This guide explains the most commonly used shipping terms in international trade and how businesses can choose the right terms for different transactions.
1. Incoterms (International Commercial Terms)
Incoterms are standardised trade terms published by the
International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international transactions. They answer three key questions:
- Who arranges and pays for freight and insurance?
- Where does risk transfer from seller to buyer?
- Who handles export and import customs clearance?
| Term |
Full name |
Risk transfers at |
Pays Freight |
Pays Insurance |
Import clearance |
Any mode of transport
|
| EXW |
Ex Works |
Seller's premises / named place |
Buyer |
Buyer |
Buyer |
| FCA |
Free Carrier |
Handed to carrier at named place |
Split |
Buyer |
Buyer |
| CPT |
Carriage Paid To |
Handed to first carrier at origin |
Seller |
Buyer |
Buyer |
| CIP |
Carriage & Insurance Paid To |
Handed to first carrier at origin |
Seller |
Seller |
Buyer |
| DAP |
Delivered at Place |
Named destination, ready to unload |
Seller |
Seller |
Buyer |
| DPU |
Delivered at Place Unloaded |
Named destination, after unloading |
Seller |
Seller |
Buyer |
| DDP |
Delivered Duty Paid |
Named destination, duties paid |
Seller |
Seller |
Seller |
Sea & inland waterway only
|
| FAS |
Free Alongside Ship |
Alongside vessel at port of loading |
Buyer |
Buyer |
Buyer |
| FOB |
Free On Board |
On board vessel at port of loading |
Buyer |
Buyer |
Buyer |
| CFR |
Cost and Freight |
On board vessel at port of loading |
Seller |
Buyer |
Buyer |
| CIF |
Cost, Insurance and Freight |
On board vessel at port of loading |
Seller |
Seller |
Buyer |
Most Commonly Used Incoterms
FOB (Free On Board) - The seller delivers goods on board the named vessel. Risk passes to the buyer once goods are on board. The buyer arranges and pays for freight and insurance from the port of loading onwards.
CIF (Cost, Insurance and Freight) - The seller pays freight and insurance to the named port of destination, but risk transfers to the buyer as soon as goods are loaded on the vessel.
EXW (Ex Works) - Maximum responsibility for the buyer. The seller makes goods available at their premises; the buyer bears all costs and risks from that point, including export clearance.
DDP (Delivered Duty Paid) - Maximum responsibility for the seller. The seller delivers goods cleared for import, with all duties and taxes paid. Widely used in e-commerce cross-border shipments.
2. How to Choose the Right Shipping Term
Choosing the right shipping term depends on:
- Logistics Experience - New importers often prefer CIF, DAP, or DDP.
- Cost Control - Experienced buyers may prefer EXW or FOB.
- Risk Management - Consider insurance obligations and transfer points.
- Customs Expertise - Understand import compliance requirements before accepting responsibility.
- Transport Mode - Some terms work better for sea freight while others support multimodal transport.
3. Common Mistakes Exporters and Importers Should Avoid When Choosing Shipping Terms
- Using FOB for container shipments without understanding operational implications
- Treating Incoterms as the whole contract
- Assuming insurance is always included
- Ignoring destination customs costs
- Failing to specify exact delivery locations
- Confusing ownership transfer with risk transfer
For specific advice on trade documentation, customs procedures, or freight rates, consult a licensed freight forwarder or customs broker familiar with your trade lanes and commodities.
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Article ID: 199, Created: June 20 at 4:59 PM, Modified: June 27 at 9:18 PM