Incoterms 2020 Explained: Which Term Should You Actually Use?
Incoterms decide who pays, who carries the risk and who clears customs at every step of a shipment. After coordinating 300+ shipments a year, I can promise you: more money is lost to wrong Incoterms than to freight rates.
What Incoterms do and do not cover
Incoterms 2020 is a set of eleven standardized trade terms published by the International Chamber of Commerce. Each term defines three things: where costs transfer from seller to buyer, where risk transfers and who handles export and import clearance.
They do not cover payment terms, ownership transfer or product liability. Those belong in your contract. Treating an Incoterm as a full agreement is mistake number one.
The terms you will actually meet
In real trade, a handful of terms cover nearly everything:
- EXW, Ex Works: buyer takes everything from the factory door. Looks cheap, often is not, and export clearance responsibility gets murky
- FCA, Free Carrier: seller delivers export-cleared to your carrier. The cleanest term for most container and truck shipments
- FOB, Free On Board: classic for sea freight, seller loads the vessel. Should not be used for containerized cargo in theory, used constantly in practice
- CIF and CFR: seller pays freight to your port, risk still transfers at loading. The gap between who pays and who risks surprises many buyers
- DAP, Delivered At Place: seller brings goods to your door, you clear import
- DDP, Delivered Duty Paid: seller does everything including your import duties. The most dangerous term to accept casually
How to choose in practice
My working rule: control the leg where you have better rates or better knowledge, and never let the other side clear customs in your own country blind. Buyers with good freight agreements should buy FCA or FOB and control the main carriage. Buyers new to a market are often better served by DAP while they learn the lane.
Avoid EXW internationally unless you have your own export setup in the seller's country, because export clearance in someone else's name creates real compliance exposure. And be very careful with DDP: a seller quoting DDP into a market they do not know is quoting a guess, and the shipment pays for that guess at the border.
The 2020-specific details people miss
Incoterms 2020 renamed DAT to DPU and reordered insurance defaults: CIP now requires all-risk cover while CIF keeps minimum cover. FCA gained an optional on-board bill of lading mechanism, which matters for letter of credit payments on sea shipments.
Always write the term with a precise named place and the version: FCA Istanbul Halkalı Terminal, Incoterms 2020. A term without an exact place is an invitation to argue later.