International Incoterms 2020: A Complete Guide with Real Cases, Do’s & Don’ts, and FAQs

Introduction

In international trade, misunderstandings about shipping responsibilities, costs, and risks often lead to disputes and financial losses. To prevent such issues, businesses rely on Incoterms (International Commercial Terms)—a globally recognized set of rules developed by the International Chamber of Commerce (ICC). These terms clearly define who is responsible for transportation, insurance, customs duties, and risk transfer in global transactions.

Understanding Incoterms is crucial for importers, exporters, logistics professionals, and financial managers, as incorrect usage can lead to costly mistakes. This guide provides:
✔ A detailed breakdown of Incoterms 2020
✔ Real-world case studies illustrating common mistakes and how to avoid them
✔ Essential Do’s and Don’ts when using Incoterms
✔ A FAQ section addressing common concerns

By the end of this guide, you’ll have a clear understanding of how Incoterms work and how to use them effectively.

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What Are Incoterms?

Incoterms (International Commercial Terms) are standardized trade terms that outline the responsibilities of buyers and sellers in cross-border transactions. They specify:

• Who arranges transportation and bears its cost
• Who is responsible for insurance and customs duties
• When the risk transfers from seller to buyer

Incoterms do not govern payment terms—they only define logistical and risk responsibilities between parties.

Why Are Incoterms Important?

• Prevent disputes: Clear obligations reduce misunderstandings.
• Improve risk management: Businesses can decide who bears risks at each stage.
• Ensure smooth customs clearance: Proper usage helps avoid delays.
• Facilitate contract negotiations: Standardized terms simplify international trade agreements.

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Key Changes in Incoterms 2020

The Incoterms 2020 update made several important changes from the Incoterms 2010 version:

1. DAT changed to DPU (Delivered at Place Unloaded) – Expanded delivery options beyond just terminals.
2. FCA (Free Carrier) allows on-board Bills of Lading – Beneficial for sellers using letters of credit.
3. Higher insurance coverage for CIP (Carriage and Insurance Paid To) – Protects buyers better.
4. Clarifications on cost responsibilities – Avoids unexpected charges in contracts.

These changes increase transparency and reduce cost-related disputes.

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Detailed Breakdown of Incoterms 2020

Incoterms are divided into two main categories:

1. Incoterms for Any Mode of Transport

• EXW (Ex Works): Buyer assumes full responsibility once goods leave the seller’s premises.
• FCA (Free Carrier): Seller delivers goods to a carrier chosen by the buyer.
• CPT (Carriage Paid To): Seller covers shipping costs, but risk transfers upon carrier handover.
• CIP (Carriage and Insurance Paid To): Similar to CPT but includes insurance.
• DAP (Delivered at Place): Seller delivers goods to the buyer’s location, but buyer handles import duties.
• DPU (Delivered at Place Unloaded): Seller covers transport and unloading costs.
• DDP (Delivered Duty Paid): Seller is responsible for all costs, including import duties and taxes.

2. Incoterms for Sea and Inland Waterway Transport

• FAS (Free Alongside Ship): Seller delivers goods next to the vessel.
• FOB (Free on Board): Seller is responsible until goods are loaded onto the ship.
• CFR (Cost and Freight): Seller pays freight but risk transfers once goods are loaded.
• CIF (Cost, Insurance, and Freight): Similar to CFR but includes insurance.

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Real-World Case Studies: Common Mistakes & Solutions

Case 1: FOB Misinterpretation Leading to Financial Loss

Scenario:
A U.S. importer ordered machinery from China under FOB Shanghai Port. During transit, the machinery got damaged. The importer assumed the supplier was responsible, but under FOB, risk transferred once the goods were loaded onto the ship.

Mistake:
The buyer didn’t purchase insurance, leading to a significant financial loss.

How to Avoid This Mistake:
✔ If you want insurance coverage, opt for CIF or CIP, where the seller is responsible for insurance.
✔ Always confirm packaging quality before shipment.

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Case 2: EXW Confusion Resulting in Customs Delay

Scenario:
An Indian e-commerce retailer purchased products from a German supplier using EXW (Ex Works) terms. The retailer assumed the supplier would handle export customs clearance. However, under EXW, all logistics, including export clearance, are the buyer’s responsibility.

Mistake:
The goods were stuck in customs, leading to delays and additional costs.

How to Avoid This Mistake:
✔ If you lack expertise in logistics, avoid EXW—use FCA instead, where the seller handles export formalities.
✔ Hire a freight forwarder to manage customs documentation.

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Case 3: Unexpected CIF Charges

Scenario:
A South African importer purchased CIF (Cost, Insurance, and Freight) Durban Port. Upon arrival, the buyer was hit with unexpected terminal charges.

Mistake:
The contract didn’t clarify who would pay unloading fees and port handling charges.

How to Avoid This Mistake:
✔ Always confirm cost responsibilities in writing.
✔ Consider DAP or DPU for better cost predictability.

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Do’s and Don’ts When Using Incoterms

✅ Do’s

✔ Choose an Incoterm that suits your experience level (e.g., avoid EXW if you’re new to importing).
✔ Negotiate cost responsibilities upfront to avoid hidden charges.
✔ Use CIF or CIP if you want insurance protection.
✔ Verify customs clearance obligations before shipping.
✔ Specify Incoterms in contracts to prevent disputes.

❌ Don’ts

❌ Don’t assume sellers handle customs clearance—verify the terms.
❌ Don’t ignore terminal fees and unloading charges—ask for details in writing.
❌ Don’t rely on verbal agreements—always have clear documentation.
❌ Don’t choose Incoterms based on price alone—consider the total cost of ownership.
❌ Don’t forget to check country-specific regulations—some Incoterms may not work in all regions.

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Frequently Asked Questions (FAQs)

1. Which Incoterm is best for new importers?

For beginners, CIP (Carriage and Insurance Paid To) or DAP (Delivered at Place) are better, as the seller handles most logistics.

2. Do Incoterms define payment terms?

No, Incoterms only clarify logistics and responsibilities. Payment terms should be separately negotiated.

3. Are Incoterms legally binding?

Incoterms are not laws but become legally binding once included in a contract.

4. How often are Incoterms updated?

The ICC updates Incoterms every 10 years, with the latest version being Incoterms 2020.

5. What happens if a contract doesn’t specify an Incoterm?

Without an Incoterm, shipping responsibilities default to local trade laws, which can lead to disputes. Always include an Incoterm in your contract.

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Conclusion

Understanding Incoterms 2020 is crucial for avoiding unnecessary shipping costs, delays, and disputes in global trade. Whether you’re an importer, exporter, or financial professional, using the right Incoterm can improve efficiency and profitability.

Would you like to see more industry-specific Incoterm case studies? Let us know in the comments!

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