Incoterms 2020, Shipping, and Trade Terms defined // What Does EXW, FOB, DDP, DPU, FCA, CIP Mean?
Incoterms are created by the International Chamber of Commerce (ICC) to dictate when and how a shipment will be handed off between a buyer and a supplier. The ICC updated the terms into what is called Incoterm 2020. Incoterms also define who is expected to pay the insurance and when the risk transfer happens between the buyer and the seller. This is the first time that the Incoterms drafting group has included representatives from China.
This guide is part of our series on shipping; check out Sourcing Hub’s Ultimate Guide to Freight Shipping for more articles on shipping.
On January 1, 2020, the new Incoterms 2020 went into effect. These new terms were released by the International Chamber of Commerce in Sept of 2019 and set guidelines for handling shipments between sellers and buyers in different countries. The ICC has released new incoterms every decade, with the last change in 2010. Incoterms also define who is expected to pay the insurance and when the risk transfer happens between the buyer and the seller. However, this is the first time that the Incoterms 2020 drafting group has included representatives from China.
One big thing to remember is that the Incoterms 2020 are voluntary and need to be added to the contract. Incoterms are defined and recognized globally, so you must reference them when making a contract. Regardless, you can choose not to use the Incoterms when creating a shipping contract if you define which parties are responsible for delivering goods, insurance, shipment, risk, customs clearance, etc.
Click Here to Access the full Incoterms 2020 infographic.
What differs from the Incoterms 2010 to Incoterms 2020?
Overall, the difference between 2010 and the Incoterms of 2020 is reasonably small compared to the previous decades’ changes. There is only one new term, and most changes are minor. We wrote an abbreviated guide to Incoterms 2020 vs. 2010
DAT is now DPU
DPU (Delivery Place Unloaded) replaces DAT (delivery at Terminal) in the incoterms 2020. This is the only newly named term in the guide, which is the same, with clearer language and rules. The obligations of the Buyer and Seller are the same in both DP and DAT.
The ICC viewed the change as necessary as you cannot unload goods at the dock, port, or airport, so they needed to make it clear that someone could only unload it after the goods had been cleared by customs and had arrived at a final destination, such as a warehouse.
FCA option for On-Board notation for Bill of Lading
In the Incoterms 2010 rules, who was responsible for the On Board Bill of Lading was not defined and had to clarify in the contract if both parties chose the FCA option. As this leads to confusion, the new 2020 rules clarify that the buyer should instruct the carrier or its agent to release the Bill of Lading(B/L) on the seller’s behalf. The B/L will have the annotation on the on-board, or Aboard, that states the goods have been loaded on the vessel. The Bill of Lading is one of the most common documents used to release payment if you pay by a letter of credit.
New Insurance Rules For CIF and CIP
There are changes to Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP), which are the only Incoterms that define who is to pay for insurance. For both CIF and CIP, the seller pays the insurance. Previously, the seller was only responsible for the minimum insurance requirements; however, in the new rules, the seller has to purchase insurance for the shipment to at least 110% of the value of the goods.
Greater clarity on who is responsible for what
The new 2020 clarified which party, the buyer or seller, is responsible for Customs Clearance, which party is responsible for the payments, and who will assume the risk and insurance cost. The new rules were rewritten to use less technical jargon and to be easier to understand. It tried to make the rules as straightforward as possible while being legally enforceable in a multinational legal contract.
DIY Transport Options
For the first time, the new Incoterms 2020 recognizes that buyers and sellers can transport the goods using their vehicles. In the previous version, the rules assumed that a third-party shipping service would exclusively handle the transportation. This means they recognize buyers can now pick up goods using their vehicle from a port or terminal destination.
This update only affects Free Carrier (FCA), Delivered at Place (DAP), Delivered at Place Unloaded (DPU), and Delivered Duty Paid (DDP)
New Security Requirements
The new rules clarify which party is liable at two key points: Transport from the country of origin and customs clearance into the destination country.
For the transport out of the country, the seller is to assume liability for CPT, CFR, CIP, CIF, DAP, DPU, and DDP, while the buyer is liable if it is EXW, FCA, FAS, and FOB. Customs clearance falls on the party defined in the terms.
What are Incoterms and trade terms?
What are the Trade Terms on Alibaba? Do you need clarification about what the three letters that came with your quote mean? Cosmo Defines the incoterms 2020 abbreviations, such as FOB, CFR, and DAP for international trade!
When you get quotes from suppliers, they almost always give you three pieces of information: the price per unit, the MOQ (Minimum Order Quantity), and the shipping terms. The shipping terms, incoterms, are usually given as three letters at the end.
For instance, I recently received a quote: “Thank you, Jim, and please see below 1000-1.75/pc, 2000-1.65/pc, 10000-1.50/pc, EXW”. In this case, the EXW stands for Ex-Works and defines the shipping terms and the obligation you, the buyer, or the seller, have to get the product to its final destination. I often get asked, “Do Alibaba prices include shipping?” The answer is no; they always quote prices in EXW on the website.
Incoterms are sometimes called Trade Terms and are international contracts of sale. EXW and FOB are far and away from the two most common incoterms. Incoterms have two parties, ‘the Seller,’ typically a factory, manufacturer, trading company, or wholesaler. ‘The Buyer is the person who purchases the goods from overseas and imports them for final sale. If you run an FBA business, you will be classified as the buyer in these examples. This guide is for the most recent incoterms 2020, which was updated in 2020. There are now 11 recognized terms, the same as in 2010, and down from 13 in 2000. Incoterms are published by the International Chamber of Commerce, which holds the copyright.
The buyer, seller, or agent must complete ten steps in the shipping process to get a product from a factory to the final destination.
Transport to the Export Port
Unloading the carriage in the export port
Loading onto the vessel
Export Customs Clearance (To Clear for Export)
Shipping on the vessel (such as Ocean Shipping or plane)
Unloading the vessel at the import port
Import Customs and Clearance
Import Duties and taxes
Loading of Carriage in Import Port
Unloading at destination (Terminal)
The buyer defines the final destination, and if you are an FBA seller, that would typically be either Amazon’s warehouse or a prep and ship center. The incoterm terms explain who is responsible for doing each action. For example, it’s common for a buyer to hire a freight forwarder to do the shipping for them.
Before we get into the incoterms 2020, There are a few terms that need to be defined:
Seller: Typically, the manufacturer, trade companies, or wholesaler who is supplying the goods for sale
Buyer: The person who is purchasing the goods and will receive them upon final delivery
Delivery: The point in which the process at which the risk is transferred from seller to buyer
Arrival: The point at which the delivery has been paid. The seller should name the place.
Free: How far must the seller deliver the goods to be picked up by the buyer?
Bill of Lading: this is the shipping receipt. This is a detailed list of goods provided to and signed by the carrier and sent to the person cosigning or receiving the goods. Note that it’s ‘lading,’ NOT ‘landing.’
Carrier: the party obligated to transport the goods. This can be done by any means, such as ship, rail, or truck.
Freight Forwarder: A firm that is commonly contracted to make shipping arrangements.
To Clear for export: Getting permission to export
Terminal: The final destination of the shipment. Such as a dock or warehouse. For FBA sellers, this is most commonly an Amazon fulfillment center.
Incoterms 2020 defined
As EXW and FOB are the most common, we’ll start with those two. When we ask for initial quotes from manufacturers in our RFQs, we request that they quote prices in EXW and FOB. We want to know the EXW price, which is the product's price. The FOB is to gauge the shipping prices because the port is a good place for our freight forwarder to pick up an item. Most of our projects are FOB; we contract with a freight forwarder to complete the rest of the shipping.
EXW- Ex Works
This is the most basic shipping information that a supplier can provide. The seller makes the item available to pick up at the factory and is not responsible for the product once it leaves the factory doors. Instead, the buyer is responsible for transporting it from the factory, covering all export and import clearances and insurance costs.
If you get initial quotes from a factory for the first time, they will almost always quote you for EXW unless you explicitly ask for one in another term. This is because factories and supplier quotes in EXW are simply because it’s the lowest price for them, and it looks good when comparing quotes, and you need the lowest price.
FOB – Free On Board
FOB means that the seller ships the goods to the nearest port, and the seller is responsible for everything after that. The seller will drop this off at the port of shipment, and the buyer will either pick it up themselves or, more commonly, work with a freight forwarder to ship it for them. The seller is the one to clear the goods for export, and the buyer is responsible for the goods from the port onwards. So it’s very important when getting FOB quotes to ensure you get the port's name where they drop the goods off.
One of the big reasons this is the most popular incoterm term used is that the Export port is an excellent place to have a 3rd party inspection service inspect the goods. Further, the seller is responsible for all activities in the country of export, while the buyer is responsible for all activities once the goods leave the country, making things simple. In addition, most freight forwarders will have an office at or near the port, and it’s an easy spot for them to pick up the goods on your behalf.
FCA – Free Carrier
This is just one step up from EXW, in which the seller clears the goods for export and delivers the goods to the port of export. Next, the buyer has to unload the goods in the port and is responsible for them once they reach the port. Next, the buyer arranges the carrier. The most significant difference between EXW and EXW is that the seller must load the goods on the buyer’s carrier. It should be noted that this is often confused for FOB, and if you think there is confusion, feel free to ask your supplier to elaborate and give details.
CPT – Carriage paid to
The seller pays for the goods shipped to the buyer's import port. The risk is transferred to the buyer once the goods arrive at the port. The buyer is responsible for unloading the vessel and arranging further transportation. Even though the seller is responsible for the cost to the Export port, the buyer assumes the risk and insurance cost once the goods are unloaded at the Export port. The seller is responsible for export clearance and freight costs.
CIP – Carriage and Insurance paid to
It is the same as CPT, except the seller must obtain insurance for the goods during transit. CIP also covers all modes of transportation, while CIF specifically covers sea freight. We should note that CIP and CIF are the only ways risk and insurance differ. Once the goods are unloaded at the export port, the seller assumes the insurance cost but not the risk until the goods are unloaded at the import port.
DPU – Delivery Place Unloaded
The seller delivers the goods (unloaded) to the import port, and the buyer is responsible for the cost and risk of the goods from that point on. The seller takes on all risks or costs associated with the goods until they reach the import port. The buyer pays all imports and Customs Fees.
DAP – Delivered at Place
The seller delivers the goods to the buyer's final destination. The seller assumes all risks with the shipping and either loads or pays a third party to load the goods for shipment. The buyer is only responsible for paying customs fees and clearing the goods for clearance. The buyer also pays to unload the goods at the final destination.
DDP – Delivered Duty Paid
In these terms, the seller pays for everything and is responsible for everything. The seller pays all costs and assumes all risks to the final destination. The buyer is only responsible for unloading the goods once they arrive at the final destination chosen by the buyer.
We often ask, why don’t you get every project DDP? It is easiest for the buyer but will not be the cheapest. The seller is the one that picks the shipping company and will choose the one they like best and not the cheapest or most reliable. You are putting a ton of trust in the shipping company. If you want, I would suggest you get a quote for DDP from your supplier, then get a quote for FOB and a quote from a freight forwarder and compare the final total price of the two.
Note: FOB, FAS, CFR, and CIF are specifically for waterway-based shipments (both ocean and inland waterways), while the above is for all forms of shipping, including water. Other forms of transportation can include rail, trucking, or air cargo.
FAS – Free Alongside Ship
The seller is responsible for delivering all goods to the vessel’s side at the named export port. The seller pays for and assumes all risks until the goods are placed in the port and the seller clears the goods for export. The buyer then takes on all costs and risks from that point on, including loading the ship. This has one less step than FOB, in which it bears the cost and risk of loading the ship.
CFR – Cost and Freight
The seller is responsible for bearing the cost of shipping til the named import port; however, the risk is given to the buyer once the goods are loaded onto the ship at the export port and the final delivery of goods from the destination port. This is the same as CPT, except CFR is specifically for water-based transport.
CIF – Cost Insurance and Freight
This is similar to the one above, except that the buyer will require the seller to take on the risk or obtain insurance on the goods until the destination port. The seller bears all shipping costs and assumes the risk of the goods until the destination port. The seller is also responsible for clearing customs, but the buyer pays the duty. Again, this is effectively the same as CIP, except CIF is specifically for water.
Conclusion
The changes between Incoterms 2010 and 2020 are fairly minor compared to the past. DPU is the new Incoterm introduced this year. As always, you must understand what the new Incoterms 2020 means in your shipping and manufacturing plan.
Sourcing Kit // Take Control Of Your Sourcing!
Transform your entire sourcing process with the Sourcing Kit! Our all-in-one toolkit is designed to give you the power to manage every aspect of sourcing confidently and easily, including mastering the complexities of Incoterms.
Imagine having access to detailed contract templates that ensure you’re protected, self-guided courses that teach you the ins and outs of global procurement, practical scripts to streamline your communications, and expert guidance to navigate every step of your sourcing journey. The Sourcing Kit isn’t just about templates—it’s about empowering you with the tools and knowledge to fully control your sourcing strategy, including understanding and applying Incoterms correctly.
Incoterms can be challenging but are crucial for ensuring smooth international trade. With the Sourcing Kit, you’ll clearly understand these terms and how to use them to your advantage. Whether you need to determine who pays for shipping, insurance, or customs duties, our comprehensive resources will help you master these details and avoid costly mistakes.
Whether you are a seasoned professional or new to sourcing, the Sourcing Kit provides everything you need to connect with top manufacturers in China and Vietnam—no more guesswork or uncertainties—just a seamless, efficient, and successful sourcing experience.
Don’t stop at the basics. Elevate your sourcing game, master Incoterms, and achieve more than you ever thought possible.
Click here to sign up for the Sourcing Kit today!
Take the first step towards mastering global procurement and transforming product sourcing. Your journey to sourcing excellence starts now—don’t miss out!