Incoterms 2020 in plain language: who pays for what

Two companies agree a price for 40 pallets of tiles. The contract says “FOB”. One side thinks that settles who pays for the ship. The other thinks it settles who owns the goods if the ship sinks. Both are partly right, and both are partly wrong. That gap is where most Incoterms disputes begin.

What Incoterms are

Incoterms are a set of standard trade terms published by the International Chamber of Commerce (ICC). The current edition, Incoterms 2020, took effect on 1 January 2020. Each rule is a three-letter code that you write into a sales contract so that buyer and seller do not have to spell out the same duties from scratch every time.

A rule answers three questions. Who arranges and pays for the transport? At what point does the risk of loss or damage pass from seller to buyer? Who clears the goods for export and for import?

That is the whole job. The code is shorthand for a package of duties, nothing more.

What they do not cover

This is where people get caught. An Incoterm says nothing about who owns the goods. It does not say when or how you pay. It does not choose the law that governs the contract, and it does not decide what happens if the seller ships the wrong product. Those points belong in the sales contract, along with the payment terms.

So “FOB” on a proforma invoice settles delivery, cost and risk. It leaves the rest open.

The eleven rules in two groups

The 2020 edition has eleven rules, split by the kind of transport they suit.

Seven work for any mode, including road, air, rail and containers on a ship:

• EXW (Ex Works)
• FCA (Free Carrier)
• CPT (Carriage Paid To)
• CIP (Carriage and Insurance Paid To)
• DAP (Delivered at Place)
• DPU (Delivered at Place Unloaded)
• DDP (Delivered Duty Paid)

Four are meant only for sea and inland waterway transport:

• FAS (Free Alongside Ship)
• FOB (Free On Board)
• CFR (Cost and Freight)
• CIF (Cost, Insurance and Freight)

One change from the previous edition is worth knowing if you have older paperwork. DPU replaced DAT (Delivered at Terminal) in 2020. The new name makes a point that DAT blurred: the named place can be any place, terminal or otherwise, and the seller unloads there.

EXW: the buyer does nearly everything

Ex Works is the lightest duty a seller can carry. The seller makes the goods available at their own premises, say a factory gate in Guangzhou. From that moment the buyer arranges the truck and loads it. The buyer also handles export clearance in China, pays the freight and takes the risk.

For an importer in Panama, EXW can look cheap because the seller’s price is low. The catch is that you now manage a chain of steps in a country where you may not have staff, and you depend on a local agent to do it. Export clearance is a particular sore point, since the seller is usually better placed to deal with it than a foreign buyer.

FOB: the seller gets the goods on the ship

Under FOB the seller clears the goods for export and delivers them on board the vessel you name, at a named port of shipment. Say, FOB Shanghai. Once the cargo is on board, the risk is yours. So is the ocean freight, the insurance if you want any, and everything that follows in Panama.

FOB is popular. It fits well for bulk and break-bulk cargo lifted straight onto a ship. Containers are another story, covered below.

CIF: the seller pays for the trip, not for the risk

CIF causes more misunderstanding than any other term. The seller books the sea freight and buys insurance to the port of destination, and the price quoted includes both. A buyer reads that and concludes the seller is responsible until the goods land at Balboa or Manzanillo.

That is wrong. Under CIF, risk still passes to the buyer once the goods are on board at the port of loading. The seller paid for the voyage and the cover, but if the container is damaged mid-ocean, you are the one who files the claim. The minimum insurance the rule requires is also modest (the narrower Institute Cargo Clauses (C), in the usual reading), so a careful importer checks whether that cover is enough or asks for more.

CIF also stops at the destination port. Unloading, terminal handling, customs clearance and the truck to your warehouse are separate matters unless the contract says otherwise.

DAP and DDP: the seller brings it to you

With DAP, the seller delivers the goods to a named place in the destination country, ready for unloading, say your warehouse in Colon. The seller pays the freight and carries the risk until arrival. You unload. You also handle import clearance and pay duties and taxes.

DDP goes one step further. The seller also clears the goods through import customs and pays the duties. For the buyer it is the easiest term to live with, and the price reflects that.

There is a catch. Acting as importer of record in another country is hard for a foreign seller, and in many places it needs a local presence. Some sellers quote DDP and then quietly ask the buyer to handle clearance anyway. If you agree to DDP, ask who will actually act as importer and whether the price covers every charge.

Common mistakes

1. FOB for containers. FOB pictures the seller putting the goods on board the ship. A container is usually handed to a carrier or terminal days before loading. FCA is generally the better fit there, because the risk moves where the seller actually hands the box over, and the ICC’s own guidance points the same way.
2. Reading CIF as “everything handled”. It covers freight and insurance to the destination port. It is not a door-to-door promise.
3. A vague named place. “FOB China” is not a term. “FOB Ningbo, Beilun terminal” is. The more exact the place, the fewer arguments about who paid for a crane or a storage fee.
4. The wrong rule for the mode. A sea-only term on an air shipment makes no sense. Use FCA, CPT or CIP instead.

Where customs value comes in

The Incoterm you choose shapes the number that customs looks at. In many systems the customs value of imported goods includes freight and insurance up to the point of entry, not only the price of the product. So an FOB invoice and a CIF invoice for the same cargo may be treated differently on paper, and the duty and tax base can shift with them.

The rules for how this is calculated depend on the country and on the tariff line. Before you sign a contract, ask your customs broker how the value will be built and which documents they need. A short call at that stage costs far less than a correction after the cargo arrives.

Choosing a term as an importer

There is no best Incoterm, only the one that matches what you can do well. If you have a forwarder at origin and a clear view of costs, FCA or FOB gives you control over the freight and often a better rate. If you have no one at origin, a DAP quote shifts the work onto the seller, at a price. EXW rewards experience.

Whatever you pick, write the version into the contract (“FCA Shenzhen, Incoterms 2020”), name the place exactly, and keep the sales contract, the invoice and the transport booking in agreement with each other.

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