If you’re new to international trade, you’ve probably come across the word Incoterms and thought, “This looks complicated.” Don’t worry—you’re not alone. The good news is that Incoterms aren’t as intimidating as they seem once you break them down into plain English.
This guide will explain what Incoterms 2020 are, why they matter, and how importers and exporters can use them with real-world examples.
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What Are Incoterms?
Incoterms stands for International Commercial Terms. They are a set of standardized trade rules published by the International Chamber of Commerce (ICC). These rules define the responsibilities of buyers and sellers when goods are shipped across borders.
Think of Incoterms as a contract “shortcut.” Instead of writing long explanations in every contract about who arranges shipping, pays insurance, handles customs, or takes on risk, traders just use a three-letter code like FOB or CIF.
For example, if you agree to sell goods “FOB Shanghai” (Free on Board), both sides know what that means because the rules are universally recognized.
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Why Incoterms Matter
In global trade, misunderstandings can be costly. Imagine two businesses:
• The seller thought the buyer was covering shipping insurance.
• The buyer assumed the seller had already insured the goods.
If the shipment is damaged, both parties will argue over who’s responsible. That’s where Incoterms prevent disputes.
In short, Incoterms clarify:
• Who arranges transportation?
• Who pays shipping and insurance?
• Who handles export/import customs?
• At what point does the risk transfer from seller to buyer?
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The 11 Incoterms of 2020
The Incoterms 2020 update includes 11 rules, split into two groups:
1. Any mode of transport (7 terms): EXW, FCA, CPT, CIP, DAP, DPU, DDP.
2. Sea and inland waterway transport only (4 terms): FAS, FOB, CFR, CIF.
Let’s break them down into plain English with examples.
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- EXW (Ex Works) – “Buyer takes it all from my door.”
• Seller’s responsibility: Make the goods available at their warehouse/factory.
• Buyer’s responsibility: Everything else—loading, transport, insurance, customs.
Example: A Canadian furniture maker sells chairs EXW Toronto. The buyer from Germany must arrange a truck, ship, insurance, and pay all duties.
Best for: When the buyer wants full control.
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- FCA (Free Carrier) – “I’ll deliver to your shipper.”
• Seller delivers goods to a carrier chosen by the buyer at an agreed location.
• Risk passes once the goods are handed over.
Example: A U.S. electronics company sells FCA New York. The seller delivers goods to the buyer’s freight forwarder in New York. After that, it’s the buyer’s problem.
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- CPT (Carriage Paid To) – “I’ll pay for transport, but risk transfers early.”
• Seller pays for carriage up to the named destination.
• Risk transfers when goods are handed to the first carrier.
Example: An exporter in Brazil sells CPT Hamburg. They pay shipping to Germany, but if goods are damaged during transit, the buyer bears the risk after handover.
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- CIP (Carriage and Insurance Paid To) – “I’ll cover transport AND insurance.”
• Similar to CPT, but seller also pays insurance.
• Still, risk transfers once goods are handed to the first carrier.
Example: A clothing manufacturer in India sells CIP Paris. They cover freight and insurance until Paris, but risk shifts to the buyer once goods leave India.
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- DAP (Delivered at Place) – “I’ll deliver to your doorstep, but not clear customs.”
• Seller delivers to the buyer’s location (or named place).
• Seller covers transport and risk until arrival.
• Buyer handles import duties and customs clearance.
Example: A machinery exporter in Japan sells DAP Chicago. They ship and deliver to the buyer’s warehouse. The buyer must handle customs duties in the U.S.
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- DPU (Delivered at Place Unloaded) – “I’ll even unload it for you.”
• Same as DAP, but seller must also unload at the destination.
• This is the only Incoterm requiring seller to unload goods.
Example: A Spanish tile supplier sells DPU Dubai. The supplier unloads the tiles at the buyer’s warehouse in Dubai.
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- DDP (Delivered Duty Paid) – “I handle everything, including customs.”
• Seller takes full responsibility: shipping, insurance, customs, and duties.
• Buyer just receives the goods.
Example: A Swiss chocolate company sells DDP London. They pay for shipping, UK customs, and taxes. The buyer simply receives chocolates at their store.
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- FAS (Free Alongside Ship) – “I’ll get it next to the ship.”
• Seller delivers goods alongside the vessel at the port of shipment.
• Buyer loads goods on the ship and handles everything after.
Example: An oil exporter in Nigeria sells FAS Lagos. They place barrels at the dock; the buyer arranges loading and sea freight.
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- FOB (Free on Board) – “I’ll load it onto the ship.”
• Seller delivers goods on board the vessel at the port of departure.
• Risk transfers once goods are on the ship.
Example: A tea exporter in Sri Lanka sells FOB Colombo. Once the tea is loaded onto the ship, it’s the buyer’s responsibility.
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- CFR (Cost and Freight) – “I’ll pay shipping, but risk passes at departure.”
• Seller pays for transport to the destination port.
• Risk transfers once goods are on board.
Example: A steel exporter in China sells CFR Los Angeles. They cover shipping, but if goods are damaged at sea, the buyer bears the risk.
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- CIF (Cost, Insurance, and Freight) – “I’ll pay shipping and insurance, but risk passes early.”
• Same as CFR, but seller also buys minimum insurance.
• Risk still transfers once goods are on the ship.
Example: An exporter in Egypt sells CIF Rotterdam. They cover shipping and insurance, but risk passes to the buyer after loading in Alexandria.
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Choosing the Right Incoterm
Here are a few tips:
1. If you’re a seller wanting minimal responsibility: Choose EXW.
2. If you want to keep control but share some costs: FCA or FOB works.
3. If you’re a buyer who wants convenience: Negotiate DDP so the seller handles everything.
4. If insurance is important: Go with CIP (any transport) or CIF (sea).
5. For complex shipments: Match the Incoterm to your logistics partner’s capability.
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Common Mistakes to Avoid
• Using the wrong Incoterm for the transport mode. For example, FOB is only for sea shipments.
• Not specifying the location. Saying “FOB” alone is incomplete—always add the port (e.g., FOB Shanghai).
• Confusing risk and cost. Just because the seller pays for shipping doesn’t mean they bear the risk.
• Ignoring customs duties. DDP requires the seller to know local import regulations, which can be complicated.
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Why Incoterms 2020 Changed
The ICC updates Incoterms about every 10 years. The 2020 version made key clarifications:
• DAT (Delivered at Terminal) was replaced by DPU (Delivered at Place Unloaded).
• CIP now requires higher insurance coverage compared to CIF.
• More emphasis on using electronic documents when possible.
These changes reflect modern logistics practices and risk management.
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Final Thoughts
For anyone starting out in importing or exporting, knowing Incoterms is like learning the “language” of global trade. It helps avoid misunderstandings, ensures smooth transactions, and protects both buyers and sellers from unexpected costs and risks.
Whether you’re a small business shipping your first container or a large company dealing with multiple countries, mastering Incoterms 2020 will save you time, money, and stress.
