Incoterms (International Commercial Terms) are a set of standardised three-letter trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international transactions — specifically, who pays for shipping, who bears the risk of loss at each stage, and who handles customs clearance.
The current version is Incoterms 2020, which includes 11 terms.
You’ll hear this when…
Incoterms appear on purchase orders, contracts, and invoices in international trade. “The order is FOB Shanghai” or “delivered DDP to our warehouse” — each abbreviation tells both parties exactly where responsibility transfers.
Common Incoterms you’ll encounter:
- EXW (Ex Works): The seller makes goods available at their premises. The buyer handles everything from pickup onward.
- FOB (Free on Board): The seller delivers goods to the port and loads them onto the vessel. Risk transfers to the buyer once goods are on board.
- CIF (Cost, Insurance, Freight): The seller pays for shipping and insurance to the destination port, but risk transfers when goods are loaded at the origin port.
- DDP (Delivered Duty Paid): The seller handles everything — shipping, insurance, customs, duties — all the way to the buyer’s specified location.
Why they matter
Without Incoterms, every international contract would need pages of custom language defining cost and risk allocation. The standardised terms reduce disputes and ensure both parties have the same understanding of their obligations. Getting the Incoterm wrong can lead to unexpected costs, uninsured shipments, or customs delays.
Source: International Chamber of Commerce (ICC) — Incoterms 2020