Incoterms 2020 – How Should We Prepare for Huge Incoterms Changes in 2019?

Incoterms 2020 - Meaning

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What is Incoterms 2020?

Incoterms were first developed in 1936 by the International Chamber of Commerce (ICC) in attempt to simplify communicational shortfalls involved with international trade. It was through the publication of the first ever International Rules for the Interpretation of Trade Terms that we now have “Incoterms”.

It cannot be denied that the introduction of a set of standard rules and interpretations has improved and advanced international commercial transactions. Furthermore, these sets of standard rules have altered throughout time, just as the parameters of trading internationally have.

Current Incoterm Set

Today in 2018, the world is operating on the guidance of the ICC’s 2010 Incoterm rules. This being said, the revision of the current rules set by the International Chamber of Commerce has been happening for some years now. The responsibility of the reform falls on that of the Drafting Group. Moreover, this group is made up of five lawyers from the European Union, The United States of America, Australia and China.

In simple, the aim of the Drafting group and the reform has been to simplify the rules. Furthermore, the removal of unnecessarily superfluous words and phrases which may cause confusion. At the demand of growing global trade, the Drafting group will also be taking into consideration that for many users of the Incoterms, English may not be a strong language.

The important thing to note on this Rule Reform is that aspects of trade such as VAT, Customs Unions and VGM are not expected to be amended in the new set of rules. The reason for this is that matters that are specific to a country, region or product are not universally applicable. This updating of the standardized trading rules is to benefit the global community.

As a key part of their centenary celebrations, the International Chamber of Commerce is set to release the 2020 set of Incoterms, and will be effective for January 1st 2020.

Difficulties in FCA and CFR/ CIF – A New CNI

The introduction of a new CNI (cost and insurance method) will help to resolve controversies and disputes surrounding duty payment as well as bridge the gap between FCA and CFR. This CNI will enable the seller/ exporter to take responsibility for the international insurance coverage, and the buyer will have to bear the risk of transportation The change is assumed to be the best solution since it can be compared with for FOB goods and CIF.

Ex Works – The Removal

By including the proposed CNI into the new Incoterms, it will make FCA more relevant in the industry and almost point out the shortfalls of Ex Works. This opinion was also expressed by the international School of Shipping here:

Many stakeholders are of the opinion that Ex Works should be removed from the set of Incoterms completely. This is because there are many aspects that are confusing.  The removal advocates and reinforces it’s use and applicability to the domestic trade market, however, refuse to give Ex Works a place in the international one.

Changes to FOB and CIF

Free on Board and Cost Insurance and Freight have been used for a vast period of time now, and are globally understood well. This being said, most of the amendments that were agreed upon in the earlier version of the Incoterm have not been adequately implemented – meaning there are still flaws in the tools.

Many stakeholders involved In international trade expect a particularly significant change in the FOB and CIF rule set for goods being transported by container. Moreover, trading merchants have demonstrated a want for the International Chamber of Commerce to approach the drafting of 2020’s Incoterms in a more stringent manner due to the current inconsistencies within them. Thus, the following changes are believed to take place for the FOB, CIP and CIF terms:

  • The ownership of the liability of Insurance between the Buyer and the Seller.
  • Recommended penalties for the manipulation of the Supplier under CIF terms.
  • A critical investigation of hidden supplier profit.
  • The addition of Destination Handling Charges (DTHC) in the CIF shipment quotations.

FCA Expansion?

The versatility and ability to cover many transactions is what drives the demand for the Free Carrier Arrangement. Many participants and stakeholders prefer this method of arrangement as it addresses many complications faced in other Incoterm rules – such as Ex Works. The Drafting Committee may indeed consider the expansion of the FCA, allowing it to be accessed and applied to many other types of transactions. Furthermore, they could reinforce its’ use specifically for containerized freight but elaborate on the rule in that area.

Addressing Cyber-Security

Throughout the last decade or so, the increase in cyber-security threats to cross-border trade has been significant. There are been various attacks on different companies, involved in different industries all around the globe. Attacks have involved:

  • Deleting of Data
  • Corruption of Data
  • Theft of Data
  • Financial information theft

It is now believed that because of the massive migration to digitisation, and the growing need for a standard of cybersecurity that the ICC will include an Incoterm that addresses this. It is envisaged that the Chamber will work alongside cyber-security firms and experts that will produce remedies to potential cyber-attacks. Furthermore, they will shed light on the exposure companies face when trading internationally.

It is hoped that the committee will consider the introduction of new technologies and capabilities that will significantly minimise security and privacy risk.

Conclusion

In overview, the lessons that the past decade has brought to the international trading community will actually enhance the development of the 2020 Incoterms. They should make it more flexible in addressing real-time discrepancies in the following:

  • Transfer of risks and liabilities
  • Packaging, marking and inspection of goods
  • Security Clearance
  • The responsibility of participants

The Drafting Committee will also create more Incoterms, or further develop the current rules to accommodate issues that concern the facilitation of trade and will try to encourage the best practices in cross-border transactions. The new Incoterms are likely to have practical inputs and will be extremely optimized to keep up with the pace of the ever-evolving global trade landscape.

For more information and further clarifications on Incoterms, trade, marketing and negotiation, you can click on https://www.tradefinanceglobal.com/freight-forwarding/incoterms/

 

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