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Incoterms® 2020 Rules


In just under two years from now we will be introduced to the latest version of INCOTERMS®, INCOTERMS® 2020.

This is most certainly, in my opinion, a set of INCOTERMS® rules that presents us with ‘2020 vision’ insofar as definitive responsibilities, costs and the passing of risks are concerned, pun most definitely intended.

The aim of the ICC to destroy ambiguity and provide a better focused set of rules has been successfully achieved. The ICC INCOTERMS® drafting committee has certainly left no stone unturned with their drafting of the latest revision.

I cannot help but wonder how much clearer INCOTERMS® 2030 could possibly be? Well, we will have yet another decade of perfect sight in which to speculate over the possible changes that would invariably come about.

Whilst the INCOTERMS® 2020 rules have not yet been finalised, a few proposed changes have been made available for review, comments, suggestions and contributions. Companies around the world, will soon find themselves caught up in the rush of updating their staff on the changes that come with the latest revision of INCOTERMS® – and these companies will begin placing much emphasis on how these changes will affect their respective business operations, either from a freight forwarding perspective, or as a direct exporter/importer of internationally traded goods.

When one examines the newly abbreviated INCOTERMS®, several questions quickly arise; did the ICC run out of abbreviation naming options? Is it a case of mere semantics, or is there in fact significant merit to the changes that are currently being drafted?

The drafting of the INCOTERMS® 2020 is historic in its own right. What previously comprised a predominantly European member-based drafting committee has now been opened up to include consultation and input from China and Australia representatives. The drafting constituency still however remains largely European.

A session will also be held in Latin America and Asia to better diversify the new rules. One of the more notable changes will be the removal of EXW and DDP from the previous versions. This revision then begs the following questions: how is it that that a popular INCOTERM® such as EXW now ceases to exist and why has this change been considered? EXW is considered to be a more domestic term from the Unions Customs Code perspective which came into effect in 2016. This would now mean that seller would have to arrange export customs clearance and this is provided for under FCA. FCA (Free Carrier) is a very flexible trade term, which is preferred instead of EXW (Ex Works) and FOB (Free on Board) INCOTERMS® in most situations. For example, frequently exporters and importers use EXW where the exporter handles and pays for the export custom duties. But according to INCOTERMS® 2010 rules, the importer must arrange the export customs operations under EXW, where such clearance is applicable. In these situations foreign trade parties prefer the use of FCA instead of EXW. FCA is likely to replace EXW as the starting point of the international trade transaction – and there will be a greater need for the freight forwarder to become more involved in assisting exporters and importers in arranging the forwarding and logistics from the place of manufacture in the country of origin/departure.

Whilst EXW is considered to be a more domestic term, freight forwarders will still be extensively utilised to expedite and arrange domestic logistics formalities as mentioned above.

Free Carrier (FCA) is one of the more commonly used INCOTERMS® in international trade transactions and is suitable for all modes of transport and not necessarily exclusive to ocean freight as is the case with FOB. It is also a term that presents the most flexibility and allows for the buyer to arrange the main carriage. FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage. The modification made with INCOTERMS® 2010 is primarily when the goods are shipped via any mode of transport other than ocean freight, INCOTERMS® FOB and CIF should not be used, in other words, FOB and CIF are class two INCOTERMS® i.e. to be used exclusively for ocean freight transactions.

But their counterparts FCA and CIP are not being applied by the vast majority of exporting and importing companies, nor by agents involved in international trade (freight forwarders, logistics operators, banks, etc.). This because FOB and CIF are two very old INCOTERMS® and the International Chamber of Commerce has not made an effort to transmit this change adequately, which is very important, since approximately 90% of the world trade is transported via ocean freight.

In the INCOTERMS® 2020 version, it is possible that FOB and CIF will be retained for ocean freight shipments, as was the case with INCOTERMS® 2000 and earlier versions.

Let us look at what has happened over the last ten years that has invariably given rise to the changes that are currently being drafted. The most recent change in international trade is the implementation of the European Customs Code which also identified EXW and DDP as being more “domestic terms” in each instance where the seller and buyer is thus concerned.

The Union Customs Code takes into account the changes around Customs Compliance modernisation and will therefore be a significant contributor to the removal of EXW and DDP and the introduction of INCOTERMS® FCA being possibly unfolded into two more distinct terms, one for inland delivery in the country of export and the other for maritime delivery.

In the years between 2014 and now there has been an increased surge in piracy attacks which has now encouraged the ICC to have specific delivery points accompanied with distinctive responsibilities to the buyer e.g. DTP (Delivered Terminal Paid). This would avoid goods remaining at the terminal, unattended, for longer periods of time due to disputes surrounding the responsibility for duty payments.

In recent years, SOLAS has made it mandatory for all containers to be weighed and certified prior to being loaded; the addition of Verified Gross Mass as a responsibility of the seller will definitely be discussed as an inclusion in one or more of the “class two” or sea freight only INCOTERMS®. Increased cyber-attacks on shipping companies and growing security threats during the last decade have greatly influenced the development of the international trade transaction and there has never been a more crucial time to implement a unified relationship between INCOTERMS® and the international sale contract. This has been yet another reason to include for example the INCOTERM® CNI which would then bridge the gap that currently exists between FCA and CFR/CIF.

It is a well-known fact that a revision of INCOTERMS® could possibly effect the computation of a country’s customs value. What does this then mean for South African Customs Value Calculations? In South Africa, we have retained the FOB contract as our basis of valuation when computing customs values. If for some reason or the other FOB is not retained, it is likely that FCA (marine) will become the basis of valuation. EXW is a popular choice for inexperienced exporters or conversely a popular choice for experienced importers. In alignment with the prescriptions of the Customs Act, when moving from EXW, a customs clearing agent adds dutiable charges to bring the total FOB before converting to South African rand and rounding off to the Customs value in the prescribed manner.

With the removal of EXW and DDP, dutiable charges such as packing the goods, inland transport to the first carrier or main carrier will now become redundant. It would appear that FCA will now become the new INCOTERM® to work from.

The new INCOTERMS® rules open up a more practical application for freight forwarders, buyers and sellers. They also alleviate the confusion and focus or lack thereof that existed with INCOTERMS® 2010. The new rules also align with the evolution of global customs compliance requirements.

The need to fully understand, interpret and apply INCOTERMS® is of paramount importance to all individuals involved in international trade since the use of an incorrect INCOTERM® could have dire consequences.

It must be noted that delivery of goods from the seller to the buyer can occur at any point of the international trade transaction and this is heavily dependent on the mutually agreed upon INCOTERM®.

There is much speculation over how the many changes will affect the international trade landscape. The sustainability of the freight forwarding business is an area of particular interest and the new rules support the ideals of the modern freight forwarder, incorporating all aspects of 4PL supply chain.

The new INCOTERMS® are expected to be released toward the end of 2019, coinciding with the centenary year of the International Chamber of Commerce, and will enter into force on January 1, 2020. I do believe that the INCOTERMS® 2020 rules are not merely a case of semantics but rather a well-thought-out and carefully considered amendment to the current rules.

There will be less effort required in understanding the seller’s or buyer’s responsibilities when taking a first glance at an INCOTERM® on a commercial invoice. There wouldn’t necessarily be less confusion or fewer blurred lines per se insofar as the new INCOTERMS® are concerned but there is certainly going to be more clarity and concise focus on the respective seller’s and buyer’s responsibilities, costs and the transfer of risk from seller to buyer as well inclusions around the changes that have taken place over the last decade.

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