Incoterms 2020 explained: EXW, FOB, CIF, DAP, DDP and all 11 rules

Two companies agree a price for goods to move across a border. Almost immediately a dozen questions appear: who books the ship, who pays the freight, who insures the cargo, who clears customs at each end, and if a container falls off the vessel, whose loss is it? Incoterms are the short code that settles all of this in three letters. Write "CIF Nhava Sheva" or "FOB Shanghai" in the contract and both sides know exactly who does what, and where responsibility changes hands.

This guide explains Incoterms 2020 in plain English: what they are, the two things every rule decides, all 11 rules in one table, the most-used ones with Indian import and export examples, the common comparisons people search for (FOB vs CIF, EXW vs FOB, DAP vs DDP), what changed in the 2020 version, and how the Incoterm ties into your letter of credit. Two examples run through it:

• Export example: Surat Textiles in India sells fabric to Hudson Retail in the USA. Surat is the seller.
• Import example: Bharat Tools in Vadodara imports CNC machines from Zhejiang Machinery in China. Bharat Tools is the buyer.

What are Incoterms?

Incoterms (short for International Commercial Terms) are a set of standard trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities of the seller and the buyer in a sale of goods: delivery, risk, transport, insurance, export and import clearance, and the split of costs. They do not cover price, payment method, or the transfer of ownership; those live elsewhere in your contract and in the letter of credit.

The current version is Incoterms 2020, in force since 1 January 2020. It has 11 rules, each a three-letter code. Quote the rule plus a named place (for example "FOB Mundra" or "DAP Chicago") and you have defined the handover precisely.

The two questions every Incoterm answers

Strip away the jargon and each rule settles just two things:

• Cost: up to which point does the seller pay (packing, local transport, export clearance, main freight, insurance, import duty), and from where does the buyer take over the bill?
• Risk: at which exact point does the danger of loss or damage pass from seller to buyer? After that point, if the goods are lost, it is the buyer's problem even if the seller has already been paid.

The trap is that cost and risk do not always transfer at the same place. Under CIF, for example, the seller pays the freight and insurance all the way to the destination port (a cost that runs to the far end), but risk passes much earlier, the moment the goods are on board at the load port. Knowing which point is which is the whole skill of reading an Incoterm.

The 11 Incoterms 2020 rules, at a glance

Seven rules work for any mode of transport (road, rail, air, sea, or multimodal). Four are for sea and inland waterway only, because they talk about the ship's rail and the port. Here they are with who carries the main cost and risk.

In every rule except DDP, the buyer clears and pays import duty. In every rule except EXW, the seller handles export clearance. Those two anchors alone resolve a lot of confusion.

The four families: E, F, C and D

The first letter of each code tells you roughly how far the seller goes:

• E (EXW): the seller does the least. Goods are simply made available at the seller's own premises.
• F (FCA, FAS, FOB): the seller delivers the goods to a carrier or ship nominated by the buyer, but the buyer pays the main carriage.
• C (CPT, CIP, CFR, CIF): the seller pays the main carriage to the destination, but risk still passes early (at handover or on board). Cost and risk split here.
• D (DAP, DPU, DDP): the seller goes furthest, carrying cost and risk all the way to the destination country.

The most-used rules, explained with examples

EXW (Ex Works)

The seller just makes the goods available at its factory or warehouse. The buyer arranges and pays for everything after that, including export clearance in the seller's country. Minimum obligation for the seller. If Zhejiang Machinery sold "EXW Ningbo", Bharat Tools would have to arrange pickup from the Chinese factory and handle Chinese export formalities, which is why importers often avoid EXW.

FCA (Free Carrier)

The seller delivers the goods, cleared for export, to a carrier chosen by the buyer, either at the seller's premises or another named place. Risk passes at that handover. FCA is the modern, container-friendly replacement for FOB: for anything shipped in a container and handed over at a terminal, FCA is the correct choice.

FOB (Free on Board)

Sea freight only. The seller loads the goods on board the vessel at the named port and clears them for export; risk passes once they are on board. The buyer books the ship, pays the freight and insures the cargo. If Surat Textiles quotes "FOB Nhava Sheva", it gets the fabric loaded on the ship the US buyer nominated, and from the ship's rail onward it is Hudson Retail's freight, insurance and risk.

CFR and CIF (Cost and Freight / Cost, Insurance and Freight)

Both are sea-only and both pass risk once the goods are on board at the load port, but the seller pays the freight to the destination port. Under CFR the buyer arranges insurance; under CIF the seller also arranges insurance (minimum cover, Institute Cargo Clauses C). So "CIF New York" means Surat Textiles pays freight and buys basic insurance to New York, but risk already sat with the buyer from the moment the goods were loaded in India.

CPT and CIP (Carriage Paid To / Carriage and Insurance Paid To)

These are the any-mode equivalents of CFR and CIF. The seller pays carriage to the destination, but risk passes when the goods are handed to the first carrier. Under CIP the seller also insures, and in Incoterms 2020 that insurance must be the higher all-risks cover (Institute Cargo Clauses A). Use CPT/CIP for air, road, rail or container shipments instead of CFR/CIF.

DAP, DPU and DDP (the delivered rules)

Under the D-rules the seller carries the goods all the way to a named place in the buyer's country. DAP: delivered ready for unloading (buyer unloads and clears import). DPU: the seller also unloads (the only rule where the seller unloads). DDP: the seller does everything including paying import duty and taxes, the maximum obligation. If Zhejiang sold "DDP Vadodara", the machines would arrive at Bharat Tools' door with Chinese export, freight, and even Indian customs duty already handled by the seller.

The comparisons people search for

• FOB vs CIF: both pass risk on board at the load port. The difference is cost: under FOB the buyer arranges and pays the main freight and insurance; under CIF the seller does, and builds it into the price. CIF looks more expensive because it bundles freight and insurance in.
• EXW vs FOB: under EXW the buyer handles everything from the seller's gate, including export clearance. Under FOB the seller loads the goods on the vessel and clears them for export. FOB shifts meaningfully more work onto the seller.
• DAP vs DDP: both deliver to the buyer's country. Under DAP the buyer clears import and pays duty; under DDP the seller pays the import duty and taxes too. DDP is the only rule where the seller bears import duty.
• CIF vs CIP: CIF is sea-only with minimum insurance (Clause C); CIP works for any mode and requires all-risks insurance (Clause A). For containers or air, CIP is the right one.

What changed in Incoterms 2020

If you learned Incoterms on the 2010 version, here is what moved:

• DAT became DPU. The old "Delivered at Terminal" was renamed "Delivered at Place Unloaded" and widened to any place, not just a terminal. DAP now appears before DPU because delivery-then-unload is the natural order.
• CIP insurance was upgraded. CIP now requires all-risks cover (Institute Cargo Clauses A). CIF still requires only minimum cover (Clause C).
• FCA can trigger an on-board bill of lading. The buyer and seller can agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller, which helps when payment is by a letter of credit that needs one.
• Own transport is recognised. FCA, DAP, DPU and DDP now allow for carriage using the buyer's or seller's own vehicles, not only a third-party carrier.
• Security and costs are clearer. Security-related transport obligations and a consolidated list of who pays what were made explicit in each rule.

How Incoterms tie into your letter of credit

The Incoterm and the letter of credit have to agree. The LC names the Incoterm, and the shipping documents you present must be consistent with it: a "CIF" LC will expect an insurance document and a freight-prepaid transport document, while an "FOB" LC will not ask the seller for insurance at all. A mismatch between the Incoterm and the documents is a classic LC discrepancy that delays payment. Agree the Incoterm first, then make sure the LC and the documents mirror it.

Choosing the right Incoterm

A few practical rules keep you out of trouble:

• Match the term to the transport. For containers and multimodal shipments, use FCA, CPT or CIP. Reserve FOB, CFR and CIF for bulk or break-bulk cargo actually loaded across a ship's rail.
• Do not sell EXW for exports unless you must: it leaves your foreign buyer handling your country's export clearance. FCA is almost always better.
• Know where your risk really ends. Under the C-rules you pay freight to the far port but your risk ended at the load point, so decide whether you also want cargo insurance for peace of mind even when the rule does not require it.
• Price the term, not just the goods. CIF and DDP look pricier because they bundle in freight, insurance and (for DDP) duty. Compare like with like.
• Always name the place precisely, down to the port or address, and ideally the version: "CIF Nhava Sheva, Incoterms 2020".

Used well, an Incoterm is a compact contract in three letters: it tells a factory in Surat and a buyer in New York exactly who books the ship, who insures the cargo, and whose loss it is if something goes wrong at sea. Used loosely, it is the source of the argument that starts the day the shipment is damaged.

Frequently asked questions

What is the full form of Incoterms?

Incoterms stands for International Commercial Terms, a set of standard trade rules published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020.

What is the difference between FOB and CIF?

Under both, risk passes once the goods are on board the vessel. The difference is cost: with FOB the buyer arranges and pays the main freight and insurance; with CIF the seller pays the freight and buys minimum insurance to the destination port and builds it into the price.

What does EXW mean?

Ex Works: the seller only makes the goods available at its own premises, and the buyer arranges and pays for everything after that, including export clearance. It is the minimum obligation for the seller.

What is the difference between DAP and DDP?

Both deliver the goods to a named place in the buyer's country. Under DAP the buyer clears import and pays the duty; under DDP the seller pays the import duty and taxes as well. DDP is the only rule where the seller bears import duty.

Which Incoterm should I use for container shipments?

Use FCA, CPT or CIP for containers and multimodal transport. FOB, CFR and CIF are meant for cargo loaded across a ship's rail, and using them for containers leaves a gap because the container is handed over at the terminal before it is loaded.

How many Incoterms are there in 2020?

Eleven: seven that work for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four for sea and inland waterway only (FAS, FOB, CFR, CIF).

Note: This article is a general explainer of Incoterms 2020. It is not legal advice, and it is a summary, not a substitute for the official ICC Incoterms 2020 text. Always state the exact named place and the version in your contract, and confirm the details with your freight forwarder and banker.