Expected Changes in Incoterms 2020
With this decade coming to an end, so are the 2010 Incoterms, making room for the Incoterms 2020, which will start to apply on January 1st, 2020.
Incoterms were first established in 1936 by the International Chamber of Commerce (ICC). They provide rules of guidance for international and domestic trade. They do so by defining the responsibilities of buyers and sellers operating in the international trade system. Incoterms get updated every ten years, in accordance with developments in international trade.
In brief, from the 1st of January 2020, we expect to see;
- The removal of the Ex Works, DDP and FAS Incoterms
- New incoterm –CNI
- The split of DDP
- The expansion of FCA
- Changes in the ruling of the FOB and CIF
With the establishment of an updated set of Incoterms, the ICC is aiming for simplification and minimisation of misunderstandings in international trade.
THE REMOVAL of Ex Works (EXW)
Under EXW Incoterm, the seller is obliged to make the goods available for collection at his premises or at another named place (warehouse, factory, etc). Under EXW the buyer assumes all risks, costs and paperwork associated with the transport of goods. EXW is the Incoterm with the least amount of responsibility for the seller. However, trading under EXW can be very challenging for the buyer. Especially, if they are based overseas, they can face excessive issues with customs clearance due to lack of knowledge on local export laws. Essentially, the removal of EXW is because it is mostly used for domestic trade and mainly misused when within international trade.
THE SPLIT OF DDP, TO DPP AND DTP
As per the ICC, Delivered Duty Paid (DDP) means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. Under DDP, the seller is responsible for all costs and risks until the goods reach their destination address. The seller is also liable for clearing and paying the duties for import and/or export, alongside any other duty formalities. In other words, it is like a door-to-door service.
However, it seems like DDP was causing issues with payments of customs duty, due to discrepancies in the delivery address. For example, if an exporter is not registered with the ATO in Australia, they could not claim back the 10% GST.
Hence, we expect that DDP will cease to exist as of next year. However, rather than eliminating DDP, the ICC committee has decided to split it instead, into two new Incoterms;
- Delivered at Terminal (DTP); Under DTP, the seller must make the goods available at a transport terminal (e.g depot). The seller is responsible for all transport related costs up until that point, including clearance and duty and tax payment.
- Delivered at Place Paid (DPP); Under DPP, the seller can make the goods available at anything other than a transport terminal. The seller is responsible for all transport related costs up until that point, including clearance and duty and tax payment.
Free Carrier Agreement (FCA) Vs Free Alongside Ship (FAS)
FCA is the most commonly used Incoterm nowadays. Approximately 40% of global trade happens under FCA. The reasoning for its broad use, is not to be solely attributed to the fact that it is a multi-mode Incoterm. But that it also very flexible with the location of delivery. It could be anything along the sellers’ address, a warehouse, a portside terminal, etc.
On the other hand, we have FAS Incoterm, which sees very scarce use these days. Mainly because FAS is very similar to FCA, which alone, covers FAS rules. Under FAS, the seller clears and delivers goods alongside the vessel at a specified portside terminal, which is where the risk transfers. The use of FAS applies only to sea freight cargo or inland cargo transport.
Therefore, here we are suggesting that in Incoterms 2020 we will see;
- The removal of FAS
- The expansion of the FCA for i) Inland freight ii) Sea freight
FOB and CIF oldies, but goldies
Free on Board (FOB) and Cost Insurance Freight (CIF), are two very old Incoterms. As a matter of fact, FOB and CIF have been used since 1936. Regardless, the ICC has not properly adjusted the terms to align with industrial advancements over the years. Consequently, they are now somehow, outdated, regardless of being used quite frequently. To our understanding, FOB will no longer be used for containarised cargo.
Expected changes in the ruling of CIF include;
- Insurance liability between buyer and seller
- Incorporation of penalties for cases of manipulation of the CIF terms by the supplier
- The addition of Destination Handling Charges in the CIF shipment quotations
- Critical investigations over hidden supplier profit
New Incoterm – CNI
The new Incoterms edition will also see the introduction of a new incoterm, Cost and Insurance (CNI). CNI’s establishment mainly came from the need to bridge the gap between FCA and CFR. As per the rest of the “C” incoterms, CNI is an arrival incoterm. The transport risks and costs transfer from the seller to the buyer once the goods are available at the port of departure. Under the proposed CNI, the seller will be responsible for insurance costs, unlike FCA, but will not include freight, unlike CFR/CIF.
Furthermore to the probable removal, extension, creation of some incoterms, we will see Australia and China having members in the Incoterms 2020 drafting committee, at the ICC headquarters in France.
Overall, incoterms 2020 should provide higher clarity in matters such as responsibilities of each party, risk and cost transfer points, as well as reduce misinterpretations. Moreover, they should also address customs clearance discrepancy matters.
Once again, please note that the offficial version of Incoterms has not been published yet. Therefore, there is a chance of variations in the actual changes taking place.
The above is based on discussions we have had with a number of industry participants.
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