Definition
Incoterms (International Commercial Terms) are a set of 11 standardized trade rules published by the International Chamber of Commerce (ICC). They define who is responsible for costs, risks, and tasks at each stage of an international shipment.
Why it matters for traders
Incoterms directly determine your landed cost calculation. Choosing the wrong term can mean unexpected freight charges, customs duties, or insurance gaps. They also affect which party arranges transport, handles export/import clearance, and bears risk during transit.
Incoterms 2020 — All 11 Rules
Any mode of transport
- EXW (Ex Works) — Seller makes goods available at their premises. Buyer handles everything from pickup.
- FCA (Free Carrier) — Seller delivers to a carrier nominated by the buyer. Seller handles export clearance.
- CPT (Carriage Paid To) — Seller pays freight to the named destination. Risk transfers when goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To) — Like CPT, but seller also pays for insurance (all-risk cover).
- DAP (Delivered at Place) — Seller delivers to the named place, ready for unloading. Buyer handles import clearance.
- DPU (Delivered at Place Unloaded) — Seller delivers and unloads at the named place. The only term requiring seller to unload.
- DDP (Delivered Duty Paid) — Seller handles everything including import duties and taxes. Maximum seller obligation.
Sea and inland waterway only
- FAS (Free Alongside Ship) — Seller places goods alongside the vessel at the named port.
- FOB (Free on Board) — Seller loads goods on board the vessel. Risk transfers once goods are on board.
- CFR (Cost and Freight) — Seller pays freight to the destination port. Risk transfers when goods are on board.
- CIF (Cost, Insurance and Freight) — Like CFR, but seller also pays for minimum insurance cover.
How Incoterms affect landed cost
Your Incoterm determines which costs you need to track:
| If you buy under... | You typically pay for |
|---|---|
| EXW | Everything from the seller's door |
| FOB | Ocean freight, insurance, destination charges |
| CIF | Destination port charges, import duties, inland transport |
| DDP | Nothing additional (seller covers all) |
Operational example
A buyer in Nairobi imports machinery from Shanghai under FOB Shanghai terms. The seller is responsible for getting the goods loaded on the vessel at Shanghai port. Once the goods are on board, risk transfers to the buyer. The buyer must then arrange and pay for: ocean freight to Mombasa, marine insurance, Kenyan import clearance, duties, and inland transport to Nairobi.