incoterms can be used within contracts to define and agree upon shipping terms and responsibilities, but they do not represent a sales contract between a Buyer and a Supplier. There are additional details that must be agreed upon alongside them.
Some of the common trade details not covered by Incoterms include:
The latest edition of Incoterms is known as Incoterms 2020 and was published in the same year.
This edition is not too different from the previous iteration - Incoterms 2010 - and features the same 11 rules. However, there were some important updates added to the 2020 iteration.
Most significantly, Incoterms 2020 features an in-depth introduction and expanded explanatory notes for each term and trading role, which previous editions did not have. The 2020 edition also outlines best practices for using the terms in global trade deals and their incorporation into sales contracts.
These updates were included to minimise errors and improve efficiency and accuracy in international trade.
Incoterms are beneficial when setting expectations between Suppliers and Buyers in international trade agreements. However, many companies are concerned about the impact that Brexit has had - and will continue to have - on the use and validity of Incoterms.
Brexit has not drastically affected the use of Incoterms in international trade. But there is occasional confusion regarding the term DDP (Delivered Duty Paid).
The UK’s withdrawal from the EU has caused confusion about the destinations of goods, such as the places where Buyers receive shipments before they reach their destination.
Furthermore, new rules surrounding custom fees post-Brexit have made this more challenging for Suppliers.
Therefore, Suppliers must pay closer attention to ensure they are applying the correct terms.
The ICC recommends that any new international trade agreements be arranged using Incoterms 2020.
However, any iteration of Incoterms can be used so long as the Buyer and Supplier agree and follow the same terms in the sales contract and related documents.
The most commonly used Incoterms are EXW and DDP. This is because these two agreements see a single party – the Buyer or the Supplier – take full responsibility for shipment risks and costs, reducing the sales contract complexities.
EXW sees the Buyer assume full responsibility for the risks and costs of the shipment, while DDP requires the Supplier to organise and assume responsibility for the shipment.
Incoterms may appear complicated but they are easy to understand once you realise why they are there. The terms exist to reduce errors and delays in international trade, therefore ensuring an easy experience for both Buyer and Supplier.
Stenn hopes the above information has clarified any confusion about Incoterms and their uses in global trade agreements. We recommend that you check whether the Incoterms you use for your shipments are correct and in line with the latest edition.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
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