Incoterms Delivery Terms: Key Conditions of International Trade

Import and export are equations with many variables. Incoterms conditions have become an effective tool to bring order to the chaos of international trade. By understanding the key points of delivery terms, you will know who is responsible for damages, who pays for freight, and how much you will spend on delivery. Incoterms has become a universal “language” for importers and exporters from different countries.

What Are Delivery Terms and Why They Are Needed

Simply put, Incoterms is a list of terms that distributes costs, risks, and responsibilities between the parties of a contract. Instead of describing them in detail every time in a contract, delivery terms were created and standardized.

What is an Incoterms delivery basis? It is a three-letter abbreviation that defines when and where risks transfer from the supplier to the buyer.

A simple example of delivery terms: you purchased 500 pairs of sneakers in Guangzhou. If the contract states EXW, you pick them up from the factory warehouse in China, and from that moment all risks and responsibilities are on you. If the condition is DDP, the seller delivers the goods to a warehouse in the destination country, paying freight and taxes. You simply receive the cargo. The difference is enormous.

Why are Incoterms terms needed? They help to:

• avoid ambiguity: the term is understood the same way in Ukraine, China, the USA, Germany, and worldwide;
• forecast the budget: you know which costs must be included in your budget;
• protect the interests of the parties in case of disputes.

What types of delivery terms exist? There are 11 terms in total. The rules are regularly updated by the International Chamber of Commerce (ICC). Each version is called an edition:

• Incoterms 2000 focused on paper documentation.
• Incoterms 2010 delivery terms were updated with rules for container transportation and e-commerce.

The most recent edition is Incoterms 2020. Some concepts were replaced and transportation security requirements were clarified. Businesses can use any edition, but the 2020 version is the most recommended because it reflects modern logistics realities.

Popular Incoterms Terms: EXW, FOB, CIF, DDP

Four conditions are especially popular:

1. EXW (Ex Works). The seller simply releases the goods from their warehouse. Delivery organization, insurance, payment, and customs clearance are the responsibility of the buyer.
2. FOB (Free On Board). A classic for sea logistics. The seller must deliver the goods to the port and load them onto the vessel. Risks transfer when the cargo is loaded on board.
3. CIF (Cost, Insurance and Freight). The supplier is responsible for delivery to the port of departure, freight, and insurance with minimum coverage. However, risks transfer at the moment the goods are loaded onto the vessel.
4. DDP (Delivery Duty Paid). These are “all-inclusive” conditions for the buyer. The seller takes on all expenses, including customs clearance. However, you have less control over contractor selection, and many charge a percentage for organization.

Some Incoterms terms apply only to sea transportation, while others are universal. The terms are specified in the contract, invoice, and customs declaration in the following format: abbreviation, place of risk transfer, and edition year. For example:

• EXW Shanghai Incoterms 2020
• DDP Odesa Incoterms 2010
• FCA Shanghai Port Incoterms 2020

It is important that the terms and edition match in all documents where they are mentioned.

Distribution of Risks and Responsibilities Between the Parties

The moment of risk transfer receives significant attention. The most common mistake beginners make is confusing the moment of risk transfer with the moment of physically receiving the goods.

In international trade, you may own the cargo even if it has not yet arrived at the port of departure. Moreover, you may already bear full responsibility for it. For example, the Incoterms CIP delivery basis determines that risks transfer when the goods are handed over to the first carrier. From that moment, you — not the seller — are responsible for the goods, even though they are still physically in the country of origin.

It is important to understand these nuances in advance, as they affect:

• the insurance policy — which risks it should cover and from what moment;
• the claims procedure: if the goods arrive damaged, depending on the term you contact the seller, the carrier, or the insurance company.

We recommend our articles about the CIP and FAS terms — be prepared before signing the contract!

How to Choose the Right Delivery Term for a Contract

There is no universal answer to this question: everything depends on your logistics expertise, resources, budget, and even the scale of your business. First, consider how involved you want to be in the transportation process — both in terms of organization and expenses.

Here are some recommendations:

• EXW, if you understand the route well, can deliver goods to the port, and know how to find a carrier. You will be able to control every cent and choose any shipping line or airline. However, EXW requires deep knowledge of export procedures, as you will also handle customs clearance yourself. Suitable for: experienced importers.
• FOB (only for sea deliveries). You entrust domestic logistics to the seller, while international logistics services are provided by a company or intermediary you choose. Suitable for: businesses that delegate transportation.
• CIF (only for sea deliveries). An ideal option if you do not want to deal with transportation, freight, and insurance. However, unloading at the port of arrival and customs clearance remain your responsibility. Suitable for: beginners who are ready to handle customs procedures.
• DDP. The most “extensive” delivery term for the seller: risks transfer to you when you receive the goods. Incoterms DDP is the most expensive option, but it provides turnkey delivery without any effort from your side. Suitable for: beginners who do not want to deal with logistics and legalization.

It is worth noting that terms where freight, insurance, and customs clearance are handled by the seller are not always the best for experienced entrepreneurs. Usually, EXW and FOB are cheaper because you can choose the logistics company and optimal rates yourself. Otherwise, you rely only on the seller’s choice.

Incoterms conditions revolutionized international logistics: with them, business without borders became possible! Contact us — we will consult you on choosing the optimal terms and act as a carrier for cargo from China, the USA, Canada, or Europe. Remember that a mistake in international trade can cost thousands of dollars: do not take risks, delegate to professionals!