Incoterms 2020 Explained: The Complete Guide for International Trade

Published by Exvoria Team

Introduction

International trade involves much more than simply buying and selling products. Every shipment requires clear agreements regarding transportation, insurance, customs responsibilities, delivery locations, and the transfer of risk between buyers and sellers.

Without clearly defined rules, misunderstandings can easily arise. Questions such as "Who pays for freight?", "Who is responsible for customs clearance?", or "When does the risk transfer from the seller to the buyer?" can quickly become costly disputes.

To solve these challenges, the International Chamber of Commerce (ICC) created the International Commercial Terms, commonly known as Incoterms.

Incoterms are internationally recognized trade rules that define the responsibilities of buyers and sellers during international transactions. They provide a common language that businesses around the world use when negotiating contracts and shipping goods across borders.

Today, Incoterms are used by manufacturers, exporters, importers, freight forwarders, logistics providers, customs brokers, banks, insurance companies, and governments in almost every country.

Whether you are exporting for the first time or managing global supply chains, understanding Incoterms is essential for reducing risk and avoiding misunderstandings.

In this guide, you'll learn:

• What Incoterms are

• Why Incoterms matter

• The 11 Incoterms 2020 rules

• How responsibilities are divided

• Which Incoterm is best for different situations

• Common mistakes businesses make

• Frequently asked questions about Incoterms

What Are Incoterms?

Incoterms (International Commercial Terms) are standardized trade rules published by the International Chamber of Commerce (ICC).

Their purpose is to define the responsibilities of buyers and sellers during international trade transactions.

Incoterms determine:

• Who arranges transportation

• Who pays transportation costs

• Who purchases cargo insurance

• Who completes export customs procedures

• Who completes import customs procedures

• Where delivery officially takes place

• When the risk transfers from seller to buyer

These rules help businesses avoid confusion by clearly defining each party's obligations before goods are shipped.

It is important to understand that Incoterms do not determine:

• Product ownership

• Payment methods

• Product quality requirements

• Contract terms

• Dispute resolution procedures

Instead, they focus specifically on the delivery of goods and the allocation of costs and risks during transportation.

Why Are Incoterms Important?

International shipments often involve multiple organizations working together.

A typical export transaction may include:

• Exporter

• Importer

• Freight forwarder

• Shipping company

• Customs authorities

• Insurance provider

• Warehouse operators

• Local transportation companies

Without standardized trade rules, each party could have different expectations regarding responsibilities.

Incoterms eliminate uncertainty by establishing internationally accepted definitions that are recognized across global markets.

Businesses benefit from using Incoterms because they help:

• Reduce misunderstandings

• Improve contract clarity

• Define transportation responsibilities

• Clarify customs obligations

• Allocate transportation costs

• Reduce commercial disputes

• Support smoother international transactions

For this reason, Incoterms are included in millions of international sales contracts every year.

Who Uses Incoterms?

Incoterms are not limited to large multinational corporations.

Businesses of all sizes use them when buying or selling goods internationally.

Common users include:

• Manufacturers

• Exporters

• Importers

• Wholesalers

• Distributors

• Trading companies

• Freight forwarders

• Customs brokers

• Logistics companies

• Procurement teams

Even small businesses entering international markets benefit from understanding Incoterms before negotiating with overseas partners.

Incoterms 2020

The latest official version is Incoterms® 2020, published by the International Chamber of Commerce.

This version became effective on January 1, 2020, replacing the previous Incoterms® 2010 rules.

Although older contracts may still reference earlier versions, businesses are generally encouraged to specify Incoterms® 2020 in new international sales agreements to ensure both parties are working under the same set of rules.

When drafting contracts, it is good practice to state both the rule and the named place.

For example:

• FOB Shanghai Port – Incoterms® 2020

• CIF Hamburg Port – Incoterms® 2020

• DDP Berlin – Incoterms® 2020

Including the named location helps eliminate ambiguity and ensures both parties clearly understand where responsibilities and risks transfer.

💡 Expert Tip

Always specify the exact Incoterms rule and the delivery location in your contract.

Writing only "FOB" or "CIF" is not enough. A complete reference such as FOB Shanghai Port – Incoterms® 2020 provides much greater clarity and reduces the risk of misunderstandings during international shipments.

The 11 Incoterms® 2020 Rules Explained

Incoterms® 2020 includes 11 internationally recognized trade rules that define the responsibilities of buyers and sellers during international shipments.

Some rules apply to any mode of transport, while others are designed specifically for sea and inland waterway transport.

Understanding when to use each rule helps businesses reduce risk, improve communication, and negotiate international contracts more effectively.

EXW (Ex Works)

EXW (Ex Works) places the minimum responsibility on the seller.

Under EXW, the seller's obligation is simply to make the goods available at an agreed location, usually the seller's warehouse or factory.

From that point onward, almost every responsibility belongs to the buyer.

The buyer is responsible for:

• Loading the goods

• Inland transportation

• Export customs clearance

• International freight

• Insurance

• Import customs clearance

• Final delivery

Best For

• Experienced international buyers

• Domestic collections

• Buyers with strong logistics capabilities

Advantages

• Lowest responsibility for the seller

• Maximum control for the buyer

• Flexible logistics planning

Disadvantages

• Complex for inexperienced buyers

• Buyer assumes most transportation risks

• Export procedures may be difficult in some countries

FCA (Free Carrier)

FCA is one of the most flexible Incoterms and is widely used in international trade.

Under FCA, the seller delivers the goods to a carrier or another party nominated by the buyer at an agreed location.

The seller is responsible for:

• Preparing the goods

• Export customs clearance

• Delivering goods to the agreed carrier

Once the goods are handed over to the carrier, the risk transfers to the buyer.

Best For

• Container shipments

• Air freight

• Rail freight

• Road transport

• Multimodal transportation

Advantages

• Suitable for almost every transport method

• Clear transfer of responsibility

• Efficient for international logistics

CPT (Carriage Paid To)

Under CPT, the seller pays for transportation to the agreed destination.

However, an important point is often misunderstood.

Although the seller pays for freight, the risk transfers to the buyer once the goods are delivered to the first carrier.

This means transportation costs and transportation risk do not transfer at the same moment.

Seller responsibilities include:

• Export customs clearance

• Transportation arrangements

• Freight payment

Buyer responsibilities include:

• Insurance (unless arranged separately)

• Import customs clearance

• Import duties

• Final delivery after arrival

Best For

• Multimodal transport

• International commercial shipments

• Businesses with established logistics partners

CIP (Carriage and Insurance Paid To)

CIP is similar to CPT, but with one major difference.

The seller must also purchase cargo insurance for the buyer during transportation.

Seller responsibilities include:

• Export customs clearance

• Freight payment

• Cargo insurance

• Delivery to the first carrier

The buyer remains responsible for import procedures and import duties after arrival.

Best For

• High-value products

• Electronics

• Medical equipment

• Machinery

• Sensitive cargo

Advantages

• Additional protection through cargo insurance

• Suitable for multimodal transportation

• Greater confidence for buyers

DAP (Delivered at Place)

DAP means the seller delivers the goods to an agreed destination, ready for unloading.

The seller is responsible for nearly the entire transportation process.

However, the buyer is responsible for:

• Import customs clearance

• Import duties and taxes

• Unloading the goods

DAP is commonly used when sellers are willing to organize transportation but prefer buyers to manage local import formalities.

Best For

• International commercial shipments

• Long-term business relationships

• Buyers familiar with local customs procedures

💡 Expert Tip

One of the most common mistakes in international trade is assuming that the party paying for transportation also carries the transportation risk.

Under some Incoterms, such as CPT and CIP, these responsibilities transfer at different stages. Always read the specific rule carefully before signing an international sales contract.

DPU (Delivered at Place Unloaded)

DPU (Delivered at Place Unloaded) is the only Incoterms® 2020 rule that requires the seller to unload the goods at the agreed destination.

Under DPU, the seller is responsible for:

• Export customs clearance

• Transportation

• Freight costs

• Delivery to the agreed destination

• Unloading the goods

The buyer is responsible for:

• Import customs clearance

• Import duties and taxes

Because unloading is included in the seller's responsibilities, DPU should only be used when the seller has the capability to arrange unloading safely and efficiently.

Best For

• Heavy industrial equipment

• Construction materials

• Large machinery

• Project cargo

DDP (Delivered Duty Paid)

DDP places the maximum responsibility on the seller.

The seller manages almost the entire transportation process until the goods arrive at the buyer's location.

Seller responsibilities include:

• Export customs clearance

• Transportation

• Insurance (if arranged)

• Import customs clearance

• Import duties and taxes

• Final delivery

The buyer is generally responsible only for receiving the goods.

Advantages

• Very convenient for buyers.

• Simple purchasing process.

• Predictable delivery experience.

Disadvantages

• Greater responsibility and cost for sellers.

• Sellers must understand the import regulations of the destination country.

• Unexpected customs issues can increase overall costs.

FAS (Free Alongside Ship)

FAS is designed specifically for sea and inland waterway transport.

Under FAS, the seller delivers the goods alongside the vessel at the named port of shipment.

Once the goods are placed alongside the ship, responsibility transfers to the buyer.

The buyer then arranges:

• Loading onto the vessel

• Ocean freight

• Insurance

• Import customs clearance

Best For

• Bulk cargo

• Commodities

• Large industrial shipments

FOB (Free On Board)

FOB is one of the best-known Incoterms in international trade.

Under FOB, the seller is responsible until the goods are loaded onto the vessel at the agreed port of shipment.

Seller responsibilities include:

• Preparing the goods

• Export customs clearance

• Delivering the cargo to the port

• Loading the goods onto the vessel

Once the cargo is on board, the risk transfers to the buyer.

Best For

• Sea freight

• Bulk cargo

• Non-containerized shipments

Although FOB is widely recognized, businesses should ensure it is used appropriately based on the shipment type and logistics arrangements.

CFR (Cost and Freight)

With CFR, the seller pays the transportation costs required to move the goods to the destination port.

However, the transfer of risk occurs much earlier.

Risk transfers to the buyer once the goods have been loaded onto the vessel at the port of shipment.

Seller responsibilities include:

• Export customs clearance

• Ocean freight

Buyer responsibilities include:

• Insurance

• Import customs clearance

• Import duties

• Final transportation after arrival

This difference between transportation costs and transportation risk is one of the most frequently misunderstood aspects of CFR.

CIF (Cost, Insurance and Freight)

CIF builds upon CFR by adding one additional responsibility.

The seller must also obtain cargo insurance covering the shipment during ocean transportation.

Seller responsibilities include:

• Export customs clearance

• Ocean freight

• Cargo insurance

The buyer remains responsible for:

• Import customs clearance

• Import duties

• Delivery after arrival

Best For

• Ocean freight

• International commercial shipments

• Buyers seeking additional cargo protection

Choosing the Right Incoterm

Selecting the appropriate Incoterm depends on several factors, including:

• Transportation method

• Product value

• Experience of the buyer and seller

• Customs expertise

• Insurance requirements

• Control over logistics

• Destination country

There is no single Incoterm that is suitable for every transaction.

Businesses should evaluate each shipment individually and choose the rule that best matches their commercial agreement and operational capabilities.

Incoterms Comparison Overview

Incoterm	Export Clearance	Freight Paid by Seller	Insurance by Seller	Import Clearance	Main Transport
EXW	Buyer	Buyer	Buyer	Buyer	Any
FCA	Seller	Buyer	Buyer	Buyer	Any
CPT	Seller	Seller	Buyer	Buyer	Any
CIP	Seller	Seller	Seller	Buyer	Any
DAP	Seller	Seller	Optional	Buyer	Any
DPU	Seller	Seller	Optional	Buyer	Any
DDP	Seller	Seller	Optional	Seller	Any
FAS	Seller	Buyer	Buyer	Buyer	Sea
FOB	Seller	Buyer	Buyer	Buyer	Sea
CFR	Seller	Seller	Buyer	Buyer	Sea
CIF	Seller	Seller	Seller	Buyer	Sea

💡 Expert Tip

Do not choose an Incoterm simply because it is commonly used. Select the rule that reflects your logistics capabilities, customs responsibilities, and commercial agreement. The wrong Incoterm can increase costs, create delays, and lead to unnecessary disputes between trading partners.

Common Incoterms Mistakes

Even experienced exporters and importers occasionally misunderstand Incoterms. These mistakes can lead to unexpected costs, shipment delays, disputes, and financial losses.

Understanding the most common errors helps businesses negotiate international contracts with greater confidence.

Using the Wrong Incoterm

One of the most common mistakes is selecting an Incoterm simply because it is familiar.

For example, some businesses continue using FOB for container shipments without considering whether another rule, such as FCA, may better reflect the actual logistics process.

Before choosing an Incoterm, consider:

• Mode of transport

• Shipping route

• Customs responsibilities

• Insurance requirements

• Experience of both trading partners

The correct Incoterm should match the commercial agreement—not habit.

Assuming Incoterms Cover Everything

Incoterms define responsibilities related to the delivery of goods, but they do not replace a sales contract.

They do not determine:

• Ownership of the goods

• Payment terms

• Product specifications

• Warranty conditions

• Dispute resolution

• Transfer of intellectual property

A complete international sales agreement should address these topics separately.

Forgetting to Specify the Named Place

Writing only FOB or CIF is incomplete.

Always include the named location.

For example:

• FOB Shanghai Port – Incoterms® 2020

• CIF Hamburg Port – Incoterms® 2020

• DDP Berlin – Incoterms® 2020

The named place determines exactly where responsibilities and risks transfer between the seller and the buyer.

Ignoring Insurance Responsibilities

Not every Incoterm requires the seller to arrange cargo insurance.

For example:

• Under CIF and CIP, the seller is responsible for obtaining insurance.

• Under FOB, FCA, and CFR, insurance is generally the buyer's responsibility unless agreed otherwise.

Before shipping goods, both parties should clearly understand who is responsible for insurance coverage.

Frequently Asked Questions

What are Incoterms?

Incoterms are internationally recognized trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers during international shipments.

How many Incoterms are included in Incoterms® 2020?

Incoterms® 2020 includes 11 official trade rules.

Seven rules apply to any mode of transport, while four are designed specifically for sea and inland waterway transport.

Which Incoterm is best for beginners?

There is no universal answer.

The most suitable Incoterm depends on the shipment, transportation method, logistics capabilities, and commercial agreement between the buyer and seller.

Businesses new to international trade often seek professional advice before selecting an Incoterm.

Which Incoterms require insurance?

Under Incoterms® 2020, CIF and CIP require the seller to arrange cargo insurance.

Other rules may still involve insurance, but responsibility depends on the agreement between the parties.

Do Incoterms determine who owns the goods?

No.

Incoterms only define transportation responsibilities, costs, and risk transfer.

Ownership of the goods should be determined in the sales contract.

Can Incoterms be used for domestic trade?

Yes.

Although Incoterms were developed for international trade, they may also be used for domestic transactions if both parties agree.

Why are Incoterms important?

Incoterms reduce misunderstandings by clearly defining each party's responsibilities regarding transportation, customs procedures, costs, and risk.

They help businesses communicate more effectively and reduce commercial disputes.

Should every international contract include an Incoterm?

Yes.

Including the appropriate Incoterm and the named place provides greater clarity and helps both parties understand their obligations before shipment begins.

Final Thoughts

Incoterms® 2020 form the foundation of modern international trade.

By clearly defining responsibilities for transportation, customs procedures, costs, insurance, and risk transfer, these rules help businesses conduct international transactions with greater confidence and fewer misunderstandings.

Understanding Incoterms is not only important for exporters and importers—it is equally valuable for manufacturers, wholesalers, logistics providers, procurement teams, and international sales professionals.

Choosing the right Incoterm, using it correctly, and specifying the appropriate named place in every agreement can reduce operational risks, improve communication, and strengthen long-term business relationships.

As global trade continues to evolve, a solid understanding of Incoterms remains an essential skill for every company operating across international markets.

Continue Learning

Expand your knowledge of international trade with these related guides:

• How to Find International Buyers

• How to Find Manufacturers

• Supplier Verification

• Export Documentation

• International Shipping Guide

• Letter of Credit Explained

• FOB vs CIF: Key Differences

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