Incoterms 2020 are the universal language of international trade. This comprehensive guide covers all 11 terms, their logistics implications, cost allocation, risk transfer, and how to apply them correctly in import and export operations.
Incoterms (International Commercial Terms) are a set of standardized rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international transactions. Since their first publication in 1936, they have evolved to reflect modern commercial practices, with the 2020 edition being the most current version in force.
These rules determine three fundamental aspects of every international commercial transaction: who pays for transport and insurance costs, at what point the risk of loss or damage transfers from seller to buyer, and who is responsible for export and import customs clearance. Without clear Incoterms, international contracts become a breeding ground for costly disputes.
Incoterms are NOT law. They are voluntary contractual clauses that parties agree to include in their contracts. However, their use is so widespread that international courts and arbitrators apply them as the standard in trade disputes.
The 2020 version includes 11 Incoterms divided into two categories: 7 rules for any mode of transport (including multimodal) and 4 rules exclusively for sea and inland waterway transport. This distinction is crucial because using a maritime Incoterm for air or land transport creates legal and operational ambiguity.
EXW (Ex Works) represents the minimum obligation for the seller. Under this term, the seller makes the goods available to the buyer at the seller's own premises (factory, warehouse, depot). From that point, all costs and risks fall on the buyer, including loading onto the collection vehicle.
While EXW seems straightforward, it presents significant practical complications. The foreign buyer must handle export customs clearance in the seller's country, which is frequently impossible or impractical. For this reason, the ICC recommends using FCA instead of EXW when goods are being exported, reserving EXW for domestic transactions or between parties with local representation.
In many countries, export customs clearance requires a locally licensed customs broker. If you buy EXW from a foreign country, you as the buyer need to arrange export clearance there. This adds cost and complexity unnecessarily.
In terms of customs valuation, EXW generates the most adjustments. Since the EXW price includes no transport costs, the importer must declare all freight and insurance expenses as additions to the transaction value. This requires meticulous documentation of every cost from the factory to the border of the importing country.
FCA is the most versatile Incoterm and recommended by the ICC for the majority of transactions. The seller delivers the goods to the carrier nominated by the buyer at an agreed place. If delivery is at the seller's premises, the seller is responsible for loading; if at another place, the seller delivers without unloading from the transport vehicle.
The 2020 version introduced an important innovation for FCA: the option for the buyer to instruct their carrier to issue a bill of lading with an 'on-board' notation to the seller. This solves the historical problem of letters of credit requiring on-board B/Ls, which was previously only possible with FOB.
FAS (Free Alongside Ship) requires the seller to place the goods alongside the vessel at the port of shipment. FOB (Free on Board) goes one step further: the seller loads the goods on board the vessel. In both cases, risk transfers at the port of shipment, but FOB includes the costs of loading onto the vessel. FOB remains the most widely used Incoterm in global maritime trade, especially for raw materials and bulk cargo.
Using FOB for containerized cargo is incorrect. When goods are delivered in containers to a port terminal (not directly to the vessel), FCA should be used. FOB only applies when goods are physically loaded over the ship's rail, such as bulk or breakbulk cargo.
Group C Incoterms have a unique characteristic: the point of risk transfer differs from the point to which the seller pays for transport. The seller contracts and pays for transport to the agreed destination, but risk transfers to the buyer at the point of shipment. This duality frequently causes confusion.
CPT (Carriage Paid To) requires the seller to contract and pay for transport to the destination. CIP (Carriage and Insurance Paid To) adds the obligation for the seller to arrange transport insurance. The 2020 version raised the minimum insurance level for CIP to Institute Cargo Clauses A (all-risk coverage), while CIF maintains Clause C (minimum coverage). This difference is significant in terms of financial protection.
CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) are the maritime equivalents of CPT and CIP respectively. CIF is probably the most widely known Incoterm globally and serves as the basis for customs valuation in many countries. In the United States, customs value is generally calculated on a FOB basis (transaction value), while most other countries use CIF.
If importing into the US with CIF Incoterm, you may need to deduct insurance and freight to arrive at the FOB value that US Customs uses for duty calculation. Conversely, many other countries add freight and insurance to FOB prices.
Group D Incoterms represent the maximum obligation for the seller. The goods are delivered in the destination country, and the seller assumes costs and risks to that point. These are the preferred Incoterms for buyers who want a simplified purchasing experience, similar to buying domestically.
DAP requires the seller to deliver the goods at the agreed destination, ready for unloading. The seller assumes all costs and risks to that point, including international transport and export clearance. However, import clearance and customs duties are the buyer's responsibility. DAP is ideal when the buyer has customs clearance capability in their country.
DPU (formerly DAT in Incoterms 2010) is the only Incoterm where the seller is responsible for unloading at destination. The name changed from DAT to DPU to reflect that delivery can be at any place, not just a terminal. The seller delivers when the goods are unloaded from the transport vehicle at the agreed destination.
DDP represents maximum obligation for the seller: delivering goods cleared for import with all duties and taxes paid at the destination. It is the exact opposite of EXW. DDP is very attractive for the buyer but risky for the seller, who must understand the customs regulations of the destination country. The seller must also handle import VAT/GST, which they typically cannot recover as a non-resident taxpayer.
Under DDP, the seller pays import duties and taxes (e.g., VAT) in the destination country. Since foreign sellers are usually not registered taxpayers, they cannot claim input tax credits. This significantly increases the total cost. Many businesses prefer DAP to let the buyer handle and claim import taxes.
The choice of Incoterm directly impacts customs valuation, which is the basis for calculating duties, taxes, and other import charges. In the United States, customs value is based on the transaction value under the Trade Agreements Act, using the price actually paid or payable for goods when sold for export to the United States — essentially the FOB value.
When importing under an Incoterm that includes freight and insurance (like CIF or CIP), the importer may need to deduct these costs to arrive at the FOB value for US Customs purposes. Conversely, when importing under EXW or FCA, additional costs like inland freight at origin may need to be included depending on the terms of sale.
It is essential that the commercial invoice clearly specifies the Incoterm used and the delivery point. Customs authorities may reject a declaration if the Incoterm is unclear or if the price components do not match the declared Incoterm. Documentary consistency is the first line of defense in a customs audit.
Always include the complete Incoterm on the commercial invoice: 'CIF Port of Long Beach, USA, Incoterms 2020'. Specifying the version (2020) and exact location eliminates ambiguity and facilitates customs clearance.
Choosing the right Incoterm is not a trivial decision. It depends on multiple factors: negotiating power between the parties, experience in international logistics, financing requirements (letters of credit), mode of transport, and customs regulations of the countries involved.
For US-Mexico and US-Asia trade lanes, the most common Incoterms are FOB and CIF for maritime, and FCA and DAP for ground and multimodal transport. In the context of nearshoring, where supply chains are shortening, FCA and DAP have gained popularity for their flexibility with cross-border ground transport.
Remember that the Incoterm is negotiable. Do not automatically accept the term proposed by your counterpart. Analyze total costs under different Incoterms: sometimes a low FOB price with expensive freight results in higher total cost than a higher CIF price with competitive freight included.
Camtom can help you calculate the impact of different Incoterms on the total cost of your import, including duties, taxes, and additions to transaction value. Try our import cost calculator.
Despite their apparent simplicity, Incoterms are frequently misused, generating legal disputes, cost overruns, and customs issues. These are the most common mistakes we observe in international trade operations.
Another critical mistake is not aligning the Incoterm with the letter of credit. If the letter of credit requires an on-board bill of lading but the Incoterm is FCA, the seller cannot meet the bank's documentary requirements unless they use the special FCA 2020 clause for on-board B/L.
“80% of international commercial disputes involve misunderstandings about transport and insurance responsibilities that a well-defined Incoterm would have prevented.”
— International Chamber of Commerce (ICC)
The key to avoiding problems is clear communication: include the complete Incoterm in all commercial documents (contract, purchase order, invoice, letter of credit) and ensure both parties understand their obligations. When in doubt, consult an international trade specialist or your customs broker.
Camtom Team
Editorial Team
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