Incoterms are a set of eleven standardized three-letter codes that define who pays for what, and who bears the risk of loss, when goods move between a buyer and seller in international trade. Published by the International Chamber of Commerce (ICC), the current edition is Incoterms 2020. Every time you see a term like “FOB Shanghai” or “CIF Rotterdam” on a commercial invoice or purchase order, that shorthand is doing heavy lifting: it tells both parties exactly where the seller’s responsibilities end and the buyer’s begin.
What Incoterms Actually Decide
A single international shipment involves dozens of costs and handoff points: loading at the factory, trucking to a port, export customs clearance, ocean freight, cargo insurance, import duties, and final delivery. Incoterms split those responsibilities between the buyer and seller by drawing a line at a specific point in the journey. Everything on the seller’s side of that line (costs and risk of damage or loss) belongs to the seller. Everything on the buyer’s side belongs to the buyer.
The three main things each Incoterm spells out are:
- Cost allocation: Which party pays for freight, insurance, loading, customs fees, and other charges at each stage of transport.
- Risk transfer: The exact point where the risk of goods being damaged, lost, or stolen shifts from seller to buyer. This is not always the same point where costs shift, which catches many newcomers off guard.
- Delivery obligations: What the seller must physically do to be considered “delivered,” whether that means simply making goods available at a warehouse or placing them inside a container at a destination port.
Incoterms do not cover everything in a trade deal. They say nothing about when or how the buyer pays (net 30, letter of credit, etc.), they do not transfer legal ownership or title to the goods, and they do not address what happens if one party breaches the contract. Those issues are handled by the sales contract and applicable law separately.
The Eleven Incoterms 2020 Rules
The eleven terms fall into two groups based on transport mode. Seven apply to any form of transport, including truck, rail, air, and multimodal shipments. Four are reserved exclusively for sea and inland waterway transport.
Rules for Any Mode of Transport
- EXW (Ex Works): The seller’s only job is to make the goods available at their own premises. The buyer handles everything from that point forward: loading, export clearance, freight, insurance, import duties. This places the maximum burden on the buyer.
- FCA (Free Carrier): The seller delivers goods to a carrier or another location nominated by the buyer and handles export clearance. Risk transfers once the goods are handed to that carrier. This is one of the most flexible and widely used terms.
- CPT (Carriage Paid To): The seller pays freight to get the goods to a named destination, but risk transfers to the buyer the moment the goods are handed to the first carrier. The cost and risk transfer points are different here.
- CIP (Carriage and Insurance Paid To): Same as CPT, but the seller must also buy cargo insurance covering the buyer’s risk during transit. Under Incoterms 2020, CIP requires “all risks” insurance coverage, a higher standard than in previous editions.
- DAP (Delivered at Place): The seller bears all costs and risk until the goods arrive at a named destination, ready for unloading. The buyer handles unloading and import customs clearance.
- DPU (Delivered at Place Unloaded): The seller bears all costs and risk until the goods are unloaded at the named destination. This is the only Incoterm that requires the seller to unload the goods.
- DDP (Delivered Duty Paid): The seller handles everything: freight, insurance, export and import customs clearance, and duties. The buyer’s only job is to receive the goods. This places the maximum burden on the seller.
Rules for Sea and Inland Waterway Only
- FAS (Free Alongside Ship): The seller delivers by placing the goods alongside the vessel at the named port. Risk transfers at that point.
- FOB (Free on Board): The seller delivers by loading the goods onto the vessel at the named port. Once the goods are on board, risk shifts to the buyer. FOB is one of the most commonly referenced Incoterms in global trade.
- CFR (Cost and Freight): The seller pays freight to the destination port, but risk transfers to the buyer once goods are loaded on board at the origin port.
- CIF (Cost, Insurance, and Freight): Same as CFR, but the seller also provides marine cargo insurance. Under Incoterms 2020, CIF only requires minimum insurance coverage, unlike CIP’s higher standard.
Where Cost and Risk Split Apart
The trickiest part of Incoterms is that the point where the seller stops paying and the point where the buyer starts bearing risk are not always the same. Under CPT, for example, the seller pays for freight all the way to the destination city, but if the goods are destroyed during transit, that is the buyer’s loss because risk transferred when the goods were handed to the first carrier. This means the buyer needs their own cargo insurance even though the seller is paying for the transportation.
CIF works the same way. The seller pays freight and insurance to the destination port, but risk shifts at the origin port once the goods are loaded on the vessel. If a shipment sinks mid-ocean, the buyer technically owns the loss. The seller’s insurance policy is there to cover it, but the claim belongs to the buyer. Understanding this split is essential to making sure you actually have insurance in place for the leg of the journey where you carry the risk.
Choosing the Right Incoterm
The right term depends on how much control you want over logistics and how much risk you are willing to manage. If you are an exporter who can negotiate favorable freight rates and wants to control how goods are shipped, terms like CIF or CIP let you bundle freight and insurance into your price. If you are an importer with established relationships with freight forwarders and customs brokers, FOB or FCA lets you take control at the origin and often negotiate lower total shipping costs.
EXW looks attractive to sellers because it offloads almost everything onto the buyer, but it can create practical problems. In many countries, the buyer (a foreign company) cannot legally handle export customs clearance in the seller’s country. That makes FCA a more realistic minimum for most export transactions. On the other end, DDP is convenient for buyers but can be risky for sellers who are unfamiliar with import regulations and duty rates in the buyer’s country.
The four sea-only terms (FAS, FOB, CFR, CIF) should only be used when goods are literally loaded onto a vessel. If your shipment moves in a container that is handed to a carrier at an inland depot before reaching the port, FCA or CIP is more appropriate because the goods leave the seller’s control before they reach the ship.
How Incoterms Appear in Contracts
An Incoterm is always written with a named location. “FOB” by itself is incomplete. A proper reference looks like “CIF Los Angeles (Incoterms 2020)” or “FCA Seller’s Warehouse, Munich (Incoterms 2020).” Including the edition year matters because rules change between versions. DPU, for instance, replaced the older DAT (Delivered at Terminal) in the 2020 edition, and insurance requirements for CIP were raised.
Simply writing an Incoterm on an invoice does not automatically make it legally binding. It needs to be incorporated into the actual sales contract between buyer and seller. When both parties agree to “FOB Shenzhen, Incoterms 2020,” they are incorporating the ICC’s full set of obligations for that term into their deal. Courts and arbitration panels regularly interpret Incoterms in trade disputes, so getting the term and location right at the contract stage saves significant trouble later.