What Are Incoterms?
Incoterms (International Commercial Terms) are standardized three-letter trade terms published by the International Chamber of Commerce (ICC). They clearly define who is responsible for costs, risks, and obligations at each stage of international shipping.
Think of Incoterms as the "rules of the game" for international trade. They answer critical questions: Who pays for shipping? When does risk transfer? Who handles customs clearance? Without clear Incoterms, these questions lead to disputes, unexpected costs, and delayed shipments.
Key Point for Importers: Your chosen Incoterm directly affects your total landed cost and import duty calculations. Some terms include freight in the customs value, while others don't.
The 11 Incoterms 2020 Explained
Incoterms 2020, the latest revision, includes 11 terms divided into two categories: terms for any mode of transport and terms for sea/inland waterway transport only.
Any Mode of Transport
Ex Works
Seller makes goods available at their premises. Buyer handles everything else: loading, transport, export/import clearance, and all costs.
Importer Impact: Maximum responsibility and cost. You handle export clearance in foreign country - often problematic.
Free Carrier
Seller delivers to carrier nominated by buyer. Seller handles export clearance. Risk transfers when goods handed to first carrier.
Importer Impact: Good balance. You control main shipping but seller handles export. Popular for containerized cargo.
Carriage Paid To
Seller pays freight to named destination but risk transfers when goods handed to first carrier. Buyer needs insurance from that point.
Importer Impact: Freight included in price but you bear risk during transit. Don't forget insurance!
Carriage and Insurance Paid To
Like CPT but seller must buy insurance. Incoterms 2020 requires higher coverage (ICC A) versus 2010's minimum coverage.
Importer Impact: Convenient but verify insurance coverage meets your needs. Risk still transfers early.
Delivered at Place
Seller delivers to named place in destination country. Buyer only handles import clearance and duties. Seller bears all transport risks.
Importer Impact: Very favorable. Minimal risk, just handle import formalities. Popular for new importers.
Delivered at Place Unloaded
Only term requiring seller to unload. Goods delivered and unloaded at named place. Replaced DAT in Incoterms 2020.
Importer Impact: Excellent for heavy/complex cargo. Unloading risk on seller. You still handle import clearance.
Delivered Duty Paid
Maximum seller obligation. Delivers cleared goods to buyer's premises. Seller handles everything including import duties and taxes.
Importer Impact: Easiest but often most expensive. Verify seller can handle import procedures in your country.
Sea and Inland Waterway Transport Only
Free Alongside Ship
Seller delivers alongside vessel at port. Buyer handles loading and all subsequent costs. Common for bulk cargo.
Free on Board
Seller loads goods on vessel. Risk transfers when goods pass ship's rail. Most common term for ocean freight.
Importer Impact: Traditional favorite. Clear risk transfer, you control ocean freight. Note: Often misused for containers - use FCA instead.
Cost and Freight
Seller pays ocean freight but risk transfers at origin port. Buyer needs insurance from loading onward.
Cost, Insurance and Freight
CFR plus seller provides minimum insurance. Popular but watch coverage levels - often insufficient for valuable cargo.
Importer Impact: Common for imports. Remember: CIF value (including freight/insurance) forms customs value for duties.
Incoterms Impact on Import Duties
How Incoterms Affect Customs Value
Your customs value (the base for calculating duties) depends on your Incoterm. Understanding this relationship is crucial for accurate duty calculations.
Customs Value Formula by Incoterm
Pro Tip: ImportCal automatically adjusts customs value calculations based on your Incoterm, ensuring accurate duty assessments regardless of terms.
Best Incoterms for Importers
Recommended Terms
- FCABest for containers. Clear handover, you control main transport.
- FOBTraditional choice for sea freight. Well understood globally.
- DAPMinimal risk. Seller handles transport complexities.
Terms to Avoid
- EXWToo much risk. Export clearance issues common.
- DDPExpensive. Sellers often can't handle your import properly.
- CIFInsurance often inadequate. You can't control coverage.
Remember: The "best" Incoterm depends on your experience, cargo type, trade route, and relationship with suppliers. Start with lower-risk terms and adjust as you gain expertise.
Common Incoterms Mistakes
❌ Using FOB for Container Shipments
FOB risk transfer "over ship's rail" doesn't work for containers loaded away from the ship. Use FCA for container shipments to avoid coverage gaps.
❌ Ignoring Insurance Gaps
With CPT, CFR, and similar terms, risk transfers before delivery. Many importers forget to arrange insurance, leaving cargo exposed during transit.
❌ Misunderstanding DDP Obligations
Foreign sellers often can't legally act as importer of record in your country. DDP can lead to delays and compliance issues.
❌ Not Specifying Exact Delivery Points
Terms like FCA, DAP, and DPU need precise locations. "FCA Shanghai" is too vague - specify the exact address or terminal.
❌ Mixing Incoterms Versions
Always specify the version (e.g., "FOB Shanghai Incoterms 2020"). Different versions have different rules and obligations.
Incoterms Selection Guide
Choose Your Incoterm Based On:
🚢 Shipping Method
- • Ocean Freight: FOB, CFR, CIF (traditional bulk/breakbulk)
- • Containers: FCA, CPT, CIP (better risk transfer point)
- • Air Freight: FCA, CPT, CIP (never use ocean-only terms)
- • Multimodal: FCA, DAP, DPU (designed for combined transport)
📊 Your Experience Level
- • New Importers: DAP, DPU (minimal risk and complexity)
- • Intermediate: FCA, FOB (balance of control and responsibility)
- • Experienced: Any term, optimize for cost and control
- • High-Value Cargo: Terms where you control insurance
💰 Financial Considerations
- • Cash Flow: EXW/FCA delay payment for freight
- • Financing: Banks prefer CIF/CIP for documentary credits
- • Cost Control: FCA/FOB let you negotiate freight rates
- • Duty Optimization: Lower freight portion reduces customs value
Negotiating Incoterms with Suppliers
Know Your Leverage
Large orders give negotiating power. Suppliers may accept your preferred terms for significant business. Start discussions early, not after price agreement.
Understand Supplier Preferences
Many suppliers default to FOB or CIF from habit. Explain why FCA works better for containers. Show how proper terms protect both parties.
Factor Total Costs
DDP might seem expensive, but includes all logistics. Compare total landed costs, not just product prices. Sometimes paying more upfront saves money overall.
Document Everything
Specify exact Incoterm version and delivery location in all documents. Include in purchase orders, contracts, and invoices to avoid disputes.
Simplify Import Calculations Regardless of Incoterms
No matter which Incoterm you use, ImportCal automatically adjusts duty calculations to reflect the correct customs value. Our AI understands how each term affects your total landed cost:
- Automatically extracts Incoterm from commercial invoices
- Adjusts customs value based on included/excluded costs
- Calculates accurate duties regardless of shipping terms
- Identifies when freight/insurance affect duty calculations
- Provides total landed cost including all components
Master Your Import Costs
Stop guessing how Incoterms affect your duties. Let ImportCal handle the complexity.
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