Understand Incoterms and choose the right one for your business.
Incoterms (International Commercial Terms) are the standard trade terms that split responsibility between seller and buyer. They are published by the International Chamber of Commerce; the current edition is Incoterms 2020.
They settle four questions: who pays the freight, who insures it, who clears customs, and where risk passes. Getting the term right prevents most of the disputes and surprise invoices in international trade.
What they do not cover: payment terms, transfer of title, or what happens if the goods are defective. Those belong in the contract of sale.
Incoterms 2020 contains 11 rules, in two groups. ANY MODE OF TRANSPORT: Incoterm — Name — Risk passes EXW — Ex Works — At the seller's premises FCA — Free Carrier — On handover to the carrier CPT — Carriage Paid To — On handover to the carrier CIP — Carriage and Insurance Paid To — On handover to the carrier DAP — Delivered At Place — At the place of delivery DPU — Delivered At Place Unloaded — After unloading DDP — Delivered Duty Paid — At the place of delivery SEA AND INLAND WATERWAY ONLY: Incoterm — Name — Risk passes FAS — Free Alongside Ship — Alongside the vessel FOB — Free On Board — On board the vessel CFR — Cost and Freight — On board the vessel CIF — Cost, Insurance and Freight — On board the vessel
It depends on which side you are on and how much of the chain you want to control. IF YOU ARE THE SELLER: • New to exporting: EXW or FCA — let the buyer run the logistics • Experienced: DAP or DDP — take control and price it in • Careful: avoid DDP unless you know the destination's duty rates IF YOU ARE THE BUYER: • You want control: EXW or FCA — arrange the transport yourself • You want it simple: DDP — the seller handles everything • Middle ground: DAP — the seller delivers, you clear the import FOR CONTAINERS: use FCA, not FOB. FOR BULK BY SEA: FOB, CFR or CIF all work. FOR HIGH-VALUE GOODS: CIP, or CIF plus your own cover.
EXW for an export. The seller has no export-clearance status, because the goods never leave their premises under their control. Use FCA instead. FOB for containers. FOB was written for loading a vessel. A container is handed over at the terminal, not on the ship, so the risk point in the contract does not match what happens. Use FCA. Assuming CIF means you are insured. CIF requires only minimum cover — 110% of the value, against total loss. Most damage is not covered. Ask for CIP, or arrange your own policy. A vague place. "FOB China" is not a delivery point. Write "FCA Shanghai Port, Yangshan Terminal". DDP without knowing the duty. Under DDP the seller pays everything, customs and import VAT included. Quote it without checking the rates and the price is wrong. Check first, or use DAP.
IMPORTING FROM CHINA — FOB Shanghai You pay: • Sea freight Shanghai to Koper • Marine insurance • Terminal handling at Koper • Customs clearance, duty and VAT • Delivery Koper to Ljubljana The seller pays: • Inland transport to Shanghai port • Export clearance • Loading on board THE SAME IMPORT — DDP Ljubljana You pay: • Nothing further — it is all in the price The seller pays: • Everything from their warehouse to your door, including Slovenian customs duty and VAT The second looks simpler and usually costs more, because the seller prices in a risk they cannot measure.
Minimum obligation on the seller. The buyer collects from the seller's premises and carries everything from there — including export clearance, which the buyer often cannot legally do.
The seller delivers to the carrier at an agreed place and handles export clearance. The right default for containers and the term that replaces EXW in practice.
The seller delivers on board the vessel. Cost and risk pass to the buyer from loading. Bulk cargo only — for containers, use FCA.
The seller pays freight and insurance to the destination port. Risk still passes on loading, and the required cover is the minimum — not what most people assume.
The seller delivers to a named place. The buyer unloads and clears the import. A sensible middle ground when the buyer knows their own duty rates.
Maximum obligation on the seller — to the buyer's door, duty and VAT included. Only agree to it if you know the import duties in the destination country.
Not in themselves. They are an internationally recognised standard, and they bind you once you write them into the contract — which is the point. Naming a rule and a place removes the argument about who was supposed to pay for what.
FOB is a sea term: risk passes when the goods are on board the vessel. FCA works for any mode: risk passes when the goods are handed to the carrier at the named place. For containers FCA is the correct one, because you hand a container over at the terminal, not on the ship.
The seller — all of it, including import VAT in the destination country. That means the seller may need to be registered for VAT there, which many are not. If your supplier offers DDP without knowing your duty rates, expect either a surprise invoice or a shipment stuck at the border.
If you are new to it, CIF or DDP: the supplier arranges most of the move. If you are experienced, FOB or FCA: you control the sea leg and the destination costs, which is usually cheaper, because the supplier's freight margin is invisible to you under CIF.
No. They divide cost and risk, nothing else. Title passes according to the contract of sale and the law that governs it — which is a separate clause and often a separate jurisdiction.
Because CIF splits cost from risk deliberately: the seller pays freight and insurance to the destination, but the goods travel at the buyer's risk from the moment they are on board. If they are damaged at sea, the buyer claims on the policy — and the seller has already been paid.