What are the Incoterms® Rules? Introduction to Trade Terms

C J International is a full-service Customs broker and freight forwarder.

Explanation of Incoterms® Rules

International Commercial terms (“Incoterms®” for short) are a globally used set of three-letter standard trade terms used in international contracts for the sale of goods. The Incoterms® Rules do not refer to all terms of sale, but those specifically developed and trademarked by the International Chamber of Commerce. The Incoterms® Rules are widely used in international and domestic commercial transactions, and are essential to understand prior to a shipment.

Which terms you and your seller/buyer agree upon will define the responsibilities each party has for the delivery of goods under sales contracts.

The most recent version of Incoterms® Rules is Incoterms® 2020.* The Incoterms® Rules are separated into two groups and organized by mode of transport. Knowing these terms of sale will help you avoid any misunderstanding when preparing sales contracts and will clearly outline your obligations versus your buyer or seller’s obligations.

* Note that Incoterms® 2010 is still in effect today” according to the ICC. The older version can be used for any contracts prior to the January 1, 2020 effective date of Incoterms® 2020.

Tips for Navigating Trade Terms

When negotiating with your buyer or seller, pay close attention to when responsibility for certain transportation costs and risk of damage or loss passes from one party to the next. The Incoterms® Rules are intended to reduce or remove uncertainties arising from different interpretations of the rules in different countries.

If you import or export, it’s important to be able to answer:

  • Do I understand what each trade term signifies, and which will be the most beneficial for me?
  • Is the term I’m using applicable to the type(s) of transport involved?
  • Am I using the term precisely, or are there missing details?

“One common thing that I have seen is that shippers will not be specific enough. For example, they may use the term FCA but they don’t include the place of delivery. It should be FCA [named place of delivery] — the seller’s facility or another place. If FCA is used and no place of delivery is listed, then there could certainly be confusion between the shipper and consignee as to where (place) the transfer of responsibilities occurs.” — Brenda Cox, CHB, CCS, CES | VP of Kentucky Operations @ C J International

How many Incoterms® Rules are there?

The Incoterms® Rules consist of 11 trade terms, which are divided into two groups.

Group 1 consists of terms that can be used for any mode of transportation:

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

Group 2 consists of terms that apply to sea and inland waterway transport only:

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

Resources on Trade Terms

This blog series is intended to be a helpful introduction to international trade terms, not a comprehensive resource. C J International recognizes that the ICC is the only official source of definitions and explanations surrounding the Incoterms® Rules, and encourages our clients and the shipping community to consult iccwbo.org and their educational materials for further details. 

The International Chamber of Commerce (ICC) has provided a very helpful illustration of The Incoterms® Rules that you can download for free. It shows how in working down the list of incoterms, risk progressively changes from the buyer’s responsibility to the seller’s responsibility.

Incoterms® and the Incoterms® 2020 logo are trademarks of ICC.  Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.  The Incoterms® Rules are protected by copyright owned by ICC.  Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org.


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