Incoterms

Incoterms (International Commercial Terms) are a set of standardized three-letter trade terms published by the International Chamber of Commerce (ICC) that define precisely where the seller's responsibilities end and the buyer's begin in an international transaction. They cover the transfer of costs, risks, and logistics responsibilities at a specific point in the shipment journey.

Incoterms are not laws — they're voluntary contract terms that become binding when explicitly incorporated into a sales contract. The current version, Incoterms 2020, contains 11 rules and supersedes Incoterms 2010.

Why Incoterms Exist

International trade involves complex handoffs between multiple parties across multiple countries, each with different legal systems and commercial practices. Without standardized terms, every contract would need lengthy custom clauses to address questions like: Who pays ocean freight? Who insures the cargo at sea? Who handles import customs clearance? Who bears the risk if the container is damaged during loading?

Incoterms replace all those negotiations with a single three-letter code agreed by both parties.

The 11 Incoterms 2020 Rules

Rules for any mode of transport:

• EXW (Ex Works): Seller makes goods available at their premises. Buyer arranges and pays everything — export customs, freight, insurance, import customs. Maximum responsibility for buyer.
• FCA (Free Carrier): Seller delivers goods to a named carrier or location. Commonly used for containerized cargo.
• CPT (Carriage Paid To): Seller pays freight to named destination; risk transfers to buyer when goods are handed to first carrier.
• CIP (Carriage and Insurance Paid To): Like CPT but seller must also arrange insurance. Incoterms 2020 increased minimum insurance requirement to Institute Cargo Clauses (A) — all-risk coverage.
• DAP (Delivered at Place): Seller delivers to named destination, uncleared for import. Buyer handles import duties.
• DPU (Delivered at Place Unloaded): Seller delivers and unloads at destination. Formerly DAT (Delivered at Terminal).
• DDP (Delivered Duty Paid): Maximum seller responsibility. Seller handles everything including import duties and taxes. Often used for e-commerce DTC shipments.

Rules for sea and inland waterway only:

• FAS (Free Alongside Ship): Seller delivers alongside vessel at port of shipment.
• FOB (Free on Board): Risk transfers when goods are loaded on the vessel. The most widely used Incoterm in practice.
• CFR (Cost and Freight): Seller pays ocean freight; risk transfers at loading.
• CIF (Cost, Insurance and Freight): Seller pays freight and insurance to destination port; risk transfers at loading.

The Most Common Incoterms in Practice

FOB is the dominant term for most manufactured goods traded between Asia and Western markets. The seller in China handles export customs and loads the container aboard the vessel; from that point, the buyer's risk and costs begin.

DDP is standard for cross-border e-commerce — customers expect to pay a single price with no surprise duties at delivery. Platforms like Amazon, Alibaba, and direct-to-consumer brands routinely ship DDP to avoid customer friction.

EXW is commonly used between manufacturers and freight forwarders, though trade lawyers often recommend FCA instead, since EXW technically requires the buyer to handle export customs in the seller's country — often impractical.

Common Mistakes

The most frequent Incoterms error is using sea-specific terms (FOB, CIF) for containerized shipments. The ICC explicitly notes that for containerized cargo, FCA and CIP are more appropriate, because risk in container shipping transfers when the carrier takes custody — not when goods are loaded onto the vessel (which happens at the container terminal, not the ship).