Every international trade contract includes a three-letter code that determines who pays for shipping, who arranges insurance, who handles customs clearance, and — critically — at what point risk transfers from seller to buyer. These codes are called Incoterms, short for International Commercial Terms. Published by the International Chamber of Commerce (ICC), the 2020 edition contains 11 rules that apply to goods moving by any mode of transport. Getting Incoterms wrong can mean unexpected costs of tens of thousands of dollars, insurance gaps that leave cargo unprotected, or disputes that end business relationships. This guide explains every term in plain language with concrete examples.
Why Incoterms Matter More Than You Think
Incoterms are not just bureaucratic labels — they have direct financial consequences. Consider a $500,000 shipment of electronics moving from Shenzhen to Dubai. Under EXW (Ex Works), the buyer in Dubai is responsible for collecting the goods from the factory gate in China, arranging export customs in China, booking the ocean freight, insuring the cargo, and handling import customs in the UAE. Under DDP (Delivered Duty Paid), the seller handles every single one of those steps and delivers the goods cleared through UAE customs to the buyer's warehouse. The cost difference and risk exposure between these two extremes can easily exceed $15,000–$30,000. Choosing the wrong term — or misunderstanding who is responsible — can result in cargo sitting at a port under demurrage charges, insurance claims being denied, or both parties assuming the other arranged critical services.
The Two Categories: Rules for Any Mode vs Sea-Only Rules
Incoterms 2020 are divided into two categories. The first group of seven rules — EXW, FCA, CPT, CIP, DAP, DPU, and DDP — can be used for any mode of transport: air, sea, road, rail, or multimodal. The second group of four rules — FAS, FOB, CFR, and CIF — apply only to sea and inland waterway transport, and specifically to bulk cargo or breakbulk where the point of delivery is the ship's side or on board. A critical and widely misunderstood point: FOB and CIF are frequently used (incorrectly) in container shipping contracts. For containerized cargo, FCA and CIP are the correct equivalents because risk should transfer at the container freight station (CFS) or port of loading, not at the ship's rail — you cannot place a container "on board" in the traditional sense without the container already being in the carrier's control.
EXW — Ex Works: Maximum Responsibility for the Buyer
Under Ex Works, the seller's only obligation is to make the goods available at their premises — typically their factory or warehouse. The buyer bears all costs and risks from that point forward: arranging a truck to collect the goods, handling export customs documentation and duties in the seller's country, booking ocean or air freight, insuring the cargo, and arranging import customs clearance at the destination. EXW gives the buyer maximum control over the entire supply chain but requires significant logistics expertise and relationships in the seller's country. It is rarely appropriate for buyers who do not have a freight forwarder or customs broker in the country of export. Example: A UK buyer purchasing furniture from a manufacturer in Vietnam on EXW terms is responsible for organizing a truck from the factory in Ho Chi Minh City to the port, filing Vietnamese export customs, booking the ocean freight, insuring the 40-foot container, and clearing UK customs upon arrival.
FCA — Free Carrier: The Preferred Alternative to FOB for Containers
Free Carrier transfers risk from seller to buyer when the seller delivers the goods to a named carrier at a named place. If that place is the seller's premises, the seller is responsible for loading. If it is another place, the seller is not responsible for unloading. FCA is the recommended Incoterm for containerized cargo instead of FOB because it accurately reflects when risk transfers — when the container is handed to the ocean carrier at the container freight station or the port terminal, not when it is hoisted over the ship's rail. The 2020 revision of Incoterms added an important clarification: under FCA, the buyer can instruct the carrier to issue an on-board bill of lading to the seller after loading, which is critical for letters of credit that require B/L evidence of loading.
FOB — Free on Board: Popular but Misapplied
Free on Board means the seller delivers the goods on board the vessel at the named port of shipment and bears all costs and risks up to that point, including export customs. Once the goods are on the ship, risk passes to the buyer, who is responsible for freight and insurance from that point. FOB is the most commonly used sea freight Incoterm in international trade — particularly for manufacturing contracts from China, India, and Southeast Asia. However, as noted above, it is technically incorrect for containerized cargo, where risk actually transfers when the container is delivered to the terminal rather than when it crosses the ship's rail. Despite this technical issue, FOB is widely accepted by banks and customs authorities in its traditional meaning, and billions of dollars of containerized cargo moves on FOB terms every year.
CIF — Cost Insurance Freight: When the Seller Pays for Shipping
Under CIF, the seller pays for freight and minimum insurance to the named port of destination, but risk transfers to the buyer when the goods are loaded on board the ship at the port of origin. This creates an important asymmetry: the seller arranges and pays for freight and insurance, but the buyer bears the risk during transit. If the ship sinks halfway, the buyer suffers the loss — not the seller. The seller's minimum insurance obligation under CIF is only 110% of the cargo value under Institute Cargo Clauses (C), which is the most basic level of cover and excludes many common perils. Buyers should be aware of this and either negotiate for Institute Cargo Clauses (A) — all-risks cover — or arrange their own marine insurance. CIF is the Incoterm used as the basis for customs valuation in most countries: import duties are calculated on the CIF value of goods.
DDP — Delivered Duty Paid: Maximum Responsibility for the Seller
Delivered Duty Paid is the opposite of EXW — the seller is responsible for everything: packing, export customs, freight, insurance, import customs duties and taxes, and delivery to the buyer's named destination. DDP gives the buyer the simplest possible buying experience, similar to purchasing domestically. However, it creates significant challenges for sellers. The seller must have a legal entity or fiscal representative in the destination country to file import customs, which is not always feasible. Import duties, VAT, and other taxes can be unpredictable and erode margins significantly. For e-commerce shipments under customs de minimis thresholds, DDP is commonly used by platforms like Shopify and Amazon Marketplace. For B2B trade, DAP (see below) is often preferred because it keeps import duties and taxes on the buyer, who knows their country's rules better.
DAP — Delivered at Place: A Practical Middle Ground
Delivered at Place means the seller delivers goods ready for unloading at the named destination, bearing all risks and costs except import duties and taxes, which are the buyer's responsibility. DAP is one of the most commonly used Incoterms for B2B cross-border e-commerce and standard commercial shipments. It gives the seller control over the freight and insurance (ensuring quality service) while keeping import customs clearance with the buyer, who understands local requirements and has an existing customs broker relationship. Many large retailers and procurement teams prefer DAP because it means they receive a firm landed price including freight, while still controlling their own import compliance.
CPT and CIP: The Container-Friendly Equivalents of CFR and CIF
Carriage Paid To (CPT) and Carriage and Insurance Paid To (CIP) are the multimodal equivalents of CFR and CIF. Under CPT, the seller pays freight to the named destination but risk transfers to the buyer when goods are handed to the first carrier (usually at the origin container freight station). CIP is identical but adds the seller's obligation to arrange insurance — and importantly, the 2020 revision upgraded the minimum insurance requirement under CIP from Institute Cargo Clauses (C) to Institute Cargo Clauses (A), providing all-risks cover. This makes CIP significantly more protective for the buyer than CIF. For containerized cargo moving door-to-door or port-to-door, CPT and CIP more accurately reflect the logistics reality than CFR and CIF.
How to Choose the Right Incoterm for Your Shipment
The right Incoterm depends on your logistics capabilities, your relationship with the counterparty, and your risk appetite. As an importer: if you have a strong freight forwarder network and want maximum control and cost transparency, use FCA or FOB — you manage your own freight and insurance. If you want a simple door-to-door price and trust your supplier's logistics, use DAP or DDP. As an exporter: if you want to minimize your logistics obligations and focus on manufacturing, use EXW or FCA. If you want to add value and margin by including logistics in your pricing, use CIF or DAP. Always specify the complete Incoterm including the version: "CIF Shanghai, Incoterms 2020" — not just "CIF Shanghai." Include it in your purchase orders, commercial invoices, and letters of credit. Track the progress of your shipments with Trackora using the container number, bill of lading, or booking reference your freight forwarder provides.
Incoterms and Insurance: What You Must Know
Insurance is one of the most dangerous gaps in international trade. Under EXW, FCA, FAS, FOB, CFR, CPT, and DAP, the seller has no obligation to arrange cargo insurance. The buyer is responsible for insuring their own cargo from the point risk transfers. Many buyers — especially SMEs new to importing — assume their goods are insured during ocean transit when they are not. If a container is lost, damaged, or stolen at sea and you are buying on FOB terms without your own cargo insurance, you bear the full loss. Always arrange marine cargo insurance independently, preferably Institute Cargo Clauses (A) which provides all-risks cover. Under CIF, the seller must provide minimum insurance, but as noted, this is only Clauses (C). Under CIP in Incoterms 2020, the seller must provide Clauses (A) cover — the most comprehensive form.
Common Incoterms Mistakes and How to Avoid Them
The most frequent Incoterms mistakes in practice: using FOB for containerized cargo (use FCA instead); specifying EXW when the buyer has no customs authority in the seller's country; using DDP when the seller has no legal entity in the destination country; forgetting to specify the named place (e.g., "FOB" with no port name is legally incomplete); using an outdated version such as Incoterms 2010 when Incoterms 2020 is now current; and assuming CIF includes all-risks insurance (it only requires minimum cover). Another common error is misapplying Incoterms to domestic trade — these rules are designed for international trade and include provisions for export/import customs that do not apply to domestic transactions. For tracking your shipments under any Incoterm, Trackora works with any reference number your freight forwarder or carrier provides.