Complete Guide to Incoterms 2020
Master all 11 Incoterms 2020 rules to eliminate confusion, reduce costs, and protect your business in international trade. Learn when to use each term, which modes apply, common mistakes, and real-world examples.
What Are Incoterms?
Incoterms (International Commercial Terms) are standardized rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international transactions. Updated every 10 years, the 2020 version replaced the 2010 rules and introduced significant changes to reflect modern trade practices.
These 11 three-letter codes specify who pays for freight, insurance, and customs clearance; who bears the risk of loss or damage; and at what point ownership transfers. Using the correct Incoterm is critical—misunderstandings can result in unexpected costs, disputes, and legal complications.
The 2020 update introduced DPU (Delivered at Place Unloaded), replacing DAT, and clarified security-related obligations for exporters and importers.
The 11 Incoterms 2020 Explained
1. EXW (Ex Works)
Modes: All modes
The seller's responsibility ends at their premises. The buyer assumes all costs, risks, and responsibilities from the moment goods are ready for pickup. The buyer arranges transportation, insurance, and customs clearance.
When to use: Domestic sales, small orders, or when the buyer has established logistics capabilities. Rarely used in international trade due to high buyer risk.
Example: A textile manufacturer in India sells fabric to a buyer in the US. Under EXW, the buyer arranges pickup from the factory, pays for all shipping, insurance, and US customs clearance. The seller's only obligation is to have the goods ready.
Common mistake: Sellers think they're done once goods leave the factory. Buyers should verify goods are properly packaged and documented before accepting delivery.
2. FCA (Free Carrier)
Modes: All modes
The seller delivers goods to a carrier chosen by the buyer at an agreed location. The seller pays for export clearance; the buyer pays for main carriage and insurance. Risk transfers when goods are handed to the carrier.
When to use: When the buyer has reliable logistics partners or when goods are picked up from the seller's location. Common for multimodal transport.
Example: An electronics exporter in Vietnam delivers goods to a freight forwarder at their warehouse. The forwarder arranges air transport to Singapore. The exporter pays for export clearance; the buyer pays for the flight and insurance.
Common mistake: Confusion about the delivery point. FCA requires clear specification of where the carrier takes possession—at the seller's premises, a terminal, or another location.
3. FAS (Free Alongside Ship)
Modes: Sea and inland waterway only
The seller delivers goods alongside the ship at the port of shipment. The seller pays for export clearance and delivery to the port; the buyer pays for loading, ocean freight, and insurance. Risk transfers when goods are placed alongside the vessel.
When to use: Sea shipments where the buyer wants to control loading and insurance. Less common than FOB or CIF.
Example: A Brazilian coffee exporter delivers bags of coffee to the dock in Santos. The buyer arranges loading onto the vessel and purchases ocean freight insurance to the US port.
Common mistake: Assuming FAS includes loading costs. The seller only delivers alongside; loading is the buyer's responsibility.
4. FOB (Free on Board)
Modes: Sea and inland waterway only
The seller delivers goods on board the ship at the port of shipment, including loading costs. The buyer pays for ocean freight and insurance. Risk transfers when goods cross the ship's rail.
When to use: Sea shipments where the buyer wants to control freight and insurance. One of the most popular terms in maritime trade.
Example: A Chinese manufacturer ships machinery to a US buyer. The seller pays for loading onto the vessel in Shanghai. Once the goods cross the ship's rail, the buyer owns them and arranges ocean freight insurance to Los Angeles.
Common mistake: Using FOB for air or truck shipments. FOB is strictly for sea transport. Use FCA for other modes.
5. CFR (Cost and Freight)
Modes: Sea and inland waterway only
The seller pays for goods, loading, and ocean freight to the destination port. The buyer pays for insurance and assumes risk once goods cross the ship's rail. The seller arranges freight but doesn't pay for insurance.
When to use: When the seller has established freight relationships and the buyer wants to control insurance. Common in bulk commodity trades.
Example: An Indian steel exporter ships 100 tons of steel to a buyer in Germany. The seller pays for loading and ocean freight to Hamburg. The buyer arranges insurance and takes ownership when goods leave Shanghai.
Common mistake: Thinking CFR includes insurance. It doesn't—the buyer must purchase separate insurance coverage.
6. CIF (Cost, Insurance, and Freight)
Modes: Sea and inland waterway only
The seller pays for goods, loading, ocean freight, and insurance to the destination port. Risk transfers when goods cross the ship's rail, but the seller pays for insurance. This is one of the most popular terms in international trade.
When to use: When the buyer wants a turnkey solution with minimal logistics involvement. Provides clarity on costs and risk allocation.
Example: A Vietnamese apparel exporter sells 500 units of clothing to a US retailer. The seller pays for production, loading, ocean freight, and insurance to Los Angeles. The buyer takes ownership when goods leave the port in Ho Chi Minh City.
Common mistake: Assuming CIF includes unloading at the destination. It doesn't—the buyer is responsible for unloading and inland transport from the port.
7. CPT (Carriage Paid To)
Modes: All modes
The seller pays for goods and carriage to the destination point. The buyer pays for insurance and assumes risk when goods are handed to the first carrier. Suitable for multimodal transport.
When to use: Air shipments, multimodal transport, or when the seller has established carrier relationships. The land-based equivalent of CFR.
Example: A Thai electronics manufacturer ships components to a buyer in Germany via air and truck. The seller pays for air freight from Bangkok to Frankfurt and truck transport to the buyer's warehouse. The buyer arranges insurance.
Common mistake: Confusing CPT with CIP. CPT doesn't include insurance; CIP does.
8. CIP (Carriage and Insurance Paid To)
Modes: All modes
The seller pays for goods, carriage, and insurance to the destination point. Risk transfers when goods are handed to the first carrier. The land-based equivalent of CIF.
When to use: Air shipments or multimodal transport when the buyer wants a complete package. Provides maximum certainty for the buyer.
Example: A Pakistani textile exporter ships fabric to a buyer in Canada via air. The seller pays for air freight, truck transport to the buyer's facility, and insurance. The buyer receives goods with minimal logistics involvement.
Common mistake: Assuming CIP includes unloading. The buyer is responsible for unloading and final delivery from the agreed point.
9. DAP (Delivered at Place)
Modes: All modes
The seller pays for all carriage and assumes risk until goods arrive at the agreed destination. The buyer pays for unloading and import clearance. This is the most seller-friendly term and provides maximum protection to the buyer.
When to use: When the buyer wants goods delivered to their location with minimal involvement. Common for e-commerce and B2B transactions.
Example: A Chinese supplier ships electronics to a buyer's warehouse in New York. The seller arranges all transportation, insurance, and export clearance. The buyer only handles unloading and US customs clearance.
Common mistake: Confusing DAP with DDP. DAP doesn't include import clearance; DDP does.
10. DPU (Delivered at Place Unloaded)
Modes: All modes
The seller pays for all carriage, unloading at the destination, and assumes risk until goods are unloaded. The buyer pays for import clearance. This is the NEW term in 2020, replacing DAT (Delivered at Terminal).
When to use: When goods need to be unloaded at a terminal or warehouse before final delivery. Common for containerized cargo and port operations.
Example: A Brazilian exporter ships machinery to a buyer in the US. The seller pays for ocean freight and unloading at the port of Los Angeles. The buyer arranges import clearance and final delivery to their facility.
Common mistake: Using the old DAT term instead of DPU. DAT is no longer valid under Incoterms 2020.
11. DDP (Delivered Duty Paid)
Modes: All modes
The seller pays for everything: carriage, insurance, unloading, import clearance, and duties. The seller assumes all risk until goods are delivered to the buyer's location. This is the most buyer-friendly term.
When to use: High-value items, sensitive products, or when the seller wants tighter control over delivery coordination. Requires the seller to have import expertise or reliable partners in the destination country.
Example: A German machinery manufacturer ships equipment to a buyer in Mexico. The seller arranges all transportation, insurance, Mexican customs clearance, duty payment, and delivery to the buyer's facility. The buyer receives goods ready to use.
Common mistake: Sellers underestimating import duties and taxes. DDP requires the seller to pay all duties, which can be substantial. Always research destination country tariffs before quoting DDP.
Quick Comparison: Who Pays What?
| Term | Freight | Insurance | Export Clearance | Import Clearance | Duties |
|---|---|---|---|---|---|
| EXW | Buyer | Buyer | Buyer | Buyer | Buyer |
| FCA | Buyer | Buyer | Seller | Buyer | Buyer |
| FOB/FAS | Buyer | Buyer | Seller | Buyer | Buyer |
| CFR/CPT | Seller | Buyer | Seller | Buyer | Buyer |
| CIF/CIP | Seller | Seller | Seller | Buyer | Buyer |
| DAP/DPU | Seller | Seller | Seller | Buyer | Buyer |
| DDP | Seller | Seller | Seller | Seller | Seller |
Common Incoterm Mistakes to Avoid
Mistake 1: Using FOB for Air Shipments
FOB is strictly for sea transport. Using it for air freight creates ambiguity about when risk transfers. Always use FCA for air shipments.
Mistake 2: Underestimating DDP Costs
Sellers often underestimate import duties and taxes when quoting DDP. Always research destination country tariffs before committing to DDP terms.
Mistake 3: Assuming Insurance is Included
CFR and CPT do NOT include insurance. Buyers must purchase separate coverage. Only CIF, CIP, and DDP include seller-paid insurance.
Mistake 4: Not Specifying the Delivery Point
Terms like DAP and DPU require a specific delivery location. "DAP New York" is clear; "DAP USA" is ambiguous and creates disputes.
Mistake 5: Mixing Old and New Terminology
Using DAT (old) instead of DPU (new) creates confusion. Always specify "Incoterms 2020" in contracts to avoid disputes over terminology.
Incoterm Selection Checklist
Use this checklist to select the right Incoterm for your shipment:
Frequently Asked Questions
Can I use FOB for air freight?
No. FOB is strictly for sea transport. For air freight, use FCA (Free Carrier). Using FOB for air creates legal ambiguity and disputes.
What's the difference between DAP and DPU?
DAP: Seller pays for delivery to the destination point; buyer handles unloading. DPU: Seller pays for delivery AND unloading at the destination. DPU is the new term (2020) replacing DAT.
Does CIF include unloading at the destination port?
No. CIF includes freight and insurance to the destination port, but the buyer is responsible for unloading and inland transport. This is a common misunderstanding.
Which Incoterm is best for first-time buyers?
CIF or DDP are best for first-time buyers because they minimize logistics involvement. CIF is common for sea freight; DDP provides maximum protection but requires seller expertise.
Can I negotiate Incoterms after signing a contract?
Technically yes, but it requires mutual agreement and may involve cost adjustments. It's better to select the right Incoterm upfront to avoid complications.
Key Takeaways
- •Always specify the Incoterm in your contract. Ambiguity leads to disputes and unexpected costs.
- •Match the Incoterm to your transport mode. FOB/FAS/CFR/CIF are sea-only; others work for all modes.
- •Consider your logistics capabilities. DDP and DAP require strong import expertise; EXW and FCA require buyer sophistication.
- •Factor in total landed cost. Don't just look at the quoted price; calculate all costs including freight, insurance, duties, and handling.
- •Use Incoterms 2020, not older versions. The 2020 update introduced DPU and clarified security obligations.
- •Always purchase insurance for valuable goods. Even if the seller pays for it (CIF/CIP/DDP), verify coverage is adequate.
Need Help Selecting the Right Incoterm?
Our trade experts can help you choose the optimal Incoterm for your shipments, negotiate better terms, and avoid costly mistakes.