Incoterms And The Evolving Transportation Industry

If your company ships to or receives goods from overseas markets, then you’ll be without doubt au fait with what are called the International Commercial Terms (known as Incoterms) which are a catalogue of standardised terms, created by the International Chamber of Commerce (ICC), and used in international trade. They are the rules of the road that are crafted to unambiguously govern the exact delivery terms between two parties. Incoterms typically specify how goods will be delivered, who pays for what, who takes out insurance, and who handles specifics such as loading/unloading. This series of internationally recognised sales terms are widely used in commercial transactions, to bifurcate costs and risks involved in the delivery of goods from a seller to a buyer.

The rules have come a long way in over eighty years. They were first established in 1936 and have since become the accepted terms of trade, recognised not only by their users, but by governments and by the United Nations. The current version of Incoterms dates from 2010 but the rules are revised every ten years to ensure they keep up with the advances in international trade. And so, with another revision around the corner by 2020, we look at what to expect given where the transportation industry is headed, and how Incoterms will likely be adapted to remain apposite in light of the changing face of the transportation industry.

But first, a timely recap. Incoterms 2010 came into effect on 1st January 2011, and each has their own specificities, but in general can be resumed as follows:

  • The E Incoterm, that is EXW or Ex Works relates to a sale on departure. The seller makes available its goods at their premises for the buyer to collect. This is the minimum obligation for the seller.
  • The F family of terms (FCA, FOB, FAS) relates also to a sale on departure wherein the seller delivers the goods to a carrier appointed by the buyer. The seller will arrange and pay for delivery of goods to the carrier, but the buyer pays for everything thereafter.
  • The C family of Incoterms terms (CFR, CIF, CPT, CIP) is also departure-based where the seller goes further and must contract for carriage but can reduce his risk by transferring his responsibility on shipment.
  • D Incoterms (DAT, DAP, DDP) relate to what is called a sale on arrival and offer more protection to the buyer since it is the seller who bears all cost and risk involved in bringing the goods to the buyer.

A risky business

Incoterms are designed to manage risk upfront between contracting parties. Since countries have different business cultures and languages, it’s wise to have a clearly-written contract to reduce any misunderstandings, and Incoterms do not purport to replace a sales contract, simply to remove any ambiguity in its execution. By specifying the exporter’s and importer’s obligations, there can arise no subsequent confusion regarding rules of transportation from point A to point B. Incoterms also do not purport to cover ownership or title transfer of the goods. These terms are agreed upon separately.

Incoterms range then from placing the major burden of risk on the buyer right through to placing it all firmly with the seller. For example, EXW means that the buyer bears the responsibility and any costs as soon as the cargo leaves the seller’s location. This imposes the most risk on the buyer and the least risk on the seller. At the other end of the risk spectrum, the term DDP (Delivery Duty Paid) denotes that the seller bears all costs and risks until the cargo arrives, customs cleared, at the buyer’s nominated final destination. The seller must arrange for transportation, loading, unloading and insurance; in other words, the seller bears the most risk and the buyer the least.

Incoterms in the ever-evolving transportation industry

Current Incoterms implicitly consider the continuous development of customs free zones, use of electronic data interchange (EDI), changes to transport practices, as well as the increasing trend toward multimodal transport and better security for the movement of goods. Let us consider each of these in turn.

In a nod to increased multi-modalism, current Incoterms were reduced during the latest 2010 release from four categories to two, namely to the catch-all “Rules for Multiple Modes of Transport” and to an exclusive “Rules for Sea and Inland Waterway Transport.” These new categories address the overall means of transport, rather than the previous “stages of transportation” and the notion of the principal leg of transport.

At the turn of the century, whilst maritime transport still dominates with over 90% of goods transported by sea, thanks to economies of scale for shipping lines and bottoming freight rates for shippers, true flexibility comes from embracing the multi-modal supply chain. As such, the new Incoterms will surely continue to bend to multi-categorisation as a by-product of multi-modalism but with an effort to further removing ambiguity on the sea, the often dominant choice of shipper and consignee alike.

A previous Incoterm reference to Ex Quay was replaced by At Terminal as a recognition that although maritime transport still dominates, a lot of what we ship moves in containers under combined bills of lading using multiple means of transport, i.e. maritime being a means to a multimodal end. This At Terminal revision allows equally for a situation wherein the goods, often containerised, can be delivered at the main port of discharge, or further downstream at a later container yard, railhead or truck depot.

A customary tale

With increasing customs cooperation and the favouring of customs free zones, as well as a potential enlarging of the European Union beyond 2020 (Turkey, will they, won’t they?), we will likely witness more associated free-trade agreements. As such, the notion of goods being transported with duty paid or unpaid will continue to further lose its significance. Already in the 2010 revision of the Incoterms, we bid adieu to the notion of Delivered At Frontier (DAF), Delivered Ex Ship (DES), Delivered Ex Quay (DEQ) and Delivered Duty Unpaid.

All four of these sale-on-arrival Incoterms, now dearly departed, had slightly differing rules on where customs clearance would take place, and by which party. It was deemed by the ICC that simplicity was in order, being replaced by Delivered At Terminal (DAT) or At Place (DAP) wherein the buyer must sort import customs formalities, or Delivered Duty Paid (DDP), a robust “all-in” service wherein it is the seller who unequivocally takes on import clearance.

The new version of Incoterms, soon to arrive, is also likely to remain less constrictive on customs formalities, preferring parties to modify responsibilities through clauses built into the sales contract or by adding a liner term such as “duty paid” or “local taxes unpaid”. This is very much advised in the case of buyers and sellers who already subscribe to the World Customs Organisation’s SAFE framework for example. Under this scheme dating from 2005, they can obtain the status of Authorised Economic Operator and all the benefits this entails. So-called AEOs can include manufacturers, traders, importers, exporters, brokers, carriers, consolidators, intermediaries, port operators, through to supply chain specialists, warehouses and distributors.

Ironically, some of the biggest world trading powers seem to be wavering around the age-old debate of protectionism vs market liberalism. One example being the US-China war on trade wherein we are witnessing a tit for tat game of price hikes and import/export restrictions.

Another example will be the UK’s departure from the EU customs union by the end of the Brexit implementation period. As with a lot of Brexit policy, a lot remains unknown, especially with respect to the Northern Ireland-Republic of Ireland border. It seems that many current EU-UK agreements between commercial parties are silent on Incoterms and therefore would need to be reworked, when customs formalities will be reinforced post-Brexit.

Incoterms therefore in their new form must not seek to become an overcontrolling custodian of customs formalities. Better that this is left more freely for buyer and seller to contract as they see fit, according to their local and state requirements at the time of negotiating the agreement.

Incoterms alongside industry disruptors

We must not ignore how the twenty first century was also the harbinger of industry shock and disturbance. Transport in general was not spared although the effects on freight transport are perhaps less than those affecting passenger traffic, albeit for now. In the city I call home, Paris, like in most urban conurbations, the ubiquity of ride sharing platforms in all their forms is clear to see. Neutron’s LimeBike promises “your ride, anytime”, by offering easy-to-rent, app-controlled electric scooters, whilst Uber and Chauffeur Privé regularly go head to head to increase their market presence in driver services.

Meanwhile, Ubeeqo has their own easy-to-rent pay-as-you-go rental fleet for business and leisure alike, and UberEats blurs the boundaries even more by becoming a food delivery platform that brings together the seller (a restaurant), the fabled delivery guy and the buyer (the hungry guy). With all these limes on the transport tree, just ripe for consolidation and further convergence, the question is to what extent the Mobility as a Service (MaaS) industry will lend itself more and more to businesses looking for international delivery and expedition. For a long time now, transport solutions providers with dedicated fleets (planes, trains, ships or the like) were already head to head with forwarders and non-fleet operating carriers.

Well the news is, the game will heat up more and more as new players join, bent on bringing platform-based solutions to bring sellers and buyers into a common marketplace for securing transport solutions. Of course, for MaaS to change the face of the logistics industry, it needs data. Big data. In fact, open data from transport providers will enable platforms to offer tailored rates and solutions, in order to best distort a somewhat closed-shop market and to bring natural correction to transport demand and supply curves. The question then arises, to what extent will future versions of Incoterms remain legitimate in the face of new transport booking solutions.

For the uninitiated, Incoterms need to be further simplified for those who decide to book transport directly via a platform solution, thus bypassing the traditional forwarder and the wise counsel they afford on such matters. Even for seasoned Incoterms pros, the days are perhaps numbered for the hardline seller who chooses to sell CPT and thus assume more charges in the transport chain, thereby giving him more opportunity to add bigger margins in his final price to his buyer. With ubiquity of information and open platforms which allow the buyer to easily cross-check rates, the buyer will not be so easily duped.

The digital question

On the menu for global trade, new suppliers, new destinations and new handlers are appearing all the time, from where the need comes for a common language. Many actors can find themselves in the life cycle of a product, from refinement, packaging and handling, to storage, refitting, re-export, and beyond. At the same time, this increase in physical touch points has increased the digital footprint it leaves behind since more and more shipments are accompanied by electronic data interchange.

The urgency we see in the need to sign contracts as well as the keen eye on speed, cost and just-in-time in global logistics, can give rise to a lack of structure and formality, and in turn, an increased exposure to risk, to imprecision or to open interpretation. Hence the challenge for Incoterms is to continue to further adapt to electronic interactions, if they are to prevail in this changing environment where risk continues to abound. We have come a long way since the one-sided days of caveat emptor, or buyer beware, in a transaction between two parties, and Incoterms must continue to light the way.

Incoterms must stay authentic

Finally, the rise of terror and extremism in the modern world has a direct impact on international trade, transportation and the traceability or authenticity of products. In this era of sanctions and embargos, directly designed to fight this problem, there is a need for authentication of exchanges through an unbroken paper-trail of documentation.

One of the downsides identified with the EXW Incoterm is that the seller is never certain to fully control the documentation for the destination to which he has sold his goods, since export and import formalities are done by the buyer. In case of an inspection, sellers have been known to encounter difficulties in proving why goods were sold without tax for example (hard to prove the final destination with missing documentation) or in complying with state sanctions (hard to show clearly who the goods were delivered to if paperwork is missing). DDP presents another set of reverse challenges for the buyer who does not take care of any import formalities, instead they find themselves beholden to the seller.

Fortunately, initiatives exist around the world to combat such predicaments such as the Customs Trade Partnership Against Terrorism (CTPAT). This is a layer in U.S. Customs and Border Protection’s cargo enforcement strategy which aims to work together with the trade community to strengthen international supply chain security. It works by helping identify security gaps and by implementing new measures to protect shipper and consignee, through secured documentation exchange.

One could argue whether DDP has any role at all for Importers pre-cleared under the CTPAT’s Importer Self Assessment Program which dramatically reduces customs import formalities for the importer. In such a case, what interest would the exporter have in taking on potentially more bureaucracy at destination under DDP, when the importer can sail through the bureaucracy.

A past legacy, a future coherence

All in all, Incoterms are here to stay. The fact that they have stood the test of time since the 1930s and encountered numerous revisions since then is testament to that fact. The ICC is made up of many industry experts, just as you reading this article may consider yourself, who understand the impacts of a fast-changing transportation industry and who are committed to staying apace of these changes.

The world of international trade will eagerly await the new arrival of these Incoterms at the beginning of 2021, deploying them where necessary, contracting alongside them, safe in the knowledge that the ICC’s experts will not only be at work already on the next version, but at their sides to intervene in case of arbitrage and mediation.

About the Author

A forward-looking article by Matthew W who has over eleven years experience in senior management in the maritime & transport sector working in varying locations across the globe. As well as Incoterms in the wider context of International Business, his other areas of expertise include maritime transportation, business transformation, reorganisation & culture, with experience in a pan-European as well as Middle Eastern context. Alongside this, he is based in Paris, France, within the heart of La Défense business district, working as a bilingual business coach and consultant.