The universal language governing international and U.S. domestic commerce is due for a revision that could come as early as January 2011.
Developed by the International Chamber of Commerce in the 1930s, Incoterms — in essence a dictionary defining 13 critical terms of shipment and delivery used in sales contracts for tangible portable goods — have been revised approximately once a decade to conform with current business needs and practices. They were last updated in 2000.
A critical part of global and domestic trade, Incoterms are rules accepted by legal authorities, as well as buyers and sellers, to interpret the commonly used terms in international trade — terms such as “ex-works,” “free carrier,” “free alongside ship” and “carriage paid to.” (For a full list of current Incoterms and critical points, see http://www.iccwbo.org/incoterms/wallchart/wallchart.pdf.)
They help global traders avoid cross-border misunderstandings because they clarify the responsibilities, costs and risks whenever sellers and buyers get together, said Frank Reynolds, a trade consultant and U.S. representative to the ICC Incoterms committee. Incoterms are also important because they assign responsibilities for selecting transportation carriers, customs brokers, forwarders and insurance providers.
The chamber expects to release the latest revisions by early 2011, and companies that do cross-border and domestic U.S. business will need to become acquainted with the changes. “The ICC can change them when they find that they do not follow current trade practices,” Reynolds said. “The ICC wants to follow trade practices, not to set them.”
A lot has changed in global trade since 2000, starting with the September 11 terrorist attacks, which spurred a major emphasis on cargo security rules and regulations. Another important change occurred in 2004, when the Uniform Commercial Code was revised, and the old American shipment and delivery terms were deleted, including “f.o.b. Factory” and “f.o.b. Destination.”
Although many businesspeople still use those terms, they differ from Incoterms 2000.
For example, Reynolds said, there is only one, very precise Incoterm meaning for “f.o.b.:” “Across the rail of a ship at a port on the seller’s side.” If both sides in a buyer-seller relationship don’t agree on a term, they don’t fully understand each other, and they may not meet each other’s expectations.
Outside the U.S., the European Union’s expansion and the harmonization of European rules and regulations mean many transactions that used to be international are now domestic European transactions. So the terms of these kinds of transactions also must be clarified and updated.
“Some of the changes in Incoterms will make them more user-friendly for domestic businesses in either Europe or the United States,” Reynolds said. “We have to tweak Incoterms to make them easier to use domestically,” not just in the U.S. but also in Europe.
Tweaking Incoterms also should help reduce internal confusion within U.S. companies, where two departments across the same hall — managing domestic and international operations — often use different terms to describe buyer-seller relationships.
Peter Robinson, president and CEO of the United States Council for International Business, said, “The meaning and usage of Incoterms can change over time, especially in the age of e-commerce, so this update should clear up misunderstandings.” The USCIB is the ICC’s voice in the U.S.
Over the past 24 months, the ICC collected more than 160 suggestions from its affiliates about how to revise these terms. The ideas have been reviewed by a group of representatives from seven countries, who have written a series of draft proposals that reflect a growing consensus about what revisions make sense.
Reynolds expects to get feedback about the second round of proposals by November, “as we get closer and closer to a consensus.” He hopes to have the final version of the revisions completed by next fall, to become effective Jan. 1, 2011.
However, he cautions, “We are dealing with a lot of countries, and a lot of issues are not yet resolved.”
As soon as the final text becomes clear, the USCIB will begin providing seminars that update the trade community about the changes. “Executives involved in international trade will need to get proper training to ensure they are using the revised Incoterms correctly,” Robinson said.
Nevertheless, traders should consider that although Incoterms appear in sales contracts between sellers and buyers, “these individuals have the responsibility of knowing and complying with the rules that the countries impose on them,” Reynolds said. “Incoterms don’t tell you who owns the goods, and they don’t tell you what happens if there is a breach of contract. While those things are left to the applicable law, we hope that the buyer and seller would stipulate those two things in their contract.”
Contact Alan M. Field at email@example.com.