Incoterms in International Trade: Meaning, 11 Rules & More

Expanding your business internationally presents significant opportunities for growth, but navigating the complexities of global commerce requires a strategic approach.

A key factor that can’t be overlooked by businesses venturing into international markets is the role of Incoterms.

Whether you're an experienced exporter/importer or new to the global marketplace, you must have a firm grasp of Incoterms for sustainable success.

What are Incoterms®: Meaning explained

Incoterms - an abbreviation of international commercial terms - are rules that facilitate fair and consistent global trade. They outline the shipping responsibilities of Buyers (Importers) and Suppliers (Exporters). 

The International Chamber of Commerce (ICC) introduced the rules in 1923.

Since then, there have been several revisions to Incoterms, the most recent edition being "Incoterms 2020".

Incoterms are recognised by numerous countries that engage in international trade. 

Incoterms answer questions like:

• Who pays for the shipping?
• Who handles export/import customs clearance?
• Where exactly does the supplier deliver the goods?
• Who handles insurance?
• When does the risk of loss or damage pass from the supplier to the buyer?

What are the 11 types of Incoterms: Fully explained

Incoterms are categorized into two main groups to facilitate understanding and application in international trade:

• 7 rules for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP).
• 4 rules for sea and inland waterway transport (FAS, FOB, CFR, CIF).

If you're wondering "What are the 11 shipping terms defined under the Incoterms?", here's an infographic visually showing and explaining each of the incoterms on the allocation of responsibility for costs:

Now, let's go through the list of incoterms one-by-one.

The 7 rules for any mode of Transport

1. EXW (Ex Works)

Under EXW Incoterms, suppliers have minimum obligations. The exporter’s only responsibility is to make the goods available at their premises or another designated location. The buyer assumes all costs and risks associated with collecting the cargo from that point onward, including transportation, insurance, and export/import clearance.

💡 Pro tip: Buyers should be aware that, under EXW, they’re responsible for all aspects of transportation and logistics once the goods leave the supplier’s premises.

Partnering with a trusted freight forwarder at the origin port can help ensure smooth operations and protect the importer’s interests.

2. FCA (Free Carrier)

Under FCA, the supplier clears the goods for export and delivers them to a carrier or designated location specified by the buyer.

The risk of loss or damage transfers to the importer once the cargo is in the carrier's possession.

💡 Pro tip: The designated point of delivery under FCA is critical, as this marks the transfer of risk from supplier to buyer.

Since this place is typically at the origin and outside the buyer's direct control, the buyer should be cautious and consider the reliability of the carrier and the accessibility of the delivery point when agreeing to FCA Incoterms.

3. CPT (Carriage Paid To)

CPT means the supplier delivers the goods to a carrier (chosen by the exporter) at an agreed-upon place and covers the transportation costs to the named destination.

The risk of loss or damage transfers to the buyer when the products are handed to the first carrier.

💡 Pro tip: Since the supplier handles transport but the buyer assumes risk early on, clear communication and a thorough understanding of this handover point are essential to avoid misunderstandings and potential disputes.

Importers should also secure cargo insurance to cover potential losses during transit, as this responsibility falls solely on them.

4. CIP (Carriage and Insurance Paid To)

CIP is similar to CPT, but in addition to the supplier’s responsibility for carriage to the named destination, they’re also required to procure and pay for cargo insurance up to that point.

It's important to note that the risk of loss or damage shifts to the buyer as soon as the goods are handed over to the first carrier.

💡 Pro tip: While CIP requires the supplier to arrange cargo insurance at the higher level of Institute Cargo Clauses (A) (as Incoterms 2020 increased the insurance requirement), buyers should still carefully review the policy details to ensure they align with their specific needs and risk tolerance.

5. DAP (Delivered at Place)

Under DAP Incoterms, the supplier is responsible for delivering the goods, ready for unloading, to a named place of destination.

This means they handle transportation costs and assume risk until the cargo is made available to the buyer at that point.

However, the importer is responsible for unloading.

💡 Pro tip: DAP requires clear communication and agreement on the precise delivery point because it marks where the responsibility for costs and risks shifts from the supplier to the buyer.

Exporters should factor in potential on-carriage issues, and importers need to be prepared to handle customs duties and any import-related requirements.

6. DPU (Delivered at Place and Unloaded)

DPU puts the responsibility on the supplier to transport the goods to the agreed-upon destination and unload them from the arriving mode of transport.

The risk transfers to the buyer once the unloading is complete at that location. DPU is unique because it's the only Incoterm that explicitly requires the exporter to handle unloading.

💡 Pro tip: Suppliers must make sure they have the resources or arrangements in place to manage the unloading process at the destination.

It's also wise to consider potential logistical challenges and have contingency plans.

7. DDP (Delivered Duty Paid)

DDP places the maximum responsibility on the supplier. They handle everything from export to import clearance, including all costs and risks associated with delivering the goods to the buyer's specified location.

This includes import duties, taxes, and customs formalities. The risk transfers to the importer only when the products are ready for unloading at the named destination.

💡 Pro tip: DDP Incoterms involve substantial responsibility and potential costs for the supplier.

Before agreeing to DDP, they need to research the import regulations, duties, and potential logistical challenges in the destination country.

Having a reliable local agent at the destination can be invaluable.

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The 4 rules for sea and inland waterway transport

1. FAS (Free Alongside Ship)

Under FAS, the supplier is responsible for delivering the goods alongside the ship designated by the buyer at the named port of shipment.

The importer assumes all costs and risks, including loading the cargo onto the vessel, once the exporter has fulfilled their obligation.

FAS is typically used for non-containerized cargo.

💡 Pro tip: Buyers should be prepared to manage all logistics and costs from the "alongside" point onward, including loading, transport, and insurance.

Engaging a knowledgeable agent at the port can be beneficial, especially if the buyer is unfamiliar with the specific handling procedures.

2. FOB (Free on Board)

Under FOB Incoterms, the supplier is responsible for delivering the goods on board the ship specified by the buyer at the named port of shipment.

The risk transfers to the importer once the products are loaded, and they handle all costs from that point forward.

FOB is generally more suitable for non-containerized shipments.

💡 Pro tip: Clear communication with the buyer about loading procedures and documentation is essential.

The supplier should be aware of potential extensions to FOB, such as "stowed" or "stowed and trimmed," and fully understand their obligations if these terms are used.

3. CFR (Cost and Freight)

CFR means the supplier is responsible for delivering the goods, cleared for export, and loaded onto the ship at the port of shipment.

The exporter also pays the costs, including freight, to transport the products to the named port of destination.

Import clearance and any associated costs at the destination port are the buyer's responsibility.

💡 Pro tip: Buyers should secure insurance coverage that begins at the port of shipment, as they assume all risks to the goods from that point forward, even though the supplier has arranged and paid for the freight.

4 CIF (Cost Insurance and Freight)

CIF Incoterms are similar to CFR, with the supplier responsible for transportation costs, including freight, to deliver the goods to the named port of destination.

The key difference is that CIF requires the exporter to obtain and pay for marine insurance covering the cargo during carriage to the destination port.

💡 Pro tip: Buyers must verify the adequacy of the insurance coverage provided by the supplier, especially if they have specific requirements or if the goods are of high value.

What do Incoterms not cover?

Incoterms can be used within contracts to define and agree upon shipping terms and responsibilities, but they do not represent a sales contract between a Buyer and a Supplier.

There are additional details that must be agreed upon alongside them.

Some of the common trade details not covered by Incoterms include:

• Pricing details, such as those of the goods
• Exact payment details, such as the method or currency of payment
• Details on the quality or condition of goods
• Legal implications of contract breaches

Incoterms 2020

The latest edition of Incoterms is known as Incoterms 2020 and was published in the same year. 

This edition is not too different from the previous iteration - Incoterms 2010 - and features the same 11 rules.

However, there were some important updates added to the 2020 iteration.

Most significantly, Incoterms 2020 features an in-depth introduction and expanded explanatory notes for each term and trading role, which previous editions did not have.

The 2020 edition also outlines best practices for using the terms in global trade deals and their incorporation into sales contracts. 

These updates were included to minimise errors and improve efficiency and accuracy in international trade.

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Helpful FAQs about the list of Incoterms

1. What is the purpose of Incoterms?

Incoterms rules define the responsibilities of buyers and suppliers in international trade transactions. They clarify who is responsible for costs, risks, and obligations at each stage of the shipment process.

2. Are Incoterms mandatory?

Incoterms rules aren’t mandatory. They aren't laws enacted by governments; they are guidelines widely used and highly recommended for clarity and risk management in international trade.

By using Incoterms, buyers and suppliers can establish a common understanding of their respective roles and responsibilities.

3. Do Incoterms apply to domestic shipments?

While Incoterms are primarily designed for international trade, they can be used in domestic sales contracts if both the buyer and supplier agree.

However, they should carefully consider whether using Incoterms is necessary and beneficial for domestic transactions, as some aspects may not be relevant or may require adaptation.

4. How often are Incoterms updated?

The ICC typically updates Incoterms every 10 years to reflect changes in international trade practices.

The latest version, Incoterms 2020, was published on January 1, 2020.

5. How has Brexit affected international trade and incoterms?

Incoterms are beneficial when setting expectations between Suppliers and Buyers in international trade agreements.

However, many companies are concerned about the impact that Brexit has had - and will continue to have - on the use and validity of Incoterms.

Brexit has not drastically affected the use of Incoterms in international trade.

But there is occasional confusion regarding the term DDP (Delivered Duty Paid). 

The UK's withdrawal from the EU has caused confusion about the destinations of goods, such as the places where Buyers receive shipments before they reach their destination. 

Furthermore, new rules surrounding custom fees post-Brexit have made this more challenging for Suppliers. 

Therefore, Suppliers must pay closer attention to ensure they are applying the correct terms.

6. How do I know which Incoterms to use?

The ICC recommends that any new international trade agreements be arranged using Incoterms 2020. 

However, any iteration of Incoterms can be used so long as the Buyer and Supplier agree and follow the same terms in the sales contract and related documents.

7. What are the most commonly used Incoterms?

The most commonly used Incoterms are EXW and DDP. This is because these two agreements see a single party - the Buyer or the Supplier - take full responsibility for shipment risks and costs, reducing the sales contract complexities.

EXW sees the Buyer assume full responsibility for the risks and costs of the shipment, while DDP requires the Supplier to organise and assume responsibility for the shipment.

Incoterms may appear complicated but they are easy to understand once you realise why they are there. The terms exist to reduce errors and delays in international trade, therefore ensuring an easy experience for both Buyer and Supplier.

Stenn hopes the above information has clarified any confusion about Incoterms and their uses in global trade agreements. We recommend that you check whether the Incoterms you use for your shipments are correct and in line with the latest edition.

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About the authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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