Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

New Trade Rules for a New Year

International trade and Incoterms

Probably the last thing you are looking for right now is another New Year’s resolution, but here’s one that is worth considering particularly if you manage international trade operations: become familiar with the revised Incoterms® rules. The revisions came into effect on January 1st, 2011, and although the new code does not represent a major rewrite, it simplifies the ground rules for trade and introduces some important updates.

Incoterms – short hand for international commercial terms – were first created by the International Chamber of Commerce in 1936 to clarify buyers’ and sellers’ costs, risks and responsibilities when transacting trade. The latest version is Incoterms 2010. It reflects the changing face of global commerce and helps users to choose the right terms for their business dealings. A working knowledge of these changes will help you to plan and execute cross-border supply chains more effectively.

The number of rules has been reduced from 13 to 11 and there are two new ones: Delivered at Terminal (DAT) and Delivered at Place (DAP). DAT provides for delivery according to the buyer’s requirements when unloaded from the arriving vessel. In all likelihood this rule will be used widely. DAP provides for delivery ready for unloading. DAP terms allow for a degree of flexibility for the two parties to decided where and when responsibilities transition from one party to the other.

The 2010 version also provides guidance notes at the beginning of each of the rules to help steer the user to the correct rule, a very useful addition.

Supply chain security has become a hot topic in trade circles, and the revised code addresses these issues. For example, the rules pertaining to air transportation focus on international terrorism and the implications for cargo security. And there is clear language that assigns responsibility for security to the exporter in the exporting country, and likewise to the importer in the importing country.

Paperless documentation is another feature of international trade that has gained in importance over recent years. The updated rules refer to electronic equivalents of documents in recognition of this development.

Incoterms 2010 also acknowledges that, in today’s complex supply chains, goods can be sold in various ways. In the past, sellers sold goods to buyers, but today the sell/buy formula is more convoluted. For example, today companies often purchase goods and ship the items direct to a customer as a drop ship consignment.

Still, not every change is clear cut and shippers should be aware of these gray areas. Take, for example, the prior version of the Freight on Board (FOB) proviso. It specifies that when cargo passes over the ship’2013-05-22 19:24:12’s rail the buyer is responsible for the safety of the goods. Under the revised regimen the buyer is liable when the cargo is aboard the ship. But when a load lands on the deck of a cargo vessel there is no guarantee that it will stay there; the unit could be moved to another position for stability reasons, for instance. No doubt this potential loophole will be tested in due course.

Shippers should also note that certain time-honored pitfalls still exist, and knowing how to avoid them can save time and money. A common misconception – particularly among professionals outside the trade arena such as accountants – is that the liability for goods changes hands from the seller to the buyer at the point of sale. In a perfect world, this would be the case, but the world is just as far from perfect now as it was before the ICC revised its rules, and the transfer of risk is still no simple matter. To draw an analogy with the real estate market, when a house burns to the ground the mortgage might be held by a bank but it is still the owner’s responsibility to carry adequate fire insurance. Incoterms simply do not determine where the title passes between the two parties. That information should be in sales agreements.

Finally, here is an old chestnut that survived the changes: FOB remains a maritime term that is not applicable to other forms of transportation such as air. Trading partners that persist in using FOB across modes are making an error that could prove costly if something goes wrong and there is a trade dispute.

By taking a look at the new Incoterms rules, you can take some of the risk out of international trade. After all, forewarned is forearmed and global supply chains are not getting any simpler.