Every international trade contract needs to answer two questions: who pays for what, and who bears the risk if something goes wrong? Incoterms — International Commercial Terms — are the globally standardised answer to both. They are three-letter codes that define precisely where the seller's responsibility ends and the buyer's begins. Used correctly, they prevent disputes and misunderstandings. Used incorrectly, they are the source of some of the most expensive disagreements in international trade. This guide explains all 11 Incoterms 2020 terms clearly — what they mean, when to use them, and where the most common mistakes happen.
What Incoterms Are — and What They Are Not
Incoterms are published by the International Chamber of Commerce (ICC) and were first introduced in 1936. The current version, Incoterms 2020, contains 11 terms and is used in commercial contracts worldwide. When a contract states "FOB Shanghai" or "DDP Madrid", those three letters carry a precise, internationally agreed meaning that defines the obligations of both parties.
Incoterms define three things: who arranges and pays for transport at each stage, who bears the risk of loss or damage at each stage, and who handles customs clearance (export and import). They do not define payment terms, title transfer, or which law governs the contract — those are separate matters for the sales contract itself.
Incoterms are not mandatory under international law, but they are standard practice in global trade. They are incorporated into contracts by reference — "FOB, Incoterms 2020" — and courts and arbitrators worldwide interpret them consistently. Always specify the version (2020) and the named place or port.
The One Rule You Must Know Before Everything Else
Incoterms are divided into two groups, and the division matters enormously:
- Any mode of transport (road, air, rail, sea, multimodal): EXW, FCA, CPT, CIP, DAP, DPU, DDP
- Sea and inland waterway only: FAS, FOB, CFR, CIF
The most expensive mistake in Incoterms: using FOB, CFR or CIF for air freight or multimodal shipments. These terms were designed for bulk maritime cargo loaded over a ship's rail. Using FOB for a container shipment or an air freight movement creates risk gaps and cost confusion. For any shipment that is not bulk sea freight, use FCA (instead of FOB), CPT (instead of CFR) or CIP (instead of CIF).
The Risk Spectrum: From Maximum Seller Responsibility to Maximum Buyer Responsibility
The 11 Incoterms can be thought of as a spectrum. At one end, the seller does almost nothing beyond making the goods available. At the other end, the seller handles everything right to the buyer's door with duties paid.
← Seller does more
Buyer does more →
DDP
DPU
DAP
CIP/CIF
CPT/CFR
FCA/FOB
FAS
EXW
The 11 Incoterms 2020 — Each One Explained
Seller pays & arranges
Making goods available at named premises. Packaging.
Buyer pays & arranges
Everything: collection, export clearance, transport, insurance, import clearance, duties, final delivery.
Best for: buyers who want full control and have logistics infrastructure in the seller's country. Rarely practical for small importers buying from China — export clearance in China without local presence is complex.
Seller pays & arranges
Delivery to named carrier or place, plus export clearance in origin country.
Buyer pays & arranges
International freight, insurance, import clearance, duties and final delivery.
Best for: container shipments and air freight where FOB is technically incorrect. Risk transfers when the carrier collects the goods — cleaner and more precise than FOB for modern logistics. Incoterms 2020 added the option for the buyer to instruct the carrier to issue an on-board Bill of Lading to the seller, which helps with letter of credit transactions.
Seller pays & arranges
Delivery alongside the named vessel at the named port. Export clearance.
Buyer pays & arranges
Loading onto the ship, ocean freight, insurance, import clearance, duties.
Best for: bulk or heavy cargo loaded directly onto a vessel (e.g. bulk grain, machinery loaded by crane). Rarely used in container shipping.
Seller pays & arranges
Delivery on board the named vessel at origin port. Export clearance.
Buyer pays & arranges
Ocean freight, insurance, import clearance, duties and delivery to final destination.
Best for: bulk sea freight. For containers, FCA is technically more appropriate (risk should transfer when the container is handed to the carrier, not when it is loaded). Despite this, FOB remains the most widely used Incoterm in Asia-Europe trade — it works well in practice for container shipments when both parties understand its application.
Seller pays & arranges
Export clearance, loading, ocean freight to destination port.
Buyer pays & arranges
Insurance, import clearance, duties, port handling and delivery.
Note: risk transfers when goods are loaded at origin port — even though the seller paid for the freight. The buyer bears the risk of loss during a voyage they did not arrange. Insurance is the buyer's responsibility. Use CPT instead for air or multimodal shipments.
Seller pays & arranges
Export clearance, ocean freight, minimum insurance (Institute Cargo Clauses C) to destination port.
Buyer pays & arranges
Import clearance, duties, port handling and final delivery. Risk from origin port.
Note: CIF is the standard Incoterm for customs valuation in most countries — the customs value includes cost + insurance + freight to the first port of entry. The minimum insurance under CIF (Clauses C) is basic: buyers of high-value goods should consider requesting a higher coverage level or arranging their own insurance. Use CIP for non-sea shipments.
Seller pays & arranges
Export clearance, transport to named destination. Risk transfers when goods handed to first carrier.
Buyer pays & arranges
Insurance, import clearance, duties and final delivery from destination.
Best for: multimodal and air freight shipments where the seller wants to control and pay for the main carriage. The multimodal equivalent of CFR.
Seller pays & arranges
Export clearance, transport and insurance (all-risks, Clauses A) to named destination.
Buyer pays & arranges
Import clearance, duties and final delivery.
Note: a key upgrade from CIF in Incoterms 2020 — CIP now requires all-risk insurance (Institute Cargo Clauses A), while CIF only requires minimum cover (Clauses C). For high-value goods on any mode, CIP offers significantly better protection than CIF.
Seller pays & arranges
Full transport to the named place of destination. Export clearance. Risk until arrival.
Buyer pays & arranges
Import clearance, duties and unloading at destination.
Best for: sellers who want to control the delivery but prefer the buyer to handle import formalities in their own country. Very widely used in B2B trade. The named place should be as specific as possible — ideally the buyer's premises address.
Seller pays & arranges
Full transport and unloading at the named destination. Export clearance. Risk until unloaded.
Buyer pays & arranges
Import clearance and duties. Receives goods already unloaded.
Note: DPU (formerly DAT — Delivered at Terminal) is the only Incoterm where the seller is responsible for unloading at destination. Only use it if you are certain the seller can organise unloading at the specific place — it requires coordination that not all sellers can deliver.
Seller pays & arranges
Everything: export clearance, international transport, import clearance, duties, VAT and delivery to the buyer's named premises.
Buyer pays & arranges
Unloading (unless agreed otherwise). Nothing else.
Best for: buyers who want a single landed price with no logistics involvement. Requires the seller to be able to act as importer of record in the buyer's country — this requires either a local legal entity, a fiscal representative, or a freight forwarder with that capability.
Quick Reference: Who Handles What
| Term |
Export clearance |
Main freight |
Insurance |
Import clearance |
Duties |
| EXW | Buyer | Buyer | Buyer | Buyer | Buyer |
| FCA | Seller | Buyer | Buyer | Buyer | Buyer |
| FOB | Seller | Buyer | Buyer | Buyer | Buyer |
| CFR / CPT | Seller | Seller | Buyer | Buyer | Buyer |
| CIF / CIP | Seller | Seller | Seller | Buyer | Buyer |
| DAP / DPU | Seller | Seller | Seller | Buyer | Buyer |
| DDP | Seller | Seller | Seller | Seller | Seller |
How to Choose the Right Incoterm
There is no universally correct Incoterm. The right choice depends on your position (buyer or seller), your logistics capabilities, your leverage in the negotiation, and the nature of the shipment. Some practical guidance:
- Importing from Asia for the first time? FOB (for sea freight) or FCA (for air or multimodal) gives you control over freight booking while the supplier handles export. It also lets your freight forwarder quote accurately.
- Selling to a buyer who wants a simple landed price? DAP or DDP are the cleanest options. DAP leaves import customs to the buyer; DDP removes even that. DDP requires you — or your freight forwarder — to have import capabilities at destination.
- Buying from a supplier in Europe? DAP or FCA are typical for intra-EU trade. EXW is also common but shifts even export logistics to you.
- Shipping high-value goods? Prefer CIP over CIF — Incoterms 2020 upgraded CIP to require all-risk insurance (Clauses A), compared to CIF's minimum cover (Clauses C).
- Using a letter of credit? FOB and CIF remain the standard terms for documentary credit transactions, as banks are familiar with them and the Bill of Lading documentation is well-established.
Always name the specific place, not just the country. "FOB China" is ambiguous and potentially unenforceable. "FOB Shanghai Yangshan Port, Incoterms 2020" is precise. The named place defines exactly where costs and risk transfer, so vagueness creates disputes.
Incoterms and Customs Valuation in Spain and the EU
When goods are imported into Spain from outside the EU, the customs duty is calculated on the customs value — which is defined as the transaction value on a CIF basis. This means the customs value always includes the cost of the goods, insurance, and freight to the first EU port of entry, regardless of what Incoterm was agreed between buyer and seller.
If the shipment was made under FOB terms, the customs agent must add the estimated sea freight and insurance costs to arrive at the correct CIF customs value. If the shipment was CIF, the declared value is used directly. This is why the Incoterm matters to your customs agent — and why invoices that omit freight and insurance figures cause clearance delays. For a full explanation of how customs clearance works in Spain, see our guide on Spanish customs clearance.
Frequently Asked Questions
What are Incoterms and why do they matter?
Incoterms are 11 internationally standardised three-letter codes (EXW, FCA, FOB, CIF, DAP, DDP, etc.) published by the International Chamber of Commerce. They define who pays for transport, who arranges insurance, and who handles customs clearance at each stage of an international shipment. They matter because they determine your cost exposure, your risk exposure, and your obligations — and because misunderstanding them is one of the most common sources of commercial disputes in international trade.
What is the difference between FOB and CIF?
Under FOB, the seller delivers the goods onto the ship at the origin port. From that point, the buyer takes on all costs and risk — freight, insurance, import clearance, duties. Under CIF, the seller also pays for the ocean freight and a minimum level of insurance to the destination port. In both cases, however, the risk transfers to the buyer when the goods are loaded at origin. This means with CIF, the buyer bears the risk during a voyage that someone else arranged and paid for — which is why experienced importers often prefer FOB or FCA, giving them control over both cost and risk.
What does EXW mean in shipping?
EXW (Ex Works) means the seller makes the goods available at their own premises and does nothing else. The buyer collects the goods, handles export clearance in the seller's country, arranges all transport, and manages import clearance and duties at destination. It is the minimum obligation for the seller and the maximum obligation for the buyer. EXW is rarely practical for importers who do not have a local presence in the seller's country, because handling export customs in a foreign country without local infrastructure is operationally complex.
What does DDP mean and when should I use it?
DDP (Delivered Duty Paid) means the seller handles everything — export, main transport, insurance, import customs, duties, and delivery to the buyer's premises. The buyer simply receives the goods. It is commonly used when the seller wants to offer a fully landed price, or when the buyer lacks logistics infrastructure. The seller or their freight forwarder must have the ability to act as importer of record in the buyer's country, which requires either a local legal entity or a fiscal representative arrangement.
Which Incoterm is best for importing from China?
For most importers, FOB (for sea freight) or FCA (for air freight and containers) is the recommended starting point. These terms mean the Chinese supplier handles export clearance and loading, while you — or your freight forwarder — control the main freight booking and insurance. This gives you control over carrier selection, transit time, and cost, and allows your forwarder to provide a complete landed cost quote. Avoid EXW unless you have a logistics partner in China who can handle export formalities on your behalf.
Can Incoterms be used for all types of transport?
No. FOB, CFR, CIF and FAS are for sea and inland waterway transport only. They should not be used for air freight, road freight, rail or multimodal shipments. For any transport mode, the correct alternatives are FCA (instead of FOB), CPT (instead of CFR), and CIP (instead of CIF). Using maritime Incoterms for air or road shipments creates ambiguity about where risk transfers and is one of the most common — and costly — mistakes in international trade contracts.
Who pays import duties under each Incoterm?
Under all Incoterms except DDP, import duties are the buyer's responsibility. Under DDP (Delivered Duty Paid), the seller pays all duties and taxes at the destination country. Export clearance is always the seller's responsibility under all Incoterms, except EXW where even export clearance falls to the buyer.
