Incoterms 2020 - TBS open teaching

Summary

Samy Obeid's video script delves into the intricacies of international business, highlighting the importance of understanding Incoterms, which are standardized by the ICC to clarify responsibilities and costs in transactions. The script humorously guides viewers through various Incoterms, from the minimal EXW to the comprehensive DDP, illustrating how each term affects the costs, risks, and logistics of shipping goods across borders. It emphasizes the need for clarity to avoid surprises and the significance of these terms in pricing and service agreements in global trade.

Takeaways

• 🌐 Incoterms are standardized international rules defined by the International Chamber of Commerce (ICC) to facilitate global trade by clarifying the responsibilities and costs between business partners.
• 📚 The latest update of Incoterms is the 2020 version, which replaced the 2010 version, reflecting changes in global trade practices.
• 🚚 EXW (Ex Works) is the least expensive Incoterm for the seller, as it requires the buyer to arrange and pay for the transportation from the seller's premises.
• 🚢 FAS (Free Alongside Ship) is an Incoterm where the seller bears the costs and risks of delivering goods alongside the ship at the port of export.
• 📦 FOB (Free on Board) is a common Incoterm where the seller covers the costs and risks of loading the goods onto the vessel, after which the buyer assumes responsibility.
• 🚢 CFR (Cost and Freight) requires the seller to pay for the goods to be transported to the port of destination, but the buyer assumes the risk of loss or damage during transit.
• 🔒 CIF (Cost, Insurance, and Freight) is similar to CFR but includes the cost of insurance, transferring the risk to the buyer once the goods are on board the ship.
• 🏭 DAP (Delivered at Place) is an Incoterm where the seller delivers the goods to a specified location, ready for unloading, but the buyer is responsible for import duties and taxes.
• 🏠 DDP (Delivery Duty Paid) is the most expensive Incoterm for the seller, as it includes all costs and risks until the goods are delivered to the buyer's door, including import duties and taxes.
• 📈 Understanding and correctly applying Incoterms is crucial for international businesses to avoid misunderstandings and additional costs that can arise from unclear agreements on responsibilities and expenses.

Q & A

What are Incoterms and who sets them?

Incoterms, short for International Commercial Terms, are rules set by the International Chamber of Commerce (ICC) to clarify responsibilities and costs between international business partners.

Why are Incoterms important in international business?

Incoterms are important because they help to avoid conflicts between international business partners by clearly defining who is responsible for what and who pays for what during the international transfer of goods.

How often does the ICC update Incoterms?

The ICC updates Incoterms periodically, with the latest version being Incoterms 2020, following the previous version Incoterms 2010, indicating updates roughly every 10 years.

What does EXW (Ex Works) mean and why is it the lowest cost Incoterm?

EXW (Ex Works) means that the seller delivers the goods to the buyer's nominated carrier at the seller's premises. It is the lowest cost Incoterm because the seller bears the least responsibility and cost, essentially just loading the goods onto the truck.

What is the difference between FAS and FOB in terms of the seller's responsibility?

FAS (Free Alongside Ship) requires the seller to deliver the goods alongside the ship at the port of shipment, while FOB (Free on Board) requires the seller to load the goods onto the ship and clear them through export customs.

What does CFR (Cost and Freight) entail for the seller?

CFR (Cost and Freight) requires the seller to pay the costs and freight necessary to bring the goods to the port of destination, but the risk of loss of or damage to the goods passes to the buyer once the goods have been loaded onto the ship.

Why is CIF (Cost, Insurance, and Freight) a more comprehensive Incoterm than CFR?

CIF (Cost, Insurance, and Freight) is more comprehensive than CFR because, in addition to the seller's responsibilities in CFR, the seller also has to procure and pay for the insurance for the goods during the carriage.

What is the significance of the risk passing to the buyer once the goods are on the ship in CIF?

In CIF, the risk of loss or damage to the goods passes to the buyer once the goods are on the ship, which means that even if the goods are lost or damaged during the voyage, the buyer is still obligated to pay the seller.

What does DAP (Delivered at Place) mean and how does it differ from DDP?

DAP (Delivered at Place) means the seller delivers the goods to the buyer at a named place, ready for unloading from the arriving means of transport, but the buyer bears all costs and risks involved in bringing the goods to the destination. DDP (Delivery Duty Paid), on the other hand, includes all the seller's responsibilities up to and including paying the import duties and taxes.

What is the change from DAT to DPU in Incoterms 2020?

In Incoterms 2020, DAT (Delivered at Terminal) is replaced by DPU (Delivered at Place Unloaded) to more accurately reflect that the seller is responsible for unloading the goods at the destination, not just delivering them to a terminal.

How do Incoterms affect the price of goods in international transactions?

The price of goods in international transactions is affected by the Incoterms chosen because different Incoterms place different responsibilities and costs on the seller. For example, DDP, which requires the seller to bear all costs and risks until the goods are delivered to the buyer's door, will result in a higher price for the buyer than EXW.

Outlines

00:00

🌐 Understanding Incoterms for International Business

Samy Obeid introduces the concept of Incoterms, which are International Commercial Terms established by the International Chamber of Commerce (ICC) to clarify responsibilities and costs in international transactions, thus avoiding conflicts. He emphasizes the importance of Incoterms in facilitating business across language barriers and mentions the updates to these terms with the release of Incoterms 2020. The video covers various Incoterms related to sea freight, starting with EXW (Ex Works), where the seller bears the least responsibility, to FOB (Free on Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), DAT (Delivered at Terminal), DPU (Delivered at Place Unloaded), DDP (Delivery Duty Paid), and DAP (Delivered at Place). Each term is explained with its implications on cost, risk, and responsibilities, highlighting the need for business people to understand these terms to avoid unpleasant surprises.

05:02

📈 The Impact of Incoterms on Business Costs and Agreements

In this paragraph, Samy Obeid discusses the significance of Incoterms in determining the cost implications of international business transactions. He explains that Incoterms are crucial in agreeing on the price of goods and that they should be specified with a location to make sense, such as CIF New York or DDP Toulouse. He concludes by reiterating the importance of Incoterms and the value of the knowledge shared in the video, humorously referring to the 'goods of knowledge' he has provided to the viewers.

Keywords

💡Incoterms

Incoterms, short for International Commercial Terms, are a set of rules defined by the International Chamber of Commerce (ICC) to establish clear guidelines on the responsibilities, costs, and risks involved in the international transport of goods. They are crucial for avoiding misunderstandings and conflicts between trading partners, even when they do not share a common language. In the video, Incoterms are the central theme, with the speaker discussing various terms to illustrate their significance in international business.

💡EXW

EXW, or Ex Works, is an Incoterm that signifies the seller's minimum obligation, where the buyer assumes all costs and risks from the moment the goods are made available at the seller's premises. It is the lowest-priced Incoterm for the seller but places the maximum burden on the buyer. In the script, EXW is humorously remembered as 'EXWife' by the speaker, indicating it's the lowest priority.

💡FAS

FAS, or Free Alongside Ship, is an Incoterm where the seller fulfills their obligation by delivering the goods alongside the ship at the named port of shipment. It is a minor responsibility for the seller compared to EXW, as it includes getting the goods to the ship's side, but the buyer is responsible for loading and all further costs and risks. The video uses this term to illustrate the incremental increase in seller's responsibility compared to EXW.

💡FOB

FOB, or Free on Board, is an Incoterm that requires the seller to deliver the goods on board the vessel nominated by the buyer at the agreed port of shipment. This term signifies a more significant responsibility for the seller than FAS, as they must cover the costs and risks of loading the goods onto the ship. The video uses a humorous mnemonic to remember FOB, linking it to a never-ending joke.

💡CFR

CFR, or Cost and Freight, is an Incoterm where the seller is responsible for paying the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are on board the ship. This term is used in the video to highlight the seller's increased responsibility for covering freight costs.

💡CIF

CIF, or Cost, Insurance, and Freight, is an Incoterm where the seller covers all the costs to bring the goods to the port of destination, including insurance. The risk passes to the buyer upon the goods being loaded onto the ship. The video uses CIF to emphasize the seller's comprehensive responsibility, including insurance, for a long and potentially risky sea voyage.

💡DAT

DAT, or Delivered at Terminal, is an Incoterm that requires the seller to unload the goods at the terminal, which in 2020 was updated to DPU (Delivered at Place Unloaded). This term signifies a high level of responsibility for the seller, as they cover all costs and risks until the goods are unloaded at the destination terminal. The video uses DAT to illustrate the seller's extensive obligations in the delivery process.

💡DDP

DDP, or Delivery Duty Paid, is an Incoterm where the seller has the greatest obligation, as they are responsible for delivering the goods to the buyer's door, including all costs and risks, and even handling import duties and taxes. The video uses DDP to show the highest level of seller responsibility, where the buyer has minimal involvement beyond unloading the goods.

💡DAP

DAP, or Delivered at Place, is an Incoterm where the seller delivers the goods to the agreed-upon place, but the buyer is responsible for import duties, taxes, and any additional costs once the goods have been delivered. The video uses DAP as an example of a 'DDP-lite' scenario, where the seller's responsibilities are extensive but do not include import taxes.

💡International Chamber of Commerce (ICC)

The International Chamber of Commerce (ICC) is a global business organization that sets the Incoterms rules. These rules are periodically updated to reflect changes in global trade practices. The video mentions the ICC as the authoritative body behind Incoterms, emphasizing the importance of their guidelines in international trade.

💡Incoterms 2020

Incoterms 2020 refers to the latest version of the Incoterms rules, which came into effect in January 2020. This update includes changes to some terms and introduces new ones to reflect modern trade practices. The video highlights the 2020 version to show that Incoterms evolve with the global business landscape.

Highlights

Incoterms are International Commercial Terms set by the International Chamber of Commerce (ICC) to clarify responsibilities and costs in international business.

Incoterms are universally applied and can work even between people with no common language.

The ICC updates Incoterms periodically, with the latest version being Incoterms 2020.

EXW (Ex Works) is the least expensive Incoterm, where the seller delivers goods to a truck outside their factory.

FAS (Free Alongside Ship) is a more involved Incoterm where the seller delivers goods alongside the ship.

FOB (Free on Board) requires the seller to bring goods to the port and pass customs before they are 'on board'.

CFR (Cost and Freight) involves the seller organizing and paying for the voyage, but not insurance.

CIF (Cost, Insurance, and Freight) adds insurance to CFR, with risk passing to the buyer once goods are on the ship.

DAT (Delivered at Terminal), changing to DPU (Delivered at Place Unloaded) in 2020, involves the seller paying to unload goods at the destination terminal.

DDP (Delivery Duty Paid) is the most expensive Incoterm, where the seller pays all costs and duties and delivers goods to the buyer's door.

DAP (Delivered at Place) is a less costly option where the seller delivers goods to the buyer's location but the buyer pays import duties.

Understanding Incoterms is crucial for avoiding surprises and correctly calculating costs in international trade.

Incoterms should be agreed upon when setting the price of goods to ensure both parties understand their responsibilities.

Incoterms are location-specific, with examples like CIF New York or DDP Toulouse, indicating where specific terms apply.

Incoterms can significantly impact costs and must be clearly understood to avoid misunderstandings in international business transactions.

Transcripts

Hey this is Samy Obeid. I’m here to talk to you about business

The only thing cooler than doing business is doing international business

In which case you’ll have to know incoterms

Incoterms are International Commercial Terms

set by the International Chamber of Commerce

The ICC

to clarify who does what and who pays for what

what and thus to avoid conflicts between international business partners

because you don’t want that drama

They work even between people who have no common languages

as they are universally applied

Vous comprenez ?

The ICC updates them from time to time because the world changes and people change

just ask all my exes

The latest version came out in 2020 and is called Incoterms 2020

Wow, very creative

The last version was Incoterms 2010

so its just like Microsoft Office, if you had to wait for an update

every 10 years

With an international transfer of goods there are several distinct stages

all of which involve costs and risks

If you just load the goods onto a truck outside your factory

that’s a very different story to bringing them all the way to your client’s warehouse

One is a lot more generous

Unfortunately business people do not always fully understand what each incoterm means

because they haven’t seen my great video

and this can lead to some nasty surprises. And I mean nasty

Lets start for goods that are shipped by sea

because who doesn’t love the ocean?

Lets look at the transport process

from the beginning

There’s the possibility to do nothing

just deliver the goods to a truck

outside your factory

and go back and have a coffee

No worries. This is called EXW

and on the scale of price it’s the lowest

for all the incoterms

I remember EXW by EXWife

because it’s the lowest on your priorities

I can make that joke, because I’ve never been married

Now obviously your client won’t be super happy

with this proposition and would prefer that

you take responsibility for something. Anything

The ‘lightest’ incoterm for you is FAS

Free Alongside Ship (FAS)

But while you’re beside the ship

you might as well put the goods on the ship

even if it’s at an added cost

so a more common incoterm for you is FOB

Free on Board (FOB)

which I remember with this

God that never gets old!

This means you bring the goods to the port

from which they will be exported, pass customs

which usually doesn’t involve new taxes

so not very expensive

put the goods ‘on board’ and you’re off the hook

Go back, have some more coffee

But the goods might be going a long way

and the freight costs might be pretty high

In addition, organizing the voyage

takes time and effort

So your client would probably prefer that you do this

Then you’re into CFR – Cost and Freight.

And of course the passage by sea is risky

Look! I am the captain now!

Storms, pirates, shipwrecks!

Basically all the Tom Hanks movies

Anything could happen

so someone needs to insure the goods

Then you’re into CIF - Cost Insurance & Freight

If it’s a long and risky voyage

we’re talking serious money now

However, the nice thing about CIF is that

even though you pay to

and transport the goods

the risk passes to the buyer

once they are on the ship

So, if pirates do steal your merchandise

your client still has to pay you

and sort out the reimbursement

with your insurance company

That’s a boss

Hello I’d like to file a claim. Yes. Pirates.

Once they arrive at the destination port

the goods are not going to come off

the ship on their own, unless they’re robots

so someone has to pay to unload them

If you’re willing to do this, then you’re going to

be delivering at the terminal – DAT

which will change in 2020 to Delivered at Place Unloaded - DPU

even if technically it should be DAPU

But imported merchandise has to

go through customs & can be very expensive

Especially in the US these days and

not just for Chinese goods

if you know what I mean

If you’re willing to pay the customs duties then

you’re into the most expensive incoterm of all

where you pass customs, pay everything

and deliver the goods to the customer’s door

Delivery Duty Paid - DDP

which I remember as dollars dollars paid

All the client has to do

is unload the goods from the truck

that's pretty nice

But of course they don’t just thank you

They pay a higher price because you’ve done all this for them

And that price is inevitably more than EXW would have been

Because, you know, after your ex-wife, you upgrade.

Or at least you try to. Sometimes you fail!

Finally, if you’re happy to deliver the goods

to your client, but baulk at the import taxes

there is a kind of DDP-lite

which means you deliver the goods to them

but with a bill for the import tariffs attached

that they have to pay

This is of course cheaper for you and called

DAP – Delivered at Place

Looking pretty Dapper there huh?

The Place being their warehouse. Usually

Its just like when your friend invites you over and you say ‘yeah I’ll come over

but you’ve got to pay for the Uber

You’re not the best friend, but they really really want your company

So there you have it. Incoterms are important.

They can lead to big increases in costs

and you need to agree to them

when you agree on the price of the goods

with your client

And they need to have a place to make sense

Like CIF New York or DDP Toulouse

I hope you enjoyed the goods of knowledge that I brought to you today

EXW World