Incoterms 2020: The Changes You Need to Know
It’s been said many, many times, but for good measure, we’ll reiterate: the Internet continues to make the world smaller and fuel the growth of global commerce. With that, e-commerce brands have more and more opportunities to connect with customers—throughout all corners of the globe.
And while that sounds great from a growth and profit standpoint, there are logistical challenges that come with international transactions. You have different sales taxes, customs clearance, and international carriers to coordinate with.
As we break down these barriers, global organizations are trying to keep up with regulating an increasingly mixed market. And with this, e-commerce companies everywhere will need to keep up with industry standards and regulations including: GDPR, IBSO’s Global Business Standard, and Incoterms 2020.
What Are Incoterms 2020?
Incoterms—“International Commercial Terms”—were originally introduced by the International Chamber of Commerce in 1936. The goal was to establish an industry standard for shipping goods in the global trade economy. These three-letter codes each define a standard the buyer, seller, or both must abide by.
“Incoterms® 2020 rules make business work for everyone by facilitating trillions of dollars in global trade annually. 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.” – ICC Secretary General John W.H. Denton AO
Previously, there were 13 Incoterms. The ICC eliminated several and added a few to make 11 for 2020. Let’s take a look at the major changes:
FCA and Bills of Lading
FCA (Free Carrier) requires the seller to either make goods available at their place of business or organize export clearance and deliver goods to the buyer’s carrier at a specified location. Once that has been completed, the seller is no longer responsible for those goods.
The bill of lading is the document the buyer’s carrier issues to the seller which confirms that the shipment has been delivered by the seller to the carrier. Banks will use the bill of lading as confirmation that the seller has provided the goods they have sold to the carrier — without this proof, some banks won’t issue payment for the shipment to the merchant.
In some cases, buyers need to use a carrier from the delivery location in addition to an international carrier. However, many international carriers won’t issue the bill of lading to the seller, since they received the goods from the buyer’s carrier instead of the seller.
Incoterms 2020 changes this. Now, the buyer can request the carrier to provide a “transport” bill of lading, with an on-board notation. Note that the seller and the buyer must agree to these terms during the sale.
Incoterms 2020 changes affect the Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP)—namely, how much the seller is responsible for covering.
Both CIF and CIP requirements include that the seller must purchase insurance from a reputable company for at least 110% of the total value of the goods in the order. It should cover the goods from the point of delivery to its destination, and allow the buyer to file a claim with the insurance company themselves (instead of the seller having to do it for them).
There are also specific guidelines for each:
The seller must purchase insurance for minimum coverage and comply with Institute Cargo Clause C of the Institute Cargo Clauses. For additional coverage, the buyer must arrange for this prior to the sale or purchase it themselves.
Under CIP, the seller must purchase an extensive insurance policy compliant with Clause A of the Institute Cargo Clauses. This offers more protection for the package and its contents — at the seller’s cost.
DAT > DPU
Delivered at Terminal (DAT) has been renamed to Delivered at Place Unloaded (DPU).
DAT referred to goods being delivered at a terminal. Because not all goods are delivered to a terminal, the ICC renamed it to more accurately reflect where goods are delivered.
DPU also specifies delivery to mean once the goods are unloaded. For example, there may be an instance where a shipping container has multiple recipients. Only when those goods are unloaded and distributed to the correct recipient is that order considered DPU.
DPU requires unloading to be done by the seller, which places any liability for damages on the seller’s shoulders.
Security Responsibilities for Imports and Exports
Incoterms 2020 aims to increase security for better protection of goods. The changes for 2020 involve more specific guidelines for security regarding the import and export of goods. You’ll notice these specifications throughout the Incoterms.
Incoterms 2020 also makes it clearer who is responsible for security and protection of goods—the seller or the buyer (or both). One example is in the case that the buyer chooses to arrange their own transport, they’re responsible, but the seller must disclose any related security requirements.
Ultimately, both the buyer and the seller have responsibilities to secure goods during the import and export process, as well as in transit.
Fulfilling With Your Shipping Needs
Global commerce certainly has its perks, but there are new logistical considerations that businesses need to be aware of. Staying updated on Incoterms 2020 will help you stay compliant and in line with industry standards—and nurture positive customer and vendor relationships.
Whether you’re established or just getting started, Shippo’s shipping software is an easy-to-use solution for e-commerce brands that want to save time and money—and delight customers, no matter where they reside.