Incoterms are essential tools for any company involved in international trade. They provide clarity, security, and efficiency, preventing conflicts and facilitating cross-border operations. Their correct use helps both large corporations and small entrepreneurs successfully navigate the complex world of global logistics.

What are Incoterms?

Incoterms (International Commercial Terms) are rules created by the International Chamber of Commerce (ICC) that define the responsibilities between the buyer and the seller in an international sales transaction. Their main purpose is to establish who assumes the costs, risks, and logistical procedures throughout the movement of the goods.

Simply put: Incoterms indicate where the seller’s responsibility ends and where the buyer’s begins.

These rules are not laws, but they are internationally recognized and voluntarily incorporated into commercial contracts. The most recent and widely used version is Incoterms 2020®, in force since January 1, 2020.

What are Incoterms used for?

1. Clarify responsibilities

They prevent misunderstandings between buyer and seller by defining who pays freight, insurance, taxes, who handles customs procedures, and when the risk of loss or damage transfers.

2. Reduce legal risks

Since they are used universally, they minimize the likelihood of legal conflicts and facilitate negotiation between companies from different countries.

3. Facilitate logistics

Each Incoterm specifies the exact delivery point, helping plan transport, insurance, and storage effectively.

4. Increase operational efficiency

They allow companies to have financial clarity over costs and margins and optimize foreign trade operations.

General Classification of Incoterms 2020

A) Incoterms for Any Mode of Transport

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

B) Incoterms Exclusive to Maritime Transport

  • FAS - Free Alongside Ship
  • FOB - Free on Board
  • CFR - Cost and Freight
  • CIF - Cost, Insurance and Freight

Practical Examples to Understand Them Better

If a Mexican company sells coffee to a firm in Germany and the sale is under EXW, the seller only makes the goods available at its warehouse. The buyer assumes everything else: transport, customs, insurance, and risks.

With FOB, the seller is responsible for taking the goods to the Mexican port and loading them onto the ship. From that moment, the risk transfers to the buyer.

If CIF is used, the seller pays transport and insurance to the German port, but the risk transfers once the goods are on board the ship.

To learn more about responsibilities regarding costs, risks, cargo insurance, and compliance, you can download our Incoterms®2020 Rules Guide.