Dear colleagues

Last year I received the following article from Toby and found it to be a
very helpful summary of the Incoterms that importers and exporters use. It
is extremely important for you, if your are involved in international trade
whether buying or selling, to understand these terms well. You will be a
smarter negotiator and a better business partner when you communicate using
these terms with your international partners.

Keep this email, save it, print it, hang it on the wall. Someday, you will
need it.


Logistics Basics - Incoterms 2000:
Toby B. Gooley


If you're involved in international business, they should be part of your
daily vocabulary. But mention "Incoterms" to a colleague or acquaintance and
the response you're likely to get is "Inco-WHATS?" Unfortunately, the
Incoterms--a set of internationally recognized terms of sale--are not as
well known or widely used in North America as they should be, considering
the benefits they offer to companies engaged in world trade.

The Incoterms were created in 1936 by the Paris-based International Chamber
of Commerce (ICC). Today, they continue to facilitate international trade by
providing voluntary rules for interpreting the rights and obligations of
buyers and sellers under international sales contracts.

The Incoterms represent 13 different international trade scenarios (see
accompanying box). Each term specifies whether the buyer or the seller is
responsible for arranging such necessities as export licenses, customs
clearance, insurance, inspections, and other obligations. They specify at
which point the risk of loss and/or damage passes from seller to buyer as
well as which party pays for specific activities. A buyer and seller who
conduct their purchase and sale under one of the Incoterms, therefore, will
have a mutual understanding of their rights, costs, and obligations
regardless of differences in language and local business practices.

Because the business of international trade is ever changing, the ICC
updates and amends the Incoterms whenever necessary. This year's
revision--Incoterms 2000--promises to make the terms easier for exporters
and importers to understand and use.

Clear and Simple

The Incoterms 2000 revision took nearly two years to complete and included
input from international traders, academics, and legal experts from more
than 100 countries, says trade expert Frank Reynolds. Reynolds is author of
the book Incoterms for Americans and was a member of the five-person working
group that drafted the revision.

Clarification and accessibility, Reynolds says, are the hallmarks of this
year's revision. "There is a greater consistency in language ... For
example, we tried to use the same words rather than similar ones ... while
taking into account linguistic differences in British and American English
that could affect the meaning," he notes. The writing style is simpler and
more straightforward than in previous versions. These improvements are
designed to make the terms more easily understood worldwide. To make them
even more accessible, the Incoterms--for the first time--will be translated
into 20 languages, in addition to the official English.

Incoterms 2000 also tries to instill clarity by defining the meaning and
usage of such terms as "shipper" and "customs clearance," a feature that was
absent from earlier versions.

Another improvement is that the authors used the same expressions that
appeared in the 1980 United Nations Convention on Contracts for the
International Sale of Goods. That harmonizes the two most important
standards for international contracts and establishes a clear relationship
between the Incoterms and U.N.-approved practices.


Three Major Changes

Most important to exporters and importers are the changes in three of the
Incoterms: the clarification of loading and unloading obligations under FCA
(Free Carrier), and the reversal of responsibility for customs clearance and
payment of duties under FAS (Free Alongside Ship) and DEQ (Delivered Ex
Quay).

FCA--When conducting business under this term, the seller is obligated to
deliver the goods, cleared for export, to the carrier nominated by the buyer
at the named location. In the Incoterms 1990, FCA offered instructions for
seven different transportation modes and specific circumstances within those
modes. This made the terms needlessly complicated and unclear, says
Reynolds. As a result, shippers also had trouble understanding terms that
were continuations of FCA, such as CPT (Carriage Paid To) and CIP (Carriage
and Insurance Paid To), he notes.

In Incoterms 2000, by contrast, the point of delivery, not the mode of
transport, is the key to applying the term FCA. Delivery is considered
completed when one of two conditions or "events" occurs. The first event is
that the specified point of delivery is the seller's premises and the goods
have been loaded there on the means of transport provided by the carrier
nominated by the buyer or a person acting on its behalf. The second event is
that the specified point of delivery is other than the seller's premises and
the goods have been "placed at the disposal of" the carrier or other person
(such as a freight forwarder) nominated by the buyer. The revision also
clarifies a point that has been the source of many international disputes:


If delivery occurs at the seller's premises, the seller is responsible for
loading. If delivery occurs elsewhere, the seller is not responsible. "Under
the 1990 Incoterms ... people argued about who was responsible [for
loading]," says Dr. James Giermanski, professor of international trade at
Texas A&M International University in Laredo, Texas, and a Logistics
Management columnist. "Now it makes sense, and there's some logic behind
it."

FAS and DEQ--FAS (Free Alongside Ship) considers delivery to have been
accomplished when the goods have been cleared for export and placed
alongside the exporting ship. Under DEQ (Delivered Ex Quay), delivery
obligations are fulfilled when the goods have been "placed at the disposal
of the buyer, not cleared for import on the quay [wharf] at the named port
of destination."

Changes in these two terms represent a reversal of some responsibilities for
both buyer and seller. Under FAS in Incoterms 1990, the buyer was required
to clear a shipment for export. Similarly, DEQ required the seller to clear
the goods for import at destination. Now, those roles have been reversed, so
that both buyer and seller are responsible for clearance and compliance with
government regulations in their home countries. That is a more reasonable
approach, says Giermanski. "If the goods are in Miami and the buyer is in
Bolivia, how can the buyer clear for export? He'd have to get a U.S. freight
forwarder in Miami to make sure he didn't violate U.S. law. But if the
seller is responsible and he's in Miami, he can do everything much more
easily."

A Truly Global Standard

This time around, many countries that were not involved in earlier revisions
played an important role in developing recommendations for change. With
countries like South Africa, China, India, and even Peru getting on board,
says Reynolds, it seems clear that worldwide usage of the terms is
increasing.

There may not be any legal obligation to use the Incoterms, says Giermanski,
but if a dispute should ever arise between buyer and seller, the terms
provide legal authorities and arbitrators with a neutral framework for
finding a remedy. That's an enormous benefit for any company that does
business globally, because it takes much of the guesswork and localization
out of international sales transactions. Says Giermanski: "There's no rule
anywhere in the world that you have to use Incoterms, but not using them
isn't smart. It's smarter and safer to use them [because] everyone knows
what they mean."

THE 13 INCOTERMS

The International Chamber of Commerce's Incoterms 2000 include 13 trade
terms that specify the buyer's and seller's rights, costs, and obligations
when they use those terms in an international sales contract.


Here's a brief look at the terms and what they mean. For a full explanation,
consult Incoterms 2000, ICC Official Rules for Interpretation of Trade
Terms, published by the International Chamber of Commerce (ICC). (See
Editor's Note.)

Keep in mind that risk of loss and damage passes to the buyer after the
seller effects delivery as specified in the term of sale. Also, the parties
must specify which version of the terms they will use as well as the
relevant destination--i.e., up to which point the seller bears an
obligation. An example of a correctly stated Incoterm is DDU Frankfurt
Schmidt GmbH Warehouse Incoterms 2000.

- EXW EX WORKS (named place): any mode of transport; seller makes goods
available to buyer at seller's premises or other location, not cleared for
export and not loaded on a vehicle. The buyer bears all risks and costs
involved in taking the goods from the seller's premises and thereafter.

- FCA FREE CARRIER (named place): any mode of transport; seller delivers
goods, cleared for export, to the carrier named by the buyer at the
specified place. If delivery occurs at the seller's premises, the seller is
responsible for loading; if delivery occurs elsewhere, the seller must load
the conveyance but is not responsible for unloading.

- FAS FREE ALONGSIDE SHIP (named port of shipment): maritime and inland
waterway only; seller delivers when the goods are placed alongside the
vessel at the named port of shipment. The seller also clears the goods for
export.

- FOB FREE ON BOARD (named port of shipment): maritime and inland waterway
only; seller delivers when the goods pass the ship's rail at the named port.
The seller clears the goods for export.

- CFR COST AND FREIGHT (named port of destination): maritime and inland
waterway only; seller delivers when the goods pass the ship's rail at the
port of export. The seller pays cost and freight for bringing the goods to
the foreign port and clears the goods for export.

- CIF COST, INSURANCE, AND FREIGHT (named port of destination): maritime and
inland waterway only; seller delivers when the goods pass the ship's rail at
the port of export. The seller pays cost and freight for bringing the goods
to the foreign port, obtains insurance against the buyer's risk of loss or
damage, and clears the goods for export.

- CIP CARRIAGE AND INSURANCE PAID TO (named place of destination): any mode
of transport; seller delivers the goods to a carrier it nominates but also
pays the cost of bringing the goods to the named destination. The seller
also obtains insurance against the buyer's risk of loss or damage during
carriage and clears the goods for export.

- CPT CARRIAGE PAID TO (named place of destination): any mode of transport;
seller delivers goods to carrier it nominates and pays costs of bringing
goods to the named destination. The seller also clears the goods for export.


- DAF DELIVERED AT FRONTIER (named place): any mode of transport to a land
frontier; seller delivers when goods are placed at the buyer's disposal on
the "arriving means of transport" (not unloaded), cleared for export but not
cleared for import before the customs border of the destination country.

- DES DELIVERED EX SHIP (named port of destination): maritime and inland
waterway only; seller delivers when goods are at the buyer's disposal on
board the ship not cleared for import. The buyer pays discharging costs.

- DEQ DELIVERED EX QUAY (named port of destination): maritime and inland
waterway only; seller delivers when the goods are placed at the buyer's
disposal, not cleared for import, on the dock (quay) at the named port of
destination. The seller pays discharging costs, but the buyer pays for
import clearance.

- DDU DELIVERED DUTY UNPAID (named place of destination): any mode of
transport; seller delivers the goods to the buyer not cleared for import and
not unloaded from the arriving means of transport at the named destination,
but the buyer is responsible for all import clearance formalities and costs.

- DDP DELIVERED DUTY PAID (named place of destination): any mode of
transport; seller delivers goods to the buyer, cleared for import (including
import license, duties, and taxes) but not unloaded from the means of
transport.

Editor's Note: The following resources will be helpful for anyone who wants
to learn more about the Incoterms.

The International Chamber of Commerce publishes Incoterms 2000, the official
text and definitions; ICC Guide to Incoterms 2000, a detailed commentary on
the Incoterms; and an Incoterms 2000 wall chart. They can be ordered online
at www.iccwbo.org or by calling (212) 206-1150.