[Music] Welcome to today's webinar, Incoterms 2020 in practice. Thank you for joining us. My name is Dave Noah and I am founder and president of Shipping Solutions. Since 1995, our export documentation and compliance software has helped thousands of successful exporters more efficiently generate accurate export documents and stay compliant with import export regulations. To help educate our customers and the wider international trade community, we regularly host free webinars like this one on the various aspects of international trade. Today's webinar is a rebroadcast of a live presentation we hosted in February 2021 that featured Robert Imbriani about using the Incoterms 2020 rules in your exports and imports. Bob has been in the transportation and logistics field for more than five decades. He's held various senior executive positions with major US customs brokers and freight forwarders. He is currently executive vice president international for team worldwide and president of team ocean services inc team international trade services and team Canada. Bob is a well-known speaker and educator in the area of trade compliance, contract negotiations, transportation, logistics and supply chain solutions, customs brokerage, trade development and financial services. He is an adjunct professor in these areas at the Brook College and Pace University in New York. He has conducted classes at the US Merchant Marine Academy and the US Naval Academy. There's a lot to present when discussing Incoterms 2020 rules and how to use them. And because of that, there was no time to take questions at the end of the webinar. However, we did host another follow-up webinar at a later day where we spent most of the hour answering attendees questions. We called it Ask Me Anything Incoterms 2020. and we will provide you with a link to that webinar at the end of this presentation. With that in mind, I'm happy we can present this webinar again. Well, good afternoon everyone and welcome to today's program on Incoterms 2020 in practice. Now, what's a little different about our program today is we're not only going to go over each of the individual terms, but we're going to talk about the key elements of each term so that if you're a seller or a buyer, you can analyze and see how that term may be beneficial or detrimental to a certain trade situation. We're actually going to start with the beginning. you know what are incot terms and what are they not you know what incot terms are and what they're intended to do how to apply incoterms in a contract or how they relate to a letter of credit or other international transactions we're certainly going to be looking at the obligations of the seller and the buyer under each term what changes have taken place in incoterms 2020 as opposed to 2010 and really give you a solid understanding of where they come from, how they should be used, but also their application. And one of the things I like to start with, there are no good terms and there are no bad terms. They're all good if they reflect what the buyer and seller agree to. They're all good if the buyer and seller can meet their obligations. They're all bad if they don't meet that criteria. So having a solid understanding of the terms is very important in all aspects of international trade and it's also important to understand in your company who should understand incot terms. Many companies focus on their logistics people which it is important but really the most important areas to understand and be able to work with the terms are purchasing and sales. They're the ones who are entering into a purchase or a sale and they have to understand what they're agreeing to. They have to understand how to construct the pricing under a term. And at the end, we're going to kind of show a quick example of a pro-form invoice and how you would construct a price to meet a specific commercial term. So, having said all of that, we have a lot to cover. Let me jump into the program itself. So, what incot terms are not? What do they not cover? They're actually not payment terms. They do not talk about how and when you would get paid, if you'll get paid at all. Payment terms are a separate area of negotiation within a transaction. And payment terms are terms such as cash in advance, open account, documentary collection, documentary credit, letters of credit and so forth. They are completely separate from the commercial term. However, we are going to mention when we look at some of the key elements of certain terms, would they be considered beneficial from a seller standpoint when handling a letter of credit or would they be looked at as beneficial from a buyer standpoint under certain commercial terms? So, we're going to try to relate a consideration between commercial terms and payment terms, but they are two separate areas. There's no rule that says if you use this commercial term, you must use this payment term or vice versa. However, some may work better with one payment term than another. And that may differ based on the point of view of the seller or the buyer. So they're not commercial terms. Incot terms do not speak of the transfer of title or ownership of the goods. This needs to be addressed in your contract or your terms and conditions, your general terms and conditions. We will talk about that incot terms are very specific about where the risk of loss transfers from the seller to the buyer. But title is a separate issue and we'll talk a little bit more about that in just a little while. They are not the American foreign trade definitions of 1941. They're not the US commercial code or other unrelated definitions of commercial terms. They are not international law, regulation or mandate. They are not a US law or regulation. So these are all the things they are not. So what are they? They are an internationally accepted convention. When properly cited in a contract or other agreement, the rules and their provisions are accorded legal standing. What we mean by that is you need to draw them into your contract since they're not laws or regulation. any version can apply. So really what you need to do is in your terms and conditions it should say that all commercial terms will be defined under incoterms 2020 or the latest version. If you were just to say incoterms incoterms were first published in 1936. So if you just say Incco terms, which version are you referring to? Especially in the first couple of years of transition of new terms, there can be an overlap where in some cases the old definitions still apply to a contract that was negotiated and agreed to for a period of time extending from one version to another. So you need to draw them in and when you do they become the binding definitions under that agreement. They can be used for domestic as well as international transaction and they have been looking to more and more be applied domestically. But for our discussion today, we're really going to focus on their international application because what we're trying to create is an international common business language so that the buyer and a seller agree that these are the terms and definitions. And if they agree, they're looking at the same definitions. And we'll talk more about why that's going to be important and different areas. So we'll come up with that shortly. So what do Incco terms actually do? They provide an internationally accepted definitions of the responsibilities and obligation of the buyer and seller to each other not to themselves. And what I mean by that is if we were to look at one of the first terms, X works, and we look at an obligation for the pre-carriage or any of the carriage or transportation, it's going to say the seller has no obligation and the buyer has no obligation. So, how do the goods move? What they're talking about, what obligation does the seller have to the buyer? What obligation might the buyer have to the seller? But it doesn't directly talk about the obligation to yourself to arrange transport, provide insurance or other areas. And it's all related to the transport of the goods. Allocation of cost and we have to understand that allocation of cost refers to ultimately the buyer pays for everything. But what cost factors is the seller including in their offering their price and what other elements of the transportation does the buyer have to arrange themselves. In one way or the or the other the buyer pays for everything. But do they pay the seller for certain elements of the supply chain or transportation or do they arrange certain elements themselves? So when we say allocation of cost remember ultimately the buyer pays for everything and the assumption or transfer of the risk of loss. This is very important. At what point in the transaction if the goods are lost or damaged does the buyer incur the loss or where does the seller incur the loss? Where does that risk of loss transfer from the seller to the buyer? Now, this is important for a number of reasons. There are only two commercial terms that talk about cargo insurance. So, in all the other terms, the seller and buyer have to understand when they are at risk and determine if they wish to cover that risk with cargo insurance or not. It also can determine in a transaction what obligations for replacement or recovery or anything the seller has versus the buyer. So a very important element but it's different than title. I mentioned earlier that title is a separate issue from the risk of loss. And a quick way to maybe understand that or help you understand it is if you lease a car, the leasing company has title, but if you get in an accident, you have to repair it. So you have risk of loss. If you purchase a car cash, theoretically you get title and risk of loss at the same time. If you have a bank loan, the bank has title, you have risk of loss. When you pay off the loan, you get title. So, think of it the same in an international transaction. There's the risk of loss. That's one concept. And there's title. They can pass at the same point, separately, or never in certain leases or repair situations or others. Incot terms clearly address where the risk of loss transfers from the seller to the buyer. They do not address title. Title gets back to your terms and conditions. Now, they're really intended to help overcome differences in interpretation and customary practices. Again, create a common business language so that if you say FOB, your client or your partner vendor in the transaction have the same definition as of FOB to create this common business language and avoid problems. Also, if a problem was to come up, if there was a dispute, they become the basis for determining dispute resolution. Because if you do not specify which definitions commercial terms will be defined in that transaction and it was to go to court or arbitration, they may use incoterms 2020. They may use an older version. they may use some local term or something that is unique to that country or that transaction. So you want to know that if it does not prevent problems and it goes to a dispute that any decision in a court or arbitration will be made on the definitions and responsibilities and obligations defined under incoterms 2020. And all of this is related to the delivery or the transport of the goods. Now they've been publishing incot terms since 1936 and got into a general update schedule of roughly every 10 years. The most current version of Incoterms is referred to as Incoterms 2020, ICC publication 723 and went into effect January 1st, 2020. They're most commonly referred to as just incoterms 2020 and they get their name from an acronym of international commercial terms. And again, as I mentioned, there are other definitions of commercial terms, but these are the internationally accepted versions and certainly by far the best practice and recommended to be drawn into all of your international transactions. Now there was some initial discussions that there was going to be major changes taking place with incot terms 2020 as some terms would be eliminated to possibly include Xwork and FAS and DDP and others and other terms to be added DTP and DPP and FCA would have its scope. In effect, those major changes did not take place. But that's not to say changes did not occur. And it's important that you be updated on these changes. Now, I know we're 13 months or so, 14 months into Incoterms 2020, but you'd be surprised how many companies are not familiar with Incoterms in general or what changes have taken place. And one of the major changes that took place was DAT delivered at terminal was eliminated and replaced with DPU. And we'll talk about what the change was and what actually is covered by DPU. The definitions of other terms such as FCA were clarified or expanded to make them more userfriendly, but not completely changed, just more of a clarification. Under CIP, they included the definition that the insurance that is provided must be all risk insurance coverage. FCA has wording that more clarifies how you would utilize it under a letter of credit and how it would be utilized. They also redefined a few words such as or range to allow the buyer seller the possibility of using their trucks for pre-carriage. So there's a number of minor changes in a number of the terms and some of the definitions were greatly expanded to introduce in a more friendly user way. In the back of the official book they go into greater detail for defining cost delivery risk insurance export import clearance and other elements of the incot terms. So it was a lot of clarification with one term being eliminated, one being added, but other changes that you need to be aware of for 2020. These are the current incot terms. Incot terms. A few versions back we used to talk about the Egroup, the F-roup, the Croup, the Dgroup and so forth which still apply to some extent. However, they have separated the commercial terms into two major categories. Those for all modes of transport, meaning they could be used for air, truck, rail, ocean, whatever it may be. They're for all modes of transport. But they maintain four terms that are for water transport only. Simple way might be to call it ocean freight. But we know that there can be inland waterways, rivers, lakes between countries. So technically it's for water transport. But we might reference ocean freight. Now why did they do that? Because there are certain consideration cost factors, risk factors that are unique to ocean. And there's some unique characteristics to ocean charter, part charter, outofgage shipments and so forth. And we will discuss those as we go through each term individually. So the terms currently for all modes of transport are x works, free carrier, carriage paid to, carriage insurance paid to, delivered at place. the new term that was added delivered at place unloaded and DDP delivered duty paid. Then for ocean freight or water transport we have CFR cost and freight, CIF cost insurance and freight, FAS, free alongside ship and FOB free on board. No company that I've worked with over the years has ever used all of the inco terms on a regular basis. Many companies will stay within a group of usually three or four maybe based on how they purchase goods or how they sell goods. That doesn't mean though that you don't need a knowledge of all the possible terms because it is a negotiation between buyers and sellers and you may have a client or a vendor that wants to and maybe is very keen on using a certain term and you need to understand the plus and minuses, the obligations to determine if you want to accept that or not or offer that depending if you're the buyer or seller. So while it's important to have a full knowledge of all the terms, you will find in practice you will probably be using a more limited number of terms. Some of the basic requirements of all incot terms so that we don't bring them up with each term. The seller must provide the buyer with all commercial documents common to the transaction or agreed upon in advance. What this means is we generally look at an international transaction requiring a commercial invoice and packing list. Anything in addition to that may be unique to that transaction or agreed upon between the seller and the buyer. More and more countries are developing pre-manifest emanifest programs for import security. So an element that was added, the seller must provide the buyer with any documentation or information required for import security programs required by the country of import. If you're familiar with import into the US by ocean, there's a requirement to file the ISF, the importer security filing. So under all of the inco terms, the seller overseas would provide the US buyer with any documentation or information related to that ISF filing. That program is now there's an air program AAS air cargo advanced screening that is not the responsibility of the importer but rather the carrier but there are advanced manifest programs now for Canada for Europe and Brazil and other countries. So they've addressed that in the general requirements export clearance obligations are subject to the regulatory requirements of the exporting country. And when we look at the commercial terms, the only definition under incot terms that makes the buyer responsible for export clearance is X works. All of the other terms, the responsible for export clearance is the seller's obligation. But we'll talk a little bit about how that's affected in the US and a routed transaction and so forth. So they're always subject to the exporting rules of that country even though Incoterms may say it's the buyer's responsibility or the seller. Now this is an extremely important factor when we look at utilizing incot terms or commercial terms. The acronym or the definition or the three-letter code covers the definitions and obligations of the buyer and seller as defined by incot terms and that provides a certain degree of security understanding and agreement between the buyer and seller. However, they will lose significant value if you do not have a named place or qualifier attached to the commercial term. Now, I'll give you an import example because that may be something easier to visualize and understand, but you have an order that you purchase from China. The term that was agreed to was CFR, cost and freight. So, it's going to come to the US by ocean, and you're in New Jersey. All that it says in regard to a commercial term is CFR, costed freight. Today, the goods arrive and you get a call from an ocean carrier or NBOCC in Long Beach, California, and they say, "Your goods are here. What do you want to do? Well, you said they're not supposed to be in Long Beach. They're supposed to be in Port Elizabeth, New Jersey. I'm on the East Coast. They're all the way there. That's not what we agreed to. Well, you go back to your vendor, your supplier, the seller. And say, "These are supposed to be on the East Coast. They're on the West Coast. They're sitting there. There's all kinds of delays on the West Coast ports. This is unacceptable. You're wrong. It should not be there." Well, they look at it and say, "All we agreed to was CFR. We send all our shipments to the US to a West Coast port. It's faster and less expensive." In a case like that, first of all, it's almost difficult, if not impossible, to resolve because you can't say which party was right or wrong. The major mistake was it should have specified CFR Port Elizabeth, New Jersey. Then the seller would be obligated to deliver it to Port Elizabeth, New Jersey. They would calculate their cost to Port Elizabeth, New Jersey. And if they for any reason did not deliver it there, they would have violated their obligations and you would have recourse against them. By not having a clear named place, it's now questionable who was right, who was wrong, what should have taken place. Now, sometimes it could be as simple as a port, Port Elizabeth, New Jersey. It could be as simple as an airport, JFK, London, Heathrow, whatever it may be. Other times it could require an address, a city, a state, more information to avoid confusion. There's no rule that the named place has to be limited to x number of characters. You have to think that whatever is needed to avoid confusion between a seller and buyer should be used because you're not trying to pull something over on the other party. You're trying to make sure things go as they should. And as we said, the commercial term comes with certain obligations between the buyer and seller. But that is further defined by having this named place. And you'd be surprised how often there is no named place or the name place is unclear or vague. Now there are some complex transactions and at a time I was involved with the World Food Program and you could have something where it might say any Gulf port or any one of two or three ports where there are special conditions where maybe something has to be diverted. But those are unusual and unique. But they're still providing a range or a description of a named place that is definable. So, what we're going to go into now is looking at each of the terms individually. And I'm going to give a short synopsis of the term, but then start talking about the key points and looking at that from a seller or buyer standpoint, how they might be looked at and considered a benefit or disadvantage in a transaction. So our first term is Xworks. It's actually the term on which all the other terms are built on. X works represents the least responsibility for the seller and the most for the buyer. The seller fulfills their obligation to deliver when the goods are made available to the buyer at the named place packed for export. The only elements in the selling price are the selling price of the goods and basic export packaging. And even that basic export packaging could be further defined in certain cases where packaging may be a unique consideration. Maybe there's a big machine that isn't going to be packed and it's only going to be on a skid or something. So it represents the least responsibility for the seller and the most for the buyer. Again, the seller fulfills their obligation to deliver when the goods are made available at the name place ready for export. The risk of loss transfers from the seller to the buyer when loading begins at that named place. The risk and expense of loading the goods onto the carrier who is retrieving them is the buyer's obligation, not the seller. Now, that may sound like not a big deal. They're just going to put the goods on a truck and that's it. But we have to look at these terms covering many types of transactions. And understanding the risk and expense of loading can be an issue when it's a heavy piece of machinery. Maybe it requires a rigger or a crane to pick it up and put it on a flatbed. Maybe it's a thousand individual cotton not palletized that require hand loading or other special loading or handling requirements can increase that risk and the cost of that obligation to the buyer. So again represents the least responsibility for the seller, the most for the buyer. The risk of loss transfers from the seller to the buyer when the loading process begins. So the risk and expense of loading is the buyer. It is the only term that says the buyer is responsible for export clearance. Here in the US, the primary element of export clearance is generally the filing of the EI, the electronic export information. US regulations do allow for what we call a routed transaction where the buyer's controlling the export which would apply in this case for the buyer to be responsible for the filing through a designated agent normally a freight forwarder to whom they provide a letter of authorization or other power of attorney to act on their behalf. It does not release the seller from still being the US PPI, the US principal party and interest and having a certain obligation to provide the needed information for filing and making sure that the filing is correct. Now, export clearance could involve licensing or other permissions to export. here in the US that will normally be still the obligation of the seller because there are very limited cases where a non US person could obtain or utilize those authorities. So again, it's always subject to the export control laws of that origin country. So having looked at that, let's look at some of the things to consider. It represents the least responsibility for the seller and the most for the buyer. From the seller's standpoint, this may not be good when there's a letter of credit. Now, why do we say that? Most letters of credit are going to have requirements for export documentation. the way the export bills of lighting are created, shipping dates, latest shipping dates, latest presentation dates and so forth. Many elements that may be controlled through a freight forwarder. Now, if the buyer is controlling the goods direct from your door, if they send in their freight forwarder to retrieve the goods, as soon as that truck drives away, the buyer is in control of the goods. And several things could happen. Although unlikely, the freight forwarder could be unethical, just ship the goods to the buyer and say, "Forget the letter of credit." More likely, the freight forwarder may just not be good at letters of credit and not conform to the requirements. Or we've even had cases where the freight forwarder is excellent with letters of credit and charges this shipper $200 or $300 for handling it because they handled the letter of credit in their mind for the shipper, not the cons. Now, it doesn't say you could not have a letter of credit under X works. Does not say that you wouldn't address some of the points I just made. It's just saying as a general key point may not be in the seller's advantage when there's a letter of credit or any situation where control of the goods relates to payment. You can structure a letter of credit in a way that maybe it is satisfied with a forwarder's receipt so that once the forwarder receives it, you get the forwarder's receipt. you provide other documents and you almost don't care what the forwarder does if you can satisfy the letter of credit that way. But that's for another program where we could talk more specifically about letters of credit. The seller loses control early in the transaction. So they're not controlling the freight. The seller may lose buying power with carriers. You may have a hundred shipments a month go out your door, but if they're all X works as far as trucking companies, airlines, steamship lines, you have no shipments at all because you're not making any choices of the carriers. So sometimes the seller may want to look at it and say, I need to create certain buying power with different carriers. So I need to provide that service to my customers where I control it. Buyers have to look at it that they must have the ability to control the goods from origin and that can vary by country but their responsible to retrieve the goods from the seller at the name place and all of the elements of the supply chain and transportation is their responsibility from that point on. So do they through a forwarder or other agencies have that ability? The buyer does control the transportation costs and it may give them the ability to combine it with other freight to utilize service contracts or buying power that they have which may be less than the seller would have charged them if they left it in the hands of the seller. And in the US the buyer is responsible for filing an EI but needs to coordinate export licensing and that with the seller. So, just some key points to look at and I'm going to add a few more. Um, one of the things you might consider in your terms and conditions that if you're a seller and you're selling Xworks, you might want to put in that if this is an Xworks transaction, if the buyer does not retrieve the goods within X number of days of notify notification of their availability, the seller has the right to charge storage or move them to a public storage facility at the buyer's expense. Now, there's two reasons for this. One, sometimes a buyer is going to look at the seller as free storage. Well, it doesn't sell for a couple of weeks. I don't want to pick it up and have other people. I'm just going to leave it there. Or they may be delaying the payment cycle. I don't need them quite yet, so we're going to leave them there and I'm not going to worry about payment until we pick it up. As long as they're in your facility, you have the risk of loss and any damage. They may be taking up valuable space. They may be getting in the way and you have to move them from one place to another. And it is always easier to forgive an existing condition than enforce a non-existing condition. Meaning you have a good client, they need to leave them there for two weeks or 30 days or something. you can say, "Don't worry, I'm going to wave that. I'm not going to charge you." But if you need to enforce it, it's much better to show that it is there and we're going to enforce it then try to enforce something you didn't notify the buyer about. So, just a quick example of this very first term that there are key points that can be looked at a little differently from the buyer or sellers's perspective. One last thing that sometimes sellers look at is, "Well, this is going to be easy. I don't have to worry about any export formalities or anything like that, so I'm just going to sell everything X Works." Well, the seller still has export compliance, regulations, due diligence, reasonable care. And what you'll find many times, the buyer is going to come back to the seller and say, "Where are my goods?" Well, as a seller, you want to tell them, "Well, this was X Works. Your people picked them up. I don't know, talk to them. Well, you can't do that. So many times you're going to find yourself tracing and providing information to your client for services they selected. And the last thing is it could get very complicated. We worked with small electronic company that sold everything Xworks, but on a Friday they had four or five truckers coming in, some picking up for these two clients, others picking up for this one. and they found it more complicated than actually making life easier. Again, there's no absolutes. It's understanding the key points, the obligations, and then applying them to a transaction. Free carrier. Free carrier can get a little bit more complex. If we look at free carrier, the basic definition is fairly simple. The seller fulfills their obligation to deliver when the goods are handed off to the named carrier at the named place. If there is no named carrier than the first carrier and sounds fairly simple. However, what makes it flexible and what makes it a little bit more complicated is that named carrier could be an actual international carrier. It could be a freight forwarder or it could even name your facility like Xworks. So, we'll break that down into a couple of possibilities. If you were to show FCA with the named place your facility the same as X works under X works the risk and expense of loading would be the buyer. The same transaction quoted FCA at that facility. The main difference would be the risk and expense of loading is now the seller. Now, it is not uncommon for FCA to be used where it names a forwarder. FCA ABC forwarding O'Hare Airport. Then the seller would be obligated to deliver it to that freight forwarder at O'Hare Airport. And once it's handed off to them, they become responsible, the buyer becomes responsible for all of the charges, the risk of loss going forward. It could also be a named international carrier. So it is going to be FCA ABC steamship line at the port of Savannah. The sellers obligated to deliver it to that steamship line. When they receive it, the risk of loss and all costs going forward are the buyers. So there is some flexibility here and we're also going to see there are some specific transactions for the US with a certain country where this may be the appropriate term. So let's go back to some of the key points. The carrier or name place can be defined as an actual domestic or international carrier, the buyer's forwarder, or even the seller's premise. Now it can be applied to certain shipments especially to Mexico. Many times US companies who sell to Mexico do not get involved in the transportation to Mexico but the agreement is for the seller to deliver it to a named entity in one of the US side border crossings whether it be McAllen Laredo El Paso Sanro Brownsville or something like that. So it would not be an unreasonable use of term to say FCA ABC company Laredo, Texas. That named forwarder or carrier doesn't have to be in the same city as the seller. So it is not an unreasonable term for some Mexican shipments where you're not going to be responsible straight into Mexico. I use Mexico more than Canada because many transactions to Mexico, the US sellers obligation sort of ends at the US side of the border and the buyer in Mexico takes it across the border into Mexico. It can be used in place of Xworks if the seller wants to control loading or the buyer cannot arrange for loading if it's a complicated loading. In the US, the buyer may be responsible for the EI filing. And the reason we say that is if the named place is the buyer's forwarder or the seller's premise, it will be considered a routed transaction. And under US regulations, in a routed transaction, the buyer can be responsible for the filing. And it's actually not commonly used to name the international carrier when we're talking about a steamship line or airline. It is used sometimes when you're talking truck moves into Canada or even possibly into Mexico where the international carrier retrieves it at the seller's premise and goes to Canada or Mexico. It can reduce the sellers's risk while still providing control in the origin country. And here's where it may be an alternative to X works when there's a letter of credit where it may be structured that it would be FCA the international carrier so that the buyer the seller controls all of the documentation everything to deliver it to that carrier but the cost of the international carriage and the risk is on the buyer. Again, just some examples. CPT, carriage paid to. Now, the seller fulfills their obligation to deliver when the goods are delivered to the named foreign destination. This foreign destination is generally a freight terminal, an airport, a seapport, a rail terminal, a truck terminal. some foreign destination. So the seller is now responsible to deliver the goods all the way to that foreign destination. They are going to select the carrier, they are going to pay the carrier and so forth. However, the thing that many buyers don't understand is the risk of loss transfers from the seller to the buyer when the goods are received by the main international carrier. So although the seller chooses the international carrier, pays the international carrier, routes the international carrier during the main carriage, the buyer is at risk. Now the seller is responsible for offloading at destination and certainly then loading at origin as well. But the buyer has the risk during the main carriage. That's a point that many buyers do not understand and sometimes sellers don't understand and if it's damaged in transit they think they've had the loss where really by definition it's the buyer's loss. looking at some of the key points here can work to the seller's advantage with letters of credit and other payment terms where control of the export process is beneficial. So definitely a term that would work well with letters of credit or any situation where the buyer needs to control the export such as goods under license or special permissions to export. The buyers must understand that they have the risk of loss for the seller's decision regarding main carriage can be an advantage to the buyer if the seller has greater buying power than the buyer. And what we mean by that is you went to your freight forwarder, you got a quote, but maybe the seller is a much larger shipper, has ocean contracts, rail agreements, truck agreements, maybe even agreements with a forwarder for the air rates. And even though they may add something to their buying rate, it's still cheaper than you can get yourself. And the seller now controls that transportation to include the precarriage and the international carriage. So it may increase their buying power. Now the next term is fairly simple. We can go through it fairly quickly. Is CIP carriage insurance paid to. It has all the obligations the same as CPT. However, it kind of recognizes that the seller is making all the decisions, paying the carrier, choosing the carrier and so forth. And during the main carriage, the buyer has the risk of loss. So, the seller is obligated to ensure the goods in favor of the buyer to cover the buyer's risk. That's the main difference between CIP and CPT. Now, insurance is in favor of the buyer. The beneficiary of the insurance is the buyer, not the seller. Now, it may start out as the seller, but it's signed over to the buyer. And a change for 2020, it must be all risk coverage. The seller and buyer must ensure ensure that the insurance is with an acceptable underwriter who can settle the claims in the country of destination. There's no good having it insured through an agency who cannot settle in the buyer's country. Insurance unless otherwise agreed to is for what we call CIF plus 10%. It's not an incot term. It's the selling price of the goods. all of the freight cost plus the insurance premium and an additional 10%. That is acceptable under cargo insurance because if you only insured it for the selling price of the goods themselves and the goods were lost near the end of the transaction, you would still have to pay freight costs, pay the insurance premium, and even maybe duties and clearance. So, this is an attempt to try to allow for full recovery if there's a full loss or a percentage of a higher dollar amount if there was a partial loss. All other obligations are the same as CPT. Sellers should always provide the buyer with an actual insurance certificate so that the buyer can validate it was insured, the amount of insurance, the settlement agents, the insurance underwriter and so forth. DAP delivered at place. The seller fulfills their obligation to deliver the goods when they arrive at the named foreign [Music] destination. However, not offloaded. Offloading at destination is the responsibility of the buyer. Now, this term can have the named place as a port, an airport, a seapport. It could be the buyer's premise. It could be any named place that is agreed upon even a border crossing. So you could say DAP Midbridge Laredo or you could say the buyer's premise and give it a location or an airport or a seapport. Now it sounds a little bit like CPT. especially if you name a freight destination. However, the first big difference is under DAP, the risk of loss stays with the seller until it arrives at the named place and the risk and expense of unloading is the buyer's responsibility. The second difference is that it can be any named place. It doesn't have to be a freight destination. So there are some differences and it's a very flexible term. So it's a flexible term and can be any name place outside the country of origin. It must be a foreign destination or border crossing. The buyer selects the custom broker and is responsible for all entry fees, duties, taxes, inspection fees, storage if goods are not released in a timely manner, etc. Seller must coordinate with the buyer's custom broker to provide all needed documentation and information for clearance especially if the named places beyond the port or airport of arrival. Seller is responsible for the final delivery to the named place after customs clearance if it's beyond the port of arrival. It actually replaces a few of the older Inkco terms because of its flexibility. Now, the new term DPU delivered at place unloaded really just changes things somewhat slightly. It has all of the obligation and risk of DAP except under DPU the risk and expense of unloading at that named place is the seller's responsibility not the buyers. So a slight difference. The seller has risk and all expenses except customs clearance duty taxes and related costs up to the point of delivery including unloading. Can be any name destination. The same as DAP may not be a preferred term from the seller's standpoint if that unloading has high risk or cost or complexity. Can be beneficial to new importers that it's going to be delivered all the way to their door. They just have to set up the customs clearance and so forth. Again, it is similar to DAP, but seller is responsible for unloading. Now, we get to the other end of the spectrum. Xworks represented the least responsibility for the seller and the most for the buyer. DDP is just the opposite. It represents the most responsibility to the seller and the least for the buyer. Just the opposite of X works. The seller is responsible to deliver the goods to the named place, not offloaded. The risk and expense of unloading is the buyer. However, unless otherwise noted, the seller is responsible for all customs clearance, duties, taxes, inspection fees, and so forth. So it is the most responsibility for the seller of any of the commercial terms. So having said that what are some of the key points? The seller is responsible for all costs involved with delivery to the name destination except offloading. And it's going to be the most difficult for the seller to quote because the seller would have to determine the rate of duty tax and all customs clearance and other expenses at destination. And that can be difficult. Even though over 130 countries work with the harmonized system, classification for import is always subject to not only the full classification within that country but rulings and interpretations in that country. So determining the true harmonized classification for import into a country can be difficult. Most rates of duty, not all, are adalorum, a percentage of the entered value. And most taxes are adorum, a percentage of the entered value. So the conversion rates from US dollars to local currency can change and that can affect the actual cost factor. And there's other considerations related to the customs clearance that can be difficult to determine. If using DDP, the name place, the seller should consider making a slight adjustment and maybe saying DDP the named place excluding VAT or other taxes. Valuated tax and other taxes can be much higher than duties in some cases. And in many cases, it's better to have the buyer take on the obligation of these taxes, do it under their deferment because they can control and recover it much easier than a non-resident importer. Also, the more outlay you have under DDP, the more important it is to have controlling your payment terms because you may be outlaying this money as soon as it arrives in country for duties, taxes, and then have to wait to recover it. The seller must consider currency conversion, classification, and other issues that affect the costing. payment terms will be important to the seller because of this outlay of money. And you don't want the buyer to be utilizing you as a bank, so to speak, that they may have to pay their country within x number of days, but they're going to take 30 or 60 days to pay you. The buyer may actually have better cash flow as opposed to handling it directly. Now, that could be a plus to the buyer, but then a negative to the seller. There are cases where DDP might be important. First of all, it's nearly the fully full landed cost. It just doesn't include cost of money and buying costs. It's beneficial to buyers who are not importers at all. Not necessarily the first choice from a seller's perspective, but may be appropriate in cases of samples, trade show, warranty replacements, or when the buyer is not an experienced importer. where allowed by regulation the seller is the importer of record. Most countries allow a non-resident importer but not all. One of the most notable and one of the countries very difficult to handle DDP is Mexico. Mexico does not allow nonresident importers and therefore someone has to be the importer of record in Mexico. So if you're handling a DDP to Mexico and a few other countries, you will have to determine how do you set up the importer of record. It might be a trading company. It might be the actual buyer. It may be someone else. So a very complex term but not unheard of and may be used in various circumstances. Those are the terms for any mode of transport. Now we go into the terms that are specific for ocean freight. And the first one is obviously for water transport only. Free alongside ship. The seller fulfills their obligation to deliver when the goods are placed alongside the vessel ready for loading. The risk and expense of loading the vessel is the buyer's responsibility. not an extremely common term for liner service but is used in certain circumstances. Liner service is normal container service and so forth. However, it is used in many cases when we're talking about charters, part charters, bulk carriers, heavy lift or out of gauge shipments for ocean where the steadoring or the loading or actually unloading of a vessel may be an issue. FAS defines clearly that the risk and expense of loading the vessel is the buyer. When combined with FOB, DAP and DPU, we can define who's responsible for loading the vessel or who's responsible for unloading the vessel. And after I go through FOB, I'll come back to that. The buyer will have to coordinate with the seller or carrier for the loading services. buyer has risk for origin loading services that they may or may not be able to easily arrange or control. Then we have FOB, free on board. The seller fulfills their obligation to deliver when the goods are loaded on board the vessel. Once they're loaded on board the vessel, the risk and expense from that point forward is the buyer. And I want to get into this. It is the most misunderstood and misused term in the United States because under UCCC the uniform commercial code and in many domestic transactions companies will use FOB for almost anything. FOB origin FOB carrier FOB destination. Under incot terms it is specifically for water transport or ocean transport only. It is not commonly used as much as you think. It relieves the buyer of the risk and expense of loading. The definition for loading has been changed. Under the older versions of Incoterm, it was when it crossed the ship's rail. Under the current version, it's when the goods are loaded on board the vessel. Now, for container transport, that's pretty straightforward. It's been ruled that when the cables go slack, when they're picking up a container and it's placed on the vessel and the cables are no longer holding the container, it's considered loaded on board the vessel. And there's some variations on that for other types of cargo. The buyer may select the carrier. So, the buyer should consider exercising this option. And they should avoid using this term with only a general name place. It should be more specific port, possibly pier, and vessel. I'm going to go back a step and talk more about using one of four terms together. When we have an ocean charter, a part charter, bulk cargo, heavy lift, or out of gauge, the risk and expense of loading or unloading a vessel can be an issue. So there are four terms that a buyer and seller could look at to define who has the risk and expense of loading or who has the risk and expense of unloading. Under FAS, the risk and expense of loading and therefore unloading will be the buyer's responsibility. Under FOB, the risk and expense of loading will be the seller's responsibility, but unloading the buyer's responsibility. If we were to use DAP, a named port and even vessel, the risk and expense of loading would be the seller and the risk and expense of unloading would be the buyer. If we were to use DPU that named port or vessel port in this case, the risk and expense of loading the vessel and unloading the vessel would be the seller's responsibility. So there are four terms that two are for any mode of transport two specifically to ocean. But if you're in a situation with an ocean charter out of gauge heavy lift, you can look at these terms and negotiate between buyer and seller to determine who may have the risk and expense of loading or unloading. Our next term is going to sound like a term we've already talked about, CFR, cost and freight. The seller fulfills their obligation to deliver when the goods are delivered to the named ocean destination. Unlike CPT where it could be any freight destination, this has to be an ocean freight destination because it is for ocean transport only. However, the big difference is under CPT, the risk of loss transfers from the seller to the buyer when it's received by the main carrier. Under CFR, the risk and expense transfers from the seller to the buyer when it's loaded on board the vessel. So, under CPT, the risk and expense of loading the vessel is the buyer. Under CFR, it's the seller. But that can be an important issue. We have two shipments sitting in an origin terminal. There's a fire in the terminal or something happens and both shipments are damaged. One was sold under CPT. The loss on that shipment is the buyer. The other was sold under CFR. The loss on that shipment was the seller because it was not yet loaded on board the vessel. Many times these slight changes in inco terms or the definitions will not mean anything if everything goes well. But if something goes wrong, if there's a loss or damage or dispute, that's when they come in and these fine points need to be understood and how they affect. So, two major differences from CPT and that it can only be used for water transport and the seller is at risk until the goods are loaded on board the vessel. If loading is a cost or risk factor, this is not a preferred term from the seller's point of view. Loading charges must be included in the quote. buyer may wish to use when goods originate in a high-risk country and not uncommon with liner service. We'll talk more about country risk in that affecting choice of terms in a moment. Our last term is CF CIF cost insurance and freight. It has the same relationship to CFR that CIP had to CPT. The seller is responsible to ensure the goods in favor of the buyer. So insurance issues and requirements are similar to but not the same as CIP. Only minimum or general coverage is required. It does not have to be all risk. Now a buyer and seller can negotiate that it should be all risk but by definition of the obligations it's not all risk insurance. The buyer should consider this over CFR if they do not have their own open cargo policy or other means of cargo insurance. Risk of loss or damage is greater by ocean freight because of the times in transit and various conditions that ocean freight may travel through. It's a higher risk than others. Buyer may consider DAP or DPU to keep the risk with the seller throughout the transport. seller can charge for insurance of course and the seller should provide an insurance certificate. Now, while there haven't been a lot of changes in 2020 from 2010, there have been some. If you're familiar with Incoterms 2020 2010, you should not have a significant problem with embracing the new terms. In addition to your logistics staff, it's critical that purchasing and sales are famili familiar with commercial terms since they are the areas that enter into sales or purchase agreements. As I mentioned at the beginning, there are no good terms. There are no bad terms. They are all good if they reflect the agreement between the seller and buyer. They are all bad if they do not or if the seller and buyer cannot effectively exercise their obligations. One of the most critical items is to ensure that they are agreed upon and have the named place and that it's clearly shown in purchase orders, contracts and other areas and that you reference the definitions are per incoterms 2020. Now, some of the factors that can affect incoterms are the buyer and sellers's ability to fulfill their obligations, but the type of commodity and the origin or destination, country. Country can play a role because let's just say you're purchasing goods from the UK. you may have no problem as a buyer being responsible for certain transport or risk within the UK. However, if you were buying from Nigeria, you may not want any risk or obligation till it's loaded on board a vessel or an aircraft and is leaving the country. Certain commodities may have higher risk than others. Some commodities may have more cost of loading or unloading. So there are factors that can affect how a company looks at the commercial terms, but that can only be determined if they look at the risks and obligations and understand each of the terms and then negotiate properly with their counterpart. Our time is up. Thanks for watching and thank you to Bob for all the great information. If you want more information about Incoterms 2020, we have created a webinar resources page on our website at shippingsolutions.com/webinar-resources, which you can also access by scanning the QR code on the screen. This web page has links to all the resources that we mentioned during today's webinar, as well as links to register for upcoming webinars. It also includes a link to the ask me anything webinar I mentioned earlier. You can also subscribe to our free international trade blog passages so you don't miss out on the latest export and import news. Finally, please note that you are watching the webinar rebroadcast on our shipping solutions YouTube channel. If you're a fan of the import export information we provide through our webinars and blog posts, please like this video and subscribe and check out the other short videos we've created that explain the various aspects of international trade. Your show of support for these free articles, webinars, and videos help us attract knowledgeable speakers like Robert Imbriani to share their expertise with all of us. Thanks again for joining us today. Stay well everyone. [Music]