Incoterms might sound complicated, but they actually decide whether your international order runs smoothly or not.
Incoterms1 are globally recognized trade terms that define the responsibilities and cost-sharing between buyers and sellers during shipping.
The first time I heard about Incoterms was during a conversation with an Indonesian customer. He asked me about the difference between FOB2 and CIF3, and that’s when I realized I needed to understand Incoterms to serve better.
[Table of contents]
What Is the Purpose of Incoterms?
Understanding the purpose of Incoterms is like knowing the rules of the game.
The main goal of Incoterms is to avoid misunderstandings in international trade4 by clearly outlining who handles what, when, and at whose cost.
Why Define Responsibilities and Risks?
In cross-border trade, shipments travel long distances. Without clear rules on who’s in charge of transport, insurance, and customs, problems often lead to blame games.
| Term | When Buyer Takes Responsibility | Seller's Key Responsibilities |
|---|---|---|
| FOB | After goods are loaded on ship | Delivery to port and loading cargo |
| CIF | At destination port | Ocean freight + insurance |
Who Should Use Incoterms?
Whether you're a brand owner, factory, or like me—offering packaging solutions from China—Incoterms make pricing and responsibilities clear. That means less confusion and smoother deals.
What Are the 12 Incoterms?
Most people know FOB or CIF, but there are actually 12 Incoterms5.
They’re divided into two groups: 7 for all transport modes and 4 for sea/inland waterway transport only. The term DPU6 is considered unique because it's the only one that requires the seller to unload the goods at destination.
Incoterms for All Modes of Transport (7 Terms):
| Term | Meaning | Seller's Responsibilities |
|---|---|---|
| EXW | Ex Works | Minimum responsibility, buyer handles all |
| FCA | Free Carrier | Delivery to a named carrier location |
| CPT | Carriage Paid To | Freight included, no insurance |
| CIP | Carriage & Insurance Paid To | Freight + insurance |
| DAP | Delivered at Place | Up to destination, not including import customs |
| DPU | Delivered at Place Unloaded | Includes unloading at destination |
| DDP | Delivered Duty Paid | Seller handles everything, including duties |
Incoterms for Sea and Inland Waterway Transport (4 Terms):
| Term | Meaning | Seller's Responsibilities |
|---|---|---|
| FAS | Free Alongside Ship | Goods placed next to the vessel |
| FOB | Free On Board | Goods loaded onto vessel |
| CFR | Cost and Freight | Includes ocean freight, no insurance |
| CIF | Cost, Insurance, Freight | Freight + insurance included |
What’s New in Incoterms 2020?
The 2020 version updates some rules for security and transport documentation7, and provides more flexibility in different shipping methods.
Which Incoterms Should I Use?
Choosing the right Incoterm can save you time, money, and headaches.
You should choose Incoterms based on your product, how your customer prefers to ship, and who handles logistics. Different cases need different terms.
Different Customers, Different Strategies
I have an Indonesian customer who cares most about price. He prefers FOB so he can use his own freight forwarder. But for new brands with no shipping experience, I often recommend CIF or DDP—they just want the goods delivered safely.
Match Shipping Mode to the Term
- For sea freight: FOB and CIF are common.
- For air freight or express: DAP or DDP works better.
- If you don’t want to manage transport: choose EXW.
- If you want to offer full service: go with DDP or CIP.
Quick Reference Guide
| Situation | Suggested Incoterm |
|---|---|
| Buyer has their own freight forwarder | FOB |
| Buyer wants door-to-door service | DDP |
| You want minimum responsibility | EXW |
| You want to offer premium service | CIP or DDP |
Conclusion
Choosing the right Incoterm keeps your deals clear, simple, and stress-free.
Footnotes
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Official definition and purpose of Incoterms from the International Chamber of Commerce. ↩
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Explanation of FOB from Maersk, a global logistics leader. ↩
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Explanation of CIF from Maersk, focusing on cost, insurance, and freight. ↩
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Importance of Incoterms in reducing risk in global business, via RTS International. ↩
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Full breakdown of all 12 Incoterms 2020 from IncoDocs. ↩
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DPU is the only Incoterm that requires the seller to unload the goods at the destination. ↩
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Official breakdown of changes between Incoterms 2010 and 2020, provided by ICC Academy. ↩
