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Incoterms (International Commercial Terms) are internationally recognized trade terms that establish the obligations of buyers and sellers in global commerce. Introduced by the International Chamber of Commerce (ICC) in 1936, these three-letter trade terms have been updated regularly to align with evolving global trade requirements.
The latest version, Incoterms 2020, came into effect on January 1, 2020, providing clearer guidance on costs and risks distribution, customs formalities and transportation obligations.
What Are the Incoterms 2020 and How Do They Work?
Incoterms 2020 consists of 11 standardized rules, classified based on their applicability to different modes of transport.
They outline who covers all the costs, who assumes the risks involved, and at what stage responsibility shifts between the buyer and seller.
Incoterms for Any Mode of Transport:
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EXW (Ex Works) – The seller makes goods available at their premises; the buyer is responsible for all the costs, including transportation, insurance cover, and import duties.
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FCA (Free Carrier) – The seller delivers the goods to a third-party carrier, with risk transferring upon handover.
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CPT (Carriage Paid To) – The seller covers transportation to the named place of destination, but the risks involved transfer to the buyer when handed to the main carrier.
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CIP (Carriage and Insurance Paid To) – Similar to CPT, but with minimum insurance based on the Institute Cargo Clause.
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DAP (Delivered at Place) – The seller delivers to the point of destination, and the buyer is responsible for unloading and customs clearance.
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DPU (Delivered at Place Unloaded) – The seller covers transportation and unloading at the place unloaded.
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DDP (Delivered Duty Paid) – The seller pays for all transportation costs, export fees, and import duties, assuming full responsibility until goods arrive in the buyer's country.
Incoterms for Maritime and Inland Waterway Transport:
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FAS (Free Alongside Ship) – The seller delivers goods alongside the vessel at the port of destination.
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FOB (Free On Board) – The seller covers costs until goods pass the ship's rail; after that, risk transfers to the buyer.
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CFR (Cost and Freight) – The seller pays for transport to the destination port, however risk transfers once goods are loaded.
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CIF (Cost, Insurance, and Freight) – Like CFR, but the seller delivers the goods with cost insurance included.
How Incoterms Divide Responsibilities, Costs, and Risks
Each Incoterms rule determines:
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Who arranges transportation and at what stage;
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Who covers all the costs related to freight, insurance paid, customs clearance, and taxes;
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When the risk of loss or damage transitions from seller to buyer.
Selecting the right trade terms is crucial for minimizing risks and ensuring cost efficiency in sales contracts.
The Role of Incoterms in Buy-Sell Agreements
Incoterms rules provide a structured framework that enhances transparency in global trade, preventing misunderstandings in sales contracts. By clarifying who is responsible for transportation, costs, and risks, these rules help businesses streamline logistics, customs clearance and cost allocation.
What are the four most used Incoterms?
It is a simple way for the sellers to deliver a product to a buyer for collection. Nonetheless, we find the following Incoterm with relative frequency: DDP (duty paid on delivery), FoB & CIF costs, insurance & freight.
Rules for any mode or modes of transport
EXW: Ex work (named site of delivery) Often used when making a quotation to the seller without any expenses EXW means the seller makes the product available either on their premises. The seller does not need to put the goods into the collection vehicle nor clear the goods for export. FCA – Free Carrier or name of the destination. FCA can be divided into two different meanings and each has different risks for both buyers and sellers. FCA (a) is applicable if the buyer delivers goods to the destination specified by them at their premises. FCA.
The Most Common Mistakes in Using Incoterms and How to Avoid Them
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Using the wrong Incoterm for the transport mode – Ensure the selected term is appropriate for sea, air, or inland waterway transport.
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Misunderstanding cost responsibilities – Some terms, such as DDP Delivered Duty Paid, include all the costs, while others, like EXW, shift all expenses to the buyer.
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Ignoring insurance coverage – Certain terms (e.g., CIP, CIF) require the seller to provide insurance paid, while others do not.
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Confusion over risk transfer points – Knowing when goods pass from seller to buyer can prevent costly disputes.
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Failure to update agreements – Always refer to the latest Incoterms 2020 version to ensure compliance with current standards.
Incoterms 2020 Risk and Fee Map
For a clearer understanding of cost distribution and risk allocation, businesses can refer to the official ICC Incoterms 2020 risk and fee chart.
This resource provides:
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A clear breakdown of cost-bearing responsibilities between buyers and sellers;
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A visual representation of risk transfer points along the supply chain;
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Key takeaways for optimizing trade agreements and logistics strategies.
Conclusion
A solid grasp of Incoterms 2020 is essential for businesses involved in international trade. Selecting the correct trade terms allows companies to optimize shipping costs, manage risks involved, and ensure smooth transactions in sales contracts.
These rules define clear responsibilities, ensuring efficient negotiations and preventing unexpected costs.
At AsstrA, the experts assist businesses in navigating Incoterms rules, providing guidance on customs clearance, insurance paid solutions, and multimodal transport options, including sea and inland waterway shipments. Our experience in handling sales contracts, managing port of destination requirements, and advising on carriage and insurance paid options ensures seamless logistics operations.
By partnering with a trusted logistics provider, companies can confidently manage their international commercial terms, mitigate buyer’s risk, and enhance their competitive edge in the global marketplace.
Frequently Asked Questions (FAQ)
1. What is the main purpose of Incoterms?
Incoterms define the responsibilities of buyers and sellers in international trade, specifying who covers costs and risks at different stages of transport.
2. How do Incoterms impact sales contracts?
They establish clear trade terms, reducing misunderstandings in sales contracts and ensuring smoother logistics operations.
3. What is the difference between CIF and FOB?
CIF (Cost, Insurance, and Freight) means the seller covers transport costs and provides insurance paid until the port of destination.
FOB (Free On Board) shifts responsibility to the buyer once goods are loaded onto the vessel.
4. Which Incoterm is best for the seller?
EXW (Ex Works) places the least burden on the seller, making the buyer responsible for all the costs.
5. Which Incoterms require the seller to provide insurance?
CIP (Carriage and Insurance Paid To) and CIF (Cost, Insurance, and Freight) require the seller to provide at least a minimum level of insurance coverage as stipulated by international trade regulations.
6. How can AsstrA help with Incoterms?
AsstrA provides expert support in customs clearance, inland waterway transport, and international commercial terms, ensuring optimal logistics solutions for every shipment.
7. What is the importance of understanding risk transfer points?
Risk transfer determines when liability shifts from the seller to the buyer, preventing disputes and ensuring clarity in sales contracts.
8. Why should businesses use Incoterms 2020 instead of older versions?
Incoterms evolve to reflect changes in global trade regulations and logistics practices, ensuring compliance and efficiency
9. Can Incoterms affect customs duties and taxes?
Yes, trade terms like DDP mean the seller covers import duties, while EXW places this responsibility on the buyer.
Trademark and Copyright Policy
Incoterms is a registered trademark of the International Chamber of Commerce (ICC).
Businesses and logistics providers, including AsstrA, must ensure compliance with ICC guidelines when referencing Incoterms 2020 in trade documentation. Any reproduction, distribution, or modification of Incoterms rules must adhere to ICC’s trademark and copyright policies.
At AsstrA, we prioritize compliance with international regulations and industry standards, ensuring that our clients receive legally sound and strategically optimized logistics solutions. AsstrA team stays updated on customs formalities, international commercial terms, and insurance cover regulations, providing businesses with expert guidance on the correct application of Incoterms rules for seamless and compliant global trade operations.