Incoterms: What they are and the 2020 changes explained

What they are and what the latest updates consist of. 

Incoterms® are a set of regulations and terms used in international trade, accepted by governments and businesses worldwide. They regulate the responsibilities of companies in sales contracts, defining the rights and obligations of both buyers and sellers.

Incoterms® are not designed to form a complete sales contract, but rather to be part of it, acting as a uniform language used by international trade participants.

The Incoterms® rules regulate the following:

• • The delivery of goods (from seller to buyer)
  • The transfer of risks (time and place of delivery)
  • The allocation of costs (who pays for transport and insurance)
  • The customs documents that each party must handle

How to use Incoterms® 2020? 

To properly apply Incoterms® in a sales contract, you need to follow this structure:

• • [The chosen Incoterm® rule] [Port, place, or specific location] Incoterms® 2020

Example: "CIF Adolfo López Mateos 190, Monterrey, Mexico Incoterms® 2020"

*It is important to specify that the Incoterms® 2020 rules are being applied, as previous versions might otherwise be used.

Select the appropriate Incoterm® rule: This is crucial for successful commercial negotiations and must be tailored to the type of goods being shipped and the means of transport.

Indicate the port or location precisely: For effective application, the parties involved should accurately specify the place of delivery or terminal.

Note that the designated location might not always be the same as the final delivery point for certain Incoterms®, such as CPT, CIP, CIF, or CFR (which refer to the destination where transport is paid).

Precautions for correctly using the rules:

• • Understand the meaning of each Incoterm® abbreviation.
  • Use only standardized abbreviations and codes, and explicitly mention them in the contract.

*Keep in mind that in our next article – 11 Incoterm Abbreviations (latest 2020 update) – we provide a detailed explanation of Incoterms, describing each of the terms that make up this regulation

Key changes in Incoterms® 2020 compared to Incoterms 2010:

• Incoterms® 2020 shift the responsibility for security requirements and additional costs to the seller.
• The Incoterms® FCA rule provides an additional option for mentioning the Bill of Lading before the goods are loaded onto a ship.
• Insurance coverage levels under CIF and CIP Incoterms have evolved, and new conditions for insurance coverage have been established.
  • • CIP: Institute Cargo Clauses Clause A includes "All Risks" insurance coverage.
    • CIF: Institute Cargo Clauses Clause C includes "Minimum" insurance coverage.
• The FCA, DAP, DPU, and DDP rules (which will be explained in the next article) now allow goods to be transported using the buyer's or seller's own means of transport, without requiring an external carrier.
• The previous DAT (Delivered at Terminal) rule has been replaced by the DPU Incoterm (Delivered at Place Unloaded).
  • • The obligations remain the same, but the change clarifies that the place of delivery is not necessarily at a terminal.

If you work in international trade or are thinking about starting to import, it's important to stay updated on the latest guidelines. More importantly, understanding how Incoterms can help you achieve a solid and cooperative agreement with your partners is crucial.