By Julie Evans
What are Incoterms?
Incoterms-- an acronym for International Commercial Terms-- are a series of 13 trade terms used in international sales contracts to clearly divide the risks and responsibilities of buyers and sellers with regard to the movement of goods between both parties. They were first introduced in 1936 in Europe to prevent misunderstandings and disputes that may arise because of different trading practices among countries. They have been revised periodically to reflect current trading practices, most recently in 1990.
Except in the United States, Incoterms are widely used for international trade throughout the world. According to Frank Reynolds, a Presidential E-Award winning exporter and author of the newly revised Incoterms for Americans, American businesses have been slow to adopt Incoterms, mainly because they are a European invention. Or they use them incorrectly, confusing commonly used domestic sales terms like ¤FOB FactoryË with Incoterms. There is no ¤FOB FactoryË in Incoterms, because that term, Free on Board, refers to the point at which the goods cross the ship's rail. The correct way to express the American concept of ¤FOB FactoryË is FCA (Free Carrier), followed by the location of the factory.
However, Incoterms are very handy, because with three English letters followed by a place name (e.g. FCA Port of Baltimore) a company can convey in its price quotation (pro-forma invoice) or sales contract extensive information that would otherwise take pages to spell out. In the quotation process, Incoterms help determine the selling price by defining the responsibilities and costs, beyond the price of the goods, which the seller is willing to handle. This includes export packing; transportation (pre-carriage to the departure point-- usually a port or airport-- main carriage to the entry point in the buyer's country and on-carriage from the entry point to buyer's place of business); export clearance on seller's side; import clearance and duties on buyer's side; and insurance.
Another important feature of Incoterms is that they delineate the exact point at which risk passes from seller to buyer in the event that the goods are damaged or lost en route. Understanding exactly where this risk transfer point takes place is important for a company to make certain it has adequate insurance coverage up until that point.
What the use of Incoterms does not do is convey title or ownership of the goods. That is agreed on by the seller and buyer independently of which Incoterm is used and occurs through separate documents. They are also not law, but they are written to conform with the UN Convention on Contracts for the International Sale of Goods, the default law applied to international contracts among signatory nations.
What has changed in Incoterms 2000?
The answer is 100 changes, but in reality very little. A major overhaul of Incoterms was done in the last go-round in 1990. Most of the changes to Incoterms 2000 are a tidying-up to eliminate inconsistencies and streamline some terms. No terms were eliminated, nor new terms added.
Reynolds, who was the only U.S. member of the ICC's Drafting Party and Working Group assigned to revise the terms, emphasizes to U.S. exporters, Don't start with trying to learn the differences between 1990 and 2000. Start from scratch. The first responsibility of export pros is to learn Incoterms 2000.
A couple important technical changes included the shifting the responsibility of export clearance of Free Alongside Ship (FAS) from the buyer to the seller, and the import clearance responsibility of Delivered Ex Quay (DEQ) from the seller to the buyer. These changes are logical, because, according to Reynolds, it makes more sense for the seller to deal with his own government with respect to export clearance (i.e. compliance with U.S. export controls) and the buyer to deal with his government on import clearance.
Trend toward ¤Omni-ModalË Terms
The trend now in Incoterms is away from the more traditional marine-only terms, such as FOB and CIF (Cost, Insurance and Freight), toward what Reynolds calls ¤omni-modalË terms. Reflecting the growth of intermodal transportation logistics, these newer terms can be used for all forms of transportation Ď ships, planes, trains, or trucks-- not just for a ship. These include FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DDU (Delivery Duty Unpaid), and DDP (Delivered Duty Paid).
Check out the ¤New and ImprovedË FCA
The term FCA (Free Carrier) has been simplified under Incoterms 2000. Instead of seven delivery options, there are jut two █ the seller's premises and the terminal of the buyer-appointed carrier, forwarder or other buyer appointed party. FCA should gradually replace such commonly used terms as EXW (Ex Works) and FOB. The principal difference between FCA, Seller's Factory and Ex Works is that the responsibility for compliance with U.S. Export controls is assigned to the seller who is in the best position to do so, not the buyer.
Experienced Trader's Preferred Incoterms
After some 30 years in the export business, Reynolds preferred choice of Incoterms is CIP (Carriage and Insurance Paid to) or DDU (Delivered Duty Unpaid) █ where door-to-door transportation is available through a reputable company like a Federal Express or UPS. These terms ¤allow me to control the selection of the freight forwarder, transportation and insurance.Ë In both cases the importer is still responsible for the import clearance in his country. However, if the importer wants to arrange the main carriage, especially in the case of a large importer who is likely to get better shipping rates than a small U.S. exporter, Reynolds goes with FCA (Free Carrier) at his place or at the terminal stipulated by the buyer.
For more information on Incoterms 2000:
Incoterms 2000 , (ICC Publication 560) is available from ICC Publishing, Inc. in New York for $31.95 through Amazon. Its companion book, Guide to Incoterms by Jan Ramburg is also available.
Incoterms for Americans by Frank Reynolds, is available for $43.00 through his company, International Projects, Inc. in Toledo, OH. The telephone number is 419-865-6201.