Navigating international trade requires clarity—and one of the most important tools for ensuring smooth global transactions is the use of Incoterms.
Updated most recently in 2020 by the International Chamber of Commerce (ICC), Incoterms (International Commercial Terms) provide a standardized set of rules that define the responsibilities of buyers and sellers in global trade. Whether you're exporting electronics from Germany or importing apparel from Vietnam, understanding these terms can protect your business and streamline operations.
What are Incoterms?
Incoterms are a set of 11 internationally recognized rules that define who is responsible for various stages of the shipping process, including transportation, insurance, customs clearance, and risk.
They are not laws but are incorporated into contracts to create clarity and avoid ambiguity in cross-border transactions. Incoterms determine:
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Who arranges and pays for transport
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Where the risk transfers from seller to buyer
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Who is responsible for customs duties and clearance
Why Incoterms 2020 matter
The latest version, Incoterms 2020, became effective on January 1, 2020, and introduced several refinements aimed at better addressing current logistics realities.
Using the correct Incoterm ensures:
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Clear allocation of responsibilities
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Reduction of legal risks
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Improved efficiency in trade documentation
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Better coordination with freight forwarders, carriers, and customs authorities
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Whether you’re a seasoned logistics manager or a first-time exporter, applying the right Incoterm is key to managing expectations, costs, and liability.
A quick overview of incoterms 2020
The 11 terms are split into two categories:
Incoterms for any mode of transport:
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EXW (Ex Works) – Seller makes goods available at their premises. Buyer bears all costs and risk.
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FCA (Free Carrier) – Seller delivers goods to a carrier or another person nominated by the buyer at the seller’s premises or another named place.
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CPT (Carriage Paid To) – Seller pays for carriage, risk transfers once goods are handed to the carrier.
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CIP (Carriage and Insurance Paid To) – Similar to CPT, but seller also pays for insurance.
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DAP (Delivered at Place) – Seller delivers when goods are placed at the disposal of the buyer at destination.
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DPU (Delivered at Place Unloaded) – Seller delivers and unloads the goods at destination.
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DDP (Delivered Duty Paid) – Seller handles everything, including customs duties and taxes.
Incoterms for sea and inland waterway transport:
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FAS (Free Alongside Ship)
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FOB (Free on Board)
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CFR (Cost and Freight)
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CIF (Cost, Insurance, and Freight)
What’s new in Incoterms 2020?
FCA now includes an option for onboard Bills of Lading – Important for letter of credit payments.
DAT (Delivered at Terminal) replaced by DPU (Delivered at Place Unloaded) – Reflects that unloading can happen anywhere, not just a terminal.
Improved guidance on transport security and insurance obligations.
Clarity on the allocation of transport-related costs.
These changes aim to increase flexibility and reflect current supply chain practices more accurately.
Choosing the right Incoterm
To select the best Incoterm for your shipment, consider the following:
1. Mode of Transport
Use FOB, CIF, etc., only for sea freight. For multimodal transport, prefer terms like FCA or DAP.
2. Level of Control Desired
Do you want control over freight forwarding and insurance? If yes, terms like EXW or FCA may be preferable.
3. Customs Responsibilities
For sellers exporting goods, consider whether you’re willing to take on import clearance (e.g., DDP) or just handle export (e.g., FCA).
4. Risk Tolerance
CIP and CIF include insurance; use them when transporting high-value or fragile goods.
5. Trust and Relationship
In long-term partnerships, more responsibilities may be shared, leading to choices like DPU or DDP for simplicity.
Common Mistakes to Avoid
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Using sea-only terms like FOB for air shipments
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Failing to specify the named location clearly
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Assuming that the seller or buyer will handle certain charges without discussing it
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Not aligning your contracts and documents with the chosen Incoterm
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Each Incoterm must be accompanied by a named place (e.g., “DAP – Bucharest, Romania”) for clarity.
The strategic advantage of understanding Incoterms
When correctly applied, Incoterms become a strategic tool for supply chain efficiency. They enable better planning, cost control, and transparency across international partnerships. Working with an experienced freight forwarder like Kuehne+Nagel ensures you get the right guidance and avoid unnecessary pitfalls.
Understanding and using Incoterms 2020 isn't just for legal compliance—it's a strategic necessity in global trade. They provide the framework for smooth operations, lower costs, and improved customer satisfaction.
Whether you're shipping pharmaceuticals, electronics, or food products, mastering Incoterms 2020 will help you:
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Avoid disputes
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Reduce delays
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Protect your business