Incoterms 2020 for Importers & Exporters: Who Pays, Who's at Risk

Three letters in a sales contract decide who pays for freight, who carries the risk if a container goes overboard, and who deals with customs on each side of the border. Those three letters are an Incoterm: and choosing the wrong one is one of the most expensive mistakes in international trade, precisely because it looks like a triviality.

Incoterms (International Commercial Terms) are published by the International Chamber of Commerce (ICC). The current edition, Incoterms 2020, defines 11 rules. This guide explains what they govern, walks the rules most importers actually use, and flags the traps that catch people out.

What Incoterms do (and don’t) cover

An Incoterm allocates three things between buyer and seller:

• Costs: who pays for carriage, loading, terminal handling, insurance and duties at each stage.
• Risk: the exact point where responsibility for loss or damage transfers from seller to buyer.
• Obligations: who arranges transport, export/import clearance and documents.

Crucially, Incoterms do not transfer ownership, set payment terms, or replace your sales contract. They are a shorthand for delivery responsibilities, powerful, but narrow.

The 11 rules at a glance

Seven rules work for any mode of transport; four are sea-freight only.

The four you’ll meet most

FOB: the importer’s workhorse

Under FOB, the seller delivers the goods on board the vessel at the origin port and clears them for export; risk and cost then pass to you. It’s popular because it gives the buyer control over the main freight leg (and the freight margin) while keeping origin logistics with the party who knows them best. The catch: FOB is strictly for sea freight. Using it for containerised cargo handed over at an inland depot is technically wrong, FCA is the correct rule there.

CIF: convenient, but you’re not in control

With CIF the seller arranges and pays for freight and insurance to your destination port. It feels easier, and it’s common for first-time importers, but you inherit risk at the origin port while the seller picks the carrier and the (minimum) insurance cover. You also pay whatever freight margin the seller builds in. Note too that CIF raises your customs value, because duty is assessed on goods + insurance + freight.

DAP: delivered, but you still clear customs

DAP puts the goods at your door (or a named place) with the seller carrying cost and risk for the whole journey, except import clearance and duties, which remain yours. It’s a clean, balanced term for many B2B deals.

DDP: maximum convenience, maximum seller risk

Under DDP the seller does literally everything, including paying import duty and taxes in your country. Buyers love it; sensible sellers are wary of it, because being on the hook for clearance and duty in a market they don’t operate in is genuinely risky. Expect to pay for that convenience in the unit price.

Common traps

• Using EXW for exports. EXW looks cheap for the seller but leaves the buyer responsible for export clearance in a foreign country, often impractical. FCA is almost always the better choice.
• FOB/CIF on containers. These sea-only terms assume goods cross the ship’s rail. For containerised freight handed over at a terminal, FCA/CPT/CIP fit the reality and your insurance better.
• Forgetting to name the place precisely. “FOB” means little; “FOB Jebel Ali” means something. Always specify the named port or place.
• Assuming insurance is adequate. CIF and CIP only oblige the seller to buy minimum cover. For valuable goods, arrange your own.

How the rest of the market helps

The ICC sells the definitive rulebook and most freight forwarders, from DHL and Kuehne+Nagel to digital players like Flexport: publish helpful Incoterms charts. Those charts are great reference, but they don’t tell you which term fits your specific deal, or what it does to your landed cost.

That’s the gap Navvic’s Incoterms Advisor fills: describe your trade and it returns a plain-English breakdown of cost and risk at every step and recommends the right rule. Pair it with the landed-cost estimator to see exactly how your chosen Incoterm moves the final number, and the document generator to get the wording onto your invoice correctly.

The bottom line

Don’t default to whatever your supplier quotes. Decide which Incoterm matches how much of the journey you want to control, model its impact on your costs, and name the place precisely in writing. Three letters, chosen deliberately, are worth more than they look.