Harnessing technology towards a clearer understanding of Incoterms®



Mark Heath | World Trade Matters

Exporting is “easy when you know how”, but, it’s not when you are ultimately responsible for negotiating and correctly pricing products for sale overseas.

This is because it’s extremely difficult to have clear visibility and transparent oversight of your product as it moves through an internationalised supply chain, which is physically fragmented, until the product reaches the delivery point of final destination – passing through borders and Customs, changing hands, accumulating risks on the way, being exposed to taxes, new surcharges, financial penalties and ever-increasing customer expectations.

Throw into this mix a high element of paperwork and manual processes and suddenly any unbudgeted “surprises” can quickly materialise, wiping out margins, damaging cash flow and more.

This is far from ideal, but the UK is a technology powerhouse and has an immense amount of global trading experience, so harnessing a technology-enabled way of trading plays to both these strengths.

This “harnessing” effect is happening right now and being made possible through the emergence of ecosystems where technology platforms connect buyers, sellers, the payment processing industry, trade financiers and insurers together with forwarders and transportation companies. Further, it does this with accuracy and speed.

An ecosystem’s (simple) business model is based on collaboration and ease of access, not control and isolation. It involves different commercial partners, who operate in different sectors, seeing the opportunity of linking up, creating a network and collectively offering a more compelling competitive advantage to the benefit of buyers and sellers – and in the process, simplifying and automating the process for customers.

Ecosystems are not about contracting out or transferring problems from one party to another but finding a solution together. Nor are ecosystems complicated consortiums, which can be fraught with competing politics or differing competitive agendas.We don’t need any reminder about the importance of international trading agreements and forging new relationships – the media beam this news relentlessly into our living rooms every day.

But the recently released (on 15th October 2019 in the UK) Incoterms® 2020 rules are a good reminder for companies to re-visit the commercial terms used in contracts for the sale of goods. These Incoterms® rules, from the International Chamber of Commerce, are applicable for domestic as well as international trade but are arguably more valuable the longer the distance your goods travel.

However, despite these rules being globally recognised, many companies importing and exporting are completely unaware of Incoterms® or how to apply them in a “heads of agreement” with their trading partner. Many companies only use commercial invoices or purchase orders without stating any reference to each other’s responsibilities.

Companies also sometimes continue to use the same Incoterms® year after year for historical continuity even if the mode of transportation, costs and risks have changed over time. Certain countries like China typically export using only FOB (Free on Board) or CIF (Cost Insurance and Freight) simply because of a lack of familiarity and awareness that other rules exist. This will change.

The USA clearly speak the same language as the UK, but this common language can give a false sense of security and it doesn’t help when one party (the USA) is thinking about a different law of sales (the Uniform Commercial Code) when they communicate with their UK counterparty.

In the US, the term FOB can be used in relation to the transportation of goods via airports and trucks but in the UK, FOB is a marine terminology and only involves the transportation of goods by ships. This miscommunication complicates trade and introduces friction, but this can be solved by mapping these languages together in a code, with the help of technology.


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