March 4, 2025
Customs
When shipping goods internationally, being clear about the terms of delivery helps to avoid any confusion or issues down the line. This is where Incoterms come in. These standardised terms help define the responsibilities of both buyers and sellers when it comes to transport, insurance, and customs clearance. Choosing the right Incoterms can have a big impact on your shipping efficiency, costs, and legal obligations.
In this article, we’ll break down questions like ‘What are Incoterms?’, why they matter in global trade, and how to pick the best ones for your business. Whether you’ve heard of them as shipping Incoterms or Interco terms, (or even mistakenly called them Intercoms terms!) this guide will clear up the confusion and give you practical insights.
What are Incoterms?
Introduced by the International Chamber of Commerce (ICC) in 1936, Incoterms were created to establish a common understanding between trading parties. The current version, Incoterms 2020, outlines 11 rules divided into two core categories:
- For any mode of transport: These include terms such as EXW, FCA, CPT, CIP, DAP, DPU, and DDP.
- For sea and inland waterway transport only: These are FAS, FOB, CFR, and CIF.
Each term specifies the division of responsibilities for costs, risks, and tasks involved in shipping goods from the seller to the buyer. For example, some terms place most of the responsibility on the seller, while others favour the buyer.
Why are Incoterms important in shipping?
Incoterms help make international trade smoother by setting clear expectations between buyers and sellers. They outline who’s responsible for key parts of the shipping process, like transportation, insurance, and customs clearance. This clarity helps prevent misunderstandings and disputes, making transactions run more smoothly. For businesses, using Incoterms simplifies logistics by clearly defining who handles what, helping to avoid surprise expenses. They also reduce legal issues by providing internationally recognised guidelines, which is especially useful when working with new trading partners.
The transparency that Incoterms offers also helps businesses control costs. With clear responsibilities in place, companies can better manage their budgets and shipping plans, preventing delays and extra fees. For any company involved in global trade, using Incoterms isn’t just helpful; it’s crucial for keeping things efficient and compliant across borders.
Full list of Incoterms
There are 11 Incoterms in total, divided into two categories based on the mode of transport. Each of these Incoterms defines different responsibilities related to the cost, risk, and ownership of goods as they move from seller to buyer. Choosing the right one depends on the specific terms of your transaction and your comfort with managing risks and logistics.
1. Incoterms for any mode of transport (including sea freight)
These terms can be used for any type of transport, including sea, air, road, and rail.
- EXW (Ex Works): The seller makes the goods available at their premises or another agreed location, and the buyer is responsible for all transportation costs and risks from there.
- FCA (Free Carrier): The seller delivers the goods to a carrier or another party nominated by the buyer at a designated place. The buyer assumes responsibility from that point.
- CPT (Carriage Paid To): The seller pays for the transportation to a specific destination, but the risk transfers to the buyer as soon as the goods are handed over to the carrier.
- CIP (Carriage and Insurance Paid To): Similar to CPT, the seller also arranges and pays for insurance during transport.
- DAP (Delivered at Place): The seller is responsible for delivering the goods to a specified location, with the buyer responsible for import duties and taxes.
- DPU (Delivered at Place Unloaded): The seller delivers and unloads the goods at a specified location, with the buyer handling the import process.
- DDP (Delivered Duty Paid): The seller assumes full responsibility for the transport, insurance, and delivery of the goods, including import duties and taxes.
2. Incoterms for sea and inland waterway transport only
These terms are specifically for shipments that are transported by sea or inland waterway.
- FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at a specified port, and the buyer assumes all responsibility from that point onward.
- FOB (Free On Board): The seller delivers the goods on board the ship at the port of shipment, after which the buyer assumes all risk and cost.
- CFR (Cost and Freight): The seller pays for the cost of transport to the port of destination, but the risk transfers to the buyer once the goods are on board the ship.
- CIF (Cost, Insurance, and Freight): Similar to CFR, the seller also arranges and pays for insurance for the goods during transport.
The role of Incoterms in customs documentation
One of the most critical aspects of international shipping is customs documentation. Mistakes in paperwork can lead to delays, additional costs, or even the seizure of goods. Incoterms define who (buyer or seller) is responsible for preparing, submitting, and paying for customs-related documents.
For example, under EXW (Ex Works), the buyer handles all customs formalities and bears all risks from the seller’s premises. Whereas DDP (Delivered Duty Paid), requires the seller to take full responsibility, including paying duties and clearing customs in the buyer’s country. Understanding the specificities of these terms helps businesses avoid costly misunderstandings and ensures compliance with international trade regulations.
How to choose the right Incoterms
With different Incoterms options to choose from, each with its own set of responsibilities and risks for both the buyer and the seller, it can feel overwhelming to know where to start. In this section, we’ll walk you through what to consider when selecting the best Incoterms for your business, so you can make the right choice and keep your shipments on track.
1. Assess your business needs
If you’re new to exporting, choose terms where the seller (or your logistics provider) handles most of the responsibilities, such as DDP. Decide how much cost and risk you’re willing to bear. For instance, FCA (Free Carrier) transfers risk earlier, while CIF (Cost, Insurance, and Freight) includes insurance costs borne by the seller.
2. Consider the mode of transport
If your shipment involves sea freight, terms like FOB (Free on Board) or CFR (Cost and Freight) are applicable. For multimodal transport, options like CPT (Carriage Paid To) are more versatile.
3. Clarify responsibilities with your trading partner
Discuss Incoterms with your buyer or seller to avoid confusion. Both parties must agree on the selected term and document it clearly in the sales contract.
4. Consult a freight forwarder or logistics partner
Professional freight forwarders, such as AGI Global Logistics, have extensive experience in handling complex shipping requirements. They can recommend the most suitable Incoterm for your shipment based on your needs.
Common mistakes to avoid when choosing Incoterms
There are several pitfalls that businesses should be mindful of to avoid unexpected costs or disruptions. One common error is assuming that all trading partners interpret Incoterms in the same way. Without clear communication and written agreements, misunderstandings about responsibilities can happen, causing disputes or delays.
Another frequent oversight involves insurance coverage. While certain terms, such as CIF (Cost, Insurance, and Freight), include insurance, the level of coverage may not be adequate for your specific shipment. In fact, the seller is only required to provide minimal insurance coverage, and buyers should arrange additional insurance if needed. It is crucial to review the insurance details to make sure your goods are fully protected, and if you are unsure, talk to our team about Marine Cargo Insurance.
Businesses also often forget to clarify customs responsibilities. Ambiguity about who will handle customs documentation and pay duties can cause significant delays at borders, adding to the overall shipping costs.
To avoid these mistakes, take the time to fully understand the terms you are using, verify the details with your trading partner, and seek guidance from logistics experts if needed. Proper planning and clear communication are key to mitigating risks and ensuring smooth international transactions.
Why partner with a logistics expert?
Navigating the complexities of international shipping and terms of delivery can be daunting, especially if your team lacks experience in customs procedures. That’s where partnering with a reputable freight forwarder like AGI Global Logistics can make all the difference. We help businesses:
- Understand and implement the most suitable Incoterms for their operations
- Streamline customs clearance processes to avoid costly delays
- Optimise shipping routes and costs through our global network of logistics experts
By choosing the right Incoterms and working with a reliable logistics partner, you can focus on growing your business while leaving the complexities of international shipping to the experts!
Partner with Us
Understanding what Incoterms are and how they influence your shipping operations is essential for success. By carefully selecting terms that align with your business goals, you can minimise risks, control costs, and create smooth delivery processes.
If you’re unsure which Incoterms to choose or need assistance with customs documentation, contact us today. Our team of specialists is here to simplify your shipping operations and make sure your goods reach their destination efficiently and on time. And for all of the latest AGI news, don’t forget to follow us on LinkedIn and Facebook!