What Are Incoterms? The Simple Guide to International Shipping Terms

International Commercial Terms (Incoterms^®) are a crucial component of the international shipping process. They govern who is responsible for what at each stage of the shipping process, from packaging and transportation to insurance and customs clearance.

Whether you’re a seasoned international retailer or brand-new to international freight, this comprehensive guide explains everything you need to know about Incoterms, how they work and which one is right for your business.

What are Incoterms?

International Commercial Terms (Incoterms, for short) are a set of global rules established by the International Chamber of Commerce (ICC) to define the responsibilities, costs and risks for buyers and sellers in international trade.

For example, they explain:

• When responsibility for goods transfers from the seller to the buyer

• Who arranges transport

• Who pays for freight and insurance

• Who handles customs clearance

Ultimately, they create a standardised and trusted framework that prevents misunderstandings and disputes.

The ICC first introduced Incoterms in 1936 and updates them around every 10 years to reflect changing international trade practices. They were last updated in 2020.

Why are Incoterms important?

Incoterms provide the clarity and predictability necessary to facilitate trade between multiple parties in different countries.

Can you imagine how complex and lengthy sale agreements would become without pre-defined responsibilities? Instead, Incoterms enable buyers and sellers to align quickly on key factors.

What are the 11 Incoterms?

There are currently 11 Incoterms split into two categories based on the mode of transport they cover. You can use seven Incoterms for all transport modes (air, sea, road, rail and multimodal shipments) and four for sea and inland waterway transport only.

Incoterms for any mode of transport

Here are the seven Incoterms you can use for any transport mode, along with descriptions of how they work.

• EXW (Ex Works): The seller makes goods available at their premises. The buyer assumes all costs and risks from that point onwards.​

• FCA (Free Carrier): The seller delivers goods to a carrier at a named place. The risk transfers when they hand goods to the carrier.​

• CPT (Carriage Paid To): The seller pays for transportation to a named destination. Risk transfers when goods are delivered to the first carrier.​

• CIP (Carriage and Insurance Paid To): The seller pays for transportation to a named destination. They also arrange and pay for comprehensive insurance coverage.​

• DAP (Delivered at Place): The seller arranges and pays for delivery to a named destination. The buyer handles unloading and customs clearance.​

• DPU (Delivered at Place Unloaded): The seller delivers and unloads goods at a named destination. The buyer is responsible for import clearance.​

• DDP (Delivered Duty Paid): The seller assumes the maximum responsibility, including all costs, risks, and import duties, until the goods reach the buyer's premises.​

Click any link to learn more about that Incoterm.

Incoterms for sea and inland waterway transport only

Here are the four Incoterms that apply only to sea and inland waterway transport, along with descriptions of how they work.

• FAS (Free Alongside Ship): The seller delivers goods alongside the vessel at the port of origin. Risk transfers to the buyer at that point.​

• FOB (Free On Board): The seller delivers goods on board the vessel at the port of shipment. The buyer then assumes all responsibility.​

• CFR (Cost and Freight): The seller pays for ocean freight to the destination port. The risk transfers to the buyer when the goods are loaded onto the vessel at the port of origin.​

• CIF (Cost, Insurance and Freight): The seller pays for ocean freight to the destination port. They also arrange and pay for minimum insurance coverage during ocean transit. ​The risk transfers to the buyer when the goods are loaded onto the vessel at the port of origin.​

Click any link to learn more about that Incoterm.

How to choose the right Incoterm for your business

You’ll want to consider your logistics capabilities, risk tolerance, and priorities when selecting an Incoterm.

Follow these steps to find the right solution for you.

Consider your logistics expertise

Think about your company’s experience with international shipping. If you’re new to global trade, a term like DDP or DAP, which places more responsibility on the seller, may be best. More experienced shippers may favour EXW or FCA, as they offer greater control.

Evaluate your chosen transport method

Shipping methods will significantly influence the selection of an Incoterm. If you’re using sea and inland waterway transport, you can use any term. But only seven are suitable for air freight or multimodal transport.

Define where you want risk to transfer

Consider carefully how to distribute responsibility and risk among parties. Terms like FOB and CFR transfer risk early in the journey (when goods are loaded at the origin port), whereas DAP and DPU retain risk with the seller until the goods arrive at the destination.​

Factor in insurance needs

Only CIF and CIP require sellers to arrange insurance. All other Incoterms require you to negotiate insurance separately. If your goods are high-value or fragile, ensure you've clearly established who will arrange adequate coverage.​

Think about costs

Some Incoterms, such as CIF, CIP, and DDP, consolidate costs into the seller’s price, offering buyers cost certainty. Terms like EXW and FCA, where buyers arrange their own carriage, provide opportunities for cost savings. However, they also require greater management.

Which Incoterms are most commonly used, and why?

While all 11 Incoterms serve specific purposes, five of them dominate international trade due to their clarity, flexibility and suitability for most scenarios.

Ex Works (EXW)

EXW is a popular Incoterm with sellers because they have little to no responsibility. The buyer assumes all of the costs and risks from the seller’s premises onwards. It’s ideal for sellers who lack logistical expertise and buyers who want total control of the process.

Free Carrier (FCA)

FCA is an incredibly versatile Incoterm that works across all transport modes. It’s particularly popular when shipping containerised goods. FVA offers clear transition points and works well when buyers want control over the main carriage but still want sellers to handle export procedures.

Free On Board (FOB)

FOB is widely used in sea freight because it clearly delineates risk as goods are loaded onto the vessel. Despite ICC recommendations to use FCA for containers, many exporters prefer FOB because it's well-established and banks readily accept it for Letters of Credit.​

Cost, Insurance and Freight (CIF)

CIF is a popular term in sea freight because sellers take responsibility for everything until the goods reach the destination port. Buyers only have to worry about customs clearance and final-mile transport.

Delivered Duty Paid (DDP)

DDP is the most popular eCommerce Incoterm because it places the maximum responsibility on sellers. They cover all shipping costs, customs clearance and import duties. It’s the perfect solution for buyers who want a hassle-free delivery process with no import costs.

What don’t Incoterms cover?

While Incoterms clearly define shipping responsibilities, several key aspects of international logistics contracts are not covered by them.

Incoterms don’t:

• Cover transfer of ownership or property rights to goods

• Specify payment methods, payment timing or currency

• Define the specification or quality of goods sold

• Address breach of contract, force majeure situations and other dispute resolution mechanisms

Understanding these limitations ensures you won’t use Incoterms as a substitute for comprehensive sales agreements.

Ship internationally with Pro Carrier

Understanding Incoterms is the first step towards successful international shipping. Selecting the right term for your business and ensuring smooth execution requires expertise, technology and reliable logistics partners.

That's where Pro Carrier comes in. Our international freight forwarding service combines innovative technology with customer service excellence to help UK businesses ship confidently from the Far East and beyond.

Our experts understand the nuances of every Incoterm and can advise on which one best suits your shipping needs.

Speak with our experts today to learn how Pro Carrier can streamline your international shipping with the right Incoterm.