What Are Incoterms?

To facilitate commerce around the world, the International Chamber of Commerce (ICC) publishes a set of Incoterms, officially known as international commercial terms. Globally recognized, Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers. Parties involved in domestic and international trade commonly use them as a kind of shorthand to help understand one another and the exact terms of their business arrangements. Some Incoterms apply to any means of transportation; others apply strictly to transportation across water.

The ICC developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. Because of these updates, contracts should specify which version of Incoterms they use—e.g., Incoterms 2010 (the latest version). Trade terms used in different countries may appear identical on the surface, but they can have different meanings when used domestically.

Key Takeaways

  • Traders use Incoterms to help understand one another in domestic and international trade.
  • The ICC developed Incoterms in 1936 and updates them periodically to conform to changing trade practices.
  • Typical examples of Incoterms rules for any mode of transportation include "Delivered at Terminal," "Delivered Duty Paid," and "Ex Works (EXW)."

Incoterms Rules for Any Mode of Transport

Some common examples of Incoterms rules for any mode of transportation include Delivered at Terminal, Delivered Duty Paid (DDP), and Ex Works (EXW). The ICC abbreviates these Incoterms as DAT, DDP, and EXW, respectively. 

DAT indicates the seller delivers the goods to a terminal and assumes all the risk and transportation costs until the goods have arrived and been unloaded. After that, the buyer assumes the risk and transportation costs of the goods from the terminal to the final destination.

DDP indicates the seller assumes all the risk and transportation costs. The seller must also clear the goods for export at the shipping port and import at the destination. Moreover, the seller must pay export and import duties for goods shipped under DDP.

Under Incoterm EXW, the seller is only required to make the goods available for pickup at the seller's business location or another specified location. Under EXW, the buyer assumes all the risk and transportation costs.

Real World Examples

In 2010, the two main categories of Incoterms were updated and classified by modes of transport.

Group 1 Incoterms: Apply to Any Mode of Transport

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

Group 2 Incoterms: Apply to Sea and Inland Waterway Transport

The ICC has specific Incoterms rules for inland waterway and sea transport such as free on board (FOB) and cost, insurance and freight (CIF). Free on board shipment terms indicates that the buyer or seller delivers the goods on a designated vessel. The buyer or seller may assume all the risk and transportation costs depending on whether the goods are sold under FOB shipping point or FOB destination point.

Cost, Insurance, and Freight (CIF) terms indicate the seller must deliver the goods to a designated port and load them on a specified vessel, assuming responsibility for paying all transportation, insurance, and loading costs. After that, the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business.