In global trade, confusion is expensive. One unclear sentence on a contract can determine who pays for marine insurance, who manages port charges, and who carries the risk the moment a container is lifted at the terminal. That’s why Incoterms, the rules published by the International Chamber of Commerce (ICC), remain one of the most important frameworks in cross-border logistics.

Yet despite their influence, many importers and exporters still misunderstand how Incoterms work—and where their responsibility ends. This guide breaks down the essential concepts, bringing clarity to a system that underpins everything from small e-commerce shipments to multi-million-dollar supply chains.

What Incoterms Actually Do

Incoterms are not laws. They’re globally recognised commercial terms that standardise who handles transport, customs clearance, insurance, and risk transfer during international shipping.

They settle questions that might otherwise create disputes, such as:

• Who books the freight?

• Who pays port handling fees?

• Where does risk transfer from seller to buyer?

• Who manages export or import customs?

• At what point is the shipment considered delivered?

By clarifying responsibilities in advance, Incoterms reduce uncertainty for freight forwarders, customs brokers, carriers, and insurers.

The 11 Incoterms Explained

The current version—Incoterms 2020—contains 11 rules. They fall into two categories:

1. For any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP

2. For sea and inland waterway transport: FAS, FOB, CFR, CIF

Below is a practical explanation of each, focusing on real-world use by importers and exporters.

Incoterms for Any Mode of Transport

EXW – Ex Works

The seller’s responsibility ends as soon as the goods are made available at their premises.
The buyer handles everything: pickup, export paperwork, freight, import clearance, and delivery.

Commonly used in manufacturing but risky for inexperienced buyers.

FCA – Free Carrier

The seller clears the goods for export and hands them to the carrier at an agreed location.
Risk transfers earlier than most buyers expect, making FCA a modern alternative to FOB for containerised shipments.

CPT – Carriage Paid To

The seller pays the international freight, but risk transfers once the goods are handed to the first carrier.
Buyers must understand that “freight paid” does not mean “risk covered.”

CIP – Carriage and Insurance Paid To

Similar to CPT, but the seller must also provide insurance with higher coverage (as defined by ICC).
Common in higher-value shipments or where buyers demand added protection.

DAP – Delivered at Place

The seller manages the transport up to the buyer’s location, excluding customs clearance.
Risk transfers at final delivery.
A popular Incoterm for e-commerce and B2B shipments.

DPU – Delivered at Place Unloaded

The seller delivers and unloads the goods at the destination.
This is the only Incoterm where unloading is the seller’s obligation.

DDP – Delivered Duty Paid

The seller takes on almost every responsibility—including import customs, duties, and taxes.
Buyers prefer DDP because it eliminates administrative work, but sellers must understand the tax and compliance implications of managing clearance in another country.

Incoterms for Sea and Inland Waterways Only

FAS – Free Alongside Ship

The seller places goods next to the vessel at the port of shipment. Rarely used today.

FOB – Free on Board

Risk transfers when the goods pass the ship’s rail at the port of loading.
Still widely used, but not recommended for containerised freight (FCA fits modern logistics better).

CFR – Cost and Freight

The seller pays for freight to the destination port, but risk transfers at the port of loading.
Buyers must manage insurance and destination charges.

CIF – Cost, Insurance and Freight

Similar to CFR, but the seller also pays for minimum insurance.
Often used for commodities like grain, minerals, or bulk cargo.

Why Incoterms Matter in Modern Supply Chains

Global trade has become more complex, driven by:

• Rising freight rates

• Expanding free trade agreements

• Stricter customs and biosecurity laws

• Shifting carrier surcharges

• E-commerce growth

• Multi-country sourcing strategies

As logistics grows more fragmented, clear Incoterms guard against financial surprises. For example, a buyer choosing CIF might still face high terminal handling charges upon arrival—fees not covered in the contract.

Conversely, a seller offering DDP must understand import tax laws in the destination country, or risk non-compliance.

How to Choose the Right Incoterm

While no single rule fits every situation, businesses often base decisions on:

1. Control Over Freight

Buyers seeking transparency often prefer FOB, FCA, or EXW.
Sellers wanting control might choose CIF, CFR, or CPT.

2. Experience Level

New importers usually avoid EXW and FOB because these place heavy responsibility on them early in the chain.

3. Cargo Value and Insurance Needs

High-value goods benefit from CIP or CIF, which include minimum insurance standards.

4. Destination Country Regulations

DDP can be effective, but only when the seller understands customs duties, GST/VAT, and licensing rules at the final destination.

Common Mistakes Importers and Exporters Should Avoid

Misunderstanding risk transfer

Many assume risk transfers when freight is paid for. Incoterms separate payment responsibility from liability.

Using FOB for containerised cargo

FOB was designed for break-bulk cargo, not containers. FCA is the recommended alternative.

Ignoring destination port charges

Rules like CIF and CFR cover only the main freight leg—not terminal fees, storage, or handling charges.

Assuming Incoterms cover ownership

They don’t govern title transfer—only cost and risk.

Not specifying the precise location

Terms like DAP or FCA must be tied to a clear, agreed delivery point.

Final Thoughts

Incoterms remain a cornerstone of international logistics. They bring structure to a supply chain that spans exporters, importers, carriers, insurers, customs authorities, and freight forwarders. While they can seem abstract on paper, these rules have real-world consequences—affecting costs, risk exposure, delivery timelines, and even business relationships.

For companies importing or exporting regularly, choosing the right Incoterm is less about tradition and more about strategy. The right decision can safeguard margins, prevent disputes, and ensure a clear pathway through complex global trade networks.