International Commercial Terms, commonly known as Incoterms®, standardize the responsibilities of the buyer and seller in an international transaction and are now used more frequently in domestic transactions in the United States. Incoterms® are used to allocate transport costs, show where risk passes from a seller to a buyer, as well as clearly define the responsibilities for export and customs clearance, not to mention identify who must purchase insurance if required (and at what level), from origin through destination.
Why then, when Incoterms® are included in international agreements, do companies (large and small) still run into issues when importing or exporting?
Many companies are either unfamiliar with Incoterms® or don’t understand them. With the launch of the latest edition of Incoterms® 2020, I thought it was a good time to shed some light on this topic. Incoterms®, when used correctly, will identify the responsibilities sellers and buyers have in international transactions between countries. Case in point:
A small retailer in Seattle, Washington, wanted to purchase three pallets of product from a mid-sized manufacturer in Paris, France. No one in the U.S. company spoke French while their Paris business partners only knew a bit of broken English. What could have been a large problem was quickly rectified by using Incoterms® 2020 since it’s available in 29 languages, including French. “FCA Incoterms® 2020 Paris, France” was added to the contract, and the deal was made, with responsibilities of both the seller and buyer clearly defined, in their native language. Per the rule, the French manufacturer (seller) assumed the costs and risks through export clearance and onto the pre-carriage collecting vehicle. Then the U.S. retailer (buyer) took on the risk and responsibility for the freight through destination, including Customs clearance in the United States. Through Incoterms®, both buyer and seller understood their obligations in the transaction, which lead to a favorable outcome.
On the other hand, when an Incoterm® rule is used in a sales contract without a complete understanding of what is expected from both parties, it can delay the transaction or cause worse problems. For example:
A manufacturer in the U.S. wants to get into the Brazilian market. Their sales department agrees to “DDP Incoterm® 2020 São Paulo, Brazil” with their new business partner in São Paulo. Under this Incoterm® rule, the U.S. manufacturer is the importer of record into Brazil, responsible for exporting from the U.S. and importing into Brazil, paying all duty, taxes, and customs charges. Unfortunately, both parties just agreed to an Incoterm® that cannot be successfully executed. According to the Customs Regulations in Brazil, this small U.S. manufacturer cannot be the importer of record. When the product arrives at the Port of São Paulo, the goods are seized by Brazilian customs for having inaccurate documentation.
These examples are just two of many Incoterm® violations that occur throughout the year. Both large and small companies don’t understand how to consistently and correctly use Incoterms® in international trade. And while the rules can help facilitate good trading practices, lack of knowledge in the meanings, and responsibilities, behind the rules is cause for concern.
When companies incorporate Incoterms® 2020 to assist when goods are sold and transported, it’s vital their logistics, procurement, tax, finance, and sales teams understand the rationale behind the rules and what steps must be taken to ensure a successful product journey from the seller to the buyer.
Education and training can be a very successful method for helping employees understand the intricacies of global trade today. The Trade Policy Team at C.H. Robinson acts as an extension of our customer’s team and often travels onsite to large and small businesses to help their logistics, procurement, and sales teams successfully understand and work with Incoterms® 2020. The team also works through how to properly apply the rules, what red flags to look for, performing mock import and export audits, assistance with the development of a comprehensive trade compliance program, classification of commodities in the Harmonized Tariff, determining Export Control Classification Numbers (ECCN) for export control purposes, and more.
If your company uses Incoterms® or plans to start with Incoterms® 2020, make sure your employees understand the requirements of both buyer and seller in each of the 11 rules. When used correctly, these rules can help your business achieve optimum success in international trade.
This was originally published in Inbound Logistics.