What is Incoterms? Incoterms 2020 Summary Sheet | Global Trade Word

 

Understanding Incoterms: Meaning and Application in Trade

 

For those new to the world of trade, Incoterms are encountered by everyone and are considered crucial. Despite significant disparities between practice and theory, perhaps the most frequently used term in trade practice is Incoterms. Today, let's explore what Incoterms are and briefly understand their differences from practical perspectives.

Incoterms 2020 Summary Sheet can be found at the bottom of the page.

 

---

 

 

Incoterms (Incoterms 2020): Standardized International Trade Conditions

 

International trade, conducted across temporal and spatial distances between countries, can encounter various issues not typically present in domestic transactions.

• For instance, consider a scenario involving the trade of teddy bears.
  When purchasing a teddy bear at a local store, one simply picks it up, pays the price, and takes it home. The ownership of the teddy bear transfers to the buyer upon payment, and any loss or damage during transport home is the buyer's responsibility.
  Now, imagine Company A in Korea purchasing teddy bears from Company B in the UK. Depending on the circumstances, there could be some differences. For instance, the logistics period between the UK and Korea could take around one week by air and approximately 40 days by sea. Especially in the case of sea transport, there is a risk of damage during the 40-day period, which could be due to the carrier's fault or natural disasters. If Company A has already paid the full amount for the goods and shipped them, then all these risks would be borne by Company A. Conversely, if payment is made only after receiving the goods, then all risks would be transferred to Company B, and Company B might receive payment for the goods produced after 40 days. Additionally, various other issues such as customs costs, customs risks, and non-payment of dues can arise. Therefore, to facilitate smooth transactions in international trade, it is necessary to clearly define the timing of responsibility and cost payments. Incoterms standardize and regulate these responsibilities and payment points to minimize confusion and disputes that may arise in trade transactions while clarifying the relationship between the parties involved.

Incoterms primarily provide rules on how responsibilities and costs are divided between the parties, and with the release of Incoterms 2020, it replaced previous versions such as Incoterms 2010.

 

---

 

 

Specific Contents of Incoterms 2020

 

 

	Sellers' Responsiblities	Buyer's Responsibilities
EXW EX Works	This condition is the minimum responsibility condition for the seller. The responsibility ends with providing the product to the carrier/buyer from their own factory or warehouse.	On the contrary, the buyer's responsibility is the greatest. From the moment of receiving the goods, all costs and responsibilities are transferred to the buyer.
FOB Free on Board	This condition is used only for sea transport. The seller must deliver the goods to the ship for shipment.	Similarly, after the shipment, all costs and responsibilities are transferred to the buyer. That is, the responsibility for payment, including transportation, custom duties, etc., lies with the buyer.
FCA Free Carrier	The seller is responsible for loading the transportation vehicle at the designated location and bears the transportation costs to the specified destination.	After loading at the specified location, the buyer is responsible for any additional costs, liabilities, exemptions, customs duties, and other additional expenses.
CIF Cost, Insurance and Freight	The goods are loaded onto the vessel, with the buyer bearing the cost of transportation to the ship as well as the insurance expenses.	The buyer is responsible for all costs and liabilities other than transportation and insurance expenses.
CFR Cost and Freight	The buyer must pay for export customs clearance costs and sea freight, but the responsibility ends upon completion of the shipment.	The buyer bear all responsibility and costs after shipment, including insurance costs.
CIP Carriage and Insurance Paid to	You can think of it as a combined transportation version of CIF. It includes freight and insurance.	Similarly, after the designated carrier receives the goods, they assume responsibility and bear the costs incurred beyond transportation and insurance.
DAP Delivered at Place	The seller bear all costs and responsibilities incurred until the destination	The buyer pay for the arrival, customs costs, and responsibilities, especially noting the obligation for customs clearance.
DPU(Replaced DAT) Delivered at Place Unloaded	DAP + Unloading obligations.	DAP - Unloading obligations.
DDP Delivered Duty Paid	This condition places all responsibility on the seller. They bear the cost and responsibility for transportation, including customs clearance.	This condition represents the minimum responsibility for the buyer. They simply pay for and receive the goods.

 

 

---

 

 

Utilization of Incoterms - Differences Between Theory and Reality

 

In practice, Incoterms offer various options to accommodate different scenarios, but in reality, each company's usage of these conditions may be limited.

In the author's experience, when trading in steel, only FOB conditions or similar were used, as heavy goods necessitated sea transport, and cost-saving in transportation was crucial. However, when working for a precision parts company, transportation costs constituted only a small part of the product price, and reducing the risk of damage through fast transportation was essential, so CIP or CFR conditions were predominantly used. Moreover, in regular trading relationships, responsibility allocation and dispute resolution often depend more on the relationship and balance of power between the parties rather than Incoterms alone. Nevertheless, the Incoterms conditions specified in the contract are mandatory, and as they determine the allocation of responsibilities, it's crucial to understand them practically.

 

 

The True Meaning of Experience in Global Business: Breaking Down the Wall of Time

 

Incoterms 2020