Incoterms 2020: A Complete Overview Of Everything You Need To Know For Cross Border B2B

Though being a booming industry before the destabilising effect of the Covid-19 pandemic, e-commerce has now been cemented as a major part of global commerce for years to come in the post-pandemic world. Companies today have had no choice but to adapt to the rapid digitalisation of their business models and supply chain processes in order to survive. With this digital revolution now afoot, efficiency and proper communication at the front and back ends of the supply chain must be prioritised for longevity and success, especially when connectivity serves as a key pillar of e-commerce. Indeed, a successful and an efficient supply chain go hand in hand, and one of the best ways to achieve and maintain this, especially when conducting B2B transactions across borders, is to prioritise clear communication and consistency. Incoterms, short for International Commercial Terms, are perhaps one of the best ways to go about achieving this, yet their value may not always be known by B2B entrepreneurs within the realm of e-commerce. In this post we will explore what exactly these international terms are, their usefulness within the supply chain network when conducting B2B e-commerce, and how to go about choosing the most advantageous Incoterm for your next cross border business transaction.

Incoterms.
What are they?

Incoterms are a series of internationally recognized and standardised terms in the realm of International trade, published by the International Chamber of Commerce. These predefined terms govern the specific roles and functions assumed by sellers and buyers and are agreed upon by both parties before goods are moved from their place of origin.

In official documentation as well as among professionals within the supply chain, these specific terms are codified or shortened to 3-letter acronyms and grouped according to their position and broad functions throughout the process of the movement of the goods.

The use of these three letter codes creates easy identification of functions fixed by each term as well as provides easy communication of roles and duties to be assumed by all parties involved.

What do Incoterms represent? 

The main roles and duties represented by Incoterms are -

• The transfer of liability and risk from seller to buyer in the event of damaged or missing cargo

• The transfer of costs from seller to buyer - export clearance, pre-carriage cost, handling charges, cost of main carriage, insurance , import clearance, tax costs, import duties

• Responsibilities/formalities of each party - which party is responsible for the pre-carriage of the goods from the seller’s warehouse to the named vessel or port , who loads and unloads the goods at the start and end of the journey, provision of documentation

N.B - Incoterms must always be followed by a named place or destination !

Per Incoterms 2020, the latest revision published for use by the ICC, there are 11 Incoterms of which 7 of these can be used for all modes of transportation and the remaining 4 are used for sea and inland waterway transport only.

Incoterms 2020 : A complete breakdown 

Incoterm+ named place/destination	Seller	Buyer	Best Practices
EXW  Ex-Works	The seller bears minimum responsibility when this Incoterm is used. His only duty is to package the goods and make them available to be collected for transport by the carrier at an agreed upon place whether that be his own warehouse or not.	The buyer is in charge of arranging the collection and transport of the packaged goods from the agreed upon place to the named port or terminal for the main carriage to take place. The buyer pays for the main carriage from one border to the next, and all loading and unloading costs, Terminal Handling Charges, import and export duties, insurance, taxes, and provides any documentation required until the goods are delivered to his own premises. Risks are  transferred from the seller to the buyer once the goods leave the seller’s premises.	This Incoterm comprises the cost of the goods as stated in the sales contract, the packaging of the goods as well as the presentation of documents required. This Incoterm is best used in cases where the seller has minimal experience in, or knowledge of logistics and would prefer to let the buyer use his own resources and facilities until the goods are delivered to him.

FCA FreeCarrier

The seller is responsible for packaging and delivering the marchandise, cleared for export, to the named place as agreed upon by the parties for the pre-carriage to take place.

The buyer bears the cost of the pre-carriage and all costs and risks thereafter. This includes the main carriage from one border to the next, all loading and unloading costs, Terminal Handling Charges, import and export duties, insurance, taxes, and all documentation requirements. The transfer of risk occurs at the moment when the seller arrives at the named place and the carrier chosen by the buyer for the pre-carriage begins to unload the goods.

This Incoterm is preferred by buyers when doing Roll-on/roll-off or when importing containerised goods as they get to choose their own freight-forwarder.

FAS* Free Alongside Ship

The seller is responsible for the packaging of the goods, export clearance, pre-carriage costs and risks, and loading and unloading onto the pre-carriage vehicle. Once this vehicle arrives at the port, the goods, having been already cleared for export, with Origin Terminal Handling Charges also paid by the seller, are offloaded and left beside the vessel. At this point the transfer of risks is moved from the seller to the buyer.

The buyer is responsible for the charges related to loading onto the vessel for main carriage and all costs thereafter including the cost of freight, insurance, offloading charges, Destination Terminal Handling Charges, delivery and import clearance.

As goods being shipped under this Incoterm are placed alongside the vessel, it must be noted that this Incoterm is not suitable for containerized goods but instead are recommended for non-containerzied goods such as bulk cargo, liquids, chemicals and certain edible items such as grains and nuts.

FOB Free On Board

In this instance, the seller is responsible for the packaging of the goods,  export clearance, pre-carriage costs and risks, loading and unloading onto the pre-carriage vehicle, export clearance, Origin Terminal Handling Charges as well as the cost of loading of the goods onto the ship. When the goods have been placed on the ship and inspected, all costs and risks transfer from the seller to the buyer for the upcoming transit.

The buyer bears all costs once the marchandise has been placed onto the vessel ready for transport including the cost of insuring the goods during the main carriage, offloading charges, Destination Terminal Handling Charges, delivery and import clearance and taxes. He also assumes all the risks once the marchandise has been placed onto the vessel ready for the main carriage.

This incoterm is a favourite of both sellers and buyers alike as they have the advantage of being responsible for the cargo, in terms of costs and risks, only when it is in their own territory or being shipped to their territory in the case of the buyer

CFR* Cost and Freight

Incoterm CFR is very specific in nature. Like incoterm FOB, the seller pays and is liable for the packaging, Origin Terminal Handling charges, export clearance, the pre-carriage journey and the loading of the goods onto the vessel. Additionally, he also bears the cost of the main carriage, however, this comes at the risk of the buyer.

Once the cargo has been loaded onto the vessel and the sea journey begins, the transfer of risk moves from the seller to buyer, even though the seller pays for the main carriage. Once the vessel arrives at the named destination for delivery, all costs and formalities including  Destination Terminal Handling Charges, unloading costs and import clearance costs transfer to the buyer.

This incoterm is typically used for bulk and non-containerized cargo or when the seller has direct access to the vessel for loading the goods.

CPT Carriage Paid To

Under this incoterm, the seller is responsible for all payments and formalities up until the vessel arrives at the named destination across borders. However, this is not inclusive of insurance for the goods, and his risk is only maintained up until the goods are handed over to the pre-carriage carrier, for which is paid for by the seller. Once the carrier receives the goods, the risks transfer from the seller to the buyer for the duration of the journey.

The buyer assumes the risk at the point when the carrier, appointed by the buyer, collects the goods from the seller at the named place. Once the vessel arrives at the named place of destination, the buyer assumes all costs thereafter including all offloading costs, Destination Terminal Handling Charges and import duties and taxes.

This Incoterm is typically the used for containerized cargo.

CIF* Cost Insurance Freight

Under CIF, the seller is required to pay for the packaging, Origin Terminal Handling charges, export clearance, the pre-carriage journey and the loading charges, and the cost of the main carriage. Unlike the other incoterms, CIF takes insurance of goods into account and it is fixed for the seller. CIF instructs the seller to pay the transport for and insure the goods until the vessel arrives at the named port of destination.

On the buyer's end, risks are transferred from the seller to the buyer once the goods have been loaded onto the vessel for the main carriage. Once the vessel has arrived at the named port of delivery, the buyer assumes all costs such as Destination Terminal Handling Charges, unloading costs and must complete all formal import duties and taxes associated.

This Incoterm is typically used for bulk and non-containerized cargo or when the seller has direct access to the vessel for loading the goods.

CIP Carriage and Insurance Paid to

The seller pays for and arranges the packaging, Origin Terminal Handling charges, export clearance, pre-carriage journey and  loading charges and formalities,  and he must insure the goods until the vessel arrives at the named place of delivery. Similarly to CPT, the seller only bears the risks up until the goods are collected by the carrier at the named place to be transported for the main carriage to be completed.

Under CIP, once the goods are taken in charge by the pre-carriage carrier, the buyer assumes all risks for the remainder of the journey. Additionally, once the vessel with the goods on board has arrived at the named place of destination for delivery, the buyer is responsible for all costs thereafter including Destination Terminal Handling Charges, unloading costs and must complete all formal import duties and taxes associated.

This Incoterm is typically the used for containerized cargo.

DAP Delivered At Place

This Incoterm implies that the seller is responsible for arranging and paying for all formalities and transit costs to deliver the goods across borders to the named place in the buyer’s territory ready to be unloaded by the buyer.This includes the pre-carriage, export duties, main carriage from one border to the next, all loading costs and Terminal Handling Charges.

Once the goods are delivered to this named place, all costs, risks and responsibilities are transferred to the buyer who must unload the cargo, and pay all accompanying import duties, taxes and handle all other formalities and documentation.

This Incoterm can be advantageous to buyers who are familiar with the process of importing goods within their own territory and would prefer to handle all importations by using their local resources and facilities. Under DAP, there is a possibility that the named place can be the buyer's premises, in which case he can save money on delivery.

DPU Delivered at Place Unloaded

Under DPU the seller is responsible for arranging and paying for all formalities and transit costs including the pre-carriage, export duties, main carriage from one border to the next, and all loading costs and Terminal Handling Charges required to deliver the goods across borders to the named place in the buyer’s territory, unloaded and ready to be cleared by the buyer.

The buyer receives the goods at the named place in his territory, unloaded, and from this point has all risks and costs transferred to him and must clear the goods for import, proceed with any other necessary formalities or documentation required.

This incoterm can be advantageous to buyers who are new to or inexperienced in the importation of goods, who do not have the resources to arrange and pay for freight across borders or who have complete trust in the seller and their transportation methods. Under DPU, there is also a possibility that the named place can be the buyer's premises, in which case he can save money on delivery.

DDP Delivered Duties Paid

DDP places the maximum responsibility on the seller. He is responsible for arranging and paying for all formalities and transit costs required to deliver the goods across borders to the named place in the buyer’s territory. This includes the pre-carriage, export duties, main carriage, and all loading costs and Terminal Handling Charges required to deliver the goods across borders to the named place in the buyer’s territory. These goods must be unloaded and cleared for import, with all taxes and any other associated duties or documentation also arranged and paid for.

The buyer in this case is not responsible for any import duties or formalities and his risk only begins once the goods have been unloaded and cleared.

This Incoterm can be advantageous to buyers who are new to or inexperienced in the importation of goods, who do not have the resources to arrange and pay for freight across borders or who have complete trust in the seller and their transportation methods. Under DDP, there is also a possibility that the named place can be the buyer's premises, in which case he can save money  on delivery.

*Used for sea and inland waterway only

Incoterms + E-commerce B2B entrepreneurs = a match made in heaven

Incoterm usage can assist e-commerce B2B entrepreneurs through :

1) Predictability, preparation, and partnership.

It’s no secret that all businesses thrive from being able to predict and anticipate the internal and external logistics and flow of their business transactions. In B2B this is especially true. Essentially, the use of Incoterms and their fixed nature give e-commerce entrepreneurs leverage, as they are able to predict and anticipate the logistics of the movement of their goods from wherever in the world they may be based. For example, knowing that costs have been handled on your end or alternatively, by the other party, or knowing that risks have been transferred is a huge benefit to B2B entrepreneurs and essentially, a weight lifted off their shoulders.
Indeed, this predictability gives way for preparation to be better managed as there are no questions on what your roles and duties are. Once the appropriate Incoterm is chosen between parties, a chain reaction effect is triggered, thereby allowing all involved in the omnichannel of your e-commerce business to effectively carry out their duties.
Partnership can be seen as an additional benefit sprouting from the regular usage of Incoterms when embarking on cross-border B2B transactions. When the shipping to and buying from the same businesses across borders under the same Incoterm becomes habitual, this can facilitate familiarity which can eventually lead to a strong business relationship between vendors, sellers and carriers. This also aids in accelerating the process of negotiation, calms possible anxieties surrounding trust and strengthens efficiency throughout the supply chain.

2)The sustainability factor

On the topic of sustainability and its promotion within the supply chain, the application of Incoterms can be a major aid. Essentially, the use of Incoterms provide those who receive products from across borders the benefit of not having to outsource logistics intermediaries outside of their countries, in the case that the seller agrees to already provide and pay for these services. In doing this, harmful emissions are minimised. Additionally, Incoterms can also provide security and thus sustainability through their fixed terms by ensuring that products are not shipped unnecessarily or to the wrong destination, thus causing additional freight to correct destinations.

3)Bridging the language barrier

The 3 letter coding which characterises Incoterms makes them easily identifiable and comprehensible no matter what language you speak. This is huge advantage especially to e-commerce B2B entrepreneurs as it gives them the flexibility to draw up commercial contracts with other businesses all over the world, with the understanding that once the Incoterm is agreed upon, the delivery will be successfully completed on those terms without worry of misinterpretations or inconvenient language barriers.

Lastly, when applied strategically, the benefits of using Incoterms during international B2B transactions are endless. Within the realm of e-commerce specifically, this is all the more true as they can be seen as a vital hack to maximizing efficiency from miles away as well as lowering both costs and effort.  Indeed, the standardised nature of Incoterms is where their value lies, and thus why it is imperative that they are easily identified and clearly understood so as to be used as an asset when shipping or receiving goods across borders.