Incoterms 2020 Explained: Complete Guide to International Trade Terms

Master the 11 Incoterms 2020 rules that govern international trade. Understand who pays for freight, insurance, customs duties, and learn how to choose the right trade term for your shipments from China.

What Are Incoterms?

Incoterms (International Commercial Terms) are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). These standardized trade terms are used in international and domestic contracts to clarify the responsibilities of buyers and sellers regarding the delivery of goods.

Incoterms define three critical aspects of every international transaction:

• Delivery Point — Where the goods are delivered from seller to buyer
• Cost Allocation — Who pays for freight, insurance, and handling charges
• Risk Transfer — When risk passes from seller to buyer

Important: Incoterms do NOT constitute a contract of sale. They only define delivery terms.

Incoterms 2020 vs 2010: What Changed?

1. DAP Replaced DAT

DAT (Delivered at Terminal) was renamed to DAP (Delivered at Place). DPU (Delivered at Place Unloaded) was created for cases where unloading is specifically at the buyer's premises.

2. Transport Insurance Under CIP

Under CIP, sellers are now required to obtain insurance coverage at "minimum cover" (previously it was "cover as per ICC 'C' conditions").

3. Cost of Things Needed for Export/Import

Incoterms 2020 clarifies that the cost of things required for export/import (such as security clearances, safety inspections) should be included in the seller's or buyer's obligations respectively.

4. Changed Layout for Readability

The presentation has been reorganized with the seller's obligations on the left and buyer's on the right for easier comparison.

All 11 Incoterms 2020 Rules Explained

Incoterms 2020 includes 11 rules that can be divided into two categories: Rules for Any Mode of Transport (7 terms) and Rules for Sea and Inland Waterway Transport (4 terms).

Rules for Any Mode of Transport

EXW — Ex Works

Ex Works (EXW) is the most buyer-favorable incoterm. The seller's obligation is simply to make the goods available at their premises (factory, warehouse). The buyer assumes all risks and costs from that point onward, including export clearance, transport, insurance, and import clearance.

Seller's Responsibilities: Make goods available at their premises, provide commercial invoice, assist with export documentation.

Buyer's Responsibilities: All transport and freight costs, export and import clearance, insurance (recommended), all risks from seller's premises.

Best for: Buyers with strong logistics capabilities who want maximum control over their shipments.

FCA — Free Carrier

Free Carrier (FCA) requires the seller to deliver goods, cleared for export, to the carrier nominated by the buyer at a named place. This is one of the most commonly used incoterms for air freight shipments.

Seller's Responsibilities: Export clearance, delivery to carrier, origin transport (if at seller's place).

Buyer's Responsibilities: Main freight costs, insurance, import clearance and duties, destination handling.

CPT — Carriage Paid To

Carriage Paid To (CPT) means the seller pays for the freight and transport of goods to the named destination. Risk transfers to the buyer when the goods are handed to the first carrier.

Seller's Responsibilities: Export clearance, main carriage costs to destination, delivery to first carrier.

Buyer's Responsibilities: Insurance (buyer's choice), risk after first carrier, import clearance, final delivery costs.

CIP — Carriage and Insurance Paid To

Carriage and Insurance Paid To (CIP) is similar to CPT, but the seller must also obtain insurance coverage for the goods during transport. Under CIP, sellers must obtain insurance at minimum cover (at least 110% of the goods' value).

Seller's Responsibilities: Export clearance, main freight costs, insurance coverage (minimum), delivery to destination.

Buyer's Responsibilities: Risks during transport, import clearance and duties, unloading and final delivery.

DAP — Delivered at Place

Delivered at Place (DAP) means the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the destination.

Seller's Responsibilities: Export clearance, all transport costs to destination, insurance, all risks up to delivery.

Buyer's Responsibilities: Unloading (unless DPU), import clearance, import duties and taxes.

DDP — Delivered Duty Paid

Delivered Duty Paid (DDP) is the most seller-favorable incoterm. The seller bears all costs and risks involved in bringing the goods to the place of destination and must clear the goods for both export and import, pay any duty for both, and carry out all customs formalities.

Seller's Responsibilities: All transport costs, export AND import clearance, export AND import duties/taxes, all risks until delivery.

Buyer's Responsibilities: Unloading at destination, receiving goods, assist with documentation.

Rules for Sea and Inland Waterway Transport

FOB — Free on Board

Free on Board (FOB) is the most widely used incoterm for ocean freight. The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. Risk transfers to the buyer once the goods are on board the vessel.

Why FOB Matters for Ocean Freight: FOB is the cornerstone of ocean freight O/F pricing. Under FOB, the buyer arranges and pays for the main ocean freight, while the seller handles getting the goods onto the vessel at the port of loading.

Seller's Responsibilities: Export clearance, transport to port of loading, loading goods onto vessel, terminal handling charges (origin).

Buyer's Responsibilities: Ocean freight costs, insurance, destination port charges, import clearance and duties.

CIF — Cost, Insurance and Freight

Cost, Insurance and Freight (CIF) means the seller delivers the goods on board the vessel. The seller must pay the costs and freight necessary to bring the goods to the named port of destination AND obtain insurance against the buyer's risk of loss or damage during carriage.

CIF vs FOB: Under CIF, the seller pays for ocean freight and insurance to the destination port. Under FOB, the buyer arranges and pays for these.

Seller's Responsibilities: Export clearance, ocean freight to destination, insurance coverage, origin charges.

Buyer's Responsibilities: Risks after loading on vessel, unloading at destination, import clearance, import duties.

CFR — Cost and Freight

Cost and Freight (CFR) is identical to CIF, except the seller is not required to obtain insurance. The buyer assumes all risks of loss or damage during carriage and must arrange their own insurance coverage if desired.

Seller's Responsibilities: Export clearance, ocean freight to destination, origin charges, no insurance obligation.

Buyer's Responsibilities: Insurance (recommended), all transport risks, unloading and delivery, import clearance and duties.

FAS — Free Alongside Ship

Free Alongside Ship (FAS) means the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. This is the point at which risk transfers to the buyer.

When to Use FAS: FAS is commonly used for heavy lift cargo or project shipments where the buyer wants to arrange their own loading operations.

Cost & Responsibility Comparison Table

Incoterm	Origin Handling	Origin Transport	Loading	Freight	Insurance	Unloading	Customs Export	Customs Import
EXW	Seller	Buyer	Buyer	Buyer	Buyer	Buyer	Seller	Buyer
FCA	Seller	Seller	Seller	Buyer	Buyer	Buyer	Seller	Buyer
CPT	Seller	Seller	Seller	Seller	Buyer	Buyer	Seller	Buyer
CIP	Seller	Seller	Seller	Seller	Seller	Buyer	Seller	Buyer
DAP	Seller	Seller	Seller	Seller	Seller	Buyer	Seller	Buyer
DDP	Seller	Seller	Seller	Seller	Seller	Seller	Seller	Seller
FOB	Seller	Seller	Seller	Buyer	Buyer	Buyer	Seller	Buyer
CFR	Seller	Seller	Seller	Seller	Buyer	Buyer	Seller	Buyer
CIF	Seller	Seller	Seller	Seller	Seller	Buyer	Seller	Buyer

Legend: Seller pays | Buyer pays

Most Popular Incoterms for China Shipping

• FOB (~45% of quotes) — The dominant incoterm for ocean freight. Chinese sellers prefer FOB because they only need to handle export logistics. Typical seller charges: OHC, ENS.
• CIF (~25% of quotes) — Used when sellers want to offer "door-to-port" pricing. Popular for buyers who want freight included. Typical seller charges: O/F, BAF, CAF.
• EXW (~15% of quotes) — Used by experienced importers with their own freight forwarding arrangements. Maximum flexibility for buyers.
• DDP (~10% of quotes) — Preferred when buyers want all-inclusive pricing and minimum hassle. May include DDC, DTHC.

How to Choose the Right Incoterm

Key Questions to Ask

1. How sophisticated is your logistics capability? If you have an experienced logistics team or work with a reliable freight forwarder, EXW or FOB give you maximum control. If logistics is not your strength, consider CIF or DDP.
2. Do you want to comparison shop for freight? FOB lets you negotiate ocean freight independently. CIF bundles freight into the product price, making comparison harder.
3. What's your cash flow situation? Under DDP, you pay everything upfront through the product price. Under FOB, you have separate invoices for goods and freight.
4. Do you need insurance coverage during transit? CIP and CIF include insurance. Under CPT and CFR, you must arrange your own coverage.

Incoterm Selection Matrix

Your Situation	Recommended Incoterm	Why
First-time importer, simple product	DDP	Seller handles everything, you just receive
Regular ocean shipments, want freight control	FOB	Industry standard, easy to compare quotes
Air freight shipments	FCA or CPT	Better suited for air transport than FOB
High-value cargo, need insurance included	CIF	Insurance built into the price
Expert logistics team, maximum control	EXW	Full control over entire logistics chain

Common Incoterms Mistakes to Avoid

Using FOB for Air Freight

❌ Wrong: FOB is designed for sea transport. For air shipments, use FCA or CPT. Using the wrong incoterm for the transport mode can cause confusion about delivery obligations.

✓ Correct: Use FCA for Air Freight. FCA properly allocates responsibility for handing goods to the airline carrier.

Assuming CIF Includes Import Duties

❌ Wrong: CIF only covers freight to the destination port. Import duties, DDC, and DTHC are always the buyer's responsibility under CIF.

Not Specifying the Port of Delivery

❌ Wrong: "FOB China" is too vague. Always specify the exact port: "FOB Shanghai" or "FOB Shenzhen." Different ports have different terminal handling charges.

Forgetting About Insurance

❌ Wrong: Under FOB, CPT, and CFR, insurance is the buyer's responsibility. Don't assume coverage exists—verify you have adequate cargo insurance before shipment.

Confusing Risk Transfer with Cost Allocation

❌ Wrong: Risk and cost are not always transferred at the same point. Under CIF, the seller pays freight but risk transfers at the port of loading. Under DAP, risk transfers at destination but unloading costs are the buyer's.

Frequently Asked Questions

Can I negotiate Incoterms after the contract is signed?
Incoterms are part of your sales contract, so any changes should be mutually agreed upon. However, many buyers successfully negotiate adjusted terms, especially for long-term relationships.

What's the difference between FOB and CIF?
Under FOB, the buyer arranges and pays for ocean freight and insurance. Under CIF, the seller includes these costs in the product price. For buyers, FOB offers more control and potentially lower costs; CIF offers convenience but may be more expensive.

Does DDP mean the buyer pays nothing?
No. Under DDP, the seller pays for transport, insurance, export clearance, and import clearance including duties. However, the buyer is still responsible for unloading at the destination and may need to assist with import documentation.

Which Incoterm is best for small businesses?
For small businesses new to importing, DDP is often the easiest choice because the seller handles most logistics. As you gain experience, you can transition to FOB or CIF to potentially reduce costs.

Are Incoterms required for domestic sales?
Incoterms are primarily designed for international trade, but they can also be used for domestic sales within a country. For domestic transactions, the export/import clearance elements become irrelevant.

What Incoterm should I use for Amazon FBA shipments?
For FBA shipments, most sellers use DDP or DAP to Amazon's warehouse. This ensures smooth delivery and avoids complications with Amazon's receiving process.