Incoterms 2020: Embracing the Rules
International Commercial Terms, commonly known as Incoterms®, standardize the responsibilities of the buyer and seller in an international transaction and are now used frequently in domestic transactions in the United States.
Incoterms are used to allocate transport costs, show where risk passes from seller to buyer, and clearly define the responsibilities for export and customs clearance. They also identify who must purchase insurance if required—and at what level—from origin through destination.
When Incoterms are included in international agreements, why then do companies large and small still run into issues when importing or exporting?
Many companies are unfamiliar with Incoterms or don't understand them. Case in point: A small retailer in Seattle wanted to purchase three pallets of product from a mid-sized manufacturer in Paris. No one in the U.S. company spoke French while their Paris business partners knew only a bit of broken English. What could have been a large problem was quickly rectified by using Incoterms 2020 since it's available in 29 languages, including French.
"FCA Incoterms 2020 Paris, France" was added to the contract, and the deal was made, with responsibilities of both the seller and buyer clearly defined in their native language.
Per the rule, the French manufacturer (seller) assumed the costs and risks through export clearance and onto the pre-carriage collecting vehicle. Then the U.S. retailer (buyer) took on the risk and responsibility for the freight through destination, including customs clearance in the United States. Through Incoterms, both buyer and seller understood their obligations in the transaction, which led to a favorable outcome.
Understand the Expectations
But using an Incoterm rule in a sales contract without a complete understanding of what is expected from both parties can delay the transaction or cause worse problems.
Here's an example. A U.S. manufacturer wants to get into the Brazilian market. The sales department agrees to "DDP Incoterm 2020 São Paulo, Brazil" with its new business partner in São Paulo. Under this Incoterm rule, the U.S. manufacturer is the importer of record into Brazil, responsible for exporting from the United States and importing into Brazil, and paying all duty, taxes, and customs charges.
Unfortunately, both parties agreed to an Incoterm that cannot be successfully executed. According to customs regulations in Brazil, this small U.S. manufacturer cannot be the importer of record. When the product arrives at the Port of São Paulo, Brazilian customs seizes the goods for inaccurate documentation.
These are just two examples of the many violations that occur when companies don't understand how to consistently and correctly use Incoterms in trade. While the rules can facilitate good trading practices, lack of knowledge in the meanings and responsibilities behind the rules is a concern.
When companies incorporate Incoterms 2020, it's vital their logistics, procurement, tax, finance, and sales teams understand the rationale behind the rules and what steps to take to ensure a successful product journey from seller to buyer.
Education and training can be successful methods for helping employees understand the intricacies of global trade. If your company uses Incoterms or plans to start with Incoterms 2020, make sure your employees understand the requirements of both buyer and seller in each of the 11 rules. When used correctly, these rules can help your business achieve optimum success in international trade.