by Christian Sivière, President - Solimpex Montréal and Ottawa
The long-awaited Incoterms® 2020 revision came out on September 10th, after months of anticipation, during which various theories circulated on the internet as to what changes were going to be introduced. The timing of the release coincided with the Chamber’s 100th anniversary.
Canadian businesses exporting goods to the UK, and anywhere else, as well as UK importers and exporters deal with these rules all the time. For our readers who are unaware, the Incoterm® rules are one of the key legal component of trading goods internationally. Published by the International Chamber of Commerce (ICC) in Paris and updated about every 10 years, these rules define the responsibilities of the seller and the buyer for the tasks, costs and risks involved in delivering merchandise. Used by traders all over the world, they greatly facilitate trade and constitute a kind of universal language for businesses.
First introduced in 1936, they originally applied only to shipments by vessel on maritime and inland waterways. They were used mainly in Europe but their application became more universal in 1969, after the United Nations endorsed them.
They are a set of abbreviations that companies incorporate in their offers, contracts, purchase orders, invoices and other relevant documentation, usually next to the price for the goods. We used to have thirteen Incoterm® but they were reduced to eleven in the 2010 revision.
The current abbreviations are:
FAS: Free Alongside Ship
FOB: Free on Board
CFR: Cost and Freight
and CIF: Cost Insurance and Freight, for traditional maritime and inland waterways shipments;
EXW: Ex Works
FCA: Free Carrier
CPT: Carriage Paid To
CIP: Carriage and Insurance Paid To
DAT: Delivered At Terminal
DAP: Delivered At Place
and DDP: Delivered Duty Paid, for containerized maritime shipments and all other modes of transport, including multimodal.
Several theories circulated in our free-flowing digital world about an upcoming Incoterm® revolution, speculating that big changes were coming: the abolition of EXW, FAS and DDP, the breaking up of FCA into 2 terms, the creation of a CNI term and so forth. The ICC kept the suspense going by communicating a lot, sending out alerts, holding podcasts and webinars, all along keeping a lid on what the actual changes were going to be. They finally came out on September 10th, with no big changes at all!
Of course, the ICC stresses that there are many improvements, clarifications, explanations, making them easier to use. And the new Incoterms indeed look good, have nice pictograms and colours, more user-friendly explanatory notes, a slightly different organization of paragraphs and a nice feel. But don’t expect anything revolutionary or big substantive changes.
In 2020, we’ll still have eleven Incoterms: four ‘’maritime’’ terms that have not evolved much since 1936 and are not supposed to be used for ocean container shipments, though many people still use them, wrongly; and seven terms for all modes of transport. From these seven terms, DAT is abolished, which is too bad. It was only introduced in 2010, and I know from my experience in delivering international trade workshops and trainings across the country that people barely got used to DAT! The only new term introduced in 2020 is called DPU for ‘’Delivered at Place Unloaded’’, an odd term putting the responsibility and costs for the unloading of the goods at destination on the seller’s shoulders! There other technical changes relating to ocean bills of lading, security declarations and insurance coverage that would be too long to cover in this article.
What will not change in 2020? The ‘’C’’ terms, CFR, CIP, CPT and CIP, will continue to have this potentially dangerous disparity between the division of risks and the division of costs. FCA will still have two different meanings and only two Incoterms® have cargo insurance obligations, CIF and CIP. This can be misleading as both parties to a sales contract should always think about cargo insurance based on their portion of the risks, and also their payment terms. What is not changing either is they are not free: you still have to purchase the book from the ICC, although we have good news on this front, as the price went down from 93 euros in 2010 to 50 euros in 2020!
The moral to the story: a lot of noise for a few changes and no big improvements, in my opinion. What’s worse is I heard on an ICC podcast that we can look forward to ‘’smart’’ Incoterms in 2030? Really? Why wait for another ten years for that?
Seriously, even though the 2020 changes aren’t huge, now is a good time to take a step back and review the entire topic. In my training and lecturing experience, I regularly see that there are a lot of misconceptions about Incoterms. Even experienced traders don’t know them that well, some believe they determine ownership, which they don’t. And the 2010 changes aren’t that well known either, particularly the disparity between costs and risks aren’t always well understood. Therefore, now is a good time to update ourselves, in order to use them well for our benefit and gain a competitive advantage.
In Canada, we have a pretty unique challenge: the U.S. is our main trading partner and companies there often ignore the international Incoterms®, using instead unique American terms of reference called the UCC terms (Uniform Commercial Code), which are very different from the Incoterms®. Canadian companies often need to adapt to this and refer to the UCC terms for their transborder trade, and use the international Incoterms® for their dealings with the rest of the world. But hey, we can do it!