Incoterms: the basics of international trade

FRIDAY, 15 NOVEMBER 2024

Incoterms 2020 define responsibilities, costs and risks between seller and buyer: the 11 rules explained and how to choose the right one.

Incoterms, or International Commercial Terms, are standardised rules published by the International Chamber of Commerce (ICC) that define the responsibilities, costs and risks of buyers and sellers in international sales contracts. Essential for avoiding misunderstandings, they provide a common language recognised worldwide. The current version, Incoterms 2020, includes 11 rules: seven valid for any mode of transport and four specific to sea and inland waterway transport.

Why they matter

Incoterms guarantee clarity and predictability: they establish who handles transport, insurance, customs clearance and other costs, and they determine the moment at which risk passes from the seller to the buyer. Specifying the version (for example "Incoterms 2020") in contracts is essential to avoid ambiguity, since the rules are updated every ten years.

The seven rules for any mode of transport

EXW (Ex Works): the seller makes the goods available at its own premises; the buyer assumes all costs and risks, including export customs clearance.

FCA (Free Carrier): the seller delivers the goods to the carrier nominated by the buyer; risk passes on delivery. Incoterms 2020 allows the buyer to request a bill of lading with an "on-board" note.

CPT (Carriage Paid To): the seller pays for transport to the destination, but risk passes on delivery to the first carrier.

CIP (Carriage and Insurance Paid To): like CPT, but with insurance borne by the seller, upgraded in Incoterms 2020 to the Institute Cargo Clauses (A).

DAP (Delivered At Place): the seller delivers ready for unloading at the place of destination; the buyer handles unloading and import customs clearance.

DPU (Delivered At Place Unloaded): replaces DAT; the seller unloads the goods at the place of destination, not limited to a terminal.

DDP (Delivered Duty Paid): the seller handles everything, including transport, customs clearance, duties and taxes, maximising its own responsibility.

The four maritime rules

FAS (Free Alongside Ship): the seller places the goods alongside the ship at the port of shipment; from there costs and risks pass to the buyer.

FOB (Free On Board): the seller delivers the goods on board the ship; risk passes once they are loaded. Traditional for sea freight, but for containers FCA is often preferred.

CFR (Cost and Freight): the seller pays costs and freight to the port of destination, but risk passes on loading onto the ship.

CIF (Cost, Insurance and Freight): like CFR, with minimum insurance (Institute Cargo Clauses C) borne by the seller. Common in the commodities trade.

How to choose

EXW and FCA give more control to the buyer; DDP and DPU transfer it to the seller. For fragile or valuable goods, CIP or CIF guarantee insurance. Freight forwarders and customs consultants can help select the most suitable Incoterm and ensure compliance. Always specifying "Incoterms 2020" in contracts is crucial to avoid ambiguity.

With La Merce, choosing the right Incoterm means knowing where risk passes and who pays for what before signing: between EXW and DDP the difference is not formal, it is the figure that appears on the invoice when something goes wrong.

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