Incoterms 2020 — Complete Guide to All 11 Trade Rules
Understand how EXW, FOB, CIF, DDP, and all 11 Incoterms rules affect your shipping costs, insurance, customs value, and total landed cost.
What Are Incoterms?
The current version, Incoterms® 2020, came into effect on January 1, 2020, replacing the 2010 edition. These rules are not law — they are contractual terms incorporated into sales contracts by reference. However, customs authorities worldwide use the declared Incoterm to determine the customs value of imported goods, making them critical for accurate duty calculation.
Choosing the wrong Incoterm can mean paying double insurance, unexpectedly covering port fees, or declaring the wrong customs value — resulting in either overpaying duty or triggering a customs valuation dispute.
All 11 Incoterms 2020 Rules
Incoterms 2020 are split into two groups: 7 rules for any mode of transport (including multimodal), and 4 rules exclusively for sea/inland waterway transport.
Any Mode of Transport (7 Rules)
Seller makes goods available at their premises. Buyer bears all costs and risks from that point — loading, export clearance, shipping, import clearance, duties. Minimum seller obligation.
Seller delivers goods to a carrier or named place. Seller handles export clearance. Risk transfers when goods are handed to the carrier. Most versatile rule.
Seller pays freight to named destination. Risk transfers to buyer when goods are handed to first carrier. Buyer is responsible for import clearance and duties.
Same as CPT, plus seller must procure insurance (CIP 2020 requires maximum coverage per ICC Clause A, unlike 2010). Risk still transfers at first carrier.
Seller delivers goods to named destination, ready for unloading. Seller bears all costs and risks until arrival. Buyer pays import duties and unloading.
Seller delivers and unloads goods at named destination. The only Incoterm where the seller must unload. Replaced DAT from Incoterms 2010.
Maximum seller obligation. Seller pays everything: freight, insurance, import customs clearance, duties, and taxes. Buyer only receives goods. Common in B2B ecommerce.
Sea & Inland Waterway Only (4 Rules)
Seller delivers goods alongside the vessel at the port of shipment. Risk transfers at the port. Buyer arranges loading, shipping, and import.
Seller delivers goods on board the vessel. Risk transfers when goods pass the ship's rail. Seller handles export clearance. Most common for sea freight.
Seller pays freight to destination port. Risk transfers when goods are loaded on board. Buyer handles insurance and import clearance.
Seller pays freight + insurance to port. CIF insurance is minimum coverage (ICC Clause C) — unlike CIP which requires maximum. CIF value = basis for customs valuation in most countries.
FOB vs CIF — The Most Important Comparison
FOB and CIF are the two most used Incoterms in global trade, and the choice directly impacts your customs value and total import duty calculation.
| Factor | FOB (Free on Board) | CIF (Cost, Insurance & Freight) |
|---|---|---|
| Freight Cost | Buyer pays | Seller pays |
| Insurance | Buyer arranges | Seller provides (minimum) |
| Risk Transfer | When loaded on vessel | When loaded on vessel |
| Customs Value | Lower (excludes freight/insurance) | Higher (includes freight + insurance) |
| Used for Duty Calc | 🇺🇸 US uses FOB | 🇪🇺🇬🇧🇦🇺 Most countries use CIF |
| Best For | Experienced importers with own freight contracts | Beginners or smaller shipments |
On a $50,000 shipment with $5,000 freight + $500 insurance, the CIF customs value is $55,500 — meaning you'd pay duty on $5,500 more than FOB. At a 10% duty rate, that's $550 extra duty in CIF-based countries.
How Incoterms Affect Customs Value
Your declared Incoterm directly determines your customs value — the amount on which import duty is calculated. This is one of the most consequential yet misunderstood aspects of international trade.
- CIF-based countries (most of the world): The EU, UK, Australia, Japan, India, and most African/Asian nations use CIF (Cost + Insurance + Freight) as the dutiable value. If you buy FOB, customs will add estimated freight and insurance to calculate the dutiable value.
- FOB-based countries (US, Canada): The United States and Canada use FOB value (transaction value at port of export). Freight and insurance to the US are not included in the dutiable value — a significant advantage for high-freight goods.
- DDP implications: Under DDP, the seller handles customs. But if the commercial invoice shows a DDP price (all-inclusive), customs may need to unbundle the value to determine the correct customs basis. Always keep the ex-works value separately documented.
- EXW pitfall: EXW value is typically the lowest, but customs authorities may add loading, inland transport, and freight costs to arrive at the proper CIF/FOB value for duty calculation.
How to Choose the Right Incoterm
Choosing the optimal Incoterm depends on your experience level, shipping volume, and risk tolerance:
First-Time Importers → CIF or DDP
Let the seller handle shipping and insurance (CIF) or even customs (DDP). You'll pay more but with fewer surprises. Good for learning the process.
Regular Importers → FOB or FCA
Once you have freight forwarder relationships and volume discounts, buying FOB gives you control over shipping costs and insurance quality. FCA is better for air/multimodal.
Large Volume / Own Logistics → EXW
Maximum control and typically lowest unit cost, but you handle everything including export clearance in the seller's country — which can be complex.
Selling to End Buyers → DAP or DDP
If you're selling internationally, offering DAP (buyer pays duties) or DDP (you pay everything) provides the best customer experience. DDP is standard for B2B ecommerce platforms.
6 Common Incoterms Mistakes That Cost Money
- Using FOB for air freight: FOB is sea-only. Use FCA for air, road, or multimodal transport. Using FOB for air creates legal ambiguity about risk transfer point.
- Confusing CIF with CIP insurance levels: Under Incoterms 2020, CIF requires only minimum coverage (ICC Clause C — ~60% of loss), while CIP requires maximum coverage (ICC Clause A — all risks). This change from 2010 catches many traders off guard.
- Not specifying the exact delivery point: "FOB Shanghai" is insufficient. Always specify: "FOB Shanghai Port, Yangshan Terminal." Ambiguous locations create disputes about who pays terminal handling charges.
- Assuming DDP means zero buyer costs: DDP covers duties and taxes but may not cover unloading, warehousing, or demurrage. Clarify these in the contract.
- Using EXW but expecting the seller to load: Under EXW, loading at the seller's premises is the buyer's responsibility. Most sellers will help, but if goods are damaged during loading, the buyer bears the risk.
- Ignoring Incoterm on customs declaration: Customs authorities use the declared Incoterm to determine dutiable value. Declaring CIF when your invoice is FOB (or vice versa) creates valuation mismatches that trigger audits.
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