What Are Incoterms?
Incoterms (International Commercial Terms) are a set of 11 standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers for:
- Who arranges and pays for transportation at each stage
- Who arranges and pays for insurance
- Who handles export and import customs clearance
- Where risk transfers from seller to buyer
The current version, Incoterms 2020, was published in 2019 and took effect January 1, 2020. When you see "FOB Shanghai" or "DDP New York" in a trade contract, you're seeing Incoterms in use.
The Most Commonly Used Incoterms
EXW — Ex Works (seller's premises)
The buyer takes maximum responsibility. The seller makes the goods available at their facility and the buyer arranges everything: local pickup, export customs, freight, insurance, import customs, and last-mile delivery. EXW = maximum buyer responsibility.
Used when: Buyer has a freight forwarder and wants full control over the shipment. Risky for inexperienced buyers because they're responsible for export clearance in the seller's country.
FOB — Free On Board (named port of shipment)
The seller delivers the goods at the named port of origin, cleared for export and loaded aboard the vessel. Risk transfers to the buyer once goods are on board the ship. The buyer pays ocean freight, insurance, import duties, and last-mile delivery.
FOB is the most common Incoterm for ocean freight from Asia. Most factory invoices are quoted FOB because it clearly separates seller cost (get it to the port) from buyer cost (everything after).
CIF — Cost, Insurance and Freight (named port of destination)
The seller pays ocean freight and insurance to the destination port, but risk transfers at the origin port (same as FOB). The buyer handles import customs and delivery. This is a common "seller-friendly" term when buyers are less experienced, but note: the insurance the seller buys is minimum coverage (often just 110% of invoice value under Institute Cargo Clauses C).
DDP — Delivered Duty Paid (named destination)
The seller bears all costs and risks to deliver goods to the named destination, including import duties and taxes. The buyer just receives the goods. DDP = maximum seller responsibility.
DDP is increasingly required for e-commerce. Amazon's FBA (Fulfillment by Amazon) program requires DDP delivery to their warehouses. Many DTC brands selling internationally use DDP to give consumers a seamless experience without surprise customs bills at delivery.
Incoterms 2020 — All 11 Terms at a Glance
| Term | Risk Transfer Point | Seller Pays | Buyer Pays |
|---|---|---|---|
| EXW | Seller's premises | Nothing after ready | Everything |
| FCA | Named place, after export clearance | Export clearance | Main carriage + import |
| CPT | First carrier | Export + main carriage | Insurance + import |
| CIP | First carrier | Export + carriage + insurance | Import duties |
| DAP | Destination (unloaded) | Export + carriage + insurance | Import duties + unloading |
| DPU | Destination (after unloading) | Export + carriage + unloading | Import duties |
| DDP | Destination (cleared) | Everything including import duties | Nothing |
| FAS | Alongside vessel (origin port) | Export clearance | Loading + main carriage + import |
| FOB | On board vessel (origin port) | Export clearance + loading | Main carriage + import |
| CFR | On board vessel (origin port) | Export + main carriage | Insurance + import |
| CIF | On board vessel (origin port) | Export + carriage + min insurance | Import duties + delivery |
Choosing the Right Incoterm
The right Incoterm depends on your relationship with the counterparty, your logistics capabilities, and your risk tolerance. As a general rule: if you're an experienced importer with your own freight forwarder, FOB gives you cost control. If you want simplicity and are selling to consumers, DDP provides the best buyer experience.
Use our shipping cost calculator to estimate freight costs under different Incoterm scenarios and compare carriers for your route.