In an era of rapidly shifting trade policies and tariff volatility, businesses engaged in international trade face increasing complexity in managing costs and risks. The International Chamber of Commerce (ICC) released its latest set of Incoterms® 2020 rules, effective January 1, 2020, to provide clarity and standardization in global trade contracts. These rules, which define the responsibilities of buyers and sellers in the delivery of goods, are a critical tool for businesses seeking to mitigate tariff-related risks and ensure smoother cross-border transactions. This article explores the key updates in Incoterms® 2020, their role in managing tariff risks, and practical steps businesses can take to leverage these rules effectively.

What Are Incoterms®?

Incoterms®, short for International Commercial Terms, are a set of 11 standardized three-letter trade terms published by the ICC. First introduced in 1936, these rules are updated periodically to reflect evolving global trade practices. Incoterms® clarify the tasks, costs, and risks associated with the transportation and delivery of goods, ensuring that buyers and sellers share a common understanding of their obligations. While Incoterms® do not govern tariffs or customs procedures directly, they allocate responsibilities for costs, documentation, and logistics, which are critical in navigating tariff-related challenges.

Key Updates in Incoterms® 2020

The Incoterms® 2020 rules build on the 2010 framework, introducing refinements to address modern trade realities. Below are the most significant updates relevant to tariff risk management:

Renaming of DAT to DPU (Delivered at Place Unloaded)

The former Delivered at Terminal (DAT) rule was renamed Delivered at Place Unloaded (DPU) to emphasize that delivery can occur at any location, not just a terminal. Under DPU, the seller is responsible for unloading the goods, which can impact cost allocation and risk transfer. This clarification helps businesses avoid disputes over unloading responsibilities, especially when tariffs or delays at customs arise.

Enhanced Insurance Coverage for CIF and CIP

Incoterms® 2020 adjusts insurance requirements for Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP). For CIF, used primarily in maritime trade, the default insurance remains Institute Cargo Clauses (C), with the option for parties to agree on higher coverage. For CIP, the default coverage has been upgraded to Institute Cargo Clauses (A), offering more comprehensive protection. These changes help businesses mitigate financial risks from goods damaged during transit, which could otherwise complicate tariff assessments.

Revised Free Carrier (FCA) Rule

The FCA rule now allows for an optional agreement where the buyer instructs the carrier to issue an on-board bill of lading to the seller after goods are loaded, facilitating smoother documentary processes in sea freight. This update is particularly useful for businesses navigating tariff-related documentation requirements, as it ensures clarity in the transfer of risk and responsibility.

Clearer Cost and Security Obligations

Incoterms® 2020 consolidates all costs associated with each rule under articles A9/B9, making it easier for businesses to identify and allocate expenses, including those related to tariffs and customs clearance. Additionally, security-related obligations, such as export/import clearance, are more explicitly defined in articles A4 and A7, reducing the risk of unexpected costs due to compliance failures.

Tariff Risks in Global Trade

Tariffs, which can change abruptly due to geopolitical shifts, trade negotiations, or policy changes, pose significant risks to businesses. For example, the U.S. Section 301 tariffs on Chinese imports and retaliatory tariffs from other nations have increased costs for many companies. These uncertainties can disrupt supply chains, inflate landed costs, and strain trading relationships. Without clear agreements, businesses may face disputes over who bears these additional costs, leading to financial losses or delayed deliveries.

Incoterms® 2020 do not directly influence tariff rates, but they provide a framework for allocating responsibilities, enabling businesses to anticipate and manage tariff-related costs. For instance, choosing the right Incoterm can determine whether the buyer or seller is responsible for import duties, taxes, or customs clearance, thus avoiding unexpected expenses.

How Incoterms® 2020 Help Manage Tariff Risks

By clearly defining the division of responsibilities, Incoterms® 2020 offer businesses a practical tool to mitigate tariff risks. Here’s how:

Clarity in Cost Allocation

Incoterms® such as Delivered Duty Paid (DDP) place the burden of import duties, taxes, and customs clearance on the seller, while Ex Works (EXW) shifts these responsibilities to the buyer. For example, a U.S. buyer purchasing from a Chinese supplier under DDP terms would not face additional tariff costs, as the seller covers them. Conversely, under EXW, the buyer assumes all tariff risks from the seller’s premises onward. Businesses can negotiate terms that align with their risk tolerance and cost management strategies.

Risk Transfer Points

Each Incoterm specifies when the risk of loss or damage transfers from the seller to the buyer. For instance, under Free on Board (FOB), the seller’s responsibility ends once goods are loaded onto the vessel, and the buyer assumes tariff and transit risks thereafter. Understanding these transfer points helps businesses plan for potential tariff-related delays or damages.

Improved Documentation and Compliance

Tariff assessments often depend on accurate documentation, such as commercial invoices, bills of lading, and certificates of origin. Incoterms® 2020 emphasize the seller’s and buyer’s roles in providing these documents, reducing the risk of customs delays or penalties that could inflate costs. For example, under DDP, the seller must handle import clearance documentation, which can streamline compliance in complex tariff environments.

Flexibility in Negotiations

Incoterms® are not legally binding unless incorporated into a contract, allowing businesses to tailor agreements to specific trade scenarios. For instance, in response to new tariffs, a buyer might negotiate a shift from DDP to DAP to avoid seller-imposed price increases, thereby taking on import duties themselves. This flexibility is critical in volatile tariff climates.

Practical Steps for Businesses

To leverage Incoterms® 2020 effectively and manage tariff risks, businesses should consider the following steps:

Understand Your Trade Needs

Assess your business’s role in the supply chain, preferred modes of transport, and exposure to tariff changes. For example, a retailer importing goods may prefer DDP to minimize tariff risks, while a manufacturer exporting raw materials might opt for FOB to limit liability.

Specify the Incoterms® Version

Clearly state “Incoterms® 2020” in contracts to avoid confusion with earlier versions, such as Incoterms® 2010. Ambiguity can lead to disputes over responsibilities, especially in tariff-heavy environments.

Incorporate Named Places

Always include specific locations in Incoterm agreements (e.g., “FOB Shanghai, China, Incoterms® 2020”). This precision clarifies where costs and risks transfer, reducing tariff-related misunderstandings.

Invest in Training

The ICC Academy offers training courses and the official Incoterms® 2020 Certificate to ensure businesses apply these rules correctly. Interactive case studies help teams simulate real-world scenarios, enhancing their ability to manage tariff risks.

Consult Experts

Partner with logistics specialists, customs brokers, or legal advisors to navigate complex tariff environments. These professionals can help select the most cost-effective Incoterms® and ensure compliance with local regulations.

Monitor Tariff Developments

Stay informed about trade policy changes, such as new tariffs or trade agreements, that could impact costs. Tools like the ICC’s Incoterms® 2020 app provide real-time insights to support decision-making.

Conclusion

The Incoterms® 2020 rules, released by the ICC, are a vital resource for businesses navigating the complexities of global trade. By clarifying responsibilities for costs, risks, and documentation, these rules help companies manage tariff-related challenges in an unpredictable trade environment. Key updates, such as the renaming of DAT to DPU, enhanced insurance for CIF and CIP, and clearer cost allocations, reflect modern trade practices and empower businesses to negotiate contracts with confidence.

To maximize the benefits of Incoterms® 2020, businesses must understand their trade needs, specify terms clearly, and invest in training to ensure accurate application. By aligning Incoterms® with their risk management strategies, companies can mitigate tariff impacts, optimize cost structures, and build resilient supply chains. As tariffs continue to evolve, Incoterms® remain a stable and universally recognized framework for fostering trust and efficiency in international trade.

For further guidance, businesses can access the official Incoterms® 2020 publication and training resources at https://iccwbo.org or consult with trade experts to tailor solutions to their specific needs.