Incoterms®, short for International Commercial Terms, are globally recognised trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities, costs, and risks between buyers and sellers in international trade contracts.
For businesses shipping worldwide, understanding Incoterms® is essential. They clarify who arranges transport, who pays for insurance, who handles customs clearance, and at what point risk transfers from seller to buyer.
At MyParcels, we help businesses navigate these rules to ensure smooth international deliveries and fewer disputes.
A Brief History of Incoterms®
The ICC first introduced Incoterms in 1936. Since 1980, updates have been issued approximately every 10 years to reflect changes in global trade practices.
The current version, Incoterms® 2020, came into effect on January 1, 2020. It is the ninth revision, following updates in 1957, 1967, 1976, 1980, 1990, 2000, and 2010. As of 2025, Incoterms 2020 remain in force, with the next review expected around 2030.
Each revision aims to:
Clarify cost responsibilities
Define risk transfer points
Align with modern shipping and security requirements
Reflect changes in insurance and transport practices
Why Incoterms® Matter in Global Trade
Incoterms® play a vital role in international shipping by:
Defining who pays for transport, insurance, and customs
Clarifying when risk transfers from seller to buyer
Reducing misunderstandings in trade contracts
Standardising global trade terminology
Helping prevent costly disputes
For importers and exporters, clearly stating the correct Incoterm in contracts and shipping documents ensures smoother operations.
Key Changes in Incoterms® 2020
Some of the most important updates include:
DAT replaced by DPU (Delivered at Place Unloaded)
Clearer cost allocation rules
Updated insurance requirements under CIP
Enhanced security-related transport obligations
FCA now allows a Bill of Lading with onboard notation
What Are Incoterms®?
Incoterms® determine:
Who pays for shipping
Who arranges insurance
Who handles export and import customs clearance
When risk transfers from seller to buyer
Some terms apply to all modes of transport, while others apply only to sea and inland waterway transport. Choosing the correct term is critical to avoiding unexpected charges or liability issues.
Incoterms® 2020 Rules
Rules for Any Mode of Transport (7 Terms)
These apply to air, sea, road, rail, and multimodal shipments:
EXW – Ex Works
FCA – Free Carrier
CPT – Carriage Paid To
CIP – Carriage and Insurance Paid To
DAP – Delivered at Place
DPU – Delivered at Place Unloaded
DDP – Delivered Duty Paid
Rules for Sea & Inland Waterway Transport Only (4 Terms)
These are used exclusively for ocean freight:
FAS – Free Alongside Ship
FOB – Free on Board
CFR – Cost and Freight
CIF – Cost, Insurance and Freight
Overview of Each Incoterm®
Incoterm® | Explanation |
EXW – Ex Works (Ex Warehouse) | The seller makes goods available at their premises or another named place. Seller responsibility: Minimal |
FCA – Free Carrier | The seller delivers goods to the buyer’s nominated carrier at a named place. Risk transfers at the exact delivery point, so this location must be clearly defined (e.g., FCA Shanghai Pudong Terminal 3). 2020 Update: Allows issuance of a Bill of Lading with onboard notation. |
FAS – Free Alongside Ship | The seller delivers goods alongside the vessel at the port of shipment. |
FOB – Free On Board | The seller loads goods onto the buyer’s nominated vessel at the port of shipment. Seller covers:
Buyer covers:
Risk transfers once goods are onboard the vessel |
CFR – Cost and Freight | The seller pays for transport to the destination port. |
CIF – Cost, Insurance and Freight | Similar to CFR, but the seller also arranges insurance. Important note: The seller is only required to provide minimum insurance cover. Buyers wanting broader protection must arrange additional coverage. |
CPT – Carriage Paid To | The seller pays transport costs to the named destination. |
CIP – Carriage and Insurance Paid To | Same as CPT, but the seller also arranges insurance (minimum cover unless otherwise agreed). |
DAP – Delivered at Place | The seller delivers goods ready for unloading at the named destination. |
DPU – Delivered at Place Unloaded | Replaces DAT (Delivered at Terminal). The seller delivers and unloads goods at the named place of destination. |
DDP – Delivered Duty Paid | The seller takes maximum responsibility. They handle:
The buyer simply receives the goods at the named destination. |
How Incoterms® Affect Your Shipping Strategy
Choosing the correct Incoterm impacts:
Pricing structure
Insurance requirements
Customs obligations
Cash flow management
Risk exposure
For example:
EXW may reduce seller responsibility but complicate export clearance.
DDP simplifies buying for customers but increases seller risk and cost.
FCA or CPT often provide balanced control for growing exporters.
At MyParcels, we help businesses select the most efficient Incoterm based on shipment type, destination, and risk appetite.
Key Takeaways
Incoterms® define responsibilities, costs, and risk transfer in global trade.
The 2020 version is the current standard worldwide.
DPU replaced DAT in the latest update.
Terms are grouped by transport mode.
Clear Incoterm selection reduces disputes and improves operational efficiency.
Understanding these rules is essential for successful international trade.
Disclaimer
This content is provided for general informational purposes only and does not constitute legal or professional advice. Businesses should seek specialist advice before entering into international trade contracts.
