INCOTERMS® Explained – 2021 Latest Guide with Infographics

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Table of Contents

Introduction

Buying a large number of goods from another country, or importing, is by far the most complex purchasing process. There are some issues to be clarified before a deal:

  • Who should do the clearance of export or import?
  • Who should pay for the loading, transporting, and unloading of the goods?
  • Who should bear the risk of loss or damage to the goods in transit?
  • Who should purchase insurance as a defense against the risks?

These questions make it necessary to have some standards of unified terms to clarify the obligations, costs, and risks.

There have been multiple standards for these terms. The most widely used one is Incoterms® made by The International Chamber of Commerce, or the ICC. Getting familiar with Incoterms® will help smooth the transaction.

Incoterms® are typically used like this:  [the chosen Incoterms® rule] [named port, place or point] Incoterms® 2020”. For example: EXW Shanghai Incoterms® 2020

What does that mean? Before we go into details, we need to clarify the word “delivery” in this article.

The way it was used here is a bit different than you think. When we say that the goods are delivered, it means that the risks of losing or damaging the goods are transferred from the seller to the buyer.

The three-word abbreviations below are sometimes called rules. They define how the goods are delivered.

The latest version Incoterms® 2020 defines 11 terms. They could be divided into two categories:

Terms That Apply to Any Mode of Transport

EXW | Ex Works

EXW (insert named place of delivery) Incoterms® 2020

incoterms.illustrations.exw 1

If you choose EXW, Delivery happens when the seller puts the goods at the named place (mentioned above). In most cases, the place is the seller’s factory/warehouse. The seller DOES NOT need to load the goods on the vehicle. After putting down the goods, all the risks, costs, and export/import procedures are on the buyers.

Notes to The Buyer

  • If you choose this rule, the seller will have the least responsibilities. Avoid this rule whenever possible.
  • The seller DOES NOT need to load the goods to the truck. However, the seller usually has the equipment and techniques that are required to safely load the goods. If you do this by yourself, the risk of damaging the goods when loading them is much higher.
  • This rule DOES NOT require the seller to do the export clearance. The buyer will have to pay for the export clearance and do all the procedures.

FCA | Free Carrier

FCA (insert named place of delivery) Incoterms® 2020

FCA - Incoterms® 2020

There are two variants of delivery under this rule.

  1. If the named place is the seller’s factory/warehouse: The buyer arranges and pays for the carrier to the seller load the goods on the truck.
  2. If the named place is somewhere else in the seller’s country, the seller must pay for the carrier from their place to the named place. They also need to prepare the goods ready for unloading. The buyer has to unload the goods by themselves and pay for transport costs afterward.

Either way, the seller has to do the export clearance. If the carrier breaks or loses the goods on the way, the seller DO NOT have to pay for the loss.

CPT | Carriage Paid To

CPT (insert named place of destination) Incoterms® 2020

CPT - Incoterms® 2020

The seller needs to arrange and pay for a carrier. The delivery happens when the seller hands the goods to the carrier at the named place. If there is an unloading cost, the seller has to pay for it. The carrier may send the goods to the importing country or only somewhere in the export country. You need to make an agreement on the place with the seller.

If the carrier breaks or loses the goods on the way, the seller DO NOT have to pay for the loss.

Under this rule, the seller has to do the export clearance.

CIP | Carriage and Insurance Paid To

CIP (insert named place of destination) Incoterms® 2020

CIP - Incoterms® 2020

The seller needs to arrange and pay for a carrier. The delivery happens when the seller hands the goods to the carrier at the named place. If there is an unloading cost, the seller has to pay for it. The carrier may send the goods to the importing country or only somewhere in the export country. You need to make an agreement on the place with the seller.

Under this rule, the seller has to do the export clearance. The seller also has to buy insurance for the goods from the delivery point to (at least) the destination. This means that if the carrier breaks or loses the goods on the way, insurance will cover the damage or loss.

Make sure the value of the insurance should be at least 110% of the goods’ value.

Under this rule, the seller has to do the export clearance.

Notes to The Buyer

In some cases, the destination country may require that the insurance to purchased locally in the destination country. This may cause some difficulties. In these cases, you may want to use the rule CPT.

DAP | Delivered at Place

DAP (insert named place of destination) Incoterms® 2020

DAP - Incoterms® 2020

First, you agree on a place. The seller arranges and pays for the carrier from their factory/warehouse to that place. They also have to prepare the goods ready for unloading. After that, the goods are delivered.

Then the buyer has to prepare and pay for the unloading.

Under DAP, the seller has to do the export clearance.

DPU | Delivered at Place Unloaded

DPU (insert named place of destination) Incoterms® 2020

DPU - Incoterms® 2020

First, you agree on a place. The seller arranges and pays for the carrier from their factory/warehouse to that place. They have to unload the goods. After unloading, the goods are delivered. However, they are not required to load the goods onto the buyer’s vehicle.

Under DPU, the seller has to do the export clearance.

DDP | Delivered Duty Paid

DDP (insert named place of destination) Incoterms® 2020

incoterms.illustrations.ddp

First, you agree on a place. The seller arranges and pays for the carrier from their factory/warehouse to that place. They also have to prepare the goods ready for unloading. After that, the goods are delivered. Then the buyer has to prepare and pay for the unloading.

Under DDP, the seller has to do both the export and the import clearance.

Notes to The Buyer

If you choose DDP, the seller has the most responsibilities.

Terms That Apply to Waterway Transport

FAS | Free Alongside Ship

FAS (insert named port of shipment) Incoterms® 2020

FAS - Incoterms® 2020

The delivery happens when the seller places the goods alongside the vessel. The buyer has to arrange and pay for the vessel. If the goods were damaged or lost on the ship to the buyer, the seller does not have to pay for the damage or loss.

Under FAS, the seller has to do the export clearance.

FOB | Free on Board

FOB (insert named port of shipment) Incoterms® 2020

FOB - Incoterms® 2020

The delivery happens when the seller puts the goods on the vessel. This means that the seller pays for the loading fee. The buyer needs to arrange and pay for the vessel. If the goods were damaged or lost on the ship to the buyer, the seller does not have to pay for the damage or loss.

Under FOB, the seller has to do the export clearance.

CFR | Cost and Freight

CFR (insert named port of destination) Incoterms® 2020

CFR - Incoterms® 2020

The delivery happens when the seller puts the goods on the ship. If the goods were damaged or lost on the ship on the way to the buyer, the seller does not have to pay for the damage or loss. The seller has to arrange and pay for the ship as well as the fee to unload the goods at the destination port.

Under CFR, the seller has to do the export clearance.

Notes of Caution to The Buyer

The risk transfers at the port of delivery from the seller to the buyer, even though the seller pays and arranges the ship from the delivery point to the destination port.

CIF | Cost Insurance and Freight

CIF (insert named port of destination) Incoterms® 2020

CIF - Incoterms® 2020

The delivery happens when The sell puts the goods on the ship.  The seller has to arrange and pay for the ship as well as the fee to unload the goods at the destination port.

The seller also has to buy the insurance from the delivery point to (at least) the destination port. If the goods were damaged or lost on the ship on the way to the buyer, insurance would cover the loss.

Under CIF, the seller has to do the export clearance.

Notes of Caution to The Buyer

  • The risk transfers at the port of delivery from the seller to the buyer, even though the seller pays and arranges the ship from the delivery point to the destination port.
  • Make sure the value of the insurance is at least 110% of the goods’ value.

That’s all of the 11 Incoterms. After reading this article, you must find it much easier to understand the trading contracts.

This article helps you understand incoterms® but does not provide a full definition or any legal advice. Conduct your own due diligence or get help from a lawyer when needed.

Incoterms® 2020 Cheat Sheet

incoterm.2020.cheatsheet

If you want a printable PDF copy of the cheat sheet, please contact us by clicking the live chat at the right bottom.

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