It’s time to blow up Incoterms,1 or “International Commercial Terms,” the shorthand used in place of contract language for trade agreements. Incoterms currently are a confusing mess of contradictory, inconsistent kludges that almost certainly cost the world dearly in lost speed, efficiency, and productivity. Indeed, research suggests most professionals do not understand or apply Incoterms with any fidelity. The resulting inappropriately applied Incoterms create risks and costs where none need be, and misalignments between expected performance and Incoterms choices mean that many logistics cycles are completed through goodwill alone, rather than through rigorous application of any standard. The only thing saving Incoterms from being a total loss is the fact that they are far better than having nothing at all.
Incoterms, or “International Commercial Terms,” were designed and published by the International Chamber of Commerce (ICC) over 80 years ago and were made to simplify trade. Prior to Incoterms, each contract had to be written to specify every aspect of the trade, such as which party was responsible for arranging and paying for all the logistics of moving the product from seller to buyer, and when the buyer would take responsibility for the goods. The International Chamber of Commerce (ICC) designed the Incoterms to serve as a universal “shorthand” for lots of long contract language across millions of trade agreements, which meant that the contract could be shorter but also that the logistics personnel effecting the contract terms could, in theory, simply check the Incoterms rule to know what responsibilities they had to fulfill under the sale.2
Incoterms define the obligations of the buyer and seller to deliver the goods in a trade. In so doing, they address the roles, responsibilities, costs, and actions of the buyer and seller to perform the logistics of moving the goods to satisfy the contract. Each rule is a three-letter designation starting with either E, F, C or D. The “E” rule deals with goods that are exchanged at the seller’s facility, the “F” rules deal with goods that are exchanged from the seller’s facility up to (and including) the port of international departure, the “C” rules deal with goods exchanged at either the port of export or the port of import (or in between), and the “D” rules deal with the goods that are exchanged upon arrival in the buyer’s country. Incoterms are accepted globally as the trade rules for both domestic and international movements.
The original Incoterms were such an improvement over having none at all that the U.S. decided to create a similar (and incompatible) standard under the Universal Commercial Code (UCC) adopted by all U.S. states but one (Louisiana).3 These UCC rules used nearly identical language to the Incoterms rules to mean quite different things that were more loosely defined, a fact that has enormously confused matters for logistics personnel both domestic and foreign to the U.S.4 To make matters worse, the UCC rules haven’t been updated at all, while the ICC spent the next eight decades updating the Incoterms to accommodate the practices of the day, but in a way that clung to legacy language and structures. These include introducing free carrier (FCA), a rule that seems to do the work of three rules with only context clues to differentiate, additional “C” rules that differ mainly by whether you want to use them on water or not, separate “D” rules that differ only by whether one party or another unloads the goods on arrival, and shifting the meanings, names, and usage of every other rule along the way.5
[FIGURE 1] Progression of Incoterms1 from 1936 to 2010
FOR/ FOT/ FOB Airport
|FOB/ FOR/ FOT/ FOB Airport||FOB||FOB||FOB||FOB|
Source: Adapted from ICC Incoterms 2010 Publication No 715E
Incoterms is a registered trade mark by the International Chamber of Commerce.
Each incarnation of Incoterms is a new “Frankenstein’s monster” of additions for the sake of modernity operating alongside concessions to the inertia of historical rules, such that neither modernists nor traditionalists could hope to be satisfied. The result is an ever-increasing thickness of the Incoterms rule book trying descriptively to solve the issues of the Incoterms, a ruleset that is supposed to be transparent and to lubricate trade. The official 2020 rulebook, which features the same number of rules as the 2010 version (with some minor changes), is now about 50% larger but has not addressed the fundamental issues bedeviling them.
Our research shows these are just some of the major issues with today’s Incoterms. The extreme proliferation of international trade in the decades since its first creation only serves to increase the stakes and amplify the costs. Any improvement to the application of Incoterms would reverberate across millions of trades each year, repeated every year thereafter.
Though increased industrywide training could help, the only true remedy is the replacement of the current Incoterms with a logically consistent, simple, and modular system that will be easy to learn, understand, and apply. This can be done by throwing away the existing structure and considering the necessary elements of a set of terms of trade and the options for rule flexibility that will cover every practitioner’s need without distortion. Our proposed ruleset includes an extreme minimum number of flexible rules that give supply chain managers maximum power with a minimum of complexity.
The next article in this series will the problems with Incoterms in greater depth. The third and final article will offer solutions based on our published research and practical realities in the field.
1. Incoterms a legally registered trademark of the International Chamber of Commerce.
2. C. Căruntu and M.L. Lăpăduşi, “Complex Issues regarding the Role and Importance of Internationally Codified Rules and Incoterms,” Petroleum-Gas University of Ploiesti Bulletin, Economic Sciences Series, 2010. 62(1).
3. J.A. Spanogle, “Incoterms and UCC Article 2—Conflicts and Confusions,” The International Lawyer, 1997. 31(1): p. 111-132.
4. J. Vogt and J. Davis, “The State of Incoterm Research,” Transportation Journal, 2020. 59(3): p. 304-324.
John Vogt is currently the president of WWBC LLC, an independent consulting company for Strategy and Global Leadership, having retired as Visiting Assistant Professor in the College of Business MBA Program for the University of Houston Downtown.
Jonathan Davis is Acting Dean and Professor of Supply Chain Management in the Marilyn Davies College of Business at the University of Houston Downtown.