Have you ever wondered how international trade functions smoothly despite the complexities of shipping goods across borders?

With buyers and sellers operating across different countries, each with its own shipping and trade terms—ensuring smooth transactions can be complicated.

Without clear guidelines, confusion can run high over who is responsible for what during the shipping process.

This is where “Incoterms” come into play.

Incoterms, which stand for International Commercial Terms, provide a clear framework for outlining the duties of buyers and sellers in transactions. They determine who pays for shipping, handles insurance, and deals with customs duties at each transport stage.

Incoterms, created to simplify global trade, have become essential in contract negotiations. In this blog, we will discuss the history of Incoterms, examine each of the 11 terms in detail, and discuss their advantages and drawbacks. 

What are Incoterms?

Incoterms are globally recognized rules that define the responsibilities of buyers and sellers in trade agreements. They simplify complex shipping arrangements and ensure all parties understand their obligations.

These terms help ensure that responsibilities are clearly defined, agreed upon, and recorded in the contract or sales agreement. They are typically included on export invoices and are used globally to streamline trade.

Incoterms are divided into two main categories:

• Terms for any mode of transport
• Terms specifically for sea and inland waterway transport

In international trade, incoterms determine:

• Where the goods will be delivered
• Who arranges transport
• What insurance is needed, and who pays
• Who handles customs procedures
• Who pays any duties and taxes

These terms cover everything from transportation costs to risk management during shipping. Incoterms are a universal system for clarifying each party’s obligations, costs, and risks when exporting goods.

Incoterms: A look back at its history

After its establishment in 1919, the International Chamber of Commerce (ICC) sought to simplify global trade practices. In 1920, the ICC began researching trade terms through a survey involving 13 countries, which was expanded in 1928 to include 30 nations.

In 1936, the ICC introduced the first set of Incoterms, featuring six key terms:

1. FAS (Free Alongside Ship)
2. FOB (Free on Board)
3. C&F (Cost and Freight)
4. CIF (Cost, Insurance, and Freight)
5. EXS (Ex Ship)
6. EXQ (Ex Quay)

Incoterms have undergone several revisions to stay aligned with evolving trade practices, with major updates in 1953, 1967, and 1976. Starting in 1980, modifications have been made approximately every decade.

The format was simplified 2000 to enhance clarity and streamline customs clearance responsibilities. Today, Incoterms are widely used in over 140 countries and translated into 31 languages.

Incoterms 2010 vs. 2020

Although Incoterms were revised in 2020, the updates from the 2010 version are relatively modest. The most notable change was renaming Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU).

The Incoterms 2020, effective January 1, 2020, specify how costs and responsibilities are divided between buyers and sellers in international trade.

This revision broadens the term’s application to include any unloading location, not just terminals. While these rules are the latest standard, they are not mandatory unless stated in the contract.

It may take 1-2 years to adopt these updated terms widely.

Here’s how Incoterms 2020 differs from 2010:

• DPU replaces DAT: The term DAT has been renamed DPU, which stands for Delivered at Place Unloaded. This better reflects the unloading of goods at the final destination.
• FCA on-board notation: The 2020 rules specify that for FCA (Free Carrier), the seller must ensure that the Bill of Lading shows an on-board notation if required by the buyer.
• Insurance changes for CIF and CIP: Under CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To), sellers are now required to provide insurance for 110% of the value of the goods, up from previous minimums.
• Simplified language: The 2020 version uses clearer language to define responsibilities, making it easier to understand who handles customs, payments, and risk.
• Recognition of self-transport: The updated rules acknowledge that buyers and sellers can use their transport means, impacting terms such as FCA, DAP (Delivered at Place), and DDP (Delivered Duty Paid).
• Updated security requirements: Incoterms 2020 clarifies liability for transportation security and customs clearance, specifying seller responsibility for terms like CPT (Carriage Paid To) and buyer responsibility for EXW (Ex Works) and FOB (Free on Board).

The 11 incoterms explained: What they mean and their pros and cons

The International Chamber of Commerce aims to foster fairness in global trade by establishing standard terms. 

As such, the 2020 edition of Incoterms includes 11 distinct abbreviations. These are organized into two categories: 

• Those for any mode of transport 
• And those specifically for sea and inland waterway shipping

We will now break down the 11 incoterms, their benefits, and their drawbacks.

Incoterms for any mode of transportation

For various transportation methods, commonly used Incoterms include Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW).

Here are seven Incoterms applicable to any transportation mode:

1. EXW (Ex Works)

With EXW, the seller provides goods at their premises or another named place, leaving the buyer to handle all transport and export duties. 

For instance, if the point of delivery is a seller’s warehouse, the buyer will assume all responsibility from that location onward.

Pros

• Minimal obligation for the seller
• Lower seller costs
• Buyer controls transport arrangements

Cons

• Significant responsibility and risk for the buyer
• Potentially higher transportation costs
• Risk of unclear responsibilities

2. FCA (Free Carrier)

In an FCA arrangement, the seller hands over goods to a carrier or another party nominated by the buyer. Let’s say that if the seller delivers goods to a shipping agent of the buyer’s choice, the responsibility shifts to the buyer at that point.

Pros

• Buyer has flexibility in choosing their carrier
• Clear division of transport responsibilities
• Suitable for various transport modes

Cons

• Potential complications with delivery arrangements
• Risk of delays if the carrier is unreliable

3. CPT (Carriage Paid To)

Under CPT, the seller pays for transportation to the buyer’s destination port, though the risk is transferred to the buyer as soon as the goods are handed over to the carrier.

As per this term, if the seller covers shipping costs to the buyer’s port, the risk of damage or loss transfers once the carrier takes over.

Pros

• Seller covers transportation costs
• Predictable costs for the buyer
• Useful for international shipments

Cons

• Risk transfers before reaching the final destination
• Buyer has limited control over transportation
• Potentially higher costs due to the seller’s markup

4. CIP (Carriage and Insurance Paid To)

CIP means the seller arranges and pays for transport and insurance up to the buyer’s destination. For example, if the seller covers shipping and insurance to the buyer’s port, the risk remains with the seller until the goods reach the agreed point.

Pros

• Added protection with insurance coverage
• The seller handles both transport and insurance costs
• Clear responsibilities for both parties

Cons

• Higher overall cost due to insurance
• Risk transfers before reaching the final destination

5. DAP (Delivered at Place)

DAP requires the seller to deliver goods ready for unloading at a specified location. For instance, if the seller delivers goods to the buyer’s warehouse, the buyer is responsible for unloading and import duties.

Pros

• The seller covers all transport costs
• Clear delivery location
• Simplifies the process for the buyer

Cons

• Risk transfers at the named delivery place
• Buyer handles unloading and import duties
• Possible disputes over delivery terms

6. DPU (Delivered at Place Unloaded)

With DPU, the seller delivers and unloads goods at a designated location. For example, if the seller delivers and unloads goods at the buyer’s premises, the seller assumes responsibility for unloading.

Pros

• Seller manages unloading, reducing buyer effort
• Clear delivery and unloading responsibilities
• It avoids disputes over unloading

Cons

• Risk transfers after unloading
• The seller bears unloading costs
• Possible disputes over unloading terms

7. DDP (Delivered Duty Paid)

In a DDP arrangement, the seller handles all costs, including transportation, duties, and taxes, and delivers goods to the buyer’s location. If the seller handles all import duties and delivers the goods to the buyer’s premises, the buyer has a clear, hassle-free delivery.

Pros

• The seller manages all aspects of the delivery
• Predictable costs for the buyer
• Simplifies the process for the buyer

Cons

• High responsibility and risk for the seller
• Potentially higher costs due to handling all duties
• The seller must manage all import formalities

Incoterms for sea and inland waterway shipping 

The Incoterms rules for sea and inland waterway transport focus on maritime shipping’s unique requirements. These terms define the responsibilities for delivery, risk management, and cost allocation specifically for these routes.

1. FAS (Free Alongside Ship)

With FAS, the seller delivers goods alongside the ship at the port of shipment. If the seller places goods next to the vessel, the buyer is responsible for loading and transporting them further.

Pros

• The seller’s responsibility ends at the port
• The buyer controls the main carriage
• Suitable for bulk goods

Cons

• Risk transfers at the port
• The buyer handles both the loading and transportation of the goods
• Possible delays or complications in loading

2. FOB (Free on Board)

Under FOB, the seller loads goods on board the vessel. For instance, if the seller places the goods on the ship, the risk transfers to the buyer once the goods are on board.

Pros

• Clear responsibility for loading
• Buyer manages shipping arrangements
• The seller avoids shipping logistics

Cons

• Risk transfers once goods are on board
• Buyer handles shipping and insurance
• Potential disputes overloading practices

3. CFR (Cost and Freight)

In CFR, the seller covers the transport cost to the destination port, while the risk transfers once the goods are on board the vessel. For example, if the seller pays for shipping to the destination port, the buyer assumes risk once the goods are on board.

Pros

• The seller covers transportation costs
• Predictable shipping costs for the buyer
• Suitable for sea and inland waterway transport

Cons

• Risk transfers before arrival at the destination
• No obligation for insurance
• Buyer may incur additional costs

5. CIF (Cost, Insurance, and Freight)

CIF involves the seller arranging and paying for transport and insurance to the destination port. If the seller handles shipping and insurance, the risk is covered until the goods reach the destination port.

Pros

• The seller covers both transport and insurance
• Provides added security with insurance
• Clear cost and risk allocation

Cons

• Insurance may not cover all risks
• Risk transfers before reaching the destination port

What’s not covered by incoterms?

Incoterms primarily define the responsibilities of buyers and sellers regarding delivery, risk, and cost allocation. However, they do not address all aspects of international trade.

Here are the key aspects not covered by Incoterms:

• Conditions of sale: Incoterms do not address the detailed terms and conditions beyond delivery, risk, and cost responsibilities.
• Goods description and pricing: They do not specify the description of goods or the agreed contract price.
• Payment terms: Incoterms do not cover the method or timing of payment between the seller and buyer.
• Title transfer: They do not define when the title or ownership of the goods transfers from the seller to the buyer, as separate contractual agreements govern it.
• Documentation requirements: Incoterms do not specify which documents are required for customs clearance in the buyer’s country.
• Compliance and liability: They do not address issues related to the goods’ noncompliance with contract specifications, delayed delivery, or dispute resolution procedures.
• Quality and packaging: Incoterms do not provide specific details on the standards for packaging or product quality.
• Customs duties and taxes: They do not provide detailed guidance on customs duties and taxes beyond general obligations. These need to be clarified separately in contracts or local regulations.

FAQs

1. Can 2010 incoterms be used instead of the 2020 ones?

Yes, Incoterms 2010 can still be used instead of the 2020 version if both parties agree and specify it in their contract. The 2020 rules are not mandatory unless stated, so using the 2010 terms is valid as long as it’s clearly outlined in the agreement.

2. Which incoterms is best for buyers?

Delivered Duty Paid and Delivered at Place benefit buyers by minimizing their responsibilities. DDP includes all costs, simplifying the process, while DAP covers most transportation costs, leaving buyers to handle only import duties.

3. What are incoterms in a freight order?

Incoterms establish clear guidelines for dividing shipping costs and responsibilities for freight orders, including who will handle the delivery process and cover associated expenses.

4. How do I know which incoterms to use?

You need to select incoterms by evaluating the level of control and responsibility you want over transportation costs and risks. Match the terms to your logistical needs and contractual preferences, ensuring both parties agree on the chosen Incoterms.

Level up your trade operations with Incoterms 

Understanding Incoterms improves negotiation skills and ensures smoother transactions. To avoid unexpected challenges, regularly assess any updates to these terms. 

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