Incoterms 2020 Quick Guide: Who Pays and Who Risks?
Defining responsibilities in international container shipping.
International trade involves a long chain of events: from the factory floor to the truck, the port, the ship, and finally the customer. At each step, there are costs and risks. Who pays the insurance? Who is responsible if the container falls overboard? Incoterms (International Commercial Terms) are the 11 rules that answer these questions, ensuring that buyers and sellers are on the same page.
EXW and FCA: Origin Responsibilities
Ex Works (EXW) puts the maximum burden on the buyer; the seller just makes the goods available at their factory. Free Carrier (FCA) is more common for container shipping, where the seller delivers the goods to a named place (like a container yard) and handles the export clearance. Most professional shippers prefer FCA over EXW to avoid legal complications with foreign customs.
The 'Big Three' for Ocean Freight: FOB, CFR, and CIF
Free On Board (FOB) means the seller pays for everything until the container is on the ship. Cost and Freight (CFR) means the seller also pays for the ocean voyage. CIF (Cost, Insurance, and Freight) adds the requirement for the seller to provide maritime insurance. These terms are the foundation of global maritime trade and dictate exactly where the 'risk of loss' transfers from seller to buyer.
DAP and DDP: Delivering to the Door
Delivered at Place (DAP) means the seller handles everything until the truck arrives at the buyer's door, but the buyer pays the import duties. Delivered Duty Paid (DDP) is the 'full service' option where the seller handles every single cost and risk, including taxes. While DDP is convenient for buyers, it requires sellers to have deep knowledge of the destination country's tax and customs laws.
Choosing the Right Term for Your Business
There is no single 'best' Incoterm. Sellers often prefer FOB because it limits their liability once the goods leave their country. Buyers often prefer CIF or DAP to simplify their logistics. The key is to match the Incoterm to your company's ability to manage freight and insurance. Using the wrong term can lead to unexpected bills or gaps in insurance coverage that can ruin a profitable trade deal.
FAQ
Does Incoterms cover the transfer of ownership?
No. Incoterms only cover the delivery of goods, the transfer of risk, and the allocation of costs. The transfer of ownership (title) must be defined separately in the sales contract.
Which Incoterm is best for LCL shipping?
FCA or CPT are often better for LCL than FOB or CIF, as 'Free On Board' technically requires the goods to be over the ship's rail, which is difficult to define for consolidated cargo in a warehouse.
What changed in Incoterms 2020?
The most significant change was the renaming of DAT to DPU (Delivered at Place Unloaded) and updated insurance requirements for CIF and CIP to reflect modern logistics practices.