What are Incoterms 2020 and why do they matter?
Incoterms 2020 is a set of eleven standard trade terms published by the International Chamber of Commerce that define where cost passes and where risk passes between seller and buyer. They are not a sales contract, they do not determine ownership, and they say nothing about payment terms. They answer one question precisely: how far does each party obligation extend.
The short answer: EXW puts almost everything on the buyer from the factory door, FOB ends the seller obligation once the cargo is on board the vessel, CIF adds freight plus minimum insurance to the port of destination, and DDP puts everything on the seller including duty and tax in your own country.
The concept that matters most: cost and risk do not always transfer at the same point. Under CIF the seller pays freight to the destination port, but risk passes to you the moment the goods are loaded on board in China. Damage in mid-ocean is therefore your loss even though the seller paid the freight bill.
What are the eleven terms and how are they grouped?
Incoterms 2020 splits into two families by mode of transport:
- Any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. These work for air, road, rail, sea and multimodal movements.
- Sea and inland waterway only: FAS, FOB, CFR and CIF. Do not use them for air freight or for containers handed over at a consolidation warehouse, because their delivery point is the quay or the ship rail.
The headline changes in the 2020 edition: DAT was replaced by DPU so that delivery with unloading can happen at any place rather than only at a terminal, the insurance level required under CIP was raised to comprehensive cover while CIF stayed at minimum cover, and FCA gained an option for an on-board bill of lading to support documentary credits.
Who bears what under each term?
| Term | Origin inland transport | Loading and export clearance | Main carriage | Insurance | Import clearance and duty | Delivery to final place |
|---|---|---|---|---|---|---|
| EXW | Buyer | Buyer | Buyer | Buyer, optional | Buyer | Buyer |
| FCA | Seller | Seller | Buyer | Buyer, optional | Buyer | Buyer |
| FAS | Seller | Seller, alongside the vessel | Buyer | Buyer, optional | Buyer | Buyer |
| FOB | Seller | Seller, on board the vessel | Buyer | Buyer, optional | Buyer | Buyer |
| CFR | Seller | Seller | Seller | Buyer, optional | Buyer | Buyer |
| CIF | Seller | Seller | Seller | Seller, minimum cover | Buyer | Buyer |
| CPT | Seller | Seller | Seller | Buyer, optional | Buyer | Buyer |
| CIP | Seller | Seller | Seller | Seller, comprehensive cover | Buyer | Buyer |
| DAP | Seller | Seller | Seller | Seller in practice, since risk stays with him | Buyer | Seller, not unloaded |
| DPU | Seller | Seller | Seller | Seller in practice | Buyer | Seller, unloaded |
| DDP | Seller | Seller | Seller | Seller in practice | Seller | Seller |
Where does risk transfer under each term?
This is the question that settles disputes when cargo is damaged, and it is separate from who pays:
- EXW: when the goods are placed at the buyer disposal at the seller premises, before loading onto the truck.
- FCA, CPT and CIP: when the goods are handed to the first carrier at the named place.
- FAS: when the goods are placed alongside the vessel at the port of shipment.
- FOB, CFR and CIF: when the goods are placed on board the vessel at the port of shipment.
- DAP and DDP: on arrival at the named place, ready for unloading.
- DPU: after the goods have been unloaded at the named place.
What is the practical difference between FOB and CIF?
Under FOB you choose the carrier, make the booking and pay freight and insurance. Under CIF the seller does all of that and folds it into the price. The real difference is less about total cost and more about control:
| Aspect | FOB | CIF |
|---|---|---|
| Choice of carrier | Yours | The seller decides |
| Freight transparency | High, you see the invoice | Buried inside the price |
| Insurance level | You set it | Minimum cover, often insufficient |
| Destination charges | Known in advance from your agent | Can surprise you on arrival |
| Best suited to | Repeat shipments and larger volumes | First-time importers and one-off shipments |
A practical note: most destination charge surprises arrive on CIF shipments, because the seller agent recovers part of its revenue at the other end. Ask for the destination charge list before you accept a CIF quotation.
Why is EXW riskier than it looks?
An EXW price looks lowest because it covers nothing beyond the factory door. The complication is that export clearance in China is tied in practice to the local exporter and its tax refund process, which makes it difficult for a foreign buyer to file in its own name. As a result many EXW shipments are effectively run as FCA with undeclared extra costs. The rule: if you want the lowest price with full control, ask for FCA rather than EXW.
Is DDP a good choice for importing into the Gulf?
It looks comfortable because the seller handles everything to your door, but it carries three problems. You never see the cost breakdown, so you lose the ability to improve it. The foreign seller needs registered importer status to pay duty and tax in your country, which is not always available. And VAT paid in another party name can be difficult to recover on your own return. Use DDP for samples and small shipments, and move to FOB, CIF or CIP for regular commercial volumes.
Practical takeaway
Always write the term with a named place and the rule edition, like this: FOB Shenzhen Incoterms 2020. A term without a named place is an invitation to dispute. Normalise the Incoterm across all supplier quotations before you compare them. And start with FOB if you import regularly, because it gives you control over carrier and insurance with full cost visibility. At ALSHUMUL we review the delivery term in every contract before signature, because one word on that line decides who pays and who loses at the first mistake.
