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com
Introduction
If you ship goods domestically, you may wonder why you need to know the international
shipping terms known as Incoterms 2020 rules as well. FOB is FOB, isn’t it?

Well, actually, no—it’s not!

While the vast majority of companies in the United States use the shipping terms identified under
the U.S. Uniform Commercial Code (UCC) when shipping domestically, these shipping terms
aren’t appropriate to use when exporting.

Domestic shippers often use a variation of the term FOB, for instance, which implies one set of
responsibilities for the shipper under the UCC but something entirely different under the
Incoterms 2020 rules, which is what most of the rest of the world relies upon. Using FOB for
your international shipment might cost you a lot more money—and put you at much greater
risk—than you ever expected.

In this whitepaper, we’ll look in-depth at Incoterms 2020: what they are and how they originated,
how to apply them, how exporters and importers benefit from them, and why they matter.

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Table of Contents
What Are Incoterms 2020 Rules?

The Origin of Incoterms

Incoterms 2020 Rules

Incoterm 2020 Definitions

Incoterms for Any Mode of Transport

Ex Works (EXW)
Free Carrier (FCA)
Carriage Paid To (CPT)
Carriage and Insurance Paid To (CIP)
Delivered at Place (DAP)
Delivered at Place Unloaded (DPU)
Delivered Duty Paid (DDP)

Incoterms for Sea and Inland Waterway Transport

Free Alongside Ship (FAS)
Free on Board (FOB)
Cost and Freight (CFR)
Cost, Insurance, and Freight (CIF)

Indicating Incoterms 2020 Rule Usage

The Importance of Incoterms 2020 Rules

Resources

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What Are Incoterms 2020 Rules?
Incoterms 2020 rules are the official terms published by the International Chamber of Commerce
(ICC). They are a voluntary, authoritative, globally-accepted, and adhered-to text for determining
the responsibilities of buyers and sellers for the delivery of goods under sales contracts for
international trade. Incoterms closely correspond to the U.N. Convention on Contracts for the
International Sales of Goods. Incoterms are known and implemented by all major trading
nations.

Incoterms are only part of the whole export contract. They don’t say anything about the price to
be paid or the method of payment that is used in the transaction. Furthermore, Incoterms 2020
rules don’t deal with the transfer of ownership of the goods, breach of contract, or product
liability; all of these issues need to be considered in the contract of sale. Also, Incoterms 2020
rules can’t override any mandatory laws.

The Origin of Incoterms

Differences in trading practices and legal interpretations between traders of different countries
necessitated a need for a common set of rules. These rules needed to be easy to understand by all
of the participants in order to prevent misunderstandings, disputes and litigation.

Incoterms were first created in 1936 and were designated Incoterms 1936. Since then, Incoterms
have evolved into a codified worldwide contractual standard. They are periodically updated as
events in international trade occur and require attention. Amendments and additions were made
in 1953, 1967, 1976, 1980, 2000, 2010 and 2020.

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Incoterms 2020 Rules
The most current revision of the terms, Incoterms 2020, went into effect on January 1, 2020, and
consists of 11 Incoterms.

The changes from the Incoterms 2010 rules include the following:

● The most obvious change is renaming the term Delivered at Terminal (DAT) to Delivered
at Place Unloaded (DPU).

● The most significant change relates to the term Free Carrier (FCA). Under this term, the
buyer can now instruct its carrier to issue a bill of lading with an on-board notation to the
seller so that they may satisfy the terms of a letter of credit.

● Under the revised term CIP, the seller is now responsible for purchasing a higher level of
insurance coverage—at least 110% of the value of the goods as detailed in Clause A of
the Institute Cargo Clauses. The insurance requirement hasn’t changed for CIF.

● Incoterms 2020 rules recognize sellers who may use their own transport to deliver the
goods. The terms now expressly state that sellers can make a contract for carriage or
simply arrange for the necessary transportation.

● Incoterms 2020 rules now specifically call out the import and export security
requirements and identify whether the buyer or seller is responsible for meeting those
requirements.

While you can still use previous versions of Incoterms rules, like Incoterms 2010, it’s not
preferred. In any case, you must clearly state which version of Incoterms you’re using and make
sure the rule is correctly noted throughout your export documents.

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Incoterm 2020 Definitions
Because each of the different Incoterms identify the responsibilities of the seller and the buyer in
the transaction at different points in the shipping journey, certain Incoterms work better for
certain modes of transportation.

Each of the 11 Incoterms is summarized below based on the mode of transport. For a more
complete list of the responsibilities for each of the terms, you should get a copy of ICC’s
Incoterms® 2020 book.

Download a free copy of the Incoterms 2020 Chart of Responsibilities and Transfer of Risk.

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Incoterms for Any Mode of Transport
The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation,
and those that should only be used for transport by “sea and inland waterway.” That’s because
companies were too often choosing Incoterms where risk and responsibilities were transferred at
a point that made no sense in a non-ocean journey.

Under Incoterms 2020, the following terms can be used for any mode of transport: Ex Works,
Free Carrier, Carriage Paid To, Carriage Insurance Paid To, Delivered at Place, Delivered at
Place Unloaded, and Delivered Duty Paid.

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Ex Works (EXW)
Under the Incoterms 2020 rules, EXW means the seller has fulfilled its obligation when the
goods are made available to the buyer, usually at the seller’s location. The seller should package
the goods appropriately or as specified in the agreement between both parties. The buyer is
responsible for loading the goods on their transport and everything else necessary to get the
goods to the final destination.

The risk or liability for the goods transfers from the seller to the buyer when the goods are made
available at the named place. That means that if damage occurs while the goods are being loaded
on the buyer’s transport, the buyer is at risk even if the seller is assisting with the loading.
Precautions should be taken.

Ex Works and Routed Export Transactions

Although the U.S. Foreign Trade Regulations (FTR) don’t reference Incoterms and the Incoterms
2020 rules don’t reference any countries’ specific trade regulations, Ex Works is the trade term
that is often used during a routed export transaction.

According to the FTR, a routed export transaction occurs when the foreign buyer of the goods
contracts with a freight forwarder or other agent to export the merchandise from the United
States. That arrangement works with the Incoterm EXW, although it could work with other
terms, namely FCA (Free Carrier).

Sellers in the United States often choose EXW because they think it minimizes their
responsibilities and risk. However, under the FTR and the Export Administration Regulations
(EAR), sellers do not escape their responsibilities for export compliance and the requirement that
they provide required data elements to the buyer’s agent (usually a freight forwarder) that has

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been authorized to submit the electronic export information through AESDirect. (See the article,
Why I Hate Routed Export Transactions.)

Using Ex Works
Although EXW is frequently used for exports from the United States, it is almost universally
reviled by those who make a living at training others about the use of Incoterms. In most cases,
FCA would be a better alternative for these folks, although one of the four C-terms— Cost &
Freight (CFR), Cost Insurance & Freight (CIF), Carriage Paid To (CPT), and Carriage Insurance
Paid To (CIP)—may be even better yet if the seller wants to handle international transportation.

For sellers, using EXW means they give up control of the goods almost immediately at the risk
that export controls aren’t being followed or that the goods never actually leave the country.

Some companies insist they use EXW because they want to be able to recognize the revenue for
the sale immediately. However, the ICC’s Incoterms 2020 book clearly states that the recognition
of revenue is independent of any Incoterm rule:

P​ erhaps most importantly, it must be stressed that the Incoterms rules do NOT deal
with the transfer of property/title/ownership of the goods sold. These are matters for
which the parties need to make specific provisions in the contract of sale.

For the buyer, using EXW means they not only have to deal with a foreign country’s export
requirements, they have to arrange to have the goods loaded on a carriage from the seller’s
location or other named place.

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Free Carrier (FCA)
Under the Incoterms 2020 rules, FCA means the seller loads the goods on the buyer’s transport
at the seller’s premises, or the seller delivers them to another named place.

Most often, the buyer hires a transport that picks up the goods at the seller’s warehouse. The
seller must load the goods on the buyer’s transport, at which point the risk for the goods transfers
to the buyer.

Alternatively, the seller and buyer may agree that the seller transport the goods to a place other
than the seller’s warehouse, like the freight forwarder’s warehouse or the carrier’s terminal. The
risk or liability for the goods transfers from the seller to the buyer when the goods are made
available at the named place. In this case, the buyer is responsible for unloading the goods from
the seller’s transport.

In both cases, the seller should package the goods appropriately or as specified in the agreement
between both parties. In addition, the seller is responsible for export clearance.

Free Carrier and Routed Export Transactions

Most Incoterms experts argue that FCA is the best Incoterm to use when the buyer is arranging
the main carriage of the goods, which means the international transportation. It is certainly the
most commonly used Incoterm.

Sellers often choose this term because they think it minimizes the amount of effort on their part.
Some buyers love to use this term, because everyone in the transportation process is working for
them and they have more control.

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FCA is certainly a better option than Ex Works, which many U.S. companies like to use, but it
puts responsibility for export clearance on the seller. That’s not necessarily a bad thing even
though it can put the use of FCA in conflict with the U.S. Foreign Trade Regulations (FTR).

The FTR calls exports where the buyer arranges the international transportation a routed export
transaction and requires the buyer to give written authorization for the Electronic Export
Information (EEI) filing through AESDirect to a U.S. party.

To comply with the obligations assigned under both Incoterm 2020 FCA and the Foreign Trade
Regulations, the buyer should provide written authorization to the seller to submit the EEI. For
the seller, this gives them access to transportation information they may not otherwise be privy to
if they weren’t doing the filing.

Free Carrier and Bills of Lading

The most significant change in Incoterms 2020 rules relates to FCA. Under this term, the buyer
can now instruct its carrier to issue a bill of lading with an on-board notation to the seller so that
the seller may satisfy the terms of a letter of credit.

Under an F-group rule, the “at a named place” is on the seller’s side, but the buyer hires the main
carrier and freight forwarder. The seller does not control shipments under the F term, so the
freight forwarder and carrier have no obligation to the seller.

This has caused problems in the past when selling under a letter of credit, because international
carriers would have no reason to provide the bill of lading to the seller who would typically need
it to get paid under a letter of credit.

The FCA Incoterms 2020 rule provides a potential solution—the buyer and seller may agree in
the sales contract that the buyer must instruct the carrier to provide the seller with an on-board
transportation document.

While the buyer may instruct the carrier to provide the required bill of lading to the seller, there
is no guarantee the carrier will comply. Even if they do, they will not issue the document before
the goods are actually loaded, which may cause delays for the seller to get paid under the letter
of credit.

Using Free Carrier

As mentioned above, FCA is generally considered the best F-group Incoterm to use. However,
those same experts will usually say FCA has some definite downside for exporters:

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 ● There are some challenges of utilizing a letter of credit under FCA as described above.

● The seller may not be familiar with the freight forwarder being used.

● There is potential for diversion of the goods before they leave the United States or to
another county in violation of the Export Administration Regulations (EAR) after they
leave the U.S.

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Carriage Paid To (CPT)
Under the Incoterms 2020 rules, CPT means the seller is responsible for clearing the goods for
export and delivering them to the first carrier or another person stipulated by the seller at a
named place of shipment, at which point risk transfers to the buyer. The seller is responsible for
the transportation costs associated with delivering goods to the named place of destination,
which is always on the buyer’s side.

Since this is a standard export transaction, the seller or its agent is responsible for submitting the
Electronic Export Information (EEI) through AESDirect on the ACE portal if such a filing is
required.

Using Carriage Paid To

With all of the C-group terms, including CPT, the seller is responsible for contracting
international transportation. The named place where the transfer of responsibility occurs is
always on the buyer’s side. Since liability for the goods transfers once the seller delivers the
goods to the carrier, the buyer has responsibility for goods they don’t control.

For these reasons, exporters often like to use C-group terms while buyers may not.

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Carriage and Insurance Paid To (CIP)
Under the Incoterms 2020 rules, CIP means the seller is responsible for delivering goods to the
first carrier or another person stipulated by the seller at a named place of shipment, at which
point risk transfers to the buyer. The seller is responsible for the transportation costs and
insurance associated with delivering goods at least to the named place of destination, which is
always on the buyer’s side.

CIP is one of only two Incoterms 2020 rules that identify which of the parties must purchase
insurance (the other being Cost, Insurance and Freight).

With the release of the Incoterms 2020 rules, the amount of insurance required under CIP has
increased to at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo
Clauses rather than the lower level provided under Clause C, which is what was required for CIP
in the 2010 rules and still is required for CIF. This is because CIP is most commonly used for
manufactured goods with higher value than commodities more typically shipped under CIF.

Since this is a standard export transaction, the seller or its agent is responsible for submitting the
Electronic Export Information (EEI) through AESDirect on the ACE portal if required.

Using Carriage and Insurance Paid To

With all of the C-group terms, including CPT, the seller is responsible for contracting
international transportation. CIP adds the additional responsibilities of purchasing insurance. The
named place where the transfer of responsibility occurs is always on the buyer’s side.

Experienced exporters often like to use CIP because everyone in the international transport
works for them yet risk transfers to the seller as soon as the goods are provided to the carrier.

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Delivered at Place (DAP)
Under the Incoterms 2020 rules, DAP means the seller is responsible for all charges and risks in
transit until the goods reach their named destination on the buyer’s side, at which point the risk
transfers to the buyer. Cost and risk transfers from seller to buyer simultaneously at the point the
goods are available for unloading; the buyer is responsible for all costs and risks associated with
unloading the goods and clearing customs to import the goods into the named country of
destination.

Since this is a standard export transaction, the seller or its agent is responsible for submitting the
Electronic Export Information (EEI) through AESDirect on the ACE portal if such a filing is
required.

Using Delivered At Place

When using DAP, it’s important the buyer and seller identify the destination precisely, because
both risk and cost transfer at this point. Under this Incoterm, the seller is not required to unload
goods unless specified. However, if the seller’s contract of carriage includes unloading the goods
at the place of delivery, they may not recover that cost from the buyer unless agreed upon by the
buyer.

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Delivered at Place Unloaded (DPU)
Previously named Delivered at Terminal (DAT) under the Incoterms 2010 rules, this Incoterm
has been renamed Delivered at Place Unloaded because the buyer and/or seller may want the
delivery of goods to occur somewhere other than a terminal, such as a construction site. Though
it is the most obvious change to from the 2010 to the 2020 rules, it is not the most significant.

Under the Incoterms 2020 rules, DPU means the seller is responsible for clearing the goods for
export and bears all risks and costs associated with delivering the goods and unloading them at
the named port or place of destination. The buyer is responsible for all costs and risks from this
point forward, including clearing the goods for import at the named country of destination.

Since this is a standard export transaction, the seller or its agent is responsible for submitting the
Electronic Export Information (EEI) through AESDirect on the ACE portal if required.

Using Delivered At Place Unloaded

This term is often used for consolidated containers with multiple consignees, and it is the only
term that tasks the seller with unloading the goods. This is because if a delivery has multiple
consignees, the seller can break down the shipment to make the goods available for them. Also,
if items require additional or special handling the seller agrees to be responsible for, they should
select this term.

With DPU, sellers should be sure they have engaged someone at the destination to handle the
goods to unload them. If they don’t want to be responsible for this step, they should use the DAP
instead.

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Delivered Duty Paid (DDP)
Under the Incoterms 2020 rules, DDP puts the maximum risk and responsibility on the seller. It
requires the seller to take responsibility for clearing the goods for export including the EEI filing,
bear all risks and costs associated with delivering the goods, unload goods at the terminal at the
named port or place of destination, clear the goods for import clearance and payment, and bring
the goods to the place of destination. Risk transfers to the buyer at the destination, so it should be
stated clearly and precisely.

Using Delivered Duty Paid

DDP is an extremely risky term for the seller. With DDP, the seller is obliged to clear the goods
for both export and import, to pay all import duties as well as required VAT and other taxes, and
to execute all customs formalities.

Sellers may not understand the complex and bureaucratic import clearance procedures that exist
in some countries. They may not know how to hire a reputable and competent customs broker in
the destination country. They may not know the current import duty rates for their goods or be
aware if those duty rates change. In addition, fulfilling the obligations under DDP may make the
seller’s company register in the country of import and may require them to pay corporate income
tax.

DDP also has questionable value to importers, since the likelihood of timely delivery of goods
depends on the seller successfully navigating the intricacies of the destination country.
Exceptions that might make DDP an acceptable Incoterms 2020 rule to use include shipments of
replacement parts, low-value shipments, free samples, and product literature or other marketing
materials.

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Incoterms for Sea and
Inland Waterway Transport
The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation
and those that should only be used for transport by “sea and inland waterway.” That’s because
companies were too often choosing Incoterms where risk and responsibilities were transferred at
a point that made no sense in a non-ocean journey.

Under Incoterms 2020, the following terms should only be used for sea and inland waterway
transport: Free Alongside Ship, Free On Board, Cost and Freight, and Cost, Insurance and
Freight.

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Free Alongside Ship (FAS)
Under the Incoterms 2020 rules, FAS means the seller has fulfilled its obligation when the goods
are made available alongside the vessel (for example, a quay or barge) nominated by the buyer at
the named port of shipment. The buyer is responsible for loading the goods on their transport and
everything else necessary to get the goods to the final destination.

The risk or liability for the goods transfers from the seller to the buyer when the goods are
alongside the ship, and the buyer bears costs from that point forward.

Using Free Alongside Ship

FAS is normally used only in a few instances with bulk cargo, such as oil or grain. Except for a
few undeveloped or small ports, rarely will you have access to drop things off right at the side of
a ship.

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Free on Board (FOB)
Under the Incoterms 2020 rules, FOB means the seller has fulfilled its obligation when the goods
are loaded on the vessel nominated by the buyer at the named port of shipment. With FOB, the
seller is responsible for loading the goods on the transport, while the buyer is responsible for
everything else necessary to get the goods to the final destination.

The risk or liability for the goods transfers from the seller to the buyer when the goods are on
board the vessel, and the buyer bears costs from that point forward.

Using Free On Board

Because the seller is responsible for the goods until they are loaded on the vessel, they need to
ensure the goods arrive at the vessel. Since most goods are now delivered to container yards
rather than right to a particular vessel, FOB is normally used only in a few instances with
containers at smaller ports.

If FOB is the agreed upon term, both buyer and seller must agree upon exactly what “loaded on
board” means in the sales contract, because it can vary for different types of vessels and
commodities.

Incoterms vs. Uniform Commercial Code

Companies in the United States that are new to exporting and importing often get tripped up with
the use of Incoterms for their international transactions after years of using traditional domestic

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terms of sale that usually include some variation of FOB, such as FOB Origin or FOB
destination.

These terms establish the contractual rights and responsibilities between a buyer and seller for
delivery, risk of loss, title, and payment of freight charges. The definition of these terms, as well
as a few others, derive from a combination of (1) the provisions of the Uniform Commercial
Code, Article 2 (the UCC), (2) the National Motor Freight Classification (NMFC), and (3)
industry usage.

When it comes to international trade, however, companies using best practices will switch to
Incoterms 2020 rules in quotations, purchase orders, contracts, commercial invoices, and other
commercial documentation when dividing the responsibilities for risk transfer, costs and
responsibility for carrier selection between the buyer and the seller.

In the case of FOB, it’s common for shippers to use this trade term for their domestic shipments.
It’s not common, and frequently not appropriate, to use FOB for international shipments.

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Cost and Freight (CFR)
Under the Incoterms 2020 rules, CFR means the seller has fulfilled its obligation when the goods
are delivered and loaded on the vessel they’ve nominated at the named port of shipment.

The risk or liability for the goods transfers from the seller to the buyer as soon as the goods are
loaded on board the vessel before carriage takes place, and the buyer bears costs from that point
forward.

Using Cost and Freight

With all of the C-group terms, including CFR, the seller is responsible for contracting
international transportation. The named place where the transfer of responsibility occurs is
always on the buyer’s side.

Although buyers and less experienced exporters may prefer an F-group term, C-group terms are
preferable to more experienced exporters, because they allow you to deal directly with the
carrier; documentation, bills of lading, and all the information needed for letters of credit
originate from a single place. Additionally, using C-group terms allows you more negotiation
power, especially if you book a lot of freight.

That being said, like all four of the Incoterms 2020 rules designed for sea and inland waterway
transport, CFR is best used in situations where sellers have direct access to the vessel for loading,
i.e. bulk cargo or non-containerized goods. For most exports, Carriage Paid To (CPT) might be a
better Incoterms choice.

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Cost, Insurance, and Freight (CIF)
Under the Incoterms 2020 rules, CIF means the seller is responsible for loading properly
packaged goods on board the vessel they’ve nominated, cost of carriage to the named port of
destination on the buyer’s side, and insurance to that point. CIF is one of only two Incoterms
2020 rules that identify which of the parties must purchase insurance.

Unlike the Incoterms 2020 change to the term Carriage and Insurance Paid To (CIP), which
increases the amount of insurance coverage required on the goods, CIF maintains that the
minimum level of coverage identified by Clause C of the Institute Cargo Clauses is enough.
That’s because CIF is generally used in shipments of lower-value goods than CIP.

In both cases—CIF and CIP—the insurance should cover, at a minimum, 110% of the value of
the goods as provided in the sales contract. The insurance should cover the goods at least to the
point of delivery.

The risk or liability for the goods transfers from the seller to the buyer as soon as the goods are
loaded upon the vessel before the international carriage takes place.

Using Cost, Insurance and Freight

With all of the C-group terms, including CIF, the seller is responsible for contracting
international transportation. The named place where the transfer of responsibility occurs is
always on the buyer’s side.

Although buyers and less experienced exporters may prefer an F-group term, C-group terms are
preferable to more experienced exporters. These terms allow you to deal directly with the carrier;

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documentation, bills of lading, and all the information needed for letters of credit originate from
a single place. Additionally, using C-group terms gives you more negotiation power, especially if
you book a lot of freight.

That being said, like all four of the Incoterms 2020 rules designed for sea and inland waterway
transport, CIF is best used in situations where sellers have direct access to the vessel for loading,
i.e., bulk cargo or non-containerized goods. For most exports, Carriage Paid To (CPT) might be a
better Incoterms choice.

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Indicating Incoterms 2020 Rule Usage
If parties want Incoterms 2020 rules to apply, the best way to make that clear in their sales
contracts and on their export paperwork is as follows:

[the chosen incoterms rule], [named port, place, or point] Incoterms 2020.

For example:

● CIF, Shanghai, Incoterms 2020, or

● DAP, No. 123, ABC Street, Importland, Incoterms 2020

Using Incoterms for Domestic Sales

Because they use Incoterms for international sales, some companies have started using Incoterms
for their domestic sales as well instead of using the Uniform Commercial Code (UCC) terms.
This is perfectly acceptable as long as their contracts identify what set of terms they’re using.

The Importance of Incoterms 2020 Rules

By correctly using Incoterms, you’ll be able to partner more harmoniously, transport and deliver
your goods more easily, and get paid more quickly. And who doesn’t want that?

Each Incoterms 2020 rule provides exporters and importers clear, succinct rules that help them
understand their responsibilities, clarify any gray areas in contracts, and save a lot of headaches
when used correctly. Incoterms reduce the risk of legal complications by giving buyers and
sellers a single home base from which to reference trade practices.

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Resources
With the changes in Incoterms 2020 rules, you may be looking for more resources. We can help!

● Get a copy of ICC’s Incoterms® 2020 Rules book.

● For a more detailed understanding of which term or terms your company should be using
in your international transactions, register for an Incoterms® 2020 Rules seminar or
webinar offered by International Business Training.

Shipping Solutions® export documentation and compliance software helps ensure you have
included all the required information, including your Incoterms 2020 rule of choice and the
proper Incoterms citation on your export paperwork.

Let us show you how easy it is to use. Register today for a free online demo of the software.
There’s absolutely no obligation.

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