What are Incoterms®?

Incoterms® (International Commercial Terms) are a globally recognized set of trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities, costs, and risks between the buyer and seller during international and domestic trade transactions.

Incoterms help both parties clearly understand:

  • Who arranges transportation
  • Who pays freight charges
  • Who obtains export and import clearances
  • Who purchases cargo insurance
  • At what point the risk transfers from seller to buyer

Using the correct Incoterm minimizes disputes, improves communication, and ensures smooth international trade operations.

Why are Incoterms Important?

Incoterms provide a common language for global trade and eliminate ambiguity in commercial contracts.

Benefits

  • Clearly defines buyer and seller responsibilities
  • Reduces misunderstandings and legal disputes
  • Simplifies international transactions
  • Helps determine transportation costs
  • Defines risk transfer points
  • Supports customs and banking documentation
  • Improves supply chain planning

What Changed in Incoterms® 2020?

Compared to Incoterms® 2010, the following key changes were introduced:

  • DAT (Delivered at Terminal) was replaced with DPU (Delivered at Place Unloaded).
  • Security-related transport requirements received greater emphasis.
  • Insurance requirements under CIP were increased to provide broader coverage.
  • More flexibility was introduced for transport using the seller’s or buyer’s own vehicles.
  • Explanatory notes and illustrations were improved for easier understanding.

The 11 Incoterms® 2020

Incoterms are divided into two categories.

Rules for Any Mode of Transport

These terms can be used for road, rail, air, sea, or multimodal transport.

1. EXW – Ex Works

Seller’s Responsibility

  • Makes goods available at their premises.
  • Packages the goods appropriately.

Buyer’s Responsibility

  • Loading cargo
  • Inland transportation
  • Export customs clearance
  • Main international transport
  • Import customs clearance
  • Final delivery

Risk Transfer

As soon as the goods are made available at the seller’s premises.

Best Used For

Domestic sales or buyers with strong logistics capabilities.

2. FCA – Free Carrier

The seller delivers goods to a carrier nominated by the buyer at an agreed location.

Seller Pays

  • Export clearance
  • Delivery to carrier

Buyer Pays

  • Main freight
  • Insurance
  • Import clearance
  • Destination delivery

Risk Transfer

When goods are handed over to the carrier.

Commonly Used For

Containerized cargo and multimodal transport.

3. CPT – Carriage Paid To

The seller pays transportation to the named destination. However, the risk transfers much earlier.

Seller Pays

  • Export clearance
  • Main freight

Buyer Pays

  • Insurance
  • Import clearance
  • Final delivery

Risk Transfer

When goods are handed over to the first carrier.

4. CIP – Carriage and Insurance Paid To

Same as CPT, but the seller also provides cargo insurance.

Seller Pays

  • Freight
  • Insurance
  • Export clearance

Buyer Pays

  • Import clearance
  • Destination charges

Risk Transfer

At the first carrier, even though the seller pays transportation.

5. DAP – Delivered at Place

The seller delivers goods to the named destination ready for unloading.

Seller Pays

  • Entire transportation
  • Export clearance

Buyer Pays

  • Import duty
  • Taxes
  • Unloading

Risk Transfer

When goods arrive at the destination before unloading.

6. DPU – Delivered at Place Unloaded

The seller is responsible until the goods are unloaded at the agreed destination.

This is the only Incoterm where the seller is responsible for unloading.

Buyer Pays

  • Import customs duties
  • Taxes

Risk Transfer

After unloading at the destination.

7. DDP – Delivered Duty Paid

This places the maximum responsibility on the seller.

Seller Pays

  • Export clearance
  • Freight
  • Insurance (if arranged)
  • Import duties
  • Taxes
  • Final delivery

Buyer Responsibility

Receive the goods.

Risk Transfer

Upon delivery at the agreed destination.

Rules for Sea and Inland Waterway Transport Only

These terms should only be used for non-containerized sea shipments unless appropriate for the trade.

8. FAS – Free Alongside Ship

The seller delivers cargo alongside the vessel at the port of loading.

Buyer Pays

  • Loading onto vessel
  • Ocean freight
  • Insurance
  • Import clearance

Risk Transfer

When goods are placed alongside the ship.

9. FOB – Free On Board

One of the most commonly used Incoterms.

The seller delivers goods on board the nominated vessel.

Seller Pays

  • Export clearance
  • Loading onto vessel

Buyer Pays

  • Ocean freight
  • Insurance
  • Import clearance

Risk Transfer

When goods are loaded onto the vessel.

Note: FOB is generally not recommended for containerized shipments; FCA is often the better choice.

10. CFR – Cost and Freight

The seller pays ocean freight to the destination port. The buyer bears the risk once the goods are loaded onto the vessel.

Seller Pays

  • Export clearance
  • Ocean freight

Buyer Pays

  • Insurance
  • Import duties
  • Inland transportation

11. CIF – Cost, Insurance and Freight

Similar to CFR, but the seller also arranges marine insurance.

Seller Pays

  • Freight
  • Marine insurance
  • Export clearance

Buyer Pays

  • Import clearance
  • Inland transportation

Risk Transfer

When goods are loaded onto the vessel.

Summary Table

Incoterm Export Clearance Freight Paid By Insurance Import Clearance Risk Transfers
EXW Buyer Buyer Buyer Buyer Seller’s premises
FCA Seller Buyer Buyer Buyer At carrier
CPT Seller Seller Buyer Buyer First carrier
CIP Seller Seller Seller Buyer First carrier
DAP Seller Seller Optional Buyer Destination before unloading
DPU Seller Seller Optional Buyer After unloading
DDP Seller Seller Optional Seller Final destination
FAS Seller Buyer Buyer Buyer Alongside vessel
FOB Seller Buyer Buyer Buyer On board vessel
CFR Seller Seller Buyer Buyer On board vessel
CIF Seller Seller Seller Buyer On board vessel

Choosing the Right Incoterm

When selecting an Incoterm, consider:

  • Mode of transport (sea, air, road, rail, or multimodal)
  • Who has better control over logistics
  • Import and export licensing requirements
  • Customs expertise
  • Insurance needs
  • Total landed cost
  • Risk tolerance of both parties

Best Practices

  • Always mention the Incoterm and the named place or port, for example: FOB Nhava Sheva, India – Incoterms® 2020 or DAP Hamburg, Germany – Incoterms® 2020.
  • Ensure the sales contract, purchase order, and shipping documents all use the same Incoterm.
  • Remember that Incoterms define responsibilities for delivery, cost, and risk—they do not determine ownership of the goods or payment terms.

Key Takeaways

Incoterms® 2020 provide a standardized framework that helps buyers and sellers clearly understand their obligations in international trade.Choosing the correct Incoterm ensures transparency, reduces disputes, improves operational efficiency, and supports smooth execution of global supply chain activities.