Incoterms 2020 - Complete Freight Responsibility Guide

Incoterms confusion costs importers 10-25% in unnecessary freight expenses: buyers accepting EXW terms discover they're responsible for export documentation they can't legally complete in China; FOB buyers unaware that risk transfers at the ship's rail fail to purchase marine cargo insurance and face uninsured losses; CIF buyers assuming comprehensive insurance coverage learn after cargo damage that CIF includes only minimum insurance (Institute Cargo Clauses C) covering major casualties but not common handling damage.

Incoterms (International Commercial Terms) are standardized trade definitions published by the International Chamber of Commerce (ICC) that establish who pays for what in international transactions—ocean freight, insurance, export clearance, import duties, inland delivery—and critically, when risk transfers from seller to buyer. The wrong Incoterm selection inflates landed costs 15-30% through inefficient freight arrangements or creates liability gaps leaving cargo damage uninsured.

This comprehensive guide explains Incoterms 2020 (the current version) including all 11 terms, detailed cost responsibility breakdowns for the five most-used Incoterms (EXW, FOB, CIF, DAP, DDP), risk transfer points, strategic selection criteria, real-world cost comparisons, and common mistakes that create expensive problems.

What Are Incoterms?

Incoterms (INternational COmmercial TERMS) are a set of 11 three-letter trade terms published by the International Chamber of Commerce that define:

Cost allocation: Who pays for transportation, insurance, export/import clearance, duties, and inland delivery.

Risk transfer: At what point in the journey risk of loss or damage transfers from seller to buyer.

Delivery obligations: Where and how the seller must deliver goods to fulfill contractual obligations.

Documentation responsibilities: Who arranges export licenses, bills of lading, customs documentation, and certificates.

Current Version: Incoterms 2020

Effective date: January 1, 2020

Next revision: Expected around 2030 (ICC updates every 10 years)

Important: As of 2024-2025, Incoterms 2020 remains the current version. References to "Incoterms 2024" are incorrect—use "Incoterms 2020" in all purchase orders, contracts, and shipping instructions.

Why Incoterms Matter

Without standardized Incoterms:

Incoterms prevent these disputes through globally recognized definitions that establish cost and risk allocation precisely.

Proper Incoterms Usage

Always specify:

  1. The Incoterm: "FOB"
  2. Named place: "FOB Shanghai" (specify port of loading)
  3. Version: "Incoterms 2020"

Complete example: "FOB Shanghai Incoterms 2020"

Incomplete (creates ambiguity): "FOB" (FOB where? Which version?)

Wrong: "FOB Los Angeles" (FOB is origin port; LA is destination—should be "FAS Shanghai" or "CIF Los Angeles")

The 11 Incoterms 2020 Terms

Incoterms divide into two categories based on transport mode:

Rules for Any Mode of Transport (7 Terms)

These work for ocean, air, truck, rail, or multi-modal shipments:

  1. EXW - Ex Works (seller's facility)
  2. FCA - Free Carrier (named place)
  3. CPT - Carriage Paid To (named destination)
  4. CIP - Carriage and Insurance Paid To (named destination)
  5. DAP - Delivered at Place (named destination)
  6. DPU - Delivered at Place Unloaded (named destination)
  7. DDP - Delivered Duty Paid (named destination)

Use these for: Air freight, trucking, rail, multi-modal, or ocean freight in containers

Rules for Sea and Inland Waterway Transport Only (4 Terms)

These apply exclusively to ocean freight and inland waterway transport:

  1. FAS - Free Alongside Ship (named port of shipment)
  2. FOB - Free on Board (named port of shipment)
  3. CFR - Cost and Freight (named port of destination)
  4. CIF - Cost, Insurance, and Freight (named port of destination)

Use these ONLY for: Ocean freight, inland barge transport

Do NOT use for: Air freight, trucking, containerized ocean freight (use FCA instead of FOB for containers, though FOB remains common in practice)

Detailed Breakdown: Top 5 Incoterms

Focus on the five most commonly used terms in international trade:

1. EXW - Ex Works (Seller's Facility)

Named place: Seller's factory, warehouse, or facility ("EXW Shenzhen Factory")

Seller's obligations:

Buyer's obligations:

Risk transfer point: When goods are placed at buyer's disposal at seller's premises (often the loading dock)

When to use:

When NOT to use:

Cost example (China to U.S., $100,000 goods):

Critical issue: EXW creates export compliance burden on buyers. Chinese regulations require Chinese exporters to handle export formalities—foreign buyers cannot legally complete Chinese export documentation. Avoid EXW for imports from China; use FCA instead.

2. FOB - Free on Board (Named Port of Shipment)

Named place: Port of loading ("FOB Shanghai" or "FOB Ningbo")

Seller's obligations:

Buyer's obligations:

Risk transfer point: When cargo passes the ship's rail during loading at port of shipment (for containerized cargo, interpreted as when cargo is loaded in the vessel)

Freight payment: Collect (buyer pays ocean freight)

Insurance: Not included—buyer must arrange marine cargo insurance separately

When to use:

Cost example (China to U.S., $100,000 goods):

Critical insurance issue: FOB includes NO insurance. Risk transfers to buyer when cargo loads on vessel (still in China), but cargo is your responsibility for 12-16 day ocean transit. Always purchase marine cargo insurance for FOB purchases (costs 0.15-0.30% of cargo value).

3. CIF - Cost, Insurance, and Freight (Named Port of Destination)

Named place: Port of destination ("CIF Los Angeles" or "CIF New York")

Seller's obligations:

Buyer's obligations:

Risk transfer point: When cargo passes the ship's rail during loading at port of shipment (same as FOB—risk transfers at origin even though seller paid freight)

Freight payment: Prepaid (seller pays ocean freight before vessel departure)

Insurance: Seller provides minimum coverage (Institute Cargo Clauses C covering major casualties: sinking, fire, collision—does NOT cover theft, handling damage, container sweat damage, or many other common losses)

When to use:

Cost example (China to U.S., $100,000 goods):

Critical insurance limitation: CIF insurance is minimum coverage only (Institute Cargo Clauses C). This covers catastrophic vessel casualties but excludes:

ICC recommends buyers purchase additional insurance for CIF shipments to obtain comprehensive coverage (Institute Cargo Clauses A). Additional insurance costs 0.10-0.20% of cargo value.

Risk transfer confusion: Many buyers assume CIF means seller bears risk during ocean transit because seller paid freight and insurance. WRONG. Risk transfers at origin port loading (same as FOB). Seller's insurance obligation is for buyer's benefit, but risk has already transferred.

4. DAP - Delivered at Place (Named Destination)

Named place: Buyer's facility, warehouse, or specified location ("DAP Memphis, TN" or "DAP Buyer's Warehouse, Chicago")

Seller's obligations:

Buyer's obligations:

Risk transfer point: When cargo is made available for unloading at the named destination

Freight payment: Prepaid (seller pays all freight)

Insurance: Not required (but seller should obtain to protect their interest until delivery)

When to use:

Cost example (China to U.S., $100,000 goods):

Key advantage: Seller handles all logistics, buyer handles only customs and duties. Simpler than CIF (which stops at port) but maintains buyer control of import clearance and duty payment.

Unloading responsibility: Under DAP, buyer unloads cargo from the delivery truck/container. If seller should unload, use DPU (Delivered at Place Unloaded) instead.

5. DDP - Delivered Duty Paid (Named Destination)

Named place: Buyer's facility or specified location ("DDP Memphis, TN")

Seller's obligations:

Buyer's obligations:

Risk transfer point: When cargo is made available for unloading at the named destination (same as DAP)

Freight payment: All prepaid by seller

Insurance: Not required but seller should obtain (protects seller's risk until delivery)

When to use:

Cost example (China to U.S., $100,000 goods):

Maximum simplicity: Buyer receives cargo cleared, duty-paid, and delivered. No freight bills, no customs invoices, no logistics coordination—just receive goods and pay supplier.

Seller risk: Seller must navigate foreign import regulations, obtain importer of record status, calculate duties accurately, and manage customs clearance. Many sellers lack this expertise or refuse DDP terms for countries where they don't have import operations established.

When sellers resist DDP: If seller declines DDP, negotiate DAP instead (seller delivers to your door, you handle only duties/clearance). This captures 90% of DDP's simplicity while avoiding seller's import compliance burden.

Cost Comparison: EXW vs FOB vs CIF vs DAP vs DDP

Using a real example: $100,000 cargo value, China to Los Angeles, 2.5% import duty rate, $3,000 ocean freight

| Cost Element | EXW | FOB | CIF | DAP | DDP | |--------------|-----|-----|-----|-----|-----| | Seller pays | | | | | | | Goods | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | | Pickup/inland origin | $0 | $300 | $300 | $300 | $300 | | Export clearance | $0 | $150 | $150 | $150 | $150 | | Loading charges | $0 | $200 | $200 | $200 | $200 | | Ocean freight | $0 | $0 | $3,000 | $3,000 | $3,000 | | Marine insurance | $0 | $0 | $200 | $200 | $200 | | Destination charges | $0 | $0 | $0 | $400 | $400 | | Inland delivery | $0 | $0 | $0 | $500 | $500 | | Customs clearance | $0 | $0 | $0 | $0 | $150 | | Import duties | $0 | $0 | $0 | $0 | $2,500 | | Seller quote | $100,000 | $100,650 | $103,850 | $104,750 | $107,400 | | | | | | | | | Buyer pays | | | | | | | Pickup/inland origin | $200 | $0 | $0 | $0 | $0 | | Export clearance | $150 | $0 | $0 | $0 | $0 | | Loading charges | $150 | $0 | $0 | $0 | $0 | | Ocean freight | $3,000 | $3,000 | $0 | $0 | $0 | | Marine insurance | $200 | $200 | $0* | $0 | $0 | | Destination charges | $400 | $400 | $400 | $0 | $0 | | Inland delivery | $500 | $500 | $500 | $0 | $0 | | Customs clearance | $150 | $150 | $150 | $150 | $0 | | Import duties | $2,500 | $2,500 | $2,500 | $2,500 | $0 | | Buyer additional costs | $7,250 | $6,750 | $3,550 | $2,650 | $0 | | | | | | | | | Total landed cost | $107,250 | $107,400 | $107,400 | $107,400 | $107,400 |

*CIF includes minimum insurance; buyer should purchase additional comprehensive coverage ($100-$150)

Key insights:

  1. Total landed cost is similar across terms when you include all expenses—you're choosing who pays what, not reducing total cost.

  2. FOB typically saves 10-20% on ocean freight versus CIF if you have freight forwarder relationships (seller's $3,000 freight quote might cost you $2,400-$2,700 buying direct).

  3. DDP appears expensive ($107,400 vs. $100,000 EXW) but includes everything—compare DDP quote to your calculated landed cost, not just to EXW price.

  4. EXW adds complexity without cost savings for international shipments—avoid it.

  5. Seller markup on freight: CIF and DAP sellers typically mark up freight 10-25% above their actual carrier costs, so FOB with your own freight arrangement often saves money.

Risk Transfer Points: When You Become Responsible

Understanding when risk transfers from seller to buyer is critical for insurance and liability:

| Incoterm | Risk Transfers When... | Location | Implication | |----------|----------------------|----------|-------------| | EXW | Goods placed at buyer's disposal | Seller's facility | Buyer responsible for all risks from pickup onward | | FCA | Goods delivered to carrier | Named place (forwarder warehouse, airport) | Buyer responsible once forwarder has custody | | FOB | Cargo passes ship's rail / loaded on vessel | Port of shipment | Buyer responsible during 12-16 day ocean transit | | CIF | Cargo passes ship's rail / loaded on vessel | Port of shipment | Seller paid freight/insurance but risk already transferred | | DAP | Cargo made available for unloading | Destination address | Seller bears risk through delivery, including ocean transit | | DDP | Cargo made available for unloading | Destination address | Seller bears risk through delivery and clearance |

Critical: For FOB and CIF, risk transfers at origin port loading even though the vessel hasn't left the origin country. Cargo damaged during ocean transit = buyer's loss, not seller's. Marine cargo insurance is essential for FOB and CIF purchases.

Strategic Incoterm Selection: When to Use Each

Use EXW When:

Better alternative for imports: FCA (seller delivers to your forwarder, seller handles export clearance)

Use FOB When:

Requirements: Marine cargo insurance essential; customs broker for import clearance

Use CIF When:

Requirements: Purchase additional insurance for comprehensive coverage; customs broker for import clearance

Use DAP When:

Requirements: Customs broker to handle clearance and duty payment

Use DDP When:

Trade-off: Typically 10-20% higher total cost than FOB with self-arranged logistics, but eliminates coordination burden

Common Incoterms Mistakes and How to Avoid Them

Mistake 1: Using FOB for Air Freight

Problem: FOB is defined for ocean and inland waterway transport only.

Correct term for air: FCA (Free Carrier) where seller delivers to airline or freight forwarder at origin airport.

Example: "FOB Shanghai Airport" is wrong. Should be "FCA Shanghai Airport Incoterms 2020."

Mistake 2: Assuming CIF Includes Comprehensive Insurance

Problem: CIF insurance is minimum coverage (Institute Cargo Clauses C) covering only major casualties—excludes theft, handling damage, container damage.

Solution: For CIF purchases, buy additional insurance (Institute Cargo Clauses A) from your insurance broker or freight forwarder for comprehensive coverage (adds 0.10-0.20% of cargo value).

Mistake 3: Not Buying Insurance for FOB Shipments

Problem: FOB includes no insurance requirement. Cargo damage during 12-16 day ocean transit is buyer's risk but uninsured.

Solution: Always purchase marine cargo insurance for FOB shipments through freight forwarder or insurance broker (costs 0.15-0.30% of cargo value, typically $150-$300 for $100,000 cargo).

Mistake 4: Using EXW for Imports from China

Problem: EXW requires buyer to handle export clearance, but Chinese regulations require Chinese entities to complete export formalities—foreign buyers cannot legally export from China.

Solution: Use FCA named place (e.g., "FCA Seller's Factory, Shenzhen, Incoterms 2020") which requires seller to handle export clearance before delivering to your freight forwarder.

Mistake 5: Confusing Risk Transfer with Cost Responsibility

Problem: Assuming CIF means seller bears risk during ocean transit because seller paid freight. Risk transfers at origin port (when loading), not at destination.

Solution: Understand that Incoterms separate cost responsibility (who pays) from risk transfer (who bears loss). For FOB and CIF, risk transfers at loading but costs differ.

Mistake 6: Not Specifying Incoterms Version

Problem: Writing "FOB Shanghai" without version creates ambiguity—Incoterms 2010 and 2020 have differences (DPU replaced DAT in 2020).

Solution: Always specify version: "FOB Shanghai, Incoterms 2020" in all purchase orders and contracts.

Mistake 7: Using Wrong Named Place

Problem: "FOB Los Angeles" when Los Angeles is the destination port (FOB is origin port term).

Solution: FOB uses port of shipment (origin): "FOB Shanghai." CIF uses port of destination: "CIF Los Angeles."

Mistake 8: Assuming DDP Means Seller Pays Everything

Problem: DDP means delivered duty paid, but buyer still responsible for unloading cargo from truck/container at destination.

Solution: If seller should unload, use DPU (Delivered at Place Unloaded) which requires seller to unload cargo at destination.

Mistake 9: Not Coordinating Incoterms with Payment Terms

Problem: Using DDP Incoterms but issuing letter of credit requiring FOB documents—document types don't match Incoterm.

Solution: Align Incoterms with payment terms. LC transactions typically use FOB or CIF with negotiable bills of lading. DDP uses simpler documentation (seaway bills, express release) incompatible with LCs.

Mistake 10: Ignoring Incoterms 2020 Changes from 2010

Problem: Using outdated knowledge—DAT (Delivered at Terminal) was replaced by DPU (Delivered at Place Unloaded) in 2020.

Solution: Use Incoterms 2020 and reference updated ICC guidance:

Incoterms and Import Duty Responsibility

Only DDP transfers import duty payment to seller. All other Incoterms leave duties with buyer:

| Incoterm | Who Pays Import Duties? | |----------|------------------------| | EXW | Buyer | | FCA | Buyer | | FAS | Buyer | | FOB | Buyer | | CFR | Buyer | | CIF | Buyer | | CPT | Buyer | | CIP | Buyer | | DAP | Buyer | | DPU | Buyer | | DDP | Seller |

Why it matters: Importers often mistakenly assume DAP or CIF means "delivered including duties." Only DDP includes duty payment. DAP delivers to your door but you pay duties. CIF delivers to destination port but you pay duties and inland delivery.

Budgeting impact: For $100,000 cargo with 2.5% duty rate, you owe $2,500 in duties under FOB/CIF/DAP. Only under DDP does seller pay that $2,500.

Freight Prepaid vs. Freight Collect

Incoterms determine who is responsible for freight; prepaid/collect determines when and where payment occurs:

Freight Prepaid: Ocean freight paid at origin before vessel departure

Freight Collect: Ocean freight paid at destination upon cargo arrival

Letter of credit issue: LCs typically require "Freight Prepaid" bills of lading. If you buy FOB (buyer arranges freight), instruct your freight forwarder to prepay freight and show "Freight Prepaid" on bill of lading for LC compliance.

Incoterms Quick Selection Guide

I want to control logistics and save 10-20% on freight → FOB

I want simple purchasing but keep import duties under my control → DAP

I want maximum simplicity, single fixed price → DDP

Seller insists on controlling logistics → CIF

Buying high-volume or commodities with strong freight leverage → FOB

Small buyer (<20 containers/year) without logistics team → DDP or DAP

Conclusion: Master Incoterms to Optimize Landed Costs

Incoterms determine who pays an estimated $4,000-$7,000 in international freight, insurance, clearance, and delivery costs per ocean container shipment—15-30% of total landed cost for typical cargo. Selecting the wrong Incoterm inflates costs through inefficient freight arrangements (accepting seller's marked-up CIF freight when you have better FOB rates), creates liability gaps (FOB without insurance leaves cargo uninsured during transit), or causes operational chaos (EXW terms requiring export clearance you cannot legally complete).

Key takeaways:

  1. Incoterms 2020 is the current version—use "Incoterms 2020" in all contracts. Next revision expected around 2030.

  2. FOB is most common for ocean imports—you control freight via your forwarder, seller handles export clearance and loading. Always buy marine cargo insurance for FOB (risk transfers at origin port).

  3. CIF includes only minimum insurance—purchase additional comprehensive coverage (Institute Cargo Clauses A) for full protection against theft, damage, and handling losses.

  4. EXW creates export compliance problems—avoid for international shipments. Use FCA instead (seller delivers to your forwarder and handles export clearance).

  5. DAP provides simplicity without duty complexity—seller delivers to your door, you handle only customs clearance and duty payment. Best middle-ground option.

  6. DDP offers maximum simplicity at 10-20% premium—seller pays everything including duties. Optimal for small buyers or when seller has better freight rates and import expertise.

  7. Risk transfers at origin for FOB/CIF—once cargo loads on vessel, it's your risk even if seller paid freight (CIF). Insurance is essential.

  8. Only DDP transfers import duty responsibility to seller—all other Incoterms leave duties with buyer.

  9. Always specify: Incoterm + Named Place + Version (e.g., "FOB Shanghai, Incoterms 2020")

  10. Total landed cost is similar across terms—you're choosing who manages logistics and how costs are bundled, not dramatically reducing total cost.

Strategic recommendation: For most importers with freight forwarder relationships and >50 annual containers, FOB provides optimal control and cost efficiency. For smaller importers (<20 containers) or those lacking logistics expertise, DAP or DDP provide simplicity worth the 10-15% premium over self-managed FOB logistics.

Master these Incoterms distinctions to negotiate optimal purchase terms, avoid expensive insurance gaps, prevent export compliance violations, and reduce landed costs by 10-25% through strategic logistics control.

Sources

Disclaimer: This content is for educational purposes only and does not constitute legal advice, trade finance counsel, or customs guidance. Incoterms applications vary by country, industry, and transaction structure. Consult qualified international trade attorneys, customs brokers, freight forwarders, and trade finance advisors for specific purchasing situations. Always specify Incoterms version and named place explicitly in contracts to prevent disputes. All examples are for illustration purposes based on industry practices current as of January 2025.