Incoterms 2020 — All 11 Trade Terms Explained in Plain English

What Are Incoterms and Why Do They Matter?

Incoterms (International Commercial Terms) are a globally recognised set of trade terms published by the International Chamber of Commerce (ICC). The current version, Incoterms 2020, came into effect on 1 January 2020. There are 11 terms in total, each defining a precise allocation of costs, responsibilities, and risk between buyer and seller in an international trade transaction.

Without a clearly stated Incoterm in a sales contract, disputes become difficult to resolve. Who pays for freight when the shipping line raises a surcharge mid-voyage? Who makes the insurance claim when cargo is damaged at sea? Who pays for demurrage if the buyer is slow to clear customs? Incoterms answer all of these questions upfront.

Every international purchase order should specify: the Incoterm, the named place, and the Incoterms version year. For example: "FOB Shanghai, Incoterms 2020" or "DDP Buyer's warehouse, Frankfurt, Incoterms 2020."

The 11 Incoterms 2020 — Quick Reference Chart

Note: For CIP, Incoterms 2020 upgraded the required insurance to Institute Cargo Clauses (A) — all risks. For other terms requiring seller insurance (CIF), minimum cover (Clauses C) is still the standard, though buyers may negotiate higher coverage.

EXW — Ex Works

EXW is the minimum obligation for the seller. The seller makes goods available at their named premises — factory, warehouse, or production site. The buyer is responsible for everything from that point: arranging collection, loading onto the truck, export customs clearance, transport to the port, ocean/air freight, destination clearance, import duties, and final delivery.

Practical reality: EXW can be problematic because the seller must allow the buyer access to their premises for loading, but does not handle export customs. In many countries, particularly China, the exporter must be the entity filing export customs — the buyer may not legally be able to do this. In practice, FCA is usually a better alternative to EXW for factory-origin shipments.

Best for: Buyers with an experienced freight forwarder in the origin country, who want full control and the lowest possible FOB-equivalent supplier price.

FCA — Free Carrier

FCA is the most flexible Incoterm. The seller delivers to a named place or to a named carrier. If the named place is the seller's premises, the seller loads the goods. If it is any other location, the seller delivers unloaded and the buyer handles loading.

A key 2020 update: under FCA, parties can now agree that the buyer's bank will receive a bill of lading marked "on board" before actual loading — resolving a longstanding issue with letters of credit in container trade.

Best for: Container shipments, air freight, and any multimodal transport where the container is handed to the carrier at an inland depot before reaching the port.

FOB — Free on Board

FOB is the most commonly used Incoterm for ocean freight. The seller delivers goods loaded on board the vessel at the named port of shipment. The seller is responsible for: export packaging, transport to the port of origin, export customs clearance, and all costs and risks until the goods are physically on board the ship.

From that point, the buyer takes over: ocean freight, marine insurance, destination port handling, import customs clearance, import duties, and final delivery.

FOB Risk Transfer — A Critical Detail

Under FOB, risk transfers when the goods pass the ship's rail at the port of loading — not when the ship reaches the destination port. If the cargo is damaged after loading but before arrival, the buyer bears that risk and must claim against their own insurance. This is why experienced FOB buyers always arrange independent marine cargo insurance for the ocean leg.

FOB Example

A buyer in Los Angeles purchases 500 units of furniture from a factory in Guangzhou, FOB Yantian port. The seller delivers goods to Yantian, clears export customs, and loads onto the nominated vessel. From that moment, the buyer (through their freight forwarder) pays the ocean freight and bears all risk. The buyer's forwarder handles destination port, customs clearance, import duty, and trucking to Los Angeles warehouse.

Best for: Ocean FCL and LCL shipments from Asia, Latin America, or Europe where the buyer wants full control over freight rates and carrier selection.

CIF — Cost, Insurance and Freight

Under CIF, the seller pays for ocean freight and insurance to the named destination port. However — and this is the critical distinction — risk transfers to the buyer at the port of origin when goods are loaded, not at destination. If cargo is damaged during ocean transit, the buyer makes the insurance claim, even though the seller arranged and paid for the insurance.

This split between who pays insurance and who bears risk makes CIF legally complex. The buyer relies on insurance coverage arranged by the seller — coverage they had no input on. The minimum coverage under CIF is Institute Cargo Clauses (C), the least comprehensive option.

Hidden cost risk: Sellers offering CIF prices often use their own freight forwarders, who may not be offering competitive rates. The buyer has no visibility into the freight component embedded in the CIF price.

Best for: Less experienced buyers who want bundled pricing. Experienced importers typically prefer FOB so they control freight and can shop for competitive rates.

DAP — Delivered at Place

The seller delivers to the named place at destination — ready for unloading — without performing import customs clearance or paying import duties. The seller bears all costs and risks up to the named delivery point (except import duties and taxes, which the buyer handles).

DAP is increasingly used for door-delivery shipments where the buyer wants to handle their own country's customs and duty payment (often to manage classification or minimise duty through correct tariff filing).

Best for: Buyers who want door delivery with seller-arranged freight but prefer to handle their own import customs process.

DDP — Delivered Duty Paid

DDP is the maximum obligation for the seller. The seller handles everything: export clearance, international freight, insurance, arrival at destination, import customs clearance, import duty payment, and delivery to the buyer's named premises. The buyer does nothing — goods arrive cleared, duty paid, and delivered.

Critical requirement: Under DDP, the seller must be able to legally import goods in the destination country. In many countries, this requires a local customs entity or an appointed Importer of Record (IOR). Sellers without local import capability cannot legally offer true DDP.

DDP is common in e-commerce where carriers like DHL and FedEx offer DDP-equivalent services using their own import infrastructure. It is also used in B2B trade where Chinese suppliers or Indian exporters use freight forwarders as IOR in the US or EU.

Best for: Buyers who want absolute simplicity — one landed price, no surprises.

FOB vs CIF — Which Should You Choose as an Importer?

This is the most common Incoterms question for importers sourcing from Asia:

Most experienced importers prefer FOB. When you control freight, you control one of the largest cost components of your landed cost. A seller quoting CIF may be embedding a 30–50% markup on freight. Under FOB, you appoint your own forwarder, get multiple quotes, and pay market rates directly.

Common Incoterms Mistakes That Cost Importers Money

• Accepting CIF without knowing the freight component. Always ask your supplier for an FOB price and compare it against a CIF price to see the embedded freight. If the difference exceeds market rates, the supplier is profiting on freight.
• Using EXW from China without a local forwarder. Export customs in China must be filed by a licensed entity in China. EXW buyers without a China-based agent often end up using the seller's forwarder anyway — negating the point of EXW.
• Forgetting to specify the named place. "FOB" is meaningless without "FOB [port name]." Always include the named place: "FOB Shenzhen, Incoterms 2020."
• Assuming DDP means no import duty. Under DDP, the seller pays import duties — but they are included in the price. You are still paying them, just indirectly. If your goods are misclassified by the seller's customs broker, you may face liability later.
• Using FOB for air freight. FOB and CIF are only appropriate for sea freight (non-containerised loading at port). For container and air shipments, FCA and CIP are the correct equivalents.
• Not arranging marine insurance under FOB/CFR. Under FOB, the buyer bears risk from loading. Many buyers assume the freight forwarder handles insurance automatically — they do not unless explicitly instructed and charged.

Frequently Asked Questions