Incoterms: A Beginner's Guide for Importers
In this article
Incoterms are the three-letter rules published by the International Chamber of Commerce that decide who pays for transport, who carries the risk at each stage of the journey, and who handles export and import clearance. The current version is Incoterms 2020. There are eleven rules in total, and most importers only ever need four or five of them. Getting the rule right on the purchase order prevents the worst outcome in a first shipment: a bill for freight or customs that neither side expected to pay.
What Incoterms actually decide, and what they do not
Every Incoterm answers three questions in a fixed way. First, which tasks each side performs: booking freight, loading, insuring, clearing export, clearing import. Second, at what point risk passes from seller to buyer. Third, which costs attach to which side. Because the answers are standardized, a seller in Vietnam and a buyer in Ohio can agree on "CIF Los Angeles" and both know what that means without negotiating every line.
What they do not cover matters just as much. Incoterms say nothing about when title to the goods transfers, what the payment terms are, which law governs the contract, or what happens if the goods are defective. Those belong in the sales contract itself. A common beginner error is treating the Incoterm as the whole agreement.
Risk and cost can split at different points
Under most rules, risk passes when the goods are handed over, but the seller still pays freight to a later destination. On a CIF shipment, for example, the seller pays carriage to the named port, yet risk moves to the buyer once the goods are on board at origin. If the vessel sinks mid-voyage, the buyer bears the loss, which is why cargo insurance matters. Read each rule for where the risk line sits, not just where the invoice stops.
The full Incoterms list, grouped by transport mode
The eleven rules split into two families. Seven apply to any mode of transport. Four apply only to sea and inland waterway shipments. Choosing a sea-only rule for an air or rail shipment creates a gap in the contract, because those rules refer to a ship's rail and a port of shipment.
Any mode (seven rules): EXW, FCA, CPT, CIP, DAP, DPU, DDP.
Sea and inland waterway only (four rules): FAS, FOB, CFR, CIF.
What each rule puts on the buyer
| Rule | Name | Risk passes to buyer | Main cost on buyer |
|---|---|---|---|
| EXW | Ex Works | When goods are placed at seller's premises | Everything: loading, export clearance, freight, import |
| FCA | Free Carrier | When goods are handed to the carrier named by buyer | Main carriage, insurance, import clearance |
| FAS | Free Alongside Ship | When goods are placed alongside the vessel | Loading on board, freight, insurance, import |
| FOB | Free On Board | When goods are on board the vessel | Freight, insurance, import clearance |
| CFR | Cost and Freight | When goods are on board the vessel | Insurance, import clearance, onward delivery |
| CIF | Cost, Insurance and Freight | When goods are on board the vessel | Import clearance, onward delivery |
| CPT | Carriage Paid To | When goods are handed to the first carrier | Insurance, import clearance, onward delivery |
| CIP | Carriage and Insurance Paid To | When goods are handed to the first carrier | Import clearance, onward delivery |
| DAP | Delivered at Place | When goods arrive at named destination, ready to unload | Unloading, import duty and clearance |
| DPU | Delivered at Place Unloaded | After goods are unloaded at destination | Import duty and clearance |
| DDP | Delivered Duty Paid | When goods arrive cleared for import at destination | Unloading only; duties paid by seller |
The table is a summary. The binding text is the ICC rule itself, and a short contract clause should always name the rule, the version, and the exact place, such as "CIF Rotterdam Incoterms 2020".
The four rules most small importers should learn first
EXW looks cheapest because the seller does almost nothing. In practice it often fails for importers. The buyer must arrange export clearance in a country where it may have no legal standing or tax registration. Many freight forwarders will not accept an EXW shipment without a local exporter of record. FCA is the usual fix: the seller clears export, and the buyer controls the main leg.
FOB is the classic sea freight rule and still works well for full containers and breakbulk. For containerized cargo, though, the container is handed to the carrier at a terminal days before it is loaded. Risk under FOB passes when the goods are on board, which leaves a stretch where the buyer has paid but does not carry risk. FCA, or FOB with an added clause, avoids that mismatch.
CIF and CIP differ in insurance. Under Incoterms 2020, CIP requires Institute Cargo Clauses (A) cover, the widest standard level. CIF requires only Clauses (C), a narrower set that excludes many perils. If your goods are high value, CIF cover may disappoint you at claim time.
DDP is convenient for small parcels and sample orders, but it puts the seller in charge of import duty in your country. Some sellers under-declare value to keep the landed price low, which leaves the importer exposed if customs audits the entry. Know what value was declared before you accept DDP.
How to pick a rule for a specific shipment
- Ask who has the better freight contract and the local knowledge at each end. The side with the stronger position should own that leg.
- Check who can legally clear export and import. If the seller cannot clear export, EXW is out.
- Match the rule to the transport mode. Do not put FOB or CIF on an air shipment.
- Decide who insures and at what cover level, then check the rule's default. Upgrade in writing if you need more.
- Name the place precisely. "DAP Chicago" is ambiguous; "DAP 1234 Example Street, Chicago, IL" is not.
- Write the rule, version and place into the purchase order and the commercial invoice.
A short worked example
Illustrative figures only. An importer in Texas buys lamps from a supplier in Ningbo for USD 20,000 on FOB Ningbo Incoterms 2020. The importer's forwarder quotes ocean freight at USD 2,400 and terminal handling at origin of USD 350. Under FOB the seller pays to get the goods on board and clears export; the importer pays freight, destination charges, duty and insurance. If the same deal were CIF Texas, the seller would add freight and minimal insurance into the price, but risk would still pass at Ningbo. The importer would hold a policy it did not choose, at a cover level it did not specify.
Mistakes that cost importers money
The most frequent problem is a mismatch between the Incoterm and the freight terms in the same deal. A supplier quoting DDP while the forwarder bills freight to the importer means someone pays twice, or nobody does. Confirm in writing which charges are excluded from the unit price.
Second, importers assume the Incoterm sets the customs value. It does not. Customs authorities in most jurisdictions assess duty on the transaction value, with adjustments for freight and insurance depending on local rules. Check the specific rule with the customs authority in your country, such as CBP in the US or HMRC in the UK.
Third, buyers forget that Incoterms 2020 replaced 2010 and changed several rules. DPU replaced DAT, and CIP insurance cover was raised. A contract that says "CIF Incoterms 2010" is still valid if both sides agree, but mixing versions across documents invites disputes.
Practical takeaway
Pick one rule per shipment, name the version and the exact place, and confirm which costs are inside the unit price. FCA and FOB suit most container and bulk imports where you control freight. CIF and CIP work when you want the seller to arrange carriage, provided you check the insurance level. DDP is fine for small orders if you know the declared value. Read the ICC's official text for the rule you choose, and verify duty treatment with your local customs authority, since rules differ by country.
This article is general information, not financial, legal or tax advice.
