International shipping can be complex, shifting responsibilities between buyers and sellers at various stages. One mistake or misunderstanding can result in unexpected costs, delayed deliveries, or disputes between trading partners.
This is where Incoterms come into play.
Incoterms, short for “International Commercial Terms”, are essential to any business involved in global trade. Using the right Incoterm, businesses can clearly define who is responsible for the shipment at every step, from departure to delivery.
In this article, we explain Incoterms, how they work, the most common terms, and how to choose the right one for your business.
What Are Incoterms?
Published by the International Chamber of Commerce (ICC), Incoterms are standardised rules used worldwide in international sales contracts.
They define the responsibilities of buyers and sellers concerning:
Transport costs
Insurance
Risk of loss or damage
Customs clearance and documentation
Each Incoterm clearly defines who bears the risk and cost at each stage of a shipment’s journey.
Incoterms, first introduced in 1936, are updated periodically to reflect changes in global trade practices. The latest version is Incoterms 2020.
Why Incoterms Are Important
Misunderstandings between sellers and buyers can lead to costly errors. Without a clear Incoterm in your contracts:
You may end up responsible for costs you did not anticipate.
Risk could transfer at an unexpected point in the shipping journey.
Disputes can arise over delivery delays, damage, or loss of goods.
By including the correct Incoterm, both parties have a shared understanding of their obligations, reducing confusion and protecting business relationships.
Example:
Conflict is inevitable if a buyer expects the seller to pay for delivery to their door, but the seller’s quote only covers shipment to the port. Incoterms prevent this by specifying exact handover points.
Breakdown of Common Incoterms
Here are some of the most widely used Incoterms in international trade:
EXW (Ex Works)
Responsibility: Seller makes the goods available at their premises.
Buyer handles: Transport, export clearance, and all costs and risks thereafter.
Best for: Buyers who have experience managing logistics.
Example: A clothing manufacturer in Italy agrees to an EXW sale to a retailer in Canada. The Canadian buyer must arrange collection, export documentation, freight, insurance, and import clearance.
FOB (Free on Board)
Responsibility: Seller delivers goods onto the ship nominated by the buyer at the port of shipment.
Buyer handles: Transport costs and risks once goods are loaded.
Best for: Maritime shipments where the buyer controls the shipping process.
Example: A tea exporter in India sells FOB to a UK wholesaler. Once the tea is loaded onto the vessel in Mumbai, the risk and responsibility transfer to the UK buyer.
CIF (Cost, Insurance and Freight)
Responsibility: Seller arranges and pays for shipping and minimum insurance cover to the destination port.
Buyer handles: Import clearance and local transportation beyond the port.
Best for: Buyers who prefer sellers to handle overseas logistics but want control once goods arrive.
Example: A furniture maker in Vietnam sells CIF to an Australian buyer. The seller pays for sea freight and insurance to Sydney port, but the Australian buyer handles customs clearance and delivery to their warehouse.
DDP (Delivered Duty Paid)
Responsibility: Seller assumes all risks and costs until the goods reach the buyer, including duties and taxes.
Buyer handles: Minimal obligations, mainly receiving the goods.
Best for: High-value or customer-focused transactions where simplicity for the buyer is important.
Example: An electronics company in Germany sells DDP to a customer in the United States. The German seller arranges shipping, customs clearance, payment of import duties, and delivery to the customer’s door.
How to Choose the Right Incoterm
Choosing the appropriate Incoterm depends on several factors:
1. Your Control Preferences
Do you want to manage transportation yourself?
Or do you prefer the seller to handle logistics up to a certain point?
If you prefer minimal involvement, DDP or CIF might be better. EXW or FOB may suit you if you want to control shipping costs and carriers.
2. Experience and Resources
Buyers unfamiliar with customs clearance should avoid terms like EXW.
New exporters may prefer CIF or DDP, letting experienced carriers handle most processes.
3. Shipping Mode
Some Incoterms are designed for maritime transport only (e.g., FOB, CIF).
For air freight or multimodal transport, terms like DDP, EXW, or FCA (Free Carrier) are more appropriate.
4. Risk Management
Evaluate how much risk your business is willing to take:
Early risk transfer favours the seller (e.g., EXW).
Later risk transfer favours the buyer (e.g., DDP).
Common Mistakes with Incoterms
Even seasoned traders make errors. Watch out for:
Using the wrong Incoterm for the transport mode: FOB is for sea shipments only.
Assuming Incoterms cover payment: They only define delivery obligations, not when the buyer pays.
Ignoring insurance: Some terms require insurance, some do not.
To avoid ambiguity, always specify the version of Incoterms you are using (e.g., “FOB Shanghai Port, Incoterms 2020”) in your contracts.
Practical Example: Comparing Two Approaches
Imagine you are selling organic skincare products from France to customers in Japan:
Using EXW: The Japanese buyer handles pickup, export paperwork, and shipping to Japan. This saves you work, but the buyer bears all risks from your warehouse onwards.
Using DDP: You take responsibility for arranging shipping, customs clearance in Japan, and final delivery to the customer. This provides a frictionless experience but demands excellent logistics partners and knowledge of Japanese import rules.
Choosing the right Incoterm depends on how much control and responsibility you are willing to accept.
Conclusion
Incoterms form the backbone of international sales agreements, ensuring that buyers and sellers have a shared understanding of responsibilities throughout the shipping process.
By learning how each Incoterm works and selecting the right one for your business model, you can prevent costly misunderstandings, improve customer satisfaction, and expand globally confidently.
Consult trade specialists or use services that integrate Incoterm management into your logistics workflow when in doubt.
Getting this right from the beginning will save time, money, and customer relationships in the long run.