How to use Incoterms effectively
This article about using Incoterms effectively comes from an interview we ran with Jeff Lewis, trainer at the Institute of Export & International Trade and Managing Director of Resultz Ltd. We also discussed the definition of an export and duty relief schemes.
What are Incoterms?
They’re international commercial terms that define the risk and responsibility of a shipment between the buyer and a seller. They also define obligations between the buyer and the seller – i.e. what your obligations and responsibilities are for the shipment.
People use them so that they can understand what they have to do to comply – i.e. who pays the import duties, who’s responsible for the loading process, who’s responsible for the main shipment itself. They define what type of freight is used – there are specific ones for different modes of transport for instance.
They are a global harmonized shipping system and are therefore used extensively.
Who sets them?
They’re set by the International Chamber of Commerce and they’re reviewed every 10 years.
The updates are done to so that they are up to date with the latest developments in global trade. When containerisation was introduced the incoterms had to update to reflect the changes this brought in. Now they’re looking at security and ecommerce as factors that need to be reflected in the next set of Incoterms. The updates move with the trading times.
The last one was done in 2010 and they’ll likely be changed in 2020 though that’s not been confirmed yet.
What are the most commonly used incoterms for an exporter?
I’d always say FCA – Free Carrier – is one of the best ones to use for an exporter.
You can specify any specific place or country that is supplying the shipment – in our case the UK – and you can say from my factory in Leeds, once I’ve loaded the product, it is then under your responsibility as the freight forwarder, say.
It minimizes the risk for the seller as under the FCA Incoterm, the Seller is responsible for export clearance and the buyer assumes all risks and costs after the goods have been delivered at the named place in the country of supply.
It’s a better term than what is usually used – Ex Works. Ex Works is a term most people use because it minimises the risk for the seller.
A lot of companies will load the product under Ex Works but Ex Works doesn’t include loading of the products by the seller, so in theory, there is non-compliance with the term that can cause issues after the goods have been loaded if there’s damage to the goods.
Most people use Ex Works but are actually doing the physical process of FCA.
With FCA you are responsible for loading and Ex Works you aren’t, but in real life the exporter loads the product. The exporter won’t let just anyone come into their dispatch area and load the product – they’ll do it themselves usually.
The course on the IOE is called Effective Incoterms. What does the course do and how does a company come to an understanding of what ‘effective incoterms’ means for their business?
The course goes into detail about what every single incoterm means. It covers the risk of each one, how that incoterm is applied, what type of freight can be used, who has the responsibility for each part of the loading process, and so on.
It gives real-life examples of what could go wrong if you use the wrong incoterm. It also goes into how people interpret the incoterms and the importance of the way they are written as far as the freight forwarder is concerned.
When we talk about ‘effective incoterms’ it really boils down to which interpretation of incoterms is effective for each individual type of business. What that is depends on your product. If you’ve got a very small product, you might want to take the risk and responsibility, based on your industry, to ship the product directly to your customer’s property. Then again, it might be more effective for you to take the minimum amount of risk.
Effective can be what your industry says to be the best way of ensuring that your company understands what your risks are so that both you and your customer comply with your incoterm and you know that your goods get through customs at each end.