Submitted by Samuel Owusu on 4/18/2019
Most of the past writings talked about domestic transportations, traffic regulations and how drivers should behave in their day to day operations. This essay deals with a higher form of transportation. It concerns with the movement of goods (autos, components, raw materials, finished goods, etc.) from one country to another.
Transportation in logistics and supply chain management is an important function. Without it, the logistics function and the whole supply chain operation will not be complete or successful. It is important because most countries do not manufacture vehicles and their components.
Not only vehicles, but most countries rely on other countries to produce most of the things they needed to survive as a nation. Therefore, for such countries to have a good transport system and another livelihood, it becomes necessary to import (buy/bring) goods and other components from countries that produce them. This function (transportation in export and import) comes with several risks, aside from their benefits to both the importing countries and the exporting (selling/sending) countries due to different laws and languages used in other countries.
In the past few decades, the movement of goods across international borders was a difficult and stressful endeavor more than it is today. The major contributor to these difficulties in the movement of goods from one country to another was the language barrier. That is when there is a miscommunication between two parties in different countries.
One party (buyer) said this; the other party (seller) understood it differently, resulting in legal battles among business partners who were supposed to collaborate to achieve Written By Samuel Owusu (BSc, MBA) their individual business objectives. Another major player was the difference in national legislations and trade rules. In those days, when it comes to international transactions, it becomes a battle as to which country’s laws should be adopted for the contract of transportation between one country and another.
Normally, what happened in those periods is that the bigger countries swallowed the smaller ones. This means that, for instance, when there is a transaction between a citizen of Ghana and another party in America or somewhere in Europe, always, the laws of the bigger country was adopted, leaving the party from the minor country with no option, even though they may not understand the laws of the other country.
These problems among others led to the creation of Free On Board (FOB) in 1812. Consequently, in the year 1919, the European Union of Emission Trading Scheme created their own commercial terms to streamline international movement of goods among their member countries. This was an improvement of the previous available regulatory framework. However, there still remained problems and limitations in international transportation or logistics.
So, in 1936, the International Chamber of Commerce came up with its first draft of international commercial interpretations referred to as “INCOTERMS” (International Commercial Terms). Incoterms ended major international trade setbacks, apart from bridging the language barrier between international trade parties. Incoterms act as a common legal platform for all parties in an international trade agreement or contract.
Incoterms, depending on the specific term chosen under a particular international logistics contract, specifies which party performs which task under the contract. For example, during the movement of goods across countries, there is a need for the goods to be insured against damages in case of a shipwreck in sea transportation. So, incoterms ensure that each party (purchaser/buyer and seller/supplier) is aware of their obligations and responsibilities from the onset of the international purchase to the time when the goods finally reach its final destination.
The final destination is not always when the buyer takes delivery of the goods. The final destination under incoterms is usually specified in the contract. Liabilities and the exchange of risks and title-ship to the goods are not covered by incoterms. These must be specified in the international or domestic sale agreement.
Since its first creation in 1936, incoterms have gone through a series of modifications in order to adapt to the current economic growth or changes in that era. For instance, in 1953, incoterms went through modifications and again in 1967. One major setback among all these modifications was that they did not include air transportation. So, in 1976, a further modification was carried out to adopt air transport into terms to enhance the movement of goods through air transportation among international borders.
Consequently, the ‘terms’ went through changes in 1980, 1990, 2000, and the year 2010. The major modification between the incoterms 1980 and incoterm 1990 was that, in 1990, the International Chamber of Commerce (ICC) who is the official legislature and creator of incoterms, dealt away with Free-On-Rail (FOR), Free-On-Trail (FOT) and FreeOn-Airport (FOA) because these three terms were becoming obsolete, bringing simplification into the legislation of the terms. So, in 1990, they were reduced to 13 terms, namely; Free On Board vessel (FOB), Ex-Work (EXW), Free Carrier (FCA), Free Alongside Ship (FAS), Cost & Freight (CFR), Carriage, Insurance & Freight (CIF), Carriage Paid To (CPT), Carriage & Insurance Paid (CIP), Delivery At Frontier (DAF), Delivery Ex Ship (DES), Delivery Ex Quay (DEQ), Delivery & Duty Unpaid (DDU) and last but not the least, we have Delivery Duty Paid (DDP).
The modification in the year 2000 did not reduce the number of incoterms though, however, the ICC made clarifications with regards to the allocation of loading and offloading costs between the seller and the purchaser. In 2010, the ICC reduced the number to 11 incoterms. They removed DEQ, DES, DDU, and DAF. However, the ICC incorporated two new terms in place to the four they removed, namely the DAP and DAT which stands for Delivery At-Port and Delivery-At-Place respectively. However, they did not take effect until January 2011.
Importance of Incoterms
The following are a summary of the importance of incoterms and why transporters need to be aware of them.
1. Power-Bank – Incoterms serves as a power bank for transporters. There is a saying that, knowledge is power. The more you know, the more powerful you become. In negotiation, the one who knows more about the type of contract and the meaning of all the important clauses contained in the contract has more power and is more likely to negotiate profitably than the one who knows only a little or nothing at all.
If transporters are to make profitable negotiations in the movement of goods from one country to another, they must know all about the important incoterms available, so they can choose the right options for their operations.
2. Simplification of international trade – one of the major contributions since its introduction by the ICC is the fact that they made international movement of goods so simple, removing all unnecessary barriers such as language differences and multiplication of laws – thereby streamlining international transportation of goods. This
was also one of the initial objectives of the ICC for its formulation.
3. Incoterms makes everybody somebody – In the past, as mentioned earlier in this writing, the bigger countries gains more advantage over the smaller ones when choosing which law should govern international transport contract. Today, due to incoterms, regardless of the size of one’s country, each party has the same or equal rights under the contract.
4. Strategic planning purpose. Companies obtain value when the right incoterm is used for their international transportation. If the wrong one is used, they will run at lost in cash and/or in-kind, when the goods get damaged or stolen. Therefore, it is important for transporters to understand incoterms thereby selecting the right one in times of need to obtain value for their companies.
Types of Transportation
To obtain value for money, transporters or professionals within the entire supply chain must select the type of transport based on what they are trying to move. For example, the transport mode for carrying vehicles from another country will be determined by the number or size of the order or purchase and the type of cars, either small or large
vehicles. The following is a list of major types of transportation used today.
1. Sea Transportation (Freight). The movement of goods by sea.
2. Conventional Cargo or General Cargo.
3. Charter Shipping, which is, bulking. Shipping in bulk.
4. “Roll On & Roll-Off” Vessels. It’s generally referring to as RORO/Lashing. This is considered
as the cheapest method of moving cargos but it’s also the one with less security and
safety for the goods being carried.
5. Containerized. Under containerized transport, one can either use full containerized
loading also known as FCL, Less than Full Container Loading (LCL)
6. Land Transportation, which includes rail and road (trucks)
7. Air Transportation (Airfreight) movement of goods by air.
8. The multimodal Transportation system, which uses more than one type of transportation
under one sale contract.
The election of a particular incoterm under sale agreement will be determined by the type of transportation to be adopted. For example, if rail or road transport will be used, one cannot adopt FAS, FOB or CIF unless sea transport is to be used for the movement of the goods. Undersea transportation, all the incoterms are applicable except DAF. DAF is applicable for only road and rail transport. However, FCA and DDP are applicable under all types of transportation.
Transportation and incoterms are interesting subjects in the movement of goods, both domestic and international. The more transporters educate themselves in these areas, the more value they could create for their corporations and the more profitable they become.
Today, companies are looking for people who create values due to the increased competition in the marketplace fueled by increasing focus on internationalization, technological advancement, and consumer dynamics.