Incoterms 2020 explained, without the jargon

What an Incoterm does and does not do

Incoterms are a set of eleven three-letter rules published by the International Chamber of Commerce. The current edition is Incoterms 2020. They are shorthand for a division of responsibility between a seller and a buyer in an international sale.

Each rule answers three questions: who arranges and pays for carriage, who bears which costs along the way, and at exactly which point risk of loss or damage passes from one party to the other. That is all they do.

They do not transfer title to the goods, they do not set payment terms, and they do not override your sales contract. A surprising number of disputes come from assuming an Incoterm has settled something it never addressed.

The four you will actually encounter

Eleven rules exist but ocean freight in practice runs on four. Learn these and you will understand ninety per cent of the quotes you receive.

• EXW (Ex Works) — the buyer collects from the seller's premises and takes on everything from that moment, including export clearance. Maximum buyer responsibility.
• FOB (Free On Board) — the seller delivers the goods on board the vessel at the named origin port and clears them for export. Risk passes once the goods are on board. The most common term for ocean imports.
• CIF (Cost, Insurance and Freight) — the seller pays carriage and insurance to the destination port, but risk still passes at origin when the goods are loaded. This split catches people out constantly.
• DDP (Delivered Duty Paid) — the seller delivers to the buyer's door with all duties and taxes paid. Maximum seller responsibility.

The CIF trap: paid for is not protected

Under CIF the seller pays for the freight and the insurance, so buyers reasonably assume the seller carries the risk for the voyage. They do not. Under CIF, risk transfers when the goods are loaded on the vessel at origin.

If the cargo is damaged mid-ocean, it is the buyer's loss, and the buyer claims on a policy the seller arranged. That policy is only required to meet minimum cover — Institute Cargo Clauses (C), which covers a narrow list of named perils and not general handling damage.

If you buy CIF and the cargo matters, check the policy wording and consider arranging your own all-risk cover in parallel rather than relying on the minimum the rule requires.

The EXW and DDP declaration problem

EXW makes the buyer responsible for export clearance in the seller's country. In most jurisdictions a non-resident business cannot file an export declaration in its own name, so the buyer ends up needing the seller's cooperation anyway — cooperation the Incoterm has just told the seller they do not owe.

DDP has the mirror problem. It obliges the seller to clear goods for import and pay duty and VAT in the buyer's country, which usually requires a local tax registration the seller does not have. Sellers agree to DDP to win the sale and then discover they cannot legally perform it.

For most trades, FCA at origin and DAP at destination are the better answers. They give you nearly the same commercial split without asking either party to file a declaration in a country where it has no standing.

Always name the place precisely

An Incoterm is incomplete without a named place, and vague naming causes real cost. 'FOB China' means nothing — FOB Ningbo and FOB Shenzhen carry different inland haulage and different terminal charges.

Write the term, the place, and the edition: 'FOB Ningbo, Incoterms 2020'. Naming the edition matters because the 2010 and 2020 rules differ, most notably in the insurance level required under CIP.