Incoterms 2020, explained simply.
Three letters on a quote decide who pays for what and who carries the risk at each step. Get them wrong and you can end up paying twice or owning a loss you did not expect. Here is the whole system in plain English.
A shared rulebook for "who does what."
Incoterms are a set of eleven three-letter trade rules published by the International Chamber of Commerce. They settle the practical questions in any international sale: who arranges transport, who pays the freight, who insures the goods, who clears them for export and import, and, most importantly, at exactly what point the risk of loss or damage passes from the seller to the buyer.
They are updated roughly once a decade. The current version is Incoterms 2020. They do not replace your sales contract; they slot into it as agreed shorthand, so both sides know who is responsible for each leg.
The one idea that trips everyone up
Here is the single most useful thing to understand: cost and risk do not always transfer at the same place.
For a whole family of rules (the "C" rules, including CIF and CFR), the seller pays to ship the goods all the way to the destination, but the risk during that voyage already belongs to the buyer. The seller is paying for transport on cargo that is, legally, at the buyer's risk. People assume that "the seller paid for the freight and insurance" means "the seller carries the risk until it arrives." It does not. Keep this in your head and the rest falls into place.
The 11 rules, split by transport mode
Seven rules work for any mode of transport. Four are reserved for sea and inland waterway only. A common mistake is using a sea-only rule like FOB for an air or courier shipment, where it does not properly fit.
| Any mode (air, road, rail, sea, multimodal) | Sea & inland waterway only |
|---|---|
| EXW · Ex Works | FAS · Free Alongside Ship |
| FCA · Free Carrier | FOB · Free On Board |
| CPT · Carriage Paid To | CFR · Cost and Freight |
| CIP · Carriage and Insurance Paid To | CIF · Cost, Insurance and Freight |
| DAP · Delivered at Place | |
| DPU · Delivered at Place Unloaded | |
| DDP · Delivered Duty Paid |
The four you will actually see most
EXW · Ex Works. The seller's minimum obligation. The seller just makes the goods available at its own premises, and from that point everything is the buyer's job: loading, export clearance, all transport, import clearance, and duties. Risk passes to the buyer at the seller's door. Cheap on paper, but the buyer takes on the most work and the most exposure.
FOB · Free On Board (sea only). The seller delivers the goods on board the vessel at the named port of shipment and clears them for export. Risk passes to the buyer once the goods are on board. The buyer arranges and pays the main ocean freight and handles import clearance and duties. A clean, common choice for full-container ocean shipments where the buyer wants to control the freight.
CIF · Cost, Insurance and Freight (sea only). The seller pays the cost, the insurance, and the freight to the destination port. But, and this is the trap, risk still passes to the buyer at origin, the moment the goods are on board at the port of shipment, exactly like FOB. And the insurance the seller is required to buy is only the minimum level (Institute Cargo Clauses C), bought for the seller's contractual compliance, not the buyer's protection. If the cargo is damaged mid-voyage, it is the buyer's risk, against a thin policy. This is why experienced buyers either avoid CIF or arrange their own all-risk cargo insurance on top.
DDP · Delivered Duty Paid. The seller's maximum obligation, the mirror image of EXW. The seller delivers the goods to the named destination, cleared for import, with all duties and taxes paid. It is the only Incoterm where the seller, not the buyer, pays the import duties. Convenient for the buyer, but it puts the seller on the hook for customs in a country it may not know well.
A quick way to read any rule
The first letter tells you the shape:
- E (EXW): seller does the least. Buyer collects from the seller's premises.
- F (FCA, FAS, FOB): seller hands off to the buyer's carrier; buyer pays the main freight.
- C (CPT, CIP, CFR, CIF): seller pays the main freight, but risk passes earlier, at origin. The cost-and-risk split lives here.
- D (DAP, DPU, DDP): seller delivers to the destination and carries the risk all the way there.
What changed in 2020
If you are comparing against older paperwork, the headline changes from Incoterms 2010 were:
- DAT became DPU. "Delivered at Terminal" was renamed "Delivered at Place Unloaded," to make clear it can be any place, not just a terminal.
- CIP insurance went up. CIP now requires high-level all-risk cover (Clauses A), while CIF keeps the minimum (Clauses C).
- FCA gained an on-board option. Buyers and sellers can now agree that the carrier issues an on-board bill of lading under FCA, which helps when a letter of credit requires one.
Choosing the right one
A few rules of thumb:
- Match the rule to the mode. Use a sea-only rule (FOB, CIF) only for actual sea freight; use FCA or CPT/CIP for air, road, or containers handed over at a terminal.
- If you want to control the freight and the insurance, buy on F-terms (FOB, FCA) and arrange transport yourself.
- If you buy CIF or CFR, plan to add your own all-risk cargo insurance. The built-in cover is thin or absent.
- Be careful agreeing to DDP as a seller, or EXW as a buyer. Each puts the full weight of foreign customs on the party least able to handle it.
How Setara helps
Choosing an Incoterm is a commercial decision, but it changes who arranges and pays for each leg of the move. When you book with Setara, we work to the agreed Incoterm and tell you plainly where your responsibility starts and ends, so there are no surprises at origin or destination. Try our Incoterms 2020 picker to see the split at a glance, and read up on cargo insurance before you accept a CIF offer.
Frequently asked
What is the difference between FOB and CIF?
Risk transfers at the same point under both, when goods are on board at the port of shipment. The difference is cost: under FOB the buyer pays the main freight; under CIF the seller pays the freight plus minimum insurance to the destination port. The voyage risk is the buyer's either way.
Who pays import duties under Incoterms 2020?
In nearly every rule, the buyer pays import duties and clears the goods. The one exception is DDP, the only Incoterm where the seller pays the import duties and taxes.
Which Incoterms are only for sea freight?
Four: FAS, FOB, CFR, and CIF. The other seven (EXW, FCA, CPT, CIP, DAP, DPU, DDP) work for any mode, including air, road, rail, and multimodal.
What changed in Incoterms 2020?
DAT was renamed DPU; CIP now requires higher all-risk insurance (Clauses A) while CIF keeps the minimum (Clauses C); and FCA added an on-board bill of lading option.
Last reviewed: May 2026. General guidance, not a substitute for the official ICC Incoterms 2020 text or legal advice. Incoterms is a registered trademark of the International Chamber of Commerce. Source: International Chamber of Commerce, Incoterms 2020.
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