In an ICC podcast to mark the launch of the Incoterms® 2020 rules last year, Emily O’Connor, Director of Trade and Investment for the International Chamber of Commerce (ICC), said that “people will frequently choose the wrong Incoterms® rule for their transaction”.
O’Connor went on to emphasise the importance for anyone who uses the Incoterms® rules to learn or re-learn them – even if you consider yourself an expert – in order to avoid costly mistakes in the future. “Learn now, ahead of time to avoid problems down the road.” she said.
To give you more insight into why it is so important for those working in international trade to have a thorough understanding of the Incoterms® rules, we spoke to some of our Incoterms® 2020 Certificate graduates to get their perspectives.
These graduates are all working practitioners of the rules and come from a range of industries and job roles, including a customs broker, a freight forwarder and an export advisor for the Canadian government. However, as you’ll see, they are all united in their belief that the Incoterms® rules should be understood ‘inside out’ by those involved in international trade.
Find out why by reading the interviews below. You can also read Emily O’Connor’s thoughts on these insights at the end of this post.
Emiliano Introcaso, Export Advisor with Export Development Canada (EDC)
Emiliano is an Export Advisor with Export Development Canada (EDC), a crown agency of the Government of Canada that provides trade knowledge and financial solutions for Canadian businesses looking to expand into international markets. They answer questions on the Incoterms® rules on an almost daily basis.
ICC Academy (ICCA): Which Incoterms® rule or rules do you come across or use most regularly?
Emiliano Introcaso (EI): “It varies. I see a trend for eCommerce exporters, using DDP to ensure their clients pay the all-inclusive price of goods delivered door to door. This rule helps improve customer service and reduce complaints due to unexpected duties or taxes in the country of destination.
At Export Development Canada, we also help companies mitigate risks of non-payment with our insurance solutions, and some companies have asked if the CIF & CIP rule covers those risks. We must explain that insurance under those two rules, focuses on cargo insurance only. Other rules we see used often are FCA and FOB.”
ICCA: Why do you believe is it so important for you and your clients or colleagues to have an accurate and thorough understanding of the Incoterms® rules?
EI: “When it comes to understanding the Incoterms® rules, companies can get help from different service providers, for example from a Freight Forwarder. However, it is very important for companies to know that even when receiving assistance from a service provider, they are still ultimately responsible for selecting the right Incoterms® rule for their transaction.
Just recently I was helping a company that had goods delayed at the Port of Vancouver. My client reached out when this happened, as they didn’t understand why they were responsible for paying the demurrage charges. Had they negotiated an Incoterms® rule that would have made the seller responsible for the delays, they would have avoided this additional cost that ended up eating part of their profit. This was a costly lesson, but at least, they are aware for next time.”
ICCA: Do you think most people understand and apply the Incoterms® rules correctly?
EI: “I think that most businesses have some level of understanding, but they might not have a member of staff who knows them inside out to be able to champion this knowledge. In many cases, deals are signed when Incoterms® have not been considered during the negotiations. It is then up to the logistics personnel to deal with potential cost overruns. Personally, I think that Incoterms® training should be mandatory for sales staff, as they are a tool to help them negotiate their contracts better.”
Jacques Yee, Project Logistics Director for Eastern Canada for Kuehne + Nagel
In his role as a Project Logistics Director for Kuehne + Nagel, Jacques looks after industrial accounts in the oil and gas, mines and metallurgy and renewable energy industries.
His team are tasked with moving goods from point A to point B based on their client’s contractual delivery mandate, as well as providing recommendations on the best Incoterms® to use for different trade lanes.
ICC Academy (ICCA): Which Incoterms® rule or rules do you come across or use most regularly?
Jacques Yee (JY): “FCA for Inbound Canada and CFR/CIF & DAP for Outbound Canada.
We regularly discuss our customer delivery terms. For example, if we notice an EXW delivery term for our client (BUYER), we would recommend amending to FCA. If we see a client’s delivery terms DDP to a “heavy bureaucratic” customs clearance process country, we would raise the flag and recommend delivering on DAP instead.”
ICCA: Why do you believe is it so important for you and your clients or colleagues to have an accurate and thorough understanding of the Incoterms® rules?
JY: “In any transaction regardless of a domestic or international purchase, there is a set of trade terms. Both the payment terms and delivery terms (Incoterms®) are integral parts of any transaction. Payment terms are generally clear cut.
While understanding and applying the proper Incoterms® rules can avoid ambiguity in terms of risk and cost transfer, there are other elements that need to be attached to an Incoterms® rule.
For example:
Delivery terms: DAP 123 ABC Street, Melbourne
Situation: Seller is not aware of the risk to be covered and thinks the mandate is only to deliver to the “door”. However, there are cases where the buyer may have worldwide blanket coverage.
Consequence & Action: The seller is exposed to financial loss if the goods are not covered. The seller could have instead proposed CPT in the case where a buyer has worldwide coverage.”
ICCA: Do you think most people understand and apply the Incoterms rules correctly?
JY: “A lot of people that I encounter still do not understand and apply the Incoterms® rules correctly. I would prefer to say that sellers and buyers do not pick the appropriate Incoterms® rules for their industries and trade lanes.
I think it is because of a lack of exposure to dealing with the various Incoterms® rules. For example, some global companies have delivery terms (Incoterms®) fixed in their terms and conditions. I feel that in my situation where I deal with sellers and buyers in various industries and with various mode of transport and trade lanes, I get enormous exposure to the utilization of the different Incoterms® rules.”
Further Learning: If you’re ready to follow in Emiliano’s and Jacques’ footsteps and take your knowledge of the Incoterms® 2020 to a much deeper level, then the best place to start is our Incoterms® 2020 Certificate. This is the only online qualification on the new rules that is fully endorsed by the ICC. Our course was written and reviewed by members of the ICC Incoterms® 2020 Drafting Group – make sure you learn from an authentic, legitimate source.
Amin A. Ahmed, Customs and Transport Officer, ALSTOM
Amin is a logistics and customs officer and his role is to lead, manage, and develop global logistics operations. As a global logistics practitioner, he uses the Incoterms® daily.
ICC Academy (ICCA): Which Incoterms® rule or rules do you come across or use most regularly?
Amin A. Ahmed (AA): “The most regularly used Incoterms® rules by our company are FCA, DAP, CIF, and CIP. I use and discuss the Incoterms® internally with sourcing and procurement teams and externally with suppliers, vendors, and freight forwarders.”
ICCA: Why do you believe is it so important for you and your clients or colleagues to have an accurate and thorough understanding of the Incoterms® rules?
AA: “I believe the international trade and global logistics industry is getting more complicated by the day. In order to cope with the obligations, risks, and costs with full competence and confidence, the Incoterms® rules must be mastered and fully understood by all stakeholders involved. Simply put, it is the language that everyone in the international trade must speak fluently.
Misunderstanding of the rules generates huge risk, cost, and uncertainty. Unfortunately, I face this issue regularly on my job and I can relay dozens of examples. Here is one story:
A supplier in Spain shipped to us containers under the DDP rule “as agreed on the purchase order”. I was surprised to receive a call from the supplier’s freight forwarder asking me “as the buyer” to pay the import customs duty and tax which is obviously under the supplier’s responsibilities according to the DDP rule. I explained that to the freight forwarder who didn’t understand the rules of DDP.
Apparently, the supplier didn’t coordinate and anticipate with their freight forwarder about the customs duty and the tax which led to a huge delay in import customs clearance and substantial storage charges.
Again, a lack of understanding around the Incoterms® rules has a severely negative impact on international trade operations.”
ICCA: Do you think most people understand and apply the Incoterms rules correctly?
“No, I don’t think so. There are several reasons for that:
- People don’t have a comprehensive understanding of the Incoterms® rules
- People assume the Incoterms® rules are easily understood; which they are not.
- People don’t get a formal education about the Incoterms® rules
- There are no regulations in the industry that enforce people to learn the Incoterms® rules
Finally, for me the Incoterms® rules is not an optional thing to learn. It is mandatory knowledge for any international trade professional who wants to thrive.”
Robert Melanson, former Director of International Trade and Development for municipal government in Louisiana, United States
Up until recently, Robert served as the Director of International Trade and Development for a municipal government in Louisiana. Prior to this he worked in freight forwarding. His role in municipal government was to promote exports – both from a quantitative and a qualitative perspective. This meant not only getting businesses to do more exporting, but to do so in a way that was less risky, more profitable and sustainable in the long term.
ICC Academy (ICCA): Which Incoterms® rule or rules do you come across or use most regularly?
Robert Melanson (RM): “In promoting exports, I discussed the Incoterms® rules on a daily basis – they should always be “front and center” in any discussion about exporting or importing. However, many people seem to lack awareness that Incoterms® are where it all starts – the sales contract (both terms and price), the shipping terms, responsibilities of each party and of course the obligations (and sometimes the repercussions) of using/misusing an Incoterms® rule.
The Incoterm® that I found businesses to use most commonly was EXW (which was almost always misunderstood and should usually have been FCA instead). Just about every business in this geographic area begins exporting passively – by taking orders online, requiring prepayment and keeping their obligations on par with their knowledge of exporting, which is usually minimal in the beginning. Unfortunately, most of these “opportunistic exporters” do not realize that EXW in the U.S.A and many other countries in a post-9/11 world is no longer as simple and carefree as it used to be, nor is it the most advantageous to apply universally if a business wants to really develop its export potential.”
ICCA: Why do you believe is it so important for you and your clients or colleagues to have an accurate and thorough understanding of the Incoterms® rules?
RM: “An accurate and through understanding of the Incoterms® is necessary to achieve even minimal literacy in the field of export/import. If considered on a continuum from EXW to DDP, Incoterms® provide a roadmap not only for the whole logistical process but for learning the elements of international trade that constitute the core of career development for a professional in this industry.
Unfortunately, so many people just want to know how to use Incoterms® so they can avoid problems. While that is a valuable aspect of using Incoterms®, such a perspective limits the potential of the person and the company. True success in business does not depend on avoiding mistakes as much as it depends on bold initiative and creative strategies.
In my experience, the biggest consequence of not understanding and learning the Incoterms properly is that of living in a “fool’s paradise.” For example, one of the most common fears I encounter is that once a professional comes to understand Incoterms® properly, they realize that they are now in the uncomfortable position of being compelled to act.
- They need to correct sales contracts that have relied on the wrong Incoterms® rules for many years;
- They realize how vulnerable using the wrong Incoterms® rule has made the company and that the risk of disaster continues on a daily basis until the Incoterm® is corrected;
- They will have to try to explain why the Incoterms® rule should be changed to people who also do not understand Incoterms® correctly, who will probably be resistant, and who may now be looking to place blame;
- They need to figure out how to deal with the fact that the company may not have been compliant with government regulations for many years;
- They may have to advise their counterparty that their “new” obligations resulting from the corrected Incoterms® rule are not really new but were actually there all along. (Similarly, they may realise that their company has been paying costs or fulfilling obligations that were supposed to be for the counterparty).
How do you explain all these things to a boss or a client? It is much easier to tell oneself that the current Incoterms® rule has “never posed a problem before” and to maintain the status quo. As you can see, there is a whole psychology behind the ostrich keeping its head in the sand on Incoterms®.
On the other hand, it is empowering to understand and use the Incoterms® rules correctly:
- Greater confidence in negotiating with counterparties, or service providers;
- A willingness to consider alternatives with old business or to acquire new business which might be riskier but would be more profitable;
- Reduce time spent fixing disasters and redirect that time to more productive efforts;
- Greater professional and personal development leading to enhanced career opportunities;
- Building a culture of compliance, efficiency and excellence within the company.
I believe that the best way to overcome the ‘fool’s paradise’ mindset outlined above is to be upfront about the “risks” of coming to understand Incoterms® and to provide some strategies for coping with the “consequences” resulting from learning to use Incoterms® correctly. At the same time, it would be necessary to convince professionals that facing any necessary changes are an investment in the profitability, long term viability and empowerment of the company and its employees.
The Official ICC View:
We spoke to Emily O’Connor, Director of Trade and Investment for the International Chamber of Commerce (ICC) to get her thoughts on the valuable insights our students provided.
“These interviews illustrate the importance of learning and applying the appropriate Incoterms® rules to your business. If misused, they can cost time and money, and result in dissatisfied customers; however, when used with knowledge and understanding, they can accelerate logistics and enhance customer satisfaction. Throughout the logistics and transport process, the Incoterms® rules are there to guide and help users avoid mistakes.
In addition, Incoterms® rules ensure all parties can maintain a competitive advantage in the global supply chain. It is these reasons why the Incoterms® rules are internationally recognised as the world’s essential terms of trade for the sale of goods”.
Conclusion:
A big thanks to Emiliano, Jacques, Amin and Robert for their feedback on how the Incoterms® rules are used (or misused) in their industries, as well as their views on the importance of understanding the Incoterms® fully.
As you have read, they all passionately believe that mastering the Incoterms® rules should be mandatory for any international trade professional. The long-term benefits of a comprehensive understanding of the rules far outweigh the short-term comfort of ‘keeping your head in the sand’.
Incoterms® are the language everyone speaks in global trade and practitioners should ensure they are fluent if they want to maximise their and their company’s potential.
Further Learning: If you’re ready to follow in Emiliano, Jacques, Amin and Robert’s footsteps and get fluent in the Incoterms® 2020 rules , then the best place to start is our Incoterms® 2020 Certificate. This is the only online qualification on the new rules that is fully endorsed by the ICC. Our course was written and reviewed by members of the ICC Incoterms® 2020 Drafting Group – make sure you learn from an authentic, legitimate source.