Incoterms for importers: EXW, FOB, DDP and the rest.

What Incoterms decide, and what they do not

Incoterms are three-letter trade rules published by the International Chamber of Commerce. The current edition is Incoterms 2020, which entered into force on 1 January 2020. Older editions are still usable if both sides agree to them, which is exactly why you write the year on the order.

Put one on a purchase order and it answers three questions:

• Who arranges and pays each leg, from loading at the seller's door to delivery at yours.
• Where the risk passes to you, meaning the point after which damage or loss is your problem, not the seller's.
• Who clears the goods for export at origin and for import at destination.

Four things they do not decide, and each one has cost somebody money:

• Title. Ownership passes the way your sales contract says it does. An Incoterm says nothing about it.
• Payment terms. A deposit, net 30 or a letter of credit sits in the contract, not in the three letters.
• Who is the U.S. importer of record. That is the party responsible to U.S. Customs and Border Protection for a correct entry, the bond and the duties. Agreeing to DDP does not by itself turn a foreign seller into one.
• The duty rate or whether the goods may enter. Classification, tariffs and agency requirements follow the product, not the term.

The 11 rules, grouped

Any mode of transport (7 rules)

These work for air, ocean containers, truck and rail, and for a door to door move that uses more than one of them.

• EXW, Ex Works. You handle almost everything from the seller's door: loading, export paperwork, freight, import and delivery.
• FCA, Free Carrier. The seller loads your goods and clears them for export, then hands them to the carrier you choose.
• CPT, Carriage Paid To. The seller pays the carriage to a named destination, but the risk passes to you when the goods reach the first carrier.
• CIP, Carriage and Insurance Paid To. CPT plus cargo insurance bought by the seller.
• DAP, Delivered at Place. The seller pays to deliver to your named place. You unload, clear import customs and pay the duties.
• DPU, Delivered at Place Unloaded. Like DAP, but the seller also unloads. You still handle import customs and duties.
• DDP, Delivered Duty Paid. The seller handles everything, including import customs and duties, all the way to your named place.

Sea and inland waterway only (4 rules)

These are built around a ship at a port, so they suit bulk, break bulk and anything loaded directly onto a vessel.

• FAS, Free Alongside Ship. The seller places the goods alongside the vessel at the origin port and clears them for export.
• FOB, Free On Board. The seller gets the goods loaded onto the ship. You pay the ocean freight and everything after it.
• CFR, Cost and Freight. The seller pays ocean freight to your port, but the risk passes to you once the goods are on board.
• CIF, Cost, Insurance and Freight. Like CFR, plus the seller buys basic cargo insurance.

Side by side: who pays what

Summary of the rules, not the text of them. The wording in your sales contract controls, and "none required" means no rule obliges anyone to insure, not that insurance is a bad idea.

The Incoterms tab in our shipper tools walks the same shipment through nine legs, from loading at the seller to delivery at your door, and marks the leg where the risk moves.

Insurance: what CIF and CIP actually buy

Only two rules make anyone buy cargo insurance, and they do not buy the same thing.

• CIF obliges the seller to hold at least Institute Cargo Clauses (C), a narrow named-perils cover. It pays for a listed event such as the vessel sinking or a fire. Everyday water damage or pilferage usually falls outside it.
• CIP obliges the seller to hold at least Institute Cargo Clauses (A), the broad all-risks style cover, subject to its own exclusions.

Under the other nine rules nobody has to insure anything. The party carrying the risk on a given leg is the party exposed on that leg. Carrier liability is not a substitute: it is capped by the transport contract and by international conventions, and the cap is normally far below what your goods are worth.

Three mistakes that cost importers money

1. FOB on a containerized shipment

FOB moves the risk once the goods are on board the ship. A container does not work that way: you hand it over at a terminal or a container yard, and it can sit there for days before it is loaded. For that gap the paperwork says the seller still carries the risk, while nobody from the seller is anywhere near it. FCA at the named terminal puts the handover where the cargo really changes hands.

2. EXW from an overseas supplier

EXW leaves export clearance in the seller's country to you, the buyer. In practice you have no filer there, no local registration and no standing with that customs authority. Many suppliers file anyway to get the goods moving, which leaves an export declaration made in your name by someone you cannot see. FCA fixes it by putting export clearance back on the seller, who is the one who can do it.

3. DDP without checking who is the importer of record

DDP sounds simple because one number covers everything. It also means someone must act as the U.S. importer of record, hold a customs bond and file an accurate entry. If your seller is not set up for that, the shipment stops at the border, or your own details end up on an entry you never reviewed. You also lose sight of the duty line, so a tariff change arrives buried inside a product price. If you are new to entries, read our guide to ISF filing before you agree to DDP.

How to choose as a U.S. importer

1. Take control at origin unless you have a reason not to. FCA for containers and air, FOB for cargo loaded straight onto a vessel. You pick the carrier, you see the rate and you see every charge after the handover.
2. If you want the seller to arrange the main freight, use CPT or CIP for any mode, CFR or CIF for sea. Expect the seller's margin to sit inside that freight number, and expect to pay destination charges you did not choose.
3. Keep import clearance on your side unless you have confirmed in writing that the seller can be the importer of record.
4. Name the exact place. "FCA China" means nothing. A city, a terminal or a street address means something.
5. Decide the insurance in the same breath. If the term does not oblige anyone to insure, and you are carrying the risk, arrange cover yourself.

When you compare two supplier offers written on different terms, you are not comparing like for like until you add the legs each one leaves out. Our guide to a freight quote, line by line shows which charges land where.

What to write on a purchase order

Write the rule, the named place in full, and the edition year. Three examples:

• FCA Ningbo, China, [seller's warehouse address], Incoterms 2020
• FOB Ningbo, China, Incoterms 2020
• DAP [your delivery address, city, state, ZIP], Incoterms 2020

Then settle these in the same document, because the three letters will not cover them:

• Who buys cargo insurance and at what level of cover.
• Who is the importer of record and whose bond is used.
• Which documents the seller sends, and how many days before the cargo ready date.
• When ownership passes and what the payment terms are.

Ask the supplier to repeat the same wording on the proforma invoice and the commercial invoice. When the term on the invoice matches the term on the order, the customs entry and the freight bill line up, and nobody spends a week arguing over a charge that was decided months ago.