Incoterms made simple

Incoterms are a set of standard three-letter rules, published by the International Chamber of Commerce, that define the responsibilities of a buyer and a seller in an international sale. They answer three questions for every shipment: who arranges and pays for transport, who carries the risk if something goes wrong, and at exactly what point responsibility passes from seller to buyer.

They matter because they turn a vague deal into a precise one. When both sides agree on a term, there is no argument later about who should have paid for freight or insurance. The current set in common use is Incoterms 2020.

There are eleven Incoterms, but most trade uses a handful. Here are the ones you will meet most often:

A simplified view of where the cost and risk sit under the most common terms:

• New to importing? DAP or DDP keep things simple, the seller handles most of the journey while you learn.
• Want control and lower cost? FOB lets you manage freight and insurance yourself, often cheaper once you know what you are doing.
• Selling and want minimal risk? EXW or FOB push responsibility to the buyer early.
• Selling and want to offer a premium, hands-off deal? DDP delivers to the buyer's door with nothing for them to arrange.

• Assuming CIF means risk-free. Under CIF the seller pays freight, but risk passes to the buyer at the origin port. If goods are damaged in transit, that can be the buyer's problem.
• Using DDP without understanding import rules. As the seller under DDP, you are responsible for the buyer's import duties and clearance, in a country whose rules you may not know.
• Not stating the version. Always specify the term and that it follows Incoterms 2020, plus the named place, for example 'FOB Busan, Incoterms 2020'.
• Forgetting insurance. Only CIF and CIP include seller-paid insurance. Under other terms, arrange your own.