A Beginner’s guide to Incoterm

Incoterms

A Beginner’s guide to Incoterm

BASICS OF INCOTERMS AND ITS EVOLUTION

Ever wondered how the business and trade terms are conducted across the globe? Interesting topic? Let’s check out!!!

Earlier the trade used to be barter system, and then it changed to paying by precious stones, further shifting to money. With money, came banks, brokers, guarantors, who gave credits and guarantees for the purchases or sales.

The trade initially used to be between the different villages through a system called Barter. Then as the economies progressed, it shifted to trade through precious stones from distant areas but not far. With the emergence of the different Sea routes through ships, traders traveled far across worlds to sell and buy different products and commodities, with the use of money in terms of gold and silver coins.

This shift bought different changes into the modernization of trade, with lenders and banks and creditors evolving to facilitate the trade further between different civilizations and countries, giving birth to International Trade.

International Trade is the exchange of goods and services across international borders or territories. While international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, scramble for Africa, Atlantic slave trade, salt roads), its economic, social, and political importance has been on the rise in recent centuries. Carrying out the trade at an international level is a complex process when compared to domestic trade.

To streamline, smoothen and justify the process of trade between countries of different economic standing, international economic organizations were formed which worked towards the support and growth of international trade.

One such organization was ICC (International Chamber of Commerce), which was founded to bring economic prosperity to a post-World War I era. With no global system of rules to govern trade, few businessmen (industrialists, traders, etc.) came together to create a Uniform Industry Standard to govern the rules of trade which came to be known as Incoterm (International Commercial Terms) rules.

ICC was created in 1919. In the early 1920’s they studied the commercial trade terms used by merchants which were limited to six commonly used terms in just 13 countries. The findings were published in 1923.

During this time, most of the trade was done by ships and traveling. In 1936, based on these studies, the first version of Incoterms was published. The terms included were: FAS, FOB, C&F, CIF, Ex Ship, and Ex Quay.

Due to World War II, supplementary revisions of the Incoterms were suspended and did not resume again until the 1950s. The first revision of the Incoterms was then issued in 1953. It introduced three new trade terms for non-maritime transport for the mode RAIL. The new rules comprised DCP (Delivered Costs Paid), FOR (Free on Rail) and FOT (Free on Truck).

Then further advancements and amendments were done in 1967 with the further addition of two trade terms to address delivery at the frontier (DAF) and delivery at the destination (DDP).

By 1974, the increased use of air transportation gave creation for another version of the trade terms. This included the new term FOB Airport (Free on-Board Airport). This rule aimed to allay confusion around the term FOB (Free on Board) by signifying the exact “vessel” used.

By 1990, a complete revision and the fifth version of trade terms were created and simplified the term, Free Carrier by deleting rules for specific modes of transport (i.e., FOR; Free on Rail, FOT; Free on Truck, and FOB Airport; Free on Board Airport). It was considered sufficient to use the general term FCA (Free Carrier…at Named Point) instead. Then further amendments/revisions were bought into the Incoterms every ten years, like 2000, 2010 and now the current revised version of 2020.

Incoterms 2010 was the most current edition of the rules to date till Incoterms 2020. This version consolidated the D-family of rules, removing DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid) and adding DAT (Delivered at Terminal) and DAP (Delivered at Place). Other modifications included an increased obligation for buyer and seller to cooperate on information sharing and changes to accommodate “string sales.”

Incoterms in Domestic Sales

Because of the clarity and uniformity in the terms, some organizations have started using Incoterms in Domestic Sales as well instead of the normally used Uniform Commercial Code (UCC) terms.

Importance of Incoterms in Trade

The defined Incoterms provide the Seller (Consignor) and Buyer/Receiver (Consignee) and guides them to understand their responsibilities and clarify any gray areas in the contract, reducing the risk of complications and getting more clarity.

Leave a Reply

Your email address will not be published.