As anyone in international trade should know, Incoterms® are an internationally accepted set of rules that apply to the supply and transportation of physical goods.
Frances Fawcett, International Trade Specialist and Export Coach, explains why a good understanding of Incoterms® will be essential in a post-Brexit world…
They are used and recognised by everyone in international trade including governments, transporters, importers, exporters, and their advisors. They are – or should be – referred to in all paperwork and they are designed to remove ambiguity for everyone involved in the journey that goods take from the seller/exporter, via transporters, to the buyer/importer. They are published by the International Chamber of Commerce (ICC) and have been with us since 1936. The ICC update them regularly and, as their website tells us, the terms facilitate trillions of dollars in global trade each year.
They are a set of 11 different rules, and we use a three letter version in documentation. For example, if you are sending goods under the Incoterm® “Carriage Paid To”, you would quote “CPT”. Therein lies one of the challenges that we see alarmingly regularly. Three characters on export and import documentation that carries an awful lot of other information can so easily be missed. It is not unusual to find documentation generated by a third party with an Incoterm® that the exporter knows nothing about. It is not the fault of the third party such as the freight forwarder – a term has to be quoted and is almost certainly a mandatory field in their systems, but their clients don’t always know which one to use. Or the third party or their client simply uses the same one they used last time. You are responsible for the terms that are used!
As the saying goes, the devil is in the detail
This is fraught with danger because the rules carry a lot of detail about responsibility behind those innocent three characters. For example, as an importer you might guess that if someone sells you goods under Incoterm® CPT, they are paying for the carriage. You’d be right and could be forgiven for also guessing that they are responsible for the goods while on the transport they have arranged. You would be wrong and that could have significant implications. The risk and responsibility for the goods transfers to the buyer in CPT at a very early stage in their journey. So if the container ship organised by the seller has an issue along the way that leads to the loss of the goods, you the buyer are responsible for the goods and you have no recourse against the seller who arranged the transportation.
Goods are at risk
You are not in control of your goods on their journey and that was horrifically brought home to us all in the summer of 2020 following the devastating explosion at the port of Beirut. Rightly the news focussed on the tragic loss of life and numbers injured and made homeless. But in amongst that devastation there will have been the loss of goods belonging to importers and exporters from around the world. Let us hope they knew who was responsible for the goods at that point in their journey and therefore could recover the loss.
The impact of January 2021
This is a good illustration of the detail behind each of the terms and one aspect is going to become critical as the UK ends its transition period following departure from the EU. During 2020 we are in the transition period so many rules and processes are the same as they have always been. But from 1st January 2021, there will be significant changes.
Goods bought or sold from the EU will be subject to import and export procedures just as goods bought or sold from other areas of the world. That includes the responsibility for clearing customs. Buried in the detail of each of the Incoterms® is information about who is responsible for clearing customs and paying duties. And many terms also include an obligation for one party to provide assistance to the other to obtain documents related to clearance, security and inspections. There is no indication from the description of CPT who is responsible – you have to know the detail. From 1st January, the Incoterm® you are using with your trading partners in the EU will determine your responsibilities and those of the organisations you trade with. Do you know what they are? Do your trading partners know?
We can’t guarantee that your goods won’t be stuck in customs in January – the processes are changing and with significant changes comes the opportunity for mistakes and hold ups. But you will at least know in advance who should be taking care of customs procedures for your goods and can plan accordingly.
Updating your knowledge
Incoterms® knowledge is a must-have for everyone in international trade at all times. It covers numerous aspects of the journey and so much more than just who takes care of customs clearance. From January 2021, 180,000 traders in the UK who only trade domestically or with countries in the EU will need to understand Incoterms® to a greater level of detail than ever before.
Happily, at the time of writing this article, there are grant programmes to enable traders in the UK to learn all that they need to know to manage these considerable changes. Here at International Trade Matters Ltd we have Specialists that can train your teams and provide direct help and guidance to manage this change. How fortunate that traders in the UK might not even have to pay for that support. Contact us to find out how we can help.
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