What Are Incoterms? Complete Guide to Incoterms 2020 for Imports and Exports

In international trade, agreeing on the price of goods is only one part of a transaction. From the outset, the buyer and seller need to understand who is responsible for arranging transport, who pays the freight costs, which party handles export and import customs formalities, who is required to arrange cargo insurance and, most importantly, at what point the risk of loss of or damage to the goods transfers from the seller to the buyer.

If these matters are not clearly defined in the sales contract, even a seemingly straightforward transaction can lead to disputes over freight charges, insurance, customs clearance, terminal handling charges or liability for cargo loss or damage.

To establish a common commercial language between buyers and sellers, the International Chamber of Commerce (ICC) developed a standardized set of trade rules known as Incoterms®. The current edition, Incoterms® 2020, took effect on 1 January 2020 and comprises 11 three-letter trade rules, including EXW, FCA, FOB, CIF and DDP.

This article provides a practical overview of what Incoterms are, what Incoterms® 2020 defines, the respective obligations of buyers and sellers under each of the 11 rules, and how to select an appropriate Incoterm for imports, exports, containerized cargo and multimodal transport.

What Are Incoterms?

Incoterms is an abbreviation of International Commercial Terms.

Incoterms are a standardized set of rules used in contracts for the sale of goods. They define the respective obligations of the seller and buyer in relation to delivery, transport, allocation of costs, customs formalities and transfer of risk.

The ICC published the first Incoterms rules in 1936. Since then, they have been revised several times to reflect changes in international trade and transport practices.

In practical terms, Incoterms help the buyer and seller establish clear answers to several important questions before shipment begins:

• Where exactly must the seller deliver the goods?
• At what point does the risk pass to the buyer?
• Who pays for the main carriage?
• Who is responsible for export and import customs formalities?
• Under which rules must the seller arrange insurance?
• When is loading or unloading the seller's responsibility?

For example, if a sales contract states:

FCA Shanghai Terminal – Incoterms® 2020

the parties have agreed on far more than a three-letter abbreviation; they have accepted a defined allocation of responsibilities, costs and the point at which risk transfers.

Why Are Incoterms Important in International Trade?

The primary purpose of Incoterms is to reduce ambiguity in commercial contracts. Consider an Iranian exporter and an overseas buyer who agree that goods will be shipped by sea but fail to specify who pays for inland transport to the port, loading charges, insurance or who bears the risk while the goods are in transit. If damage or unexpected costs arise, each party may have a different understanding of its responsibilities.

Selecting the appropriate Incoterm can significantly reduce these uncertainties.

Key benefits of using Incoterms include:

• Clear allocation of buyer and seller responsibilities
• A defined point for the transfer of risk
• Clearer allocation of transport and delivery costs
• Defined responsibility for export and import formalities
• Defined insurance obligations under the relevant rules
• Reduced potential for disputes in international sales contracts
• Better coordination with carriers and freight forwarders
• More accurate comparison of suppliers' commercial offers

Incoterms are therefore not merely a contractual or legal consideration. They can directly affect landed cost, export pricing, transport planning and supply chain risk management.

What Happens If Incoterms Are Not Specified in the Contract?

Failing to incorporate an Incoterm does not necessarily make a contract invalid, but it can increase the likelihood of disputes between the parties.

For example, it may be unclear:

• which party pays inland transport costs in the country of origin;
• who is responsible for terminal handling charges;
• whether the buyer or seller is responsible for cargo insurance;
• who must complete export customs formalities;
• whether risk transfers when the goods are handed over to the freight forwarder or when they are loaded on board the vessel;
• who is responsible for unloading at destination.

Choosing an inappropriate Incoterm can also create operational problems.

For example, using FOB for containerized cargo that the seller hands over to the carrier at a container terminal may create a mismatch between the actual delivery point and the selected Incoterms rule.

The key issue is therefore not simply whether Incoterms are used, but whether the appropriate rule is selected and the named place, point or port is specified precisely.

What Do Incoterms Define?

To understand Incoterms correctly, it is useful to distinguish three core concepts:

1. Obligations

Incoterms specify the respective obligations of the seller and buyer, including where applicable:

• Arranging transport
• Loading or unloading under specified conditions
• Export formalities
• Import formalities
• Providing certain transport or commercial documents
• Contracting for carriage
• Arranging insurance where required by the rule

2. Costs

Incoterms determine which costs associated with delivery are borne by the seller and from which stage costs are for the buyer's account.

3. Risk

One of the most important functions of Incoterms is to identify the point at which the risk of loss of or damage to the goods transfers from the seller to the buyer. This is critical because the point at which transport costs are allocated and the point at which risk transfers are not always the same.

Key Terms You Should Know Before Using Incoterms

Before reviewing the 11 Incoterms® 2020 rules, it is helpful to understand several commonly used logistics terms.

• Delivery: The point at which the seller performs its delivery obligation under the selected Incoterms rule and, under that same rule, risk transfers to the buyer.
Carrier: A person or company responsible under a contract of carriage for moving goods by road, rail, air, sea or a combination of transport modes.
• Freight Forwarder: An international freight forwarding company that plans, coordinates and organizes cargo transportation and related logistics services on behalf of the shipper or cargo owner.
• Named Place: The place specified after the selected Incoterms rule in the sales contract. For example FCA Shanghai Terminal In this example, Shanghai Terminal is a critical part of the agreement between the buyer and seller.
• Named Port: For maritime rules such as FOB or CIF, the relevant port of shipment or destination should be clearly specified.
• Risk Transfer: The point from which the risk of loss of or damage to the goods passes from the seller to the buyer.

Types of Incoterms® 2020 Rules

The 11 Incoterms® 2020 rules fall into two main categories.

Rules for Any Mode or Modes of Transport

These seven rules can be used for road, rail, air, containerized and multimodal transport:

• EXW – Ex Works
• FCA – Free Carrier
• CPT – Carriage Paid To
• CIP – Carriage and Insurance Paid To
• DAP – Delivered at Place
• DPU – Delivered at Place Unloaded
• DDP – Delivered Duty Paid

Rules for Sea and Inland Waterway Transport

These four rules apply only where delivery is made in direct relation to a vessel:

• FAS – Free Alongside Ship
• FOB – Free On Board
• CFR – Cost and Freight
• CIF – Cost, Insurance and Freight

This distinction is important because FOB, CFR and CIF are not automatically suitable simply because a shipment includes a sea leg.

In many containerized shipments, the seller hands the goods over before they are loaded on board the vessel, often at a container terminal. In such cases, FCA, CPT or CIP may be structurally more appropriate under Incoterms® 2020.

Incoterms® 2020 Summary Table

The table below summarizes the 11 Incoterms® 2020 rules, their transport applicability, responsibility for main carriage, insurance, export and import formalities, and the principal point of risk transfer.

Important note on EXW: Under EXW, the seller is not required to clear the goods for export. The practical use of EXW in international trade should therefore be assessed against the laws of the country of origin and whether the buyer can legally and operationally complete export formalities.

A Detailed Guide to the 11 Incoterms® 2020 Rules

1. EXW – Ex Works

Under EXW, the seller assumes the minimum level of obligation among the Incoterms® 2020 rules. The seller places the goods at the buyer's disposal at the named place, such as the seller's factory or warehouse, without being required under the rule to load them onto the collecting vehicle. From that point onward, most transport costs and risks are borne by the buyer.

When may EXW be appropriate?

EXW may be considered where the buyer:

• has a strong transport network in the country of origin;
• can manage collection and onward transportation;
• is able to complete the formalities required for export.

Important Consideration for EXW

In international trade, it may be difficult or, in some jurisdictions, impractical for a foreign buyer to complete export customs formalities. For this reason, FCA can often be a more practical option than EXW for export transactions.

2. FCA – Free Carrier

Under FCA, the seller delivers the goods at the named place to the carrier or another person nominated by the buyer.

The seller is responsible for export clearance.

FCA has two important delivery scenarios:

Delivery at the Seller's Premises

If the named place is the seller's factory or warehouse, delivery occurs when the goods are loaded onto the means of transport arranged by the buyer.

Delivery at Another Named Place

If delivery is agreed at a terminal or another location, the seller transports the goods to that place on its own means of transport and makes them available to the buyer's nominated carrier in accordance with the FCA rule.

Why Is FCA Important for Containerized Cargo?

In container shipping, the seller usually hands the container over to the carrier at a terminal and may have no direct control over when the container is loaded on board the vessel. In such cases, FCA is generally better aligned with the Incoterms delivery structure than FOB.

3. CPT – Carriage Paid To

Under CPT, the seller contracts for carriage and pays the transport cost to the named place of destination. A crucial point, however, is that the seller does not retain the risk until destination. Risk transfers when the goods are delivered to the carrier in accordance with the CPT rule.

Therefore, CPT involves two separate points:

• The place of delivery and risk transfer
• The named destination to which the seller pays the carriage costs

CPT can be used for:

• Road freight
• Rail freight
• Air freight
• Containerized freight
• Multimodal transport

4. CIP – Carriage and Insurance Paid To

CIP follows a structure similar to CPT, with one major difference:

In addition to arranging and paying for carriage, the seller must also obtain cargo insurance.

Under CIP, risk also transfers when the goods are delivered to the carrier. The fact that the seller pays carriage and insurance to the named destination does not mean that the seller bears the transit risk all the way to destination. Under Incoterms® 2020, the default insurance requirement under CIP was increased compared with the previous edition and is generally expected to correspond to Institute Cargo Clauses (A) or similar cover, unless otherwise agreed by the parties.

CIP can be particularly suitable for:

• Industrial equipment
• Machinery
• High-value cargo
• Containerized goods
• Multimodal shipments

5. DAP – Delivered at Place

Under DAP, the seller is responsible for bringing the goods to the named place of destination. Risk remains with the seller until that point. At destination, the goods are placed at the buyer's disposal on the arriving means of transport, ready for unloading.

Therefore:

• Carriage to destination is the seller's responsibility;
• Risk to destination remains with the seller;
• Unloading is generally the buyer's responsibility;
• Import formalities, import duties and taxes are the buyer's responsibility.

DAP may be appropriate where the seller can manage transport to destination but the buyer wishes to handle import customs clearance directly.

6. DPU – Delivered at Place Unloaded

DPU is the only Incoterms® 2020 rule that requires the seller to unload the goods at the named place of destination.

Risk transfers once:

• the goods have arrived at the named destination;
• they have been unloaded from the means of transport;
• they have been placed at the buyer's disposal.

The key difference between DAP and DPU is therefore straightforward:

DAP = delivery before unloading

DPU = delivery after unloading

Another important point is that the named place under DPU does not have to be a terminal or the buyer's final premises. It may be any agreed named place where unloading can be carried out safely and practically.

7. DDP – Delivered Duty Paid

Under DDP, the seller assumes the highest level of obligation among the Incoterms® 2020 rules. The seller must bring the goods to the named place of destination and manage both export and import formalities, together with the costs allocated to the seller under this rule.

In terms of the seller's obligations, EXW places the least responsibility on the seller, while DDP places the greatest.

Is DDP Always the Best Option for the Buyer? No.

Before agreeing to DDP, the seller should establish whether it is legally and operationally able in the destination country to:

• complete import formalities;
• obtain required licences or permits;
• comply with tax requirements;
• pay customs duties and other import charges;
• act in any legally required capacity for importation.

For this reason, DDP should only be used after carefully reviewing the laws and import requirements of the destination country.

Incoterms Rules for Sea and Inland Waterway Transport

The following four rules are designed exclusively for sea and inland waterway transport.

8. FAS – Free Alongside Ship

Under FAS, the seller delivers the goods alongside the vessel nominated by the buyer at the named port of shipment. Delivery occurs at that point and risk transfers to the buyer.

This rule is commonly considered for:

• Bulk cargo
• Raw materials
• Non-containerized cargo
• Goods delivered directly alongside the vessel

The seller completes export formalities, while the buyer arranges the main ocean carriage.

9. FOB – Free On Board

FOB is one of the best-known rules in international trade. Under FOB, the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. Risk transfers from seller to buyer once the goods are on board the vessel.

The seller:

• transports the goods to the port of shipment;
• completes the export formalities;
• delivers the goods on board the vessel in accordance with the rule.

The buyer generally arranges the main ocean carriage.

Is FOB Appropriate for Containerized Cargo?

This is one of the most important practical considerations when applying Incoterms®. If the seller hands the container over to the carrier at a container terminal and does not itself deliver the goods directly on board the vessel, FOB may not correspond to the actual delivery point. In such circumstances, FCA should be considered.

10. CFR – Cost and Freight

Under CFR, the seller contracts for sea carriage and pays the freight to the named port of destination. However, risk does not transfer at the destination port. Risk transfers when the goods are placed on board the vessel at the port of shipment.

In other words:

Ocean freight to destination = Seller, but risk after loading on board at origin = Buyer

This distinction between cost and risk is a defining feature of CFR.

CFR is used only for sea and inland waterway transport. For containerized or multimodal shipments, CPT may be a more appropriate rule to consider.

11. CIF – Cost, Insurance and Freight

CIF is structurally similar to CFR, except that the seller must also obtain the cargo insurance required under the rule.

The seller:

• delivers the goods on board the vessel;
• pays the freight to the named port of destination;
• arranges the required insurance cover.

However, risk transfers to the buyer once the goods are on board the vessel at the port of shipment. Therefore, paying freight and insurance to destination does not mean that the seller retains the risk until destination.

What Is the Difference Between CIF and CIP?

CIF and CIP are the only Incoterms® 2020 rules that require the seller to obtain cargo insurance. However, there are important differences between the two when selecting the right rule for international transport.

Accordingly, for containerized cargo or multimodal transport, CIP can often be structurally more appropriate than CIF.

What Is the Difference Between FCA and FOB?

FCA and FOB are two important Incoterms® 2020 rules that are frequently compared, particularly in export and containerized shipping.

FCA – Free Carrier

• May be used for any mode of transport
• Suitable for containerized cargo
• Delivery may take place at a factory, warehouse or terminal
• Risk transfers when delivery occurs in accordance with FCA

FOB – Free On Board

• Used only for sea and inland waterway transport
• Delivery must take place on board the vessel
• Risk transfers when the goods are on board the vessel

The fact that part of a shipment moves by sea does not automatically make FOB the most appropriate rule. For many containerized shipments, FCA is more closely aligned with the actual handover point.

What Is the Difference Between DAP and DDP?

Under both rules, the seller arranges transport to the named place of destination. The key difference between DAP and DDP concerns import procedures and customs clearance at destination.

DAP – Delivered at Place

Under DAP, the buyer is responsible for import customs formalities and payment of import duties and taxes.

DDP – Delivered Duty Paid

Under DDP, the seller is responsible under the rule for import formalities and the associated import charges. DDP therefore places substantially greater obligations on the seller, and the seller should confirm that it can legally comply with the destination country's import requirements before agreeing to DDP.

What Is the Difference Between DAP and DPU?

The main difference between DAP and DPU is unloading.

DAP – Delivered at Place

Under DAP, the seller delivers the goods at destination on the arriving means of transport, ready for unloading.

DPU – Delivered at Place Unloaded

Under DPU, the seller must unload the goods from the means of transport before placing them at the buyer's disposal. This makes DPU the only Incoterms® 2020 rule that requires the seller to unload the goods at the named destination.

How to Choose the Right Incoterm for Your Shipment

The appropriate Incoterm should be selected based on the type of goods, mode of transport, logistics route, required level of control, each party's ability to manage transportation and prevailing market conditions. There is no single Incoterm that is best for every transaction. The choice should reflect the actual structure of the sale and the supply chain.

The following table provides a practical starting point:

Key Factors to Consider When Selecting an Incoterm

Before selecting an Incoterms rule, the parties should answer the following questions:

• Where exactly will the goods be delivered?
• Who will manage the main carriage?
• Is the shipment containerized or non-containerized?

The choice of Incoterm should form part of the company's supply chain strategy, rather than being treated as a purely contractual formality.

What Should You Review Before Finalizing an Incoterm?

Before finalizing the sales contract, the buyer and seller should consider the following:

• At what exact point will the goods be delivered?
• At what point should risk transfer?
• Which party can obtain better freight rates?
• Who is better positioned to manage the main carriage?
• Who will complete export formalities?
• Who is legally and operationally able to complete import formalities?
• Is the cargo containerized?
• Will multiple transport modes be used?
• Is cargo insurance required?
• What level of insurance cover is appropriate for the cargo?
• Is the transaction being financed through a Letter of Credit (LC)?
• Can the seller legally and operationally meet DDP obligations in the destination country?

The selected Incoterm should reflect the actual commercial structure and transport route, rather than simply following a company's established habit or historical practice.

Why Should the Named Place of Delivery Be Specified Precisely?

Simply stating FCA – Incoterms® 2020 is not sufficiently precise. The named place or point should be identified as clearly as possible in the sales contract.

For example:

FCA Seller's Warehouse, Shanghai, China – Incoterms® 2020

or:

CIP Tehran, Iran – Incoterms® 2020

or:

FOB Shanghai Port, China – Incoterms® 2020

In some transactions, specifying the exact point within a port, terminal or delivery location can be operationally important. The more precisely the delivery point is defined, the lower the risk of disputes over:

• Transport costs
• Terminal handling charges
• Loading and unloading
• Responsibility for the goods
• The point of risk transfer

PTB Group's Role in Implementing Incoterms and Delivering Integrated Logistics Solutions

Selecting the right Incoterm and delivery structure is not merely a contractual decision; it is part of supply chain planning and risk management in international trade. When the selected Incoterms rule is aligned with the actual transport arrangement, cargo characteristics, routing and the operational capabilities of the parties, it can help reduce unnecessary costs, improve clarity of responsibilities and provide greater control over the logistics process.

Effective implementation of Incoterms requires coordination across transportation, customs, commercial documentation, cargo insurance and other supply chain functions. Drawing on its experience in international freight forwarding and integrated logistics solutions, PTB Group helps businesses translate Incoterms requirements into practical operating arrangements and design the most appropriate transport structure for their commercial needs.

PTB Group's capabilities across ocean freight, air freight, rail freight, road freight and multimodal transport enable it to develop efficient and reliable logistics solutions tailored to the route, cargo type and contractual requirements of each shipment.

Ultimately, Incoterms are not simply a set of trade terms; they are a practical framework for managing cost, risk and responsibility in international trade. Working with an experienced logistics partner such as PTB Group can help businesses select the appropriate Incoterm, align contractual responsibilities with the actual transport chain, and manage import and export operations with greater visibility, consistency and operational efficiency.