Incoterms® 2020 enter into force this January 1, kicking off the new decade with an updated set of international commercial terms for shipping. The rules still include 11 terms, but revamp five key elements for the global marketplace.
The new Incoterms® modernize terminology, raise the bar on security and insurance, and balance flexibility with accountability for all parties.
For businesses gearing up for the shift to Incoterms® 2020, following is a quick overview to help steer freight forwarding towards success in the coming decade.
A Global Ideal
Incoterms® define which party arranges for payment and handles goods during shipping. The terms are so essential that the United Nations Commission on International Trade Law (UNCITRAL) recognizes them as the global standard for interpretation in disputes or discrepancies.
While their practical value is conclusive, their genesis is inspired. The International Chamber of Commerce (ICC) standardized an inaugural six terms in 1936 — almost 20 years after its 1919 formation — to magnify and promote global trade as a means of untapped prosperity after World War I.
Now, the authors of Incoterms® 2020 represent the United States, Europe, and, for the first time ever, China and Australia. Together, they provide a comprehensive approach to the international aspects of freight agreements.
The 2020 update is the fourth in 30 years, as the rapid pace of trade demands decennial review since 1990.
Incoterms® 2020: The Rundown of All 11 Terms
7 for any mode of transport
4 for ocean and inland waterway transport
The Main Changes
This January, look for updates that improve the global trade ecosystem by offering clarity and confidence to all parties in an agreement, including businesses from emerging origin countries and carriage providers.
Overall, the changes include an update to the name of one of the terms and enhance the presentation of the rules to steer the user toward the right Incoterms® rule for their sale contract.
Incoterms® 2020 provide for five main changes:
Each of these updates may trigger a cascade of tweaks to your supply chain or other operations. The impact of Incoterms® 2020 will depend on the moving parts of each unique business.
Since Incoterms® govern international commerce only, region-specific regulations and terminology aren’t impacted. For instance, Incoterms® can’t determine payment of value-added taxes (VAT), relationships with customs unions, or national trade or legal definitions, like “less than truckload” or “breach of contract.”
Flexport Vice President of Customs and Trade Advisory Tom Gould explains a scenario in which savvy shippers could save with Incoterms®.
“U.S. Customs provides that if a company buys Free on Board (FOB) and uses a single freight forwarder, like Flexport, it can deduct transportation expenses from factory to port when duties are calculated.
“By leveraging this kind of Incoterms® expertise, a company could save a substantial amount of money.”
Incorporating Incoterms® into contracts is voluntary and timing is variable. Examine existing contracts that include Incoterms® to ensure the inclusion of an edition year. Edition specificity is a requirement of the rules — and without it, the prevailing terms become one more matter to hammer out in the event of a dispute.
For contracts beginning at the end of 2019, be sure to state which edition applies to avoid later confusion.
The big-picture strategy checklist
To learn more about Incoterms® changes affecting global trade, visit the Incoterms section of our Help Center.
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