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New decade, new upgrade: Incoterms 2010 picks up where Incoterms 2000 left off.

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The International Chamber of Commerce's (ICC's) new batch of Incoterms went into effect last month, as 2010 gave way to a more optimistic looking 2011. While it's doubtful to think that the change so excited the world's exporters and importers that it inspired them pop champagne and sing "Auld Lang Syne," the shift away from Incoterms 2000 and toward Incoterms 2010 has officially begun, and it's never too early to learn what still constitutes an important dialect in the language of international business.

Unlike certain other, stricter changes that went into effect as the clock rolled over midnight on January 1,2011, the new set of Incoterms doesn't put its users on the hook for potential penalties or other legal punishments if they remain non-compliant. Incoterms don't function as a regulatory regime so much as a Rosetta stone. They aren't law, but exist only to reduce discrepancies between the buyer and seller to make it clear who's responsible for what, where and when. Put another way, according to Laura Pedersen, CDCS, CICP, Incoterms do not dictate trade practices, but reflect them instead.

This being the case, if a company's looking for a hard-line compliance date, they won't find it in Incoterms. The prior edition, published in 2000, is still active today, despite the official effective date of January 1, 2011. "Just because the 2010 Incoterms have come out, that doesn't mean that they automatically have to be used today," said Pedersen, an Incoterms expert, FCIB instructor, and part of First National Bank's Global Banking Group."It's going to take a little while for companies to get used to the changes. They haven't even been translated into all the necessary languages yet." Hence, companies today can still use the 2000 Incoterms until they, and their buyers, are comfortable doing otherwise.

The advent of Incoterms 2010, however, does add another quick item to a seller or buyer's checklist when handling an order. "The most important thing is that they need to specify in their documents, their purchase orders, their pro forma invoices, or their letters of credit what version they're using," Pedersen added. "2000 is going to be used for a while because everyone's not on the same page with 2010 yet." With two versions floating around, the first step for any exporter using the acronyms that actually comprise Incoterms is to establish which version is in effect. This decision can be made jointly by the seller and the buyer and, again, really only comes down to what best suits both parties. "Companies should use what they feel comfortable with. They just need to make sure they're spelling it out so everybody knows which revision they're talking about."

Thirty Months in the Making

The first Incoterms, which is short for "international commercial terms" were established in 1936. The 2010 revision is the eighth since then, averaging one revamp per decade. "It's usually a ten-year time frame" said Pedersen. "We've had a revision about every ten years, so it was time." They function as the official rules for the worldwide interpretation of trade terms as developed by the ICC, and are recognized by the United Nations Commission on International Trade Law as the global standard for such interpretations.

2010's revision to Incoterms came to be after a two-and-a-half year process of research, surveys and revisions. "The ICC solicited comments from all the representative countries and came back with 2,000 different comments from many of the 130 countries on terms or things that representatives thought needed to be changed" said Pedersen. "They actually completed four drafts to the new terms before they finally accepted the one that they used." Since the ICC has designed Incoterms to remain country neutral, striking the right balance between the interests of one country and the interests of another can be rather difficult.

For example, one notable Incoterm that makes sense in other countries, but not for export shipments from the U.S., is Ex-Works (EXW). Many believe that EXW is not a good term for U.S. companies to use for exporting because it places a great deal of responsibility on the buyer to understand the inner workings of the seller's country's export procedures. "With Ex-Works, it says that the buyer is responsible for all export clearance from the seller's country" said Pedersen. Using EXW means that all export regulation requirements are solely handled by the buyer or their freight forwarder. "The real issue is here in the U.S., with all the clearance requirements," she noted. "If you're shipping anything valued more than $2,500, per Schedule B [which are how exported products are classified in the U.S.], you've got to complete an Electron Export Information (EEI) form to report what is being exported. Technically, on all the other Incoterms, that's the seller's responsibility." Under EXW though, the seller is not responsible for the EEI, leaving them vulnerable to a number of problems. "What does the buyer's forwarder know about that product? What does the buyer know about that process?," Pedersen asked. "If it doesn't get completed correctly, or the goods are diverted to somewhere they shouldn't go, the U.S. company is responsible."

This makes EXW a rule that most U.S. companies should think twice about using when establishing the terms of shipment. EXW lives on in Incoterms 2010, however, because many other countries don't have similarly complex export regulations, making it considerably more likely that an outside buyer would be capable of navigating their way through their seller country's procedures.

Despite the potential difficulty for U.S. companies to successfully use EXW, Incoterms 2010 includes 10 other terms along with some notable simplifications, and the general consensus is that they're an overall improvement over the last edition published a decade ago. "Not everything got changed that should have or could have been," said Pedersen, "but certainly the changes that they did make were good changes."

Only 11 Remain

The 2010 edition of Incoterms consists of 11 terms instead of the 13 that existed in the previous edition. They are divided into two categories pertaining to the manner in which the goods are shipped.

Rules for any mode of transport consist off

* CIP (Carriage and Insurance Paid)

* CPT (Carriage Paid To)

* DAP (Delivered At Place)

* DAT (Delivered At Terminal)

* DDP (Delivered Duty Paid)

* EXW (Ex Works)

* FCA (Free Carrier)

Rules for sea and inland waterway transport only include:

* CFR (Cost and Freight)

* CIF (Cost, Insurance and Freight)

* FAS (Free Alongside Ship)

* FOB (Free On Board)

Readers familiar with the 2000 edition will recognize the exclusion of terms DAF (Delivered At Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid), all of which were replaced with the DAT and DAP terms. "DES and DEQ were both ocean-only shipping terms," said Pedersen. "DAT and DAP are to be used for any mode of transportation, which makes them much easier to use in today's world of shipping."

Under DAT, the seller bears all risks involved with bringing the goods to and unloading them at the established terminal. This means that the seller contracts for pre-carriage, meaning transportation of the goods from the seller's facility to where they leave the seller's country, and main carriage, meaning transportation from the seller's side to the buyer's side. DAP, however, holds the seller responsible for the costs and risks until the goods are brought to the named place of destination, requiring them to contract for pre-carriage, main carriage, and possibly on-carriage, which is the transportation segment from the point of arrival on the buyer's side to the buyer's designated place. That said, import clearance still remains the buyer's responsibility under DAP. "Really DAP is the same thing as DDU, but DDU talked about duty not being paid," said Pedersen, noting that duties would only apply in international transactions. "DAP mentions duty only 'where applicable,' so it's pretty much the same term, but it keeps it more generic so that it can be used for both international and domestic transactions." Another Incoterm rule, DDP does speak to duty, and requires the seller to contract for all freight charges and clear the goods for both export and import, meaning all the buyer has to do under DDP is wait for the goods to arrive. In other words, it's the opposite of the aforementioned EXW.

The most important word in Incoterms is "delivery," which, in this instance, establishes where the seller turns the responsibility for the goods over to the buyer. For example, under DAT, the seller delivers when the goods have been unloaded from the arriving means of transport and have been placed at the disposal of the buyer at the named terminal. This aligns with what the seller is responsible for shipping-wise, but under CPT, although the seller contracts for pre-carriage and main carriage, delivery occurs, meaning responsibility transfers to the buyer, when the goods are turned over to the first carrier. Even though it's the seller contracting for the shipment, they're not responsible for the condition of the goods once they reach that first carrier. CIP is almost identical to CPT, except it provides that the seller also contracts for insurance, in addition to pre-carriage and main carriage. In another example, FCA provides for delivery when the seller releases the goods to the first designated carrier in their own country, meaning the buyer has the risk and responsibility from that point. The buyer also contracts for main carriage, and possibly for pre-carriage depending on the established FCA place.

Vessel-Only

The four vessel-only rules (FAS, FOB, CFR and CIF) underwent some slight, but notable, revisions in the 2010 edition. Previously, these maritime shipping rules had very specific stipulations even about how goods were to be loaded onto the ship that would carry them from the seller to the buyer. "In the 2010 revision, they took out the clause that the goods had to be loaded over a ship's rail and said that they had to just be loaded on board the ship," said Pedersen, meaning that the goods no longer had to specifically be loaded over the rail of a ship. "Also they now mention that the goods have to be loaded on board or procured," she added, noting that this change accommodates commodities, which can be purchased and sold mid-shipment. "Often in commodity shipments, the goods are sold several times over during the journey," Pedersen noted. "Now companies that are buying a product that's already on the seas can use these Incoterm rules because they do allow for a transaction where the goods are being procured during the shipment."

Under FAS, the seller delivers when the goods are placed alongside the vessel, on a quay or a barge, for example, named by the buyer at the port of shipment. It's the buyer's responsibility to contract for freight from the seaport to his location and his responsibility to load the vessel, while the seller is responsible for clearing the goods for export. CFR means the seller contracts for pre-carriage and main carriage, and is responsible for clearing the goods for export, officially delivering when the goods are loaded on board at the port of shipment, or are procured after being loaded. CIF is similar to CFR, but as CIP is to CPT, CIF accounts for the seller contracting for insurance as well.

The most well known of these vessel-only terms, and easily the most misunderstood, is FOB. "Part of the problem is that under the UCC, FOB had connotations within that set of rules that meant it was where title transferred" said Pedersen. "They used the term to define where the title transferred, so it was used very liberally." Incoterms, however, do not govern where title transfers, so when many companies tried to use the FOB term the same way internationally under Incoterms as they used it domestically, it didn't work. Under Incoterms, FOB officially means that the seller delivers when the goods are loaded on the ship at the named port. It's the seller's responsibility to load the vessel, but the buyer contracts for shipment from the port in the seller's country to his location.

From minimum to maximum seller responsibility, EXW requires the least of the seller, followed by the "F" terms, then the "C" terms, then the "D" terms, and finally DDP, which requires the most of the seller. Neither of the extreme ends of that spectrum is advisable in most instances, but there are many factors that figure into a seller's choice of Incoterm, including the type of goods being sold and the amount of control they want over the transaction. Ultimately, it comes down to having a frank discussion with the buyer about who will be responsible for what, and leaving things out in the open to provide for maximum benefit to both parties.

For more information about Incoterms, attend FCIB's three-day webinar, led by Pedersen, on February 15-17, 2011. Visit www.fcibglobal.com to learn more.

Jacob Barton, NACM staff writer, can be reached at jakeb@nacm.org.
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Title Annotation:INTERNATIONAL FEATURE
Author:Barron, Jacob
Publication:Business Credit
Geographic Code:1USA
Date:Feb 1, 2011
Words:2170
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