Incoterms are the eleven standard trade terms that decide who pays for transport, insurance and duties, and at which point the risk passes from seller to buyer. Getting them wrong is one of the most common reasons for surprise costs.
The three terms most importers use
EXW means you collect from the supplier and carry almost all cost and risk. FOB means the seller loads the goods onto the vessel and risk passes to you at the port of loading. DAP means the seller delivers to your named place, but you still clear import customs.
How to choose
If you have a forwarder you trust, FOB usually gives the best mix of control and cost. Write the term and the exact named place in every purchase order, for example FOB Shanghai, so there is no doubt.
The eleven terms at a glance
Incoterms 2020 are split into two groups. Seven terms work for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four terms are only for sea and inland waterway transport: FAS, FOB, CFR and CIF. The terms run from EXW, where the buyer does almost everything, to DDP, where the seller does almost everything, including import customs.
Where costs and risk change hands
It is important to know that cost and risk do not always move at the same point. Under CIF, for example, the seller pays the freight and insurance to the port of destination, but the risk already moves to you when the goods are loaded on the vessel at origin. If something goes wrong at sea, you deal with the insurance claim.
Common mistakes to avoid
Using FOB for containers that are handed over at an inland depot instead of on board the vessel, where FCA fits better. Choosing DDP without checking that the seller can actually clear goods in your country. Forgetting to name the exact place, such as a port or warehouse address. And assuming that CIF insurance covers the full value of your goods, while the minimum cover is often lower than you need.
What changed in 2020
The 2020 version added DPU, delivered at place unloaded, which replaced DAT. CIP now requires a higher level of insurance cover than before. And FCA allows a bill of lading with an on board notation, which helps buyers who pay with a letter of credit.
How we help importers
When you start buying from a new supplier, send us the draft purchase order. We check the Incoterm and named place, explain what costs you will see and set up the transport and customs plan that matches it, so the first shipment goes as smoothly as the hundredth.
Written by
Daan Bakker
Licensed customs broker
