Incoterms 2020 explained in one line: eleven three-letter codes that say who pays for what, and who carries the risk, at each step of a shipment. The rules come from the International Chamber of Commerce (ICC). They took effect on 1 January 2020. If you buy goods from abroad, the code in your contract decides your costs.
What an Incoterm does and does not do
An Incoterm covers three things. It says who arranges transport. It says who pays for each part of the trip. And it says the point where risk passes from seller to buyer. Risk means who loses out if the goods are damaged or lost.
It does not cover the price of the goods. It does not say when you pay. It does not say who owns the goods. Your sales contract must deal with those points. Write the code with a named place, such as "FOB Shanghai" or "FCA Singapore." The place matters as much as the code.
Sources: ICC, Incoterms 2020 page; US International Trade Administration, Know Your Incoterms.
The two families of rules
There are eleven rules in two groups. Seven can be used for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are only for sea and inland waterway transport: FAS, FOB, CFR and CIF.
A simple habit helps. If your goods travel in a container, check which family your code belongs to. A code from the sea-only group is meant for goods that are loaded onto a ship and handled as bulk or break-bulk cargo.
Sources: US International Trade Administration, Know Your Incoterms.
EXW, FOB and CIF in plain words
EXW means Ex Works. The seller makes the goods available at its own premises. The buyer does the rest: loading, export clearance, freight, import clearance and delivery. It puts the most work on the buyer. It can be hard for a first time importer, who may not be able to clear goods out of the seller's country.
FOB means Free on Board. The seller delivers the goods on board the ship at the named port of loading. The seller pays to get them there and clears them for export. Risk passes to the buyer once the goods are on board. The buyer pays the sea freight and everything after it.
CIF means Cost, Insurance and Freight. The seller pays freight to the named port of destination and buys insurance for the buyer. Risk still passes once the goods sit on the vessel at the loading port. That surprises many new buyers. The seller pays for the trip, but the buyer carries the risk during it.
Sources: ICC, Incoterms 2020 page; US International Trade Administration, Know Your Incoterms.
The other rules to know
FCA means Free Carrier. The seller hands the goods to a carrier named by the buyer, at a named place. It is often a safer pick than EXW because the seller handles export clearance.
CPT and CIP are the any-mode cousins of CFR and CIF. Under CIP the seller also buys insurance.
DAP means Delivered at Place. The seller brings the goods to the named place, ready to unload. DPU means Delivered at Place Unloaded, and the seller also unloads them. DDP means Delivered Duty Paid. The seller pays almost everything, including import duties and clearance. DDP gives the buyer the least work, and it usually shows in the price.
Sources: US International Trade Administration, Know Your Incoterms; ICC, Incoterms 2020 page.
What changed from the 2010 rules
The ICC made several changes. DAT, Delivered at Terminal, became DPU, so the delivery place can be any place and not just a terminal. DPU is now listed after DAP.
The rules for insurance changed. Under CIF the default cover stays at the lower Institute Cargo Clauses (C), though the parties can agree on more. Under CIP the seller must now buy higher cover, at Clauses (A) or similar.
FCA now lets the buyer and seller agree that the carrier will give the seller an on board bill of lading after loading. Costs are now gathered in one place in each rule, article A9 and B9. Security duties are also set out more clearly.
Sources: ICC, Incoterms 2020 page.
How to choose and what to check
Start with what you can handle. If you have no agent in the seller's country, avoid EXW. If you want to control freight, choose FOB or FCA. If you want the seller to arrange the trip, choose CIF or CIP, and read the insurance terms. Ask a freight forwarder to quote each option, and compare the total landed cost.
Always name the place. Always say "Incoterms 2020" in the contract, so nobody reads an older version. This is general information, not legal advice. For large orders, ask a trade lawyer or a licensed forwarder to review the contract.
Sources: US International Trade Administration, Know Your Incoterms; ICC, Incoterms 2020 page.
Sources
- International Chamber of Commerce, Incoterms 2020: https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/
- US International Trade Administration, Know Your Incoterms: https://www.trade.gov/know-your-incoterms