What are Incoterms?
Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international transactions. The current version, Incoterms 2020, contains 11 terms.
These terms determine who pays for shipping, insurance, customs, and when risk transfers from seller to buyer. Using the correct Incoterm is essential for clear contracts and avoiding disputes.
💡 Key Principle
Incoterms define two critical points: (1) where costs transfer from seller to buyer, and (2) where risk of loss or damage transfers. These points are not always the same!
EXW - Ex Works
Ex Works (EXW) places maximum responsibility on the buyer. The seller's only obligation is to make goods available at their premises.
Seller's Responsibilities
- Package goods for collection
- Make available at premises
- Provide commercial invoice
Buyer's Responsibilities
- All transport from seller's door
- Export & import customs
- All insurance
- All risks from pickup
⚠️ Caution
EXW can create complications if the buyer cannot handle export formalities in the seller's country. Use FCA instead for most export situations.
FOB - Free on Board
Free on Board (FOB) is the most commonly used term for sea freight. The seller delivers goods on board the vessel at the named port of shipment.
Seller's Scope
Transport to port, export customs clearance, loading on vessel, costs until loaded.
Buyer's Scope
Ocean freight, marine insurance, import customs, delivery from destination port.
Risk Transfer Point
Risk transfers when goods are on board the vessel at origin port.
Best for: Bulk commodities, when buyer has favorable freight contracts, traditional sea shipments.
CIF - Cost, Insurance & Freight
CIF requires the seller to arrange freight and marine insurance. Risk still transfers at origin, but costs transfer at destination port.
Seller Pays For
- Transport to destination port
- Ocean freight
- Marine insurance (minimum)
- Export customs
Buyer Pays For
- Additional insurance if needed
- Unloading at destination
- Import customs duties
- Inland transport at destination
📋 Insurance Note
CIF only requires minimum insurance (110% of invoice value, ICC C clauses). Buyers may want additional coverage - discuss with your seller or arrange separately.
DAP & DDP Terms
DAP - Delivered at Place
Seller delivers goods ready for unloading at named destination. Buyer handles import customs and unloading.
DDP - Delivered Duty Paid
DDP places maximum responsibility on the seller, who handles everything including import customs and duties.
Seller's Full Scope
All costs and risks until delivery at buyer's premises. Export AND import customs. All duties and taxes.
Best for: When seller has presence in destination country, e-commerce B2C, when buyer lacks import expertise.
Choosing the Right Term
For New Exporters
- Start with FOB or FCA
- Clear cost calculation
- Limited post-shipment risk
For Competitive Pricing
- Offer CIF for ease of comparison
- Consider CFR if insurance not needed
- DDP for e-commerce/consumer goods
Conclusion
Choosing the right Incoterm impacts your pricing, risk, and competitive position. For most Indian exporters, FOB remains the preferred term, while CIF works well when quoting to buyers unfamiliar with shipping logistics.
Need Help with Trade Terms?
Our logistics experts can advise on the best Incoterms for your specific trade routes.
