Incoterms®: What they are, how they work and how to choose them

In international trade, the success of a transaction is not only about price, but also about who does what, when, and at what risk.  

Incoterms ® (International Commercial Terms), created by the International Chamber of Commerce (ICC), are the essential tool for clarifying these issues and minimizing misunderstandings between sellers and buyers from different countries.

What are the Incoterms ®? 

Incoterms are standardized contractual terms that precisely establish the responsibilities of the parties in an international sale. Short for International Commercial Terms, they denote a set of standardized terms published by the International Chamber of Commerce (ICC) to govern international sales transactions.  

Each term precisely defines:  

• The point of delivery of the goods 
• Who bears the cost of transportation and insurance 
• Who handles customs formalities 
• When and where the risk is transferred  

They are used worldwide and recognized by most governments, insurance companies and logistics operators. 

The latest version in force is the 2020 version, updated to reflect changes in global trade and the practical needs of businesses.  

What are Incoterms needed for? 

When two companies located in different countries enter a sales contract, they face different regulations, logistics systems and business practices.  

Incoterms eliminate these ambiguities by serving as a common language internationally. 

They are essential to: 

• Prevent legal disputes: reduce ambiguities in contracts 
• Speed up logistics operations facilitates coordination with freight forwarders and customs 
• Ensure transparency in responsibilities 
• Calculate the final price correctly (CIF, DDP, etc.): clarifies who pays for transportation, insurance and customs 
• Reducing risk clearly defines the point at which risk passes from seller to buyer.  

Incoterms® 2020 version 

The latest version is effective since January 1^st ,2020. Compared with the 2010 version, it introduces some major changes: 

1. DPU (Delivered at Place Unloaded) replaces DAT (Delivered at Terminal) 
2. Greater clarity on costs and insusrance obligations
3. Possibility to indicate that transportation can be donde by own means
4. Increased focus on transportation security.

The 11 rules of Incoterms® 2020 

Incoterms are divided into two main categories:  

1.Rules that apply to all type of transportation (air, land, sea) 

2. Rules valid only for sea or inland waterway transport 

Important: Sea rules are NOT recommended for containerized transportation. Better to use FCA/CIP/CPT in those cases.  

Focus: Difference between “Risk” and “Expenses” 

There is often confusion between the transfer of risk and the payment of expenses. 

For example, in the CFR term, the seller pays the freight to the port, but the risk passes when the goods are loaded. 

This means that if something happens to the goods during the voyage, the risk is on the buyer, even if he has not paid the freight. 

How to choose the right Incoterm®? 

The choice depends on several factors: 

1. Who has more control over logistics? If the vendor has a network of reliable freight forwarders, it may offer a “C” term (e.g., CIP, CFR) 
2. Who has more negotiating power in local transportation or customs? If the buyer knows his market better, he may prefer a term such as FCA or FOB 
3. Who wants to minimize risk?  Terms such as DDP or EXW shift all responsibility to one party. 
4. Type of goods and mode of transport: For containerized cargo: better FCA/CPT/CIP. For bulk cargo or conventional ships: better FOB/CFR/CIF 

How to correctly write an Incoterm® 

To be valid, an Incoterm should always start in full form: 

objectivec 

CopyModification 

CIF – Shanghai Port, Incoterms 2020 

This avoids any ambiguity about the location and reference version. 

 Avoid this usual mistakes 

• Using FOB for container shipments (better FCA) 
• Not specifying precise location (e.g., “CIF Port” is too vague) 
• Not updating the contracts to the 2020 version 
• Assume Incoterms also regulate transfer of ownership (they don’t!). 

Professional Tips 

• Always do a full analysis of total delivery costs (landed costs) 
• Include the exact version in the contract: e.g., “FOB – Genoa, Incoterms® 2020” 
• Work with freight forwarders and customs agents to choose the most efficient Incoterm 
• Chech whether the chosen term involves tax obligations in the destination country. 

Conclusion 

Incoterms ® are more than just abbreviations: they are crucial legal and logistical tools for successful international operations. Using them well means: 

• Reduce risks 
• Optimize costs 
• Avoid disputes 
• Improve business relationships 

For anyone working with foreign countries-whether an SME, exporter, buyer or logistics manager-thorough knowledge of Incoterms is a must.