Incoterms 2020: Complete Guide to International Trade Terms

Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international transactions, particularly regarding delivery, costs, and risks.

What Are Incoterms?

Incoterms 2020 is the latest version, effective from January 1, 2020. These rules:

• Clarify who pays for what
• Define when risk transfers from seller to buyer
• Specify delivery obligations
• Outline documentation responsibilities

The 11 Incoterms 2020 Rules

Rules for Any Mode of Transport

1. EXW - Ex Works

Seller's Responsibility: Minimum

• Goods available at seller's premises
• Buyer arranges everything from pickup

Best For: Experienced buyers with local presence

Risk Transfer: At seller's facility

2. FCA - Free Carrier

Seller's Responsibility: Low-Medium

• Deliver goods to carrier nominated by buyer
• Export clearance by seller

Best For: Container shipping, air freight

Risk Transfer: When goods handed to carrier

3. CPT - Carriage Paid To

Seller's Responsibility: Medium

• Deliver to carrier and pay transport to destination
• Risk transfers earlier than cost

Best For: Multimodal transport

Risk Transfer: When goods handed to first carrier

4. CIP - Carriage and Insurance Paid To

Seller's Responsibility: Medium-High

• Same as CPT plus insurance coverage
• Minimum insurance: Institute Cargo Clauses (A)

Best For: Valuable goods, air/rail transport

Risk Transfer: When goods handed to first carrier

5. DAP - Delivered at Place

Seller's Responsibility: High

• Deliver goods at named destination
• Import clearance by buyer

Best For: Door-to-door service preference

Risk Transfer: Upon arrival at named place

6. DPU - Delivered at Place Unloaded

Seller's Responsibility: High

• Deliver and unload at named destination
• Only Incoterm requiring seller to unload

Best For: Terminal deliveries, buyer has no unloading capacity

Risk Transfer: After unloading at destination

7. DDP - Delivered Duty Paid

Seller's Responsibility: Maximum

• Deliver goods cleared for import
• Seller pays all costs including duties

Best For: Buyer wants zero responsibility

Risk Transfer: Upon arrival, import cleared

Rules for Sea and Inland Waterway Transport Only

8. FAS - Free Alongside Ship

Seller's Responsibility: Low-Medium

• Deliver goods alongside vessel at port
• Export clearance by seller

Best For: Bulk cargo, breakbulk

Risk Transfer: When goods alongside ship

9. FOB - Free on Board

Seller's Responsibility: Medium

• Deliver goods on board vessel
• Most popular for sea freight

Best For: Full container loads (FCL)

Risk Transfer: When goods pass ship's rail

10. CFR - Cost and Freight

Seller's Responsibility: Medium

• Deliver on board + pay freight to destination
• No insurance obligation

Best For: Established trade relationships

Risk Transfer: When goods pass ship's rail

11. CIF - Cost, Insurance and Freight

Seller's Responsibility: Medium-High

• Same as CFR plus minimum insurance
• Institute Cargo Clauses (C)

Best For: Commodity trading, LCL shipments

Risk Transfer: When goods pass ship's rail

Choosing the Right Incoterm

Consider These Factors:

1. Experience Level

   • Beginners: DDP, CIF, CIP
   • Experienced: EXW, FCA, FOB

2. Control Preferences

   • Want control: EXW, FCA
   • Minimal involvement: DDP, DAP

3. Cost Management

   • Minimize costs: EXW
   • Predictable costs: DDP

4. Transportation Mode

   • Sea only: FOB, CFR, CIF, FAS
   • Any mode: FCA, CPT, CIP, DAP, DPU, DDP

5. Insurance Needs

   • Required: CIF, CIP
   • Optional: All others

Responsibility Matrix

| Incoterm | Export Clearance | Main Carriage | Import Clearance | Delivery | |----------|------------------|---------------|------------------|----------| | EXW | Buyer | Buyer | Buyer | Seller's premises | | FCA | Seller | Buyer | Buyer | Carrier's location | | FAS | Seller | Buyer | Buyer | Alongside ship | | FOB | Seller | Buyer | Buyer | On board ship | | CFR | Seller | Seller | Buyer | Destination port | | CIF | Seller | Seller | Buyer | Destination port | | CPT | Seller | Seller | Buyer | Named place | | CIP | Seller | Seller | Buyer | Named place | | DAP | Seller | Seller | Buyer | Named place | | DPU | Seller | Seller | Buyer | Named place (unloaded) | | DDP | Seller | Seller | Seller | Named place |

Common Mistakes to Avoid

❌ Using FOB for Air Freight

FOB is for sea transport only - use FCA instead

❌ Confusing Risk vs Cost

Cost and risk don't always transfer at the same point

❌ Not Specifying Location

Always include exact location (e.g., "FOB Shanghai Port")

❌ Ignoring Insurance Gaps

Understand who's responsible for insurance at each stage

❌ Mixing Incoterms Versions

Always specify "Incoterms 2020" to avoid confusion

Practical Examples

Example 1: Small Business, First Export

Recommendation: DDP

• Seller handles everything
• Buyer receives goods at their door
• No surprises for buyer

Example 2: Regular Container Shipments

Recommendation: FOB or FCA

• Buyer controls shipping
• Better freight rates possible
• More flexibility

Example 3: High-Value Electronics

Recommendation: CIP or CIF

• Seller arranges insurance
• Coverage during main carriage
• Protection for valuable goods

Example 4: Bulk Commodities

Recommendation: CFR or CIF

• Seller pays freight
• Buyer arranges unloading
• Common in commodity trading

Incoterms and Payment Terms

Incoterms work together with payment terms:

With Letter of Credit (L/C):

• Often use CIF or CFR
• Shipping documents required
• Bank guarantees payment

With Telegraphic Transfer (T/T):

• Flexible with any Incoterm
• Common: FOB with T/T deposit

With Documentary Collection:

• Usually CFR or CIF
• Documents control release

Changes from Incoterms 2010

Key Updates in 2020:

1. DAT replaced by DPU

   • More flexibility in delivery location

2. Different insurance levels

   • CIP: Institute Cargo Clauses (A)
   • CIF: Institute Cargo Clauses (C)

3. FCA with Bill of Lading

   • Option for onboard notation

4. Cost allocation clarity

   • More detailed explanations

How to Use Incoterms in Contracts

Format:

[Incoterm] [Named Place] [Incoterms 2020]

Examples:

• FOB Shanghai Port, Incoterms 2020
• CIF Los Angeles, Incoterms 2020
• DDP 123 Main Street, New York, Incoterms 2020

Conclusion

Choosing the right Incoterm is crucial for:

• Clear responsibility allocation
• Risk management
• Cost control
• Smooth international transactions

Always specify Incoterms 2020 in your contracts and commercial invoices to ensure all parties understand their obligations.

Our invoice generator includes all 11 Incoterms 2020 options in the Terms of Delivery dropdown - making it easy to create compliant commercial invoices!