In international trade, one of the most common challenges is determining who is responsible for what during shipping. Who pays for transport? Who bears the risk if goods are damaged? This is where Incoterms (International Commercial Terms) come in.
Published by the International Chamber of Commerce (ICC), Incoterms are globally recognized rules that define the obligations of buyers and sellers in cross-border trade. The latest version, Incoterms 2020, came into effect on January 1, 2020, updating key responsibilities to reflect today’s global supply chain realities.
By using the right Incoterm, businesses can avoid disputes, control costs, and ensure smoother customs clearance.
What Are Incoterms?
Incoterms (International Commercial Terms) are standardized trade rules that clarify:
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Who pays for transport, duties, and insurance
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When the risk of loss or damage transfers
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Which party arranges customs clearance and paperwork
Incoterms 2020 Rules Overview
Incoterms 2020 are divided into two categories: those that can be used for any mode of transport and those that apply exclusively to sea and inland waterway shipments.
A. Incoterms 2020 for Any Mode of Transport (7 Rules)
| Incoterm | Meaning | Responsibility |
|---|---|---|
| EXW (Ex Works) | Goods available at seller’s premises. | Buyer handles all transport, risk, and customs. |
| FCA (Free Carrier) | Seller delivers goods to buyer’s carrier. | Seller clears export; buyer takes over at carrier. |
| CPT (Carriage Paid To) | Seller pays transport to destination. | Risk transfers once goods are handed to the carrier. |
| CIP (Carriage & Insurance Paid To) | Same as CPT, but with insurance. | Seller pays transport + insurance; risk transfers at carrier. |
| DAP (Delivered at Place) | Delivered to buyer’s destination (not unloaded). | Seller pays transport; buyer unloads. |
| DPU (Delivered at Place Unloaded) | Delivered and unloaded at buyer’s destination. | Seller pays all costs, including unloading. |
| DDP (Delivered Duty Paid) | Delivered with duties/taxes paid. | Seller handles everything, including customs and VAT. |
B. Incoterms 2020 for Sea & Inland Waterway Transport (4 Rules)
These apply exclusively to ocean and inland waterway transport:
| Incoterm | Meaning | Responsibility |
|---|---|---|
| FAS (Free Alongside Ship) | Goods placed alongside vessel at port of loading. | Seller delivers to quay; buyer loads, ships, and clears customs. |
| FOB (Free on Board) | Goods loaded onto vessel at port of loading. | Seller loads goods; buyer pays freight, insurance, and assumes risk. |
| CFR (Cost & Freight) | Seller pays freight to destination port. | Risk transfers once goods are loaded; buyer arranges insurance. |
| CIF (Cost, Insurance & Freight) | Seller pays freight + insurance to destination port. | Risk transfers once goods are loaded; insurance provided by seller. |
Practical Use Cases of Incoterms
Choosing the right Incoterm depends on the type of goods, shipping routes, and who should bear the responsibility. Below are practical scenarios showing how different Incoterms work in real life:
1. DDP (Delivered Duty Paid) – Tech Imports Made Easy
A telecom company importing servers into Africa prefers DDP because the seller covers everything: shipping, customs duties, and VAT. This ensures the buyer receives the goods ready for installation without hidden costs or delays
2. FOB (Free on Board) – Buyer Control for Bulk Shipments
A distributor buying fiber optic cables from Asia uses FOB. The seller ensures the goods are loaded onto the buyer’s ship, but the buyer takes over freight, insurance, and customs clearance. This allows the buyer to negotiate better shipping rates and maintain control.
3. CIP (Carriage & Insurance Paid To) – High-Value Medical Devices
A European company shipping MRI machines under CIP ensures the goods are insured during transit. Even if damage occurs, the buyer is protected, making it the preferred option for sensitive and expensive equipment.
4. EXW (Ex Works) – Small Buyers with Local Logistics
A local retailer purchasing IT accessories chooses EXW, picking up goods directly from the seller’s warehouse. While the buyer takes on full responsibility for shipping and customs, it allows them to bundle shipments with other cargo and cut costs.
Advantages and Disadvantages of Key Incoterms
| Incoterm | Advantages | Disadvantages |
|---|---|---|
| EXW | Minimal seller responsibility; good for exporters. | Buyer bears full risk and logistics. |
| FOB | Balanced cost-sharing, common in sea trade. | Buyer must manage freight & insurance. |
| CIF | Seller covers shipping + insurance; safer for buyers. | Buyer may face higher costs if seller’s insurance is expensive. |
| DDP | Hassle-free for buyers; seller handles duties & taxes. | Heavy cost/risk burden for sellers. |
| CIP | Provides comprehensive insurance coverage. | More costly for sellers compared to CPT. |
Why Choosing the Right Incoterm Matters?
The Incoterm you select directly impacts your costs, risks, and delivery timelines. Using the correct term brings several advantages:
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Clear division of responsibilities
Each party knows exactly who handles shipping, insurance, and customs — avoiding disputes. -
Better cost management
Transparent responsibilities help you plan ahead and prevent surprise expenses like unexpected duties or fees. -
Reduced risk exposure
Clearly defined transfer points specify when responsibility shifts from seller to buyer, minimizing liability. -
Smoother customs clearance
Properly assigned paperwork and compliance tasks ensure faster border processing and fewer delays.
Final Thoughts
Success in international trade depends on using the right Incoterm.
The correct term saves time, prevents disputes, and ensures goods move across borders without delays.
At IOR Africa, we specialize in simplifying cross-border trade for technology, telecom, and high-value goods. From customs compliance to duty management and door-to-door delivery, we make sure your shipments arrive safely and legally.
Talk to our compliance experts today
Frequently Asked Questions
What Are the Most Used Incoterms?
The most widely used Incoterms in international trade are:
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FOB (Free on Board) – Common in sea freight, where the seller loads goods onto the vessel and the buyer manages shipping from there.
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CIF (Cost, Insurance & Freight) – Buyer-friendly as the seller covers shipping and minimum insurance to the destination port.
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DDP (Delivered Duty Paid) – Popular with importers since the seller handles all costs, including customs duties and taxes.
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EXW (Ex Works) – Favored by sellers as it places almost all responsibility and risk on the buyer.
Can I still use Incoterms 2010 after January 1, 2020?
Yes, Incoterms 2010 can still be used if both parties agree and the contract clearly states the version (e.g., “FOB Incoterms 2010”). However, the ICC recommends Incoterms® 2020, as it reflects modern trade practices, updated insurance requirements, and replaces DAT with DPU for better clarity.
What Incoterms Do Not Cover?
Incoterms clearly define responsibilities for delivery, risk, and costs — but they do not cover every aspect of a sales contract. Specifically, they do not regulate:
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Transfer of ownership or title of goods
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Payment terms (how and when the buyer pays the seller)
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Consequences of breach of contract (delays, non-delivery, or penalties)
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Product quality requirements or warranties
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Local laws, compliance, or safety regulations in the buyer’s or seller’s country
For these areas, businesses must rely on their sales contracts and local legal frameworks, not Incoterms.