Incoterms
Incoterms (International Commercial Terms) are a set of standardised three-letter terms published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade. They specify who pays for transport, insurance, and customs duties, and where risk transfers between parties.
The current version is Incoterms 2020, with 11 terms grouped by mode:
- Any mode: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered At Place), DPU (Delivered At Place Unloaded), DDP (Delivered Duty Paid)
- Sea/inland waterway only: FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight)
The most common in ocean trade are FOB (seller delivers on board, buyer pays freight and insurance), CIF (seller pays freight + insurance to destination port), and DDP (seller pays everything including destination duties). Choosing the right Incoterm has major implications for cost, risk, and customs liability.
Incoterms decide exactly where cost and risk pass from seller to buyer. Choose the wrong one and you can find yourself liable for a loss, a freight bill or a customs duty you never expected. They are the single most important line in a sales contract for anyone shipping across borders.
Seller's door
On board, origin
Freight paid to dest.
Buyer's door
Under FOB Shanghai, risk passes to the buyer once the goods are on board at Shanghai — the buyer arranges and insures the ocean leg. Under CIF Rotterdam, the seller pays freight and insurance to Rotterdam, but risk still transfers at Shanghai. Same journey, very different liability.
What is the difference between CIF and FOB?
Under FOB the buyer arranges and pays for the main carriage and insurance; under CIF the seller pays freight and insurance to the destination port. Note that under CIF, risk still passes to the buyer at the origin port, not the destination.
How many Incoterms are there?
Eleven, in the Incoterms 2020 edition — seven for any mode (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four for sea and inland waterway (FAS, FOB, CFR, CIF).