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What are Incoterms and the history of the Incoterms rules?

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In the process of international trade and the exchange of goods, traders significantly rely on standardized rules governing commercial practices, risks, transaction costs, and more. This necessity gave rise to Incoterms. Widely adopted globally, Incoterms aims to facilitate efficient international trade transactions. So, what exactly are Incoterms? What’s the history behind their formation and their significance in the international trade of goods? This article will provide an overview of Incoterms, encompassing their concept, role, purpose, and the classification of Incoterms‘ terms.

What are Incoterms?

Incoterms, which stand for “International Commercial Terms,” are a set of standard rules for international trade. These rules elucidate the commercial conditions and obligations regarding the delivery of goods between traders or the buyer and seller in international sales contracts. Incoterms closely correspond with the United Nations Convention on Contracts for the International Sale of Goods, recognized and widely used across the globe.

These rules govern aspects such as responsibilities, which delivery and receipt of goods, risks, and costs in international sales contracts between involved parties.

The history of the Incoterms rules and versions of Incoterms

The history of the formation of Incoterms

In the realm of international trade of goods, since the late 19th century, traders have used abbreviated commercial terms in their sales contracts to delineate responsibilities, costs, and risks associated with the process of delivering goods.

However, due to differences in geographical locations, practices, and specific industries within the realm of trade, international commercial terms were interpreted in various ways. Consequently, each party held different trade practices or industry-specific conventions, leading to frequent misunderstandings and disputes among involved parties.

Hence, developing a standardized set of rules to interpret the commercial terms in international sales contracts became essential. It was for this reason that a universally applicable set of rules in international sales contracts was created.

Incoterm Timeline Infographic (Source)

Incoterms Versions

To establish standardized rules for international trade, which are widely used to this day, Incoterms have undergone numerous revisions and updates, resulting in 9 official versions that bring advantages to both buyers and sellers. Moreover, they expedite trade, contributing to the development of both domestic and international economies.

In 1936, the International Chamber of Commerce (ICC) introduced Incoterms, aiming to establish and standardize rules regarding the delivery and receipt of goods in international trade.
In 1953, responding to the rise in rail transportation, the ICC published the second official version of Incoterms.
In 1967, the ICC issued the third revised version of Incoterms, addressing misunderstandings from the previous edition.
In 1976, with the evolution of air transportation, the fourth official version of Incoterms was published.
In 1980, with the expansion of container transportation, the ICC released the fifth official version of Incoterms.
In 1990, Incoterms were adjusted to accommodate the information explosion and flexibility – marking the release of the sixth official version.
In 2000, the seventh edition of Incoterms was introduced, signifying changes in customs clearance processes.
In 2010, the eighth official version of Incoterms came into effect, reflecting the modern aspects of international trade.
In 2020, the ninth edition of Incoterms, the latest version, consisting of 11 rules, emphasized adherence to practical business conditions.

Rules in Incoterms versions

Incoterms 1936:

During this period, Incoterms were not widely recognized or used because they did not fully explain important trade practices, primarily focusing on road and sea transport methods. It consisted of 7 terms:

EXW (Ex Works) – Delivery at the factory
FCA (Free Carrier) – Delivery to the carrier
FOT/FOR (Free on Rail / Free on Truck) – Free on rail/truck
FAS (Free Alongside Ship) – Delivery alongside the ship
FOB (Free On Board) – Delivery on board
C&F (Cost and Freight) – Cost and freight
CIF (Cost, Insurance, Freight) – Cost, insurance, and freight

Incoterms 1953:

Comprising 9 terms, it retained the 7 terms from Incoterms 1936 and added 2 new terms:

DES (Delivered Ex Ship): Delivery at the ship
DEQ (Delivered Ex Quay): Delivery at the quay
1967 (Amendment 1 to Incoterms 1953)

Incoterms 1967 (Amendment 1 to Incoterms 1953) included 11 terms, maintaining 9 delivery terms similar to Incoterms 1953 and adding 2 new terms:

DAF (Delivered At Frontier): Delivery at the border
DDP (Delivered Duty Paid): Delivered duty paid, applicable to all modes of transport

Incoterms 1976 (Amendment 2 to Incoterms 1953)

Consisting of 12 terms

It retained the 11 terms from Amendment 1
Added 1 new term: FOA (FOB Airport): Delivery on board the aircraft, reflecting the growth of air transportation

Incoterms 1980:

Encompassing 14 terms, it included

12 terms from 1976
Added 2 new terms: CPT (Carriage Paid To): Freight paid to the destination and CIP (Carriage and Insurance Paid to): Freight and insurance paid to the destination

Incoterms 1990:

With 13 terms:

It eliminated the FOT and FOA terms as they were similar to FCA
Added a new term: DDU (Delivered Duty Unpaid): Delivery at the destination without duty paid

Incoterms 2000:

Maintaining the 13 terms from Incoterms 1990, it modified the content of FCA, FAS, and DEQ terms, adjusting the “licenses, authorizations, and formalities” section in FAS and DEQ to align with prevalent customs practices.

Incoterms 2010:

Comprising 11 terms, it removed DAF, DES, DEQ, and DDU from Incoterms 2000, introducing 2 new terms applicable to all modes of transport:

DAT (Delivered At Terminal): Delivery at the terminal
DAP (Delivered At Place): Delivery at the designated place

Incoterms 2020:

Incoterms 2020 retained the 11 terms from 2010 but replaced DAT with DPU (Delivered at Place Unloaded). Specifically, the terms include FOB, FAS, CIF, CFR, EXW, FCA, CPT, CIP, DAP, DPU, and DDP.

Changes in rules through Incoterms versions

Purpose and Role of Incoterms

The Main Purposes of Incoterms

Incoterms were created to explain common trade terms in international business transactions and the sale of goods. Accordingly, the terms in Incoterms delineate responsibilities, risks, and costs in the process of transferring goods from the seller to the buyer.

As a result, parties involved in transactions can avoid or minimize disputes and risks that may arise during the sale of goods.

Incoterms address three main issues in international trade:

Responsibility: It specifies the responsibilities of the buyer and seller. For example, who will transport or insure the goods; who is responsible for obtaining shipping documents, and export or import licenses?
Risk: It determines the point of transfer, risks, and losses related to the goods.
Cost: It indicates the allocation of costs associated with the delivery of goods that the parties must bear. For example, who will bear the cost of transportation, packaging, insurance, loading, unloading, etc.

The Role of Incoterms

In international trade and the sale of goods, Incoterms play five roles:

Standardization: They serve as a set of rules that help standardize international trade practices, widely used across the globe.
International Language: Incoterms are considered an international language in the transportation and delivery of international goods.
Facilitation of Negotiations: They expedite the pace of negotiations, the drafting of international contracts, and the organization and execution of contracts.
Price Determination: They are a crucial basis for businesses to determine the cost of buying and selling goods.
Legal Foundation: They provide a vital legal basis for resolving disputes and addressing complaints that may arise between the seller and the buyer during the execution of international contracts.

Classification of Incoterms

Classification of Characters

The number of Incoterms terms may vary across different versions. However, based on the first letter of the three letters composing Incoterms, Incoterms can be divided into 4 term groups:

Group D (Arrival): where the seller bears all costs and risks to deliver the goods to the specified location, including DPU, DDP, DAP.
Group C (Main Carriage Paid): where the seller bears the cost of the main carriage for transport from one port to another, including costs, insurance, chartering a vessel,… This group includes CPT, CIP, CIF.
Group F (Main Carriage Unpaid): where the seller delivers the goods to the carrier nominated by the buyer, with no responsibility for transportation from the port of loading to the port of discharge. Group F includes FAS, FOB, FCA.
Group E (Departure): where the seller delivers the goods at the specified place of origin, such as a factory or warehouse, without concern for customs procedures or transportation, including EXW.

Classification of transportation

In terms of classification based on the mode of transport, there are two groups. This includes terms applicable to any mode of transport and terms applicable specifically only for sea and inland waterway transport:

Incoterms for any mode of transport (according to Incoterms 2020):

EXW (Ex Works)
FCA (Free Carrier)
CPT (Carriage Paid To)
CIP (Carriage and Insurance Paid To)
DPU (Delivered at Place Unloaded)
DAP (Delivered at Place)
DDP (Delivered Duty Paid)

Incoterms only for sea and inland waterway transport (according to Incoterms 2020):

FAS (Free Alongside Ship)
FOB (Free On Board)
CFR (Cost and Freight)
CIF (Cost, Insurance, and Freight)

The 11th trade terms in Incoterms 2020

In this article, SSR Logistics has provided you with information related to the Incoterms rules. SSR Logistics hopes that through this article, you have gained basic information and a better understanding of these international terms.