Picking the wrong Incoterm is one of the most expensive mistakes in a new export deal. It decides who pays freight, who carries the risk if goods are damaged, and who clears customs. Get it wrong and you either lose margin or face a dispute after the container has already sailed. This guide shows you how to choose the right Incoterms 2020 rule for your situation, and how to avoid the traps that catch first-time exporters.
What Incoterms actually do (and do not do)
Incoterms are eleven three-letter trade rules published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020. They define three things: who arranges and pays for transport, at which point risk passes from seller to buyer, and who handles export and import clearance.
They do not transfer ownership, set the price, or decide your payment terms. A common misunderstanding is treating an Incoterm as a full contract. It is not. It sits inside your contract alongside price, currency, and payment method.
The two families
Seven rules work for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU, and DDP. Four rules are only for sea and inland waterway transport: FAS, FOB, CFR, and CIF. This split matters. If your goods travel in a container handed to a carrier at a terminal, FOB is technically the wrong rule even though people use it out of habit. FCA is the correct choice for containerized cargo.
How risk and cost shift across the rules
Think of the rules as a ladder. At one end, the seller does almost nothing beyond making goods available. At the other, the seller delivers to the buyer’s door with duties paid. The more letters move toward D, the more the seller carries.
| Rule | Who pays main freight | Who clears import | Best when |
| EXW | Buyer | Buyer | Buyer has a strong local forwarder |
| FCA | Buyer | Buyer | Containerized goods, buyer books transport |
| CIF | Seller | Buyer | Bulk sea cargo, buyer wants a landed sea price |
| DAP | Seller | Buyer | Seller controls freight to destination |
| DDP | Seller | Seller | Buyer wants a fully delivered, duty-paid price |
The insurance detail people miss
Under Incoterms 2020, CIP requires the seller to buy insurance at a high level of cover (Institute Cargo Clauses A or equivalent). CIF still only requires minimum cover (Clause C). If you sell high-value goods CIP, budget for the wider insurance; if you buy CIF, do not assume you are fully covered.
A real scenario
A small furniture maker agreed to sell EXW to a first-time buyer in another country because EXW looked simplest on paper. In practice the buyer could not complete export customs in the seller’s country, since only the seller had the local paperwork and VAT registration. The shipment sat for days, and both sides blamed each other. Switching the deal to FCA solved it: the seller handled export clearance, then handed the goods to the buyer’s nominated carrier. The lesson is that EXW pushes export clearance onto a party who often cannot do it.
Common mistakes and how to fix them
- Using FOB for containers. Fix: use FCA. Risk under FOB only passes once goods are on board, but you lose control of them at the terminal earlier, creating a dangerous gap.
- Choosing DDP without knowing the destination tax rules. Fix: only accept DDP if you can register for or reclaim import VAT and know the duty rate. Otherwise you eat unexpected costs.
- Not naming the exact place. Fix: always write the named place, for example “FCA Rotterdam terminal, gate 3”. A rule without a precise location invites argument.
- Assuming the Incoterm sets payment security. Fix: pair it separately with a letter of credit or advance payment terms.
Action steps to choose your rule
- Confirm the transport mode. Container or general cargo? This eliminates the sea-only rules if not applicable.
- Decide who has the stronger logistics network at each end.
- Check who can legally clear customs in each country.
- Match the rule to your pricing: buyers often compare a landed DAP price more easily than an EXW price.
- Name the precise place and the Incoterms 2020 version in writing.
- Confirm insurance responsibility and level of cover.
Conclusion and next step
Choose the Incoterm by asking who is best placed to arrange transport, carry risk, and clear customs at each end, then write the exact place into the contract. Your next step: take your last quotation and rewrite the delivery term using the correct 2020 rule and a named place.
FAQ
Is FOB or FCA better for my export?
If your goods move in containers handed to a carrier before loading, FCA is the correct and safer rule. Reserve FOB for cargo actually loaded onto a vessel, such as bulk or break-bulk.
Should a beginner exporter avoid DDP?
Usually yes, unless you understand the destination country’s duties and import VAT and can handle or reclaim them. DDP puts maximum obligation on the seller.
Do Incoterms decide when the buyer must pay?
No. Incoterms handle transport, risk, and clearance. Payment timing and security are separate contract terms you must set yourself.
Are the older Incoterms versions still valid?
Yes, if both parties agree and state the version. Always specify “Incoterms 2020” (or the version you mean) to avoid confusion, since older rules like DAT no longer exist under 2020.
References
- International Chamber of Commerce (ICC) – Incoterms 2020 rules.