If you have ever looked at an international shipping contract, you have likely seen three-letter acronyms like FOB, CIF, or EXW.
These are not random shipping codes; they are Incoterms® (International Commercial Terms).
Published by the International Chamber of Commerce (ICC), these terms are the world's essential language for trade.
They define exactly where the seller's responsibility ends and the buyer's responsibility begins.
For a US business, misunderstanding Incoterms is dangerous.
It can lead to you paying for shipping when you thought the supplier was paying, or worse, being liable for goods damaged at sea because you didn't realize who was responsible for insurance.
This guide breaks down the Incoterms 2020 rules into simple, digestible categories.
What Exactly Do Incoterms Define?
Incoterms clarify three main things in a transaction:
- Costs: Who pays for what? (Transport, insurance, duties, handling).
- Risk: Where does the risk of loss or damage transfer from seller to buyer?
- Tasks: Who is responsible for organizing transport and customs clearance?
Note: Incoterms do NOT cover payment terms (when you get paid) or transfer of ownership (title).
Category 1: Rules for Any Mode of Transport
These terms can be used for air, sea, road, or rail.
EXW (Ex Works)
The "Do It Yourself" Term.
The seller places the goods at their factory or warehouse.
The buyer is responsible for everything else: loading the truck, export customs, shipping, and import.
Pros/Cons: Maximum control for the buyer, but maximum risk.
As a US exporter, this is the easiest for you, but international buyers may find it hassle-some.
FCA (Free Carrier)
The "Flexible" Term.
The seller handles export customs clearance and hands the goods over to the buyer's carrier at a named place (e.
g.
, the seller's dock or a local airport).
Once handed over, the risk transfers to the buyer.
This is highly recommended over EXW for international shipments because the seller is better positioned to handle export compliance in their own country.
CPT (Carriage Paid To)
Seller Pays Shipping, Buyer Takes Risk.
The seller pays for the freight to bring the goods to the destination (e.
g.
, CPT Chicago).
However, the risk transfers to the buyer as soon as the goods are handed to the first carrier in the export country.
If the plane crashes, it is the buyer's problem, even though the seller paid for the ticket.
CIP (Carriage and Insurance Paid To)
Same as CPT + Insurance.
Same as above, but the seller must also purchase insurance for the goods during transit.
Under Incoterms 2020, this requires "All Risk" coverage (Clause A).
DAP (Delivered at Place)
The "Door-to-Door" (Almost) Term.
The seller pays for everything and assumes all risk until the goods arrive at the specified destination (e.
g.
, the buyer's warehouse).
The buyer is only responsible for unloading the goods and paying import duties/taxes.
DPU (Delivered at Place Unloaded)
The Only Term where Seller Unloads.
This is a new term in 2020 (replacing DAT).
The seller is responsible for transport and unloading the goods at the destination.
This is risky for sellers unless they have their own equipment at the destination.
DDP (Delivered Duty Paid)
The "Full Service" Term.
The seller does everything: shipping, insurance, and paying import duties and taxes (VAT/GST).
The buyer just opens the door.
Warning for Sellers: Do not agree to DDP unless you are 100% sure you can clear customs in the buyer's country.
For example, a US company cannot easily pay VAT in the EU without fiscal representation.
Category 2: Rules for Sea and Inland Waterway Only
These are the traditional terms used for ocean freight and bulk cargo.
FAS (Free Alongside Ship)
The seller places the goods on the dock next to the ship.
The buyer pays to load them onto the ship.
Used mostly for heavy machinery or bulk commodities (grain, coal).
FOB (Free on Board)
The Most Famous Term.
The seller loads the goods onto the vessel nominated by the buyer.
Once the goods are "on board," risk and cost transfer to the buyer.
Common Mistake: People use FOB for air freight.
This is technically incorrect; you should use FCA for air.
CFR (Cost and Freight)
The seller pays the ocean freight to the destination port.
However, risk transfers to the buyer once goods are loaded on the ship at the origin.
The buyer is responsible for insurance.
CIF (Cost, Insurance, and Freight)
Same as CFR, but the seller must provide minimum insurance (Clause C).
This is very common in agricultural and commodity trading.
How to Choose the Right Incoterm
For Importers (Buyers):
If you have a strong logistics network and want to control costs, choose FOB or EXW.
You choose the freight forwarder, meaning you control the speed and price.
If you want a hands-off experience, ask for DAP, but be aware the seller might markup the freight cost.
For Exporters (Sellers):
FCA is often the safest bet.
It ensures you handle export clearance (keeping you compliant with US laws) but limits your liability once the goods leave your country.
Avoid DDP unless you are a large multinational with tax presence in the destination country.
Conclusion
Incoterms are the rules of the road for global trade.
They prevent expensive misunderstandings.
However, they are only effective if specific locations are named.
"FOB" means nothing.
"FOB Port of Miami, Florida, USA" means everything.
When negotiating your next contract, consult this guide and choose the term that balances your risk appetite with your logistical capabilities.