Common International Trade Terms (Incoterms)

Understanding these trade terms helps avoid:

• Unexpected costs
• Customs clearance issues
• Liability disputes
• Loss of goods without compensation

1. What are Incoterms?

Incoterms are standardized international trade rules that specify:

• Who is responsible for transportation
• Who bears the cost
• When the risk transfers
• Who handles customs clearance

⚠️ Note: Incoterms do not cover payment methods or ownership transfer. They focus solely on logistics and responsibility allocation.

2. Four Most Common Trade Terms

EXW (Ex Works)

Seller Responsibility: Minimal

• Seller provides goods at the factory
• Buyer handles pickup, export customs, international shipping, and final delivery

✔ Suitable for buyers with an experienced logistics team

⚠️ Risk: Buyer handles export procedures

FOB (Free On Board)

Seller Responsibility: Deliver goods to port, export customs, and load onto the ship

Buyer Responsibility: Pay sea freight, insurance, and handle customs and delivery at destination port

📍 Risk transfers when goods are loaded onto the ship

✔ Balanced cost and control; suitable for most importers

CIF (Cost, Insurance & Freight)

• Seller pays sea freight, basic insurance, and transport to destination port
• Buyer handles customs clearance, duties, and final delivery

⚠️ Note: Risk transfers at the port of origin

✔ Suitable for buyers unfamiliar with international logistics

DDP (Delivered Duty Paid)

• Seller handles transportation, customs, duties, and delivery
• Buyer only receives the goods

✔ Ideal for e-commerce sellers or first-time importers

3. Incoterms 2020 Overview

🚚 Terms for all transportation modes: EXW / FCA / CPT / CIP / DAP / DPU / DDP

🚢 Terms for sea transport only: FAS / FOB / CFR / CIF

➡ EXW: Buyer bears maximum responsibility

➡ DDP: Seller bears maximum responsibility

4. How to Choose the Right Trade Term

1. Logistics capability: Experienced team → EXW / FOB; Inexperienced → CIF / DDP
2. Cost control: Want to manage costs → FOB; Prefer hassle-free → DDP
3. Customs familiarity: Experienced → CIF / FOB; Not familiar → DDP

5. Common Misunderstandings

• Assuming CIF risk transfers at destination port
• Assuming DDP is always the cheapest
• Thinking EXW suits all buyers

6. Summary

In international trade, trade terms determine not only costs but also responsibility and risk.

Simple guide:

• Control → FOB
• Hassle-free → DDP
• Low cost → EXW
• Balanced → CIF

Choosing the right Incoterms helps businesses:

• Reduce costs
• Minimize risks
• Improve shipping efficiency

Passionship specializes in international logistics solutions, helping clients select the most suitable trade terms to ensure smooth global trade operations.