What Are Incoterms?
Incoterms (International Commercial Terms) are a set of internationally recognized rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade transactions. They specify who is responsible for:
- Arranging and paying for transportation
- Obtaining export and import clearances
- Taking out cargo insurance
- The point at which risk transfers from seller to buyer
The current version — Incoterms 2020 — contains 11 rules and has been in use since January 1, 2020. Always specify which version you're using in your contract (e.g., "FOB Shanghai, Incoterms 2020").
The 11 Incoterms 2020 Rules
Incoterms are divided into two groups based on applicable transport modes:
Rules for Any Mode of Transport
| Term | Full Name | Risk Transfer Point | Who Arranges Main Freight |
|---|---|---|---|
| EXW | Ex Works | Seller's premises | Buyer |
| FCA | Free Carrier | Named place, once handed to carrier | Buyer |
| CPT | Carriage Paid To | When handed to first carrier | Seller |
| CIP | Carriage and Insurance Paid To | When handed to first carrier | Seller (+ insurance) |
| DAP | Delivered at Place | Named destination, ready to unload | Seller |
| DPU | Delivered at Place Unloaded | Named place after unloading | Seller |
| DDP | Delivered Duty Paid | Named destination, duties paid | Seller (all costs) |
Rules for Sea and Inland Waterway Transport Only
| Term | Full Name | Risk Transfer Point | Who Arranges Main Freight |
|---|---|---|---|
| FAS | Free Alongside Ship | Alongside vessel at port of loading | Buyer |
| FOB | Free on Board | On board vessel at port of loading | Buyer |
| CFR | Cost and Freight | On board vessel at port of loading | Seller |
| CIF | Cost, Insurance, and Freight | On board vessel at port of loading | Seller (+ insurance) |
Key Change in Incoterms 2020: FCA with Bill of Lading
One important update in the 2020 edition: under FCA, the parties can now agree that the buyer will instruct its carrier to issue an on-board Bill of Lading to the seller after loading. This is particularly useful in Letter of Credit transactions where banks require an on-board B/L.
How to Choose the Right Incoterm
Choosing an Incoterm depends on your role, capabilities, and risk tolerance:
If You're a New Exporter
Start with EXW or FCA to limit your logistics responsibilities. The buyer handles most of the shipping, and your exposure is minimal.
If You Want Control Over Freight Costs
Use CIF or CIP — you book and pay for freight and insurance, which can give you better rates if you ship frequently and allows you to bundle logistics costs into your selling price.
If Your Buyer Prefers a "Landed" Price
Use DDP — you handle everything including import duties. This is common in e-commerce and direct-to-consumer international sales, but ensure you understand the destination country's customs requirements fully.
For Containerized Ocean Freight
Avoid FOB and CIF for containerized cargo — risk transfers at the ship's rail, but containers are handed over at the terminal, creating a gap. Use FCA (for buyer's freight) or CIP/CPT (for seller's freight) instead.
Common Incoterms Mistakes
- Using FOB for container shipments — the risk transfer point is misaligned with how containers actually move
- Confusing "risk transfer" with "title transfer" — Incoterms only address logistics responsibilities, not ownership
- Not specifying a named place — "FOB" alone is incomplete; it must be "FOB [Port Name]"
- Assuming CIF insurance is adequate — CIF only requires minimum coverage (110% of invoice value); consider additional coverage for high-value goods
Final Word
Incoterms are one of the most practical tools in international trade. Used correctly, they eliminate ambiguity, prevent disputes, and ensure both parties know exactly what they're responsible for. Take time to choose the term that fits your shipment, your capabilities, and your commercial relationship — and always include it explicitly in your sales contract.