Incoterms: Complete Guide to International Trade Terms

A lot can go wrong at a lot of different points when you move goods across borders. And when something goes wrong, it all comes down to one question: Who is responsible for what?

In International trade, buyers and sellers exist across different countries, different legal systems and sometimes entirely different languages. If you don’t have a shared framework in place, the same contract can mean completely different things to you and the other party. This can be a reason for disagreements and disputes when things go wrong.

Incoterms exist to solve that issue and answer questions like: Who pays for shipping? Who arranges insurance? Who is on the hook if something gets damaged on the way?

So what exactly are Incoterms? Let’s take a closer look at what Incoterms are, their history and evolution, key objectives, and the 11 standardised trade terms in Incoterms 2020. You'll also discover the difference between rules for any transport vs sea-only, how each term allocates risk and cost, common mistakes (especially with FOB and EXW), and best practices for using Incoterms in your export contracts.

Key Takeaways

• Understanding Incoterms helps Indian exporters and importers avoid costly disputes by clearly defining who pays for what (shipping, insurance, customs duties) and where risk transfers between seller and buyer.
• Incoterms are 11 standardised three-letter trade terms published by the International Chamber of Commerce (ICC); the latest version is Incoterms 2020, in effect since January 1, 2020.
• Seven terms work for any transport mode: EXW, FCA, CPT, CIP, DAP, DPU, DDP. Four terms are sea/inland waterway only: FAS, FOB, CFR, CIF.
• Most common Indian exporter mistake: using FOB for containerised shipments. Containers should use FCA - FOB transfers risk before the container is actually loaded onto the vessel.
• For Indian exporters: Incoterms determine your contractual obligations but don't replace customs documentation (commercial invoice, packing list, EDF, shipping bill) or FEMA/RBI realisation requirements.

Incoterms, aka International Commercial Terms, are 11 standard trade terms that are published by the ICC. Each term is denoted by a three-letter code. It defines where a seller’s responsibility would end and where the buyers would begin in a trade deal. The terms bring clarity around who is responsible for delivery, costs and the risks of a shipment.

It’s worth noting here that Incoterms do not cover everything in a trade contract. They do not deal with payment terms or what happens if there is a dispute. However, they do give both parties an agreed-upon point at which risk and cost transfer to the other side.

By the early 1930s, international trade had grown far too complex, and ad hoc agreements of the past were causing way too many disputes. That’s when the ICC stepped in and introduced the very first set of Incoterms in 1936. This original set of terms was supposed to bring consistency to how trade contracts described delivery obligations.

Since then, the ICC has updated Incoterms several times to keep up with how global trade actually works. The 2010 revision reorganised the terms into two categories based on transport mode and introduced new rules for security-related obligations. In 2020, further changes were made, and a new revised rule for FCA was added, along with updated guidance on insurance under CIF and CIP.

Incoterms are meant to increase the transparency in international trade agreements for all the parties involved. Here’s what they do:

1. Clarify the responsibilities of both parties and specifically where a seller’s responsibility ends and where the buyer’s begins.
2. Define exactly who pays for what, including freight insurance and any other costs, at each stage of the journey.
3. Establish the precise point at which the risk of the trade would transfer from the seller to the buyer.
4. Reduce the overall chances of disputes as both parties get a shared reference point.
5. Make your contracts simpler to read and enforce. This works even across different languages and legal systems.
6. Help you set accurate prices for goods by making all costs explicitly available.

Incoterms are specific about what they cover. Here are the main features that decide how the terms function in practice:

• They define delivery: Each term clarifies the exact point at which the seller’s delivery obligation is complete. This could be at their factory gate, at a named port, or at the buyer's door.
• They allocate risk: The point of delivery is also the point at which risk passes. If the goods are damaged after that point, it is the buyer's problem. Before that point, it is the seller's.
• They assign cost responsibilities: The Incoterm you choose decides who pays for what. They specify if the buyer or the seller has to pick up the responsibility for expenses like export clearance, freight, import duties and more. 
• They are transport-specific: Some Incoterms work for every mode of transport. Others are designed specifically for sea or inland waterway shipments. Using the wrong one for the wrong mode is a common and costly mistake.
• They do not stand alone: Incoterms work alongside a sales contract, not instead of one. They do not cover payment terms, title transfer, or breach of contract.

The latest version of Incoterms 2020 includes 11 terms. These terms are split into two categories based on the mode of transport they are designed for.

Rules for any mode of transport

Seven of the 11 terms can be used for any mode of transport, be it road, rail, air, sea, or a combination. These include EXW, FCA, CPT, CIP, DAP, DPU, and DDP.

You should be working with these terms when you ship by air or use multimodal transport. These terms are flexible enough to apply to almost all modern supply chains where goods change hands and transport multiple times before they reach their destination.

Rules for sea and inland waterway transport

The remaining four terms, FAS, FOB, CFR, and CIF, are designed specifically for sea or inland waterway transport. These are only for situations where goods are handed over at a port.

These terms made more sense when bulk cargo was the norm. If you are shipping containerised goods, using FOB or CIF can create a gap in risk coverage because the terms transfer risk at the ship's rail, before the container is actually loaded. For container shipments, FCA or CIP are generally more appropriate.

Now, let’s take a closer look at each Incoterm and what it means. We’ll also understand what each party is responsible for and where the risk is:

Your entire logistics arrangement depends on the Incoterm of your choice. The Incoterm decides if you or the other party has to book freight, who deals with customs and who absorbs costs if something goes wrong.

For example, if you are a seller working under DDP, you have to manage the whole process end-to-end and would need a very different operational setup than if you’d used EXW. In EXW, you would be handing over responsibility at the factory door, and the buyer would pick up the responsibility and risk.

Incoterms and payment terms are two different things, and mixing them up is a mistake that causes real problems. Here is how they differ:

The latest version of Incoterms was introduced in 2020. It  made several changes to how risk and cost are allocated in certain situations. So, if your contracts still use Incoterms 2010, you should consider updating them.

Under the 2020 rule, FCA allows the buyer to instruct their carrier to issue an on-board bill of lading to the seller. This matters a lot if you are using letters of credit. CIP also now requires a higher level of insurance cover than the 2010 version did.

To update your contracts, you have to first check each Incoterm you use and identify what has changed between 2010 and 2020. Make sure that all your carriers and logistics partners are also working on the same version.

Businesses often get the finer details of using Incoterms in their contracts wrong. The most common mistakes are:

• Using FOB for container shipments: Since FOB transfers all the risk at the ship’s rail and does not cover it during the journey, there can be a gap in coverage. FCA would be a much better choice.
• Choosing EXW without understanding the implications: EXW puts almost everything on the buyer, including export clearance. If your buyer is not equipped to handle export formalities in your country, this can cause delays and issues.
• Ignoring the mode of transport: If you use sea-only terms like CFR and CIF for air or multimodal shipments, there can be gaps in responsibility and risk. Always match the term to how the goods are actually moving.
• Assuming Incoterms cover insurance: Most terms do not require either party to take out insurance. Only CIF and CIP include an insurance obligation.
• Not specifying the named place clearly: All 11 Incoterms need a named place or port mentioned clearly. Leaving it vague, or naming a place that is too broad, creates ambiguity about exactly where responsibility transfers.

If you do use Incoterms in your trade contracts, here are a few habits to build early on to avoid unnecessary disputes:

• Always mention the exact named place alongside your Incoterm. This should be down to the specific port, terminal or address.
• The Incoterm you choose should match the actual mode of transportation you plan to use.
• Both parties should work from the same version of Incoterms, and you should reference the version and the Incoterm explicitly in your contract.
• Check that the Incoterm you’ve chosen is compatible with the documentary requirements of the payment mode you’ll use.
• Review your standard contracts whenever a new version of Incoterms is published to make sure your terms are still relevant.
• Train anyone involved in drafting or reviewing trade contracts on what each term actually means in practice and what you can use.

When the ICC first published Incoterms in 1936, the goal was to give buyers and sellers a common language so that cross-border trade could happen with minimal friction and disputes. Over the last 90 years, there have been several revisions, and the overarching goal has been the same. However, the terms have evolved to keep up with modern transportation needs.

While getting your Incoterms right is important. Another part of it is to make sure your money moves as efficiently as your goods do. If your business receives international payments, particularly into India, Xflow can help.

Xflow is built for businesses that operate across borders and need to receive international revenue to arrive smoothly and reliably. Check out Xflow to see how it works.