Navigating Global Shipping: A Comprehensive Incoterms Overview

Key Changes in Incoterms 2020

The 2020 update to the Incoterms (International Commercial Terms), published by the International Chamber of Commerce (ICC), refines the 2010 version to better align with modern global trade practices. Incoterms are standardized rules that define the responsibilities, risks, and costs between buyers and sellers in international and domestic transactions. The 2020 revisions address evolving trade dynamics, incorporating practical adjustments to reflect changes in logistics, security, and documentation. Below is an expanded explanation of how the 2020 update builds on the 2010 version with practical tweaks for today’s trade environment:

1. Enhanced Clarity and User-Friendliness:

• Improved Explanatory Notes: The 2020 version includes more detailed and accessible explanatory notes for each Incoterm. These notes clarify the allocation of obligations (e.g., costs, risks, and responsibilities) to make the rules easier to understand, especially for small and medium-sized enterprises (SMEs) that may lack extensive legal or logistical expertise.
• Reordered Structure: The 2020 Incoterms reorganize the guidance to prioritize key information, such as delivery points and risk transfer, to reduce misinterpretation. This addresses feedback from 2010 users who found some rules ambiguous or complex.

2. Changes to Specific Incoterms

• DAP, DPU, and DDP Adjustments: Renaming of DAT to DPU: The 2010 term “Delivered at Terminal” (DAT) was renamed to “Delivered at Place Unloaded” (DPU) in 2020 to clarify that the delivery point is not limited to terminals (e.g., ports or warehouses) but can be any designated place where goods are unloaded. This reflects the flexibility needed in modern supply chains, where goods may be delivered to diverse locations like distribution centers or construction sites.
• DAP and DDP Clarifications: The 2020 rules provide clearer guidance on the use of “Delivered at Place” (DAP) and “Delivered Duty Paid” (DDP), emphasizing cost and risk allocation to avoid disputes over who bears import duties or unloading costs.
• FCA Enhancements: The Free Carrier (FCA) rule, one of the most widely used Incoterms, was updated to address practical challenges in trade:On-Board Bills of Lading: For FCA transactions involving sea transport, the 2020 rules allow the buyer to request the carrier to issue an on-board bill of lading to the seller (if agreed in the contract). This tweak accommodates trade finance requirements, as banks often require on-board bills for letters of credit, which was a point of friction in the 2010 version.
• Clearer Cost Allocation: The 2020 FCA rule clarifies cost responsibilities when goods are handed over to the buyer’s carrier, reducing disputes over incidental charges like terminal handling fees.

3. Adaptation to Modern Transport and Security Needs

• Security Requirements: The 2020 update reflects heightened global security concerns by explicitly incorporating requirements for security-related clearances, such as export and import security filings. These obligations are now more clearly assigned to either the buyer or seller, depending on the Incoterm, addressing the increasing complexity of customs and security regulations since 2010.
• Transport Flexibility: The 2020 rules acknowledge the growing use of multimodal transport (e.g., combining sea, air, and land transport). For example, terms like CIP (Carriage and Insurance Paid To) and CIF (Cost, Insurance, and Freight) now better accommodate scenarios where goods move through multiple modes of transport, reflecting modern logistics practices.

4. Insurance Coverage Updates

• CIP Insurance Requirements: In the 2020 version, the CIP rule mandates a higher level of insurance coverage compared to 2010. The seller is now required to obtain cargo insurance complying with the Institute Cargo Clauses (A), which provides comprehensive “all-risk” coverage, rather than the minimal coverage allowed under 2010. This change aligns with buyer expectations for greater protection in complex international shipments.
• CIF Unchanged: Notably, the CIF rule retains the 2010 requirement for minimal insurance coverage (Institute Cargo Clauses C), as it is often used in commodity trades where lower-cost insurance is standard. This distinction between CIP and CIF better caters to different trade scenarios.

5. Support for Own Transport Arrangements

The 2020 rules explicitly recognize that parties may use their own transport rather than relying on third-party carriers. This is particularly relevant for Incoterms like FCA, DAP, DPU, and DDP, where sellers or buyers may handle logistics in-house (e.g., using their own trucks or vessels). The 2010 version assumed third-party carriers, which didn’t fully reflect the practices of larger companies or e-commerce giants managing their own fleets.

6. Digitalization and Documentation

• Electronic Documentation: The 2020 Incoterms facilitate the use of electronic documents where agreed by the parties, aligning with the global shift toward digital trade documentation (e.g., e-bills of lading, e-invoices). This update reflects advancements in trade technology since 2010, reducing reliance on paper-based processes and addressing inefficiencies in documentation workflows.
• Customs and Compliance: The rules provide clearer guidance on who is responsible for customs documentation and associated costs, responding to the increasing complexity of global trade regulations and the need for precise documentation to avoid delays.

7. Alignment with Global Trade Trends

• Sustainability and Cost Efficiency: While not explicitly stated, the 2020 updates indirectly support sustainability by encouraging clarity in transport arrangements, which can optimize logistics and reduce unnecessary costs or emissions. For example, the flexibility in DPU allows for more efficient delivery points, potentially reducing transport distances.
• E-commerce Growth: The 2020 rules better accommodate the rise of e-commerce by clarifying responsibilities in smaller, cross-border transactions, which were less prevalent when the 2010 rules were drafted.

8. Continuity with 2010 Framework

Despite these tweaks, the 2020 Incoterms retain the core structure of the 2010 version, ensuring continuity for businesses familiar with the earlier rules. The 11 Incoterms (EXW, FCA, CPT, CIP, DAP, DPU, DDP, FAS, FOB, CFR, CIF) remain unchanged in number, with modifications focused on practical usability rather than a complete overhaul.

Why These Changes Matter

These changes reduce ambiguities, especially in inter-modal and containerized shipping, which dominate modern logistics. The 2020 tweaks respond to a trade environment that has evolved significantly since 2010, driven by globalization, digitalization, and increased regulatory complexity. By addressing practical issues like documentation, transport flexibility, and security, the updates reduce the risk of disputes, lower transaction costs, and make the rules more accessible to diverse users, from large corporations to SMEs entering international markets. These changes ensure Incoterms remain a vital tool for standardizing global trade, adapting to modern challenges while preserving the reliability of the 2010 framework. If you’d like a deeper dive into a specific Incoterm or aspect of the 2020 updates (e.g., implications for a particular industry or trade scenario), please contact us for more info!