What are Incoterms and why are they crucial for your international trade?
Incoterms (International Commercial Terms) are internationally recognized trade terms that create clarity in international business. First published in 1936 and last updated with Incoterms 2020 Effective from January 1, 2020, these 11 standardized rules are fundamental to secure global trade.
Why Incoterms are important for your business:
- Reduces legal risks and prevents costly misunderstandings
- Clarify the division of responsibilities between buyer and seller
- Specifies cost responsibility for transport, insurance and customs fees
- Defines exact time for risk transfer from seller to buyer
- Recognized by courts and authorities worldwide
Expert advice: Always state delivery terms with a 3-digit code or full English text, specified city and location, followed by “Incoterms 2020” to avoid misunderstandings.
What exactly do Incoterms regulate?
Incoterms clearly state:
Who pays? for transportation, insurance and other costs
From or to which place the transport will take place
If loading and unloading included in the commitment
When the risk passes from seller to buyer
The 3 most used Incoterms for international trade
1. EXW – Ex-Works (Available at the seller's warehouse)
How it works:
- The buyer is responsible for the entire transport chain
- The seller only makes the goods available at his facility
- Buyer is responsible for loading, transportation and all related costs
Risk transfer: When the goods are available at the seller's specified location
Insurance recommendation: Buyer needs comprehensive insurance from the pickup location
Best for: Buyers who want full control over the transport solution or have favorable transport agreements
2. DAP – Delivered At Place
How it works:
- The seller is responsible for the transport to the agreed destination.
- The seller bears the risk until the destination.
- The buyer is responsible for import clearance and unloading.
Risk transfer: When the goods arrive at their destination, ready for unloading
Insurance recommendation: The seller takes out insurance to the agreed destination.
Best for: Deliveries where the seller wants to have control over the transport but not handle import formalities
3. DDP – Delivered Duty Paid
How it works:
- The seller has maximum responsibility in the supply chain
- The seller handles all costs including export clearance, transportation, insurance, import clearance and local taxes/fees
- The buyer only needs to receive the goods at the specified destination.
Risk transfer: When the goods are delivered and ready for unloading at the destination
Insurance recommendation: The seller needs comprehensive insurance that covers the entire transport chain
Best for: When the buyer wants a simple “turnkey” delivery solution without administrative burdens
Complete overview: All Incoterms 2020
Incoterms | Responsibility for transportation | Risk transfer | Export/Import responsibility | Recommended for |
---|---|---|---|---|
EXW | The buyer | Upon availability at the seller's facility | The buyer for both | All modes of transport |
FCA | The buyer (after the first carrier) | Upon handover to the first carrier | Seller (export), Buyer (import) | All modes of transport |
CPT | The seller | Upon handover to the first carrier | Seller (export), Buyer (import) | All modes of transport |
CIP | The seller (incl. insurance) | Upon handover to the first carrier | Seller (export), Buyer (import) | All modes of transport |
DAP | The seller | Upon arrival at destination | Seller (export), Buyer (import) | All modes of transport |
DPU | The seller (incl. unloading) | When unloading at destination | Seller (export), Buyer (import) | All modes of transport |
DDP | The seller | Upon arrival at destination | The seller for both | All modes of transport |
PHASE | The buyer (after quay) | When placed along the side of the ship | Seller (export), Buyer (import) | Sea transport |
F.O.B | Buyer (after loading) | When the goods are on board the ship | Seller (export), Buyer (import) | Sea transport |
CFR | The seller | When the goods are on board the ship | Seller (export), Buyer (import) | Sea transport |
CIF | The seller (incl. insurance) | When the goods are on board the ship | Seller (export), Buyer (import) | Sea transport |
Detailed review
CIP - Carriage And Insurance Paid To
The seller pays: Transport and insurance to the specified location
Risk transfer: Upon handover to the first carrier
Particularly: Requires higher level of insurance (Institute Cargo Clauses A)
Best for: Valuable goods that require comprehensive insurance coverage
DPU – Delivered at Place Unloaded
The seller pays: Transport and unloading at a specified location
Risk transfer: After unloading at destination
Particularly: Only Incoterm where the seller is responsible for unloading
Best for: Heavy or bulky equipment that requires special handling
FCA – Free Carrier
The seller delivers to: Agreed location or carrier
Risk transfer: Upon handover to carrier
Particularly: Flexible regarding delivery location
Best for: Container freight and multimodal transport
CPT – Carriage Paid To
The seller pays: Transportation to specified destination
Risk transfer: Upon handover to the first carrier
Particularly: No insurance obligation for the seller
Best for: When the seller wants to control the transport but transfer risk early
How to choose the right Incoterm for your business
The choice of Incoterm directly affects your business's risk level, costs and administrative burden. Here are the most important factors to consider:
1. Evaluate your experience level
- New exporters/importers: Start with simpler terms like EXW (as buyer) or DAP (as seller)
- Experienced traders: Can optimize with more complex terms like CIP/CIF for better cost control
2. Assess your negotiating position
- Strong position: Choose terms that benefit your control and cost structure
- Weaker position: Focus on terms that minimize risk and complexity
3. Analyze the characteristics of the goods
- Sensitive/high-value goods: Consider terms where you retain control over the transportation solution
- Standard goods: Can be managed with simpler terms that focus on cost-effectiveness
4. Means of transport and destination
- Sea transport: FOB, CFR, CIF are specifically designed for ocean freight
- Multimodal transport: FCA, CPT, CIP, DAP, DDP are flexible for all modes of transport
- Complex destinations: Conditions where the most experienced party handles local formalities
Common mistakes to avoid with Incoterms
Choosing the wrong Incoterm for the means of transport (e.g. FOB for truck transport)
Unclear specification of delivery location (always specify exact address/terminal)
Mix old and new versions by Incoterms
Relying solely on Incoterms without supplementary purchase agreement
Underestimating the need for insurance especially in conditions where the risk is transferred early
Optimize your international business with the right delivery terms
Proper use of Incoterms can dramatically improve your international business by:
- Minimize risks for costly disputes and misunderstandings
- Streamline logistics processes through clear areas of responsibility
- Optimize costs for transport and insurance
- Simplify administration in cross-border trade
Do you need expert help with Incoterms?
Contact us for professional advice on how to use Incoterms to optimize your international business. Our team of experts will help you choose the right delivery terms based on your specific situation, goods and market.
