A Clear Guide to the 13 Incoterms in International Shipping
When companies engage in cross-border trade, they rely on internationally recognized rules to define who is responsible for transportation, costs, and risks. These rules are known as Incoterms (International Commercial Terms), published by the International Chamber of Commerce (ICC). The 2020 version defines 13 trade terms, which are essential for importers, exporters, and logistics providers alike.
1. What Are Incoterms and Why Do They Matter?
Incoterms standardize trade practices by clarifying the division of responsibilities between buyers and sellers. Without them, parties could face confusion over who handles shipping, insurance, customs clearance, or risk of loss. Using the right term ensures smoother negotiations and fewer disputes.
2. The 13 Incoterms Explained
Rules for Any Mode of Transport
EXW (Ex Works) – Buyer takes on maximum responsibility from the seller’s premises.
FCA (Free Carrier) – Seller delivers goods to a carrier chosen by the buyer.
CPT (Carriage Paid To) – Seller pays for transport, but risk transfers once goods are handed to the carrier.
CIP (Carriage and Insurance Paid To) – Same as CPT, but the seller also provides insurance.
DAP (Delivered at Place) – Seller delivers to a named destination; buyer handles import clearance.
DPU (Delivered at Place Unloaded) – Seller delivers and unloads goods at the destination.
DDP (Delivered Duty Paid) – Seller takes full responsibility, including import duties and delivery.
Rules for Sea and Inland Waterway Transport
FAS (Free Alongside Ship) – Seller places goods alongside the vessel at the port of shipment.
FOB (Free on Board) – Seller loads goods onto the ship; risk passes once on board.
CFR (Cost and Freight) – Seller pays transport to the destination port, risk transfers at loading.
CIF (Cost, Insurance, and Freight) – Same as CFR, but the seller also provides marine insurance.
3. Choosing the Right Incoterm
The “best” Incoterm depends on factors such as control over shipping, cost responsibility, and destination. For example:
Exporters with strong logistics capabilities often prefer CIF or DDP.
Importers seeking more control may choose FOB or FCA.
First-time shippers often rely on DAP or CPT for simplicity.
4. Common Mistakes to Avoid
Assuming Incoterms cover payment terms (they don’t).
Using sea-only terms (FOB, CIF, CFR, FAS) for air or rail shipments.
Failing to specify the exact location in contracts (e.g., “FOB Shanghai Port”).
Final Thoughts
Incoterms may look complex at first, but they are a universal language of trade. By mastering these 13 terms, businesses can reduce risk, negotiate smarter contracts, and ensure smoother shipping operations worldwide.
