Incoterms 2020 Explained: Complete Guide to All 11 Rules & Risk Transfer
Published by the International Chamber of Commerce (ICC), Incoterms® 2020 (International Commercial Terms) are the universally recognized 3-letter contract clauses used in global sales contracts. They define who organizes and pays for freight, who handles export and import customs clearance, and at what exact physical point cargo risk transfers from seller to buyer.
1. The Two Groups: Any Mode vs. Sea & Inland Waterway
The 11 Incoterms are divided into two distinct operational groups based on the transport mode:
Can be used for air freight, intermodal rail/road, courier express, or containerized sea freight:
- EXW — Ex Works
- FCA — Free Carrier (highly recommended for containers)
- CPT — Carriage Paid To
- CIP — Carriage and Insurance Paid To (Institute Cargo Clause A)
- DAP — Delivered at Place
- DPU — Delivered at Place Unloaded
- DDP — Delivered Duty Paid
Strictly intended for non-containerized maritime bulk cargo (grain, oil, break-bulk machinery):
- FAS — Free Alongside Ship
- FOB — Free on Board
- CFR — Cost and Freight
- CIF — Cost, Insurance and Freight (Institute Cargo Clause C)
Note: Although industry practice often uses FOB for containerized cargo, ICC officially recommends FCA for container shipments.
2. Cost Transfer vs. Risk Transfer: The Critical Distinction
The single most costly misunderstanding among importers is conflating who pays for transit with who bears the financial risk of loss or damage.
Under CIF (Cost, Insurance and Freight), the seller pays the international ocean freight and marine insurance to the destination port. However, risk transfers to the buyer the moment the container is loaded aboard the ship at the origin port. If the vessel catches fire or containers are lost overboard, the buyer must file the insurance claim.
3. Master Summary of Common Importer Incoterms
| Incoterm | Export Clearance | Main Freight Paid By | Risk Transfers At | Import Duty & VAT |
|---|---|---|---|---|
| EXW | Buyer | Buyer | Seller's factory floor | Buyer |
| FOB | Seller | Buyer | Loaded on vessel at origin | Buyer |
| CIF | Seller | Seller | Loaded on vessel at origin | Buyer |
| DAP | Seller | Seller | Buyer's destination warehouse | Buyer |
| DDP | Seller | Seller | Buyer's destination warehouse | Seller |
4. Why EXW is a Trap for Small Importers
Many suppliers quote in EXW (Ex Works) because it appears cheapest on initial price lists. Under EXW, the buyer is technically responsible for export customs declarations in the supplier's country.
In countries like China, customs regulations mandate that export declarations can only be filed by legally registered domestic trading entities with export licenses. As an overseas buyer, you will have to pay a trading agency or freight forwarder an additional $150 to $350 fee to provide export license credentials. Always ask for FOB or FCA terms instead.
5. Changes Introduced in Incoterms 2020
- DAT Renamed to DPU: Delivered at Terminal (DAT) was renamed Delivered at Place Unloaded (DPU) to emphasize that delivery can take place anywhere, not just a maritime terminal.
- Different Insurance Coverage Levels: CIF still requires basic Clause C Institute cargo insurance, while CIP now mandates Institute Cargo Clauses (A) (comprehensive all-risk coverage).
- FCA with On-Board Bill of Lading: Provides a mechanism for the seller to obtain an on-board bill of lading from the carrier to satisfy documentary letter of credit requirements.
Primary Sources & Verified Guidelines
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