Incoterms 2020 Explained: What Every B2B Importer and Exporter Must Know

Incoterms — International Commercial Terms — are a set of 11 standardized trade terms published by the International Chamber of Commerce (ICC). They define exactly who is responsible for costs, insurance, and risk at each stage of an international shipment.

Misunderstanding a single Incoterm can mean paying freight costs you thought your supplier would cover, or being liable for cargo loss at a point you assumed was the seller's problem. In high-volume B2B trade, these mistakes add up to hundreds of thousands of dollars.

The 11 Incoterms 2020 at a Glance

The Four Most Important Incoterms for B2B Importers

FOB (Free On Board) — The Most Common for US Importers

What it means: The seller is responsible for all costs and risk until the goods are loaded onto the vessel at the port of origin. From that point, the buyer (you) is responsible.

Why US importers like it:

• You control the freight contract (meaning you choose the freight broker and carrier)
• You know your freight costs in advance
• You can negotiate better rates if you ship volume

The hidden risk: You assume risk the moment the goods are loaded on the vessel — not when they arrive at your port. If the ship sinks or the container falls overboard, that is your loss from the moment of loading. Ensure your cargo insurance covers this.

EXW (Ex Works) — Maximum Buyer Control, Maximum Buyer Risk

What it means: The seller's obligation ends at their factory or warehouse door. You are responsible for everything — export clearance, inland transport to the origin port, ocean freight, import customs, and delivery.

When it makes sense: When you have a strong freight operation and want maximum control over every step. Large importers who consolidate cargo from multiple suppliers often prefer EXW for the control it gives them.

The risk: You must handle export clearance in the seller's country. For Chinese or Indian suppliers, this requires a local customs agent.

CIF (Cost, Insurance and Freight) — Popular with New Importers, Dangerous for Experienced Ones

What it means: The seller arranges and pays for ocean freight and insurance to your destination port. You handle import customs and inland delivery.

Why it seems attractive: Lower up-front work — the seller handles the freight.

Why sophisticated importers avoid it:

1. The seller chooses the carrier, often the cheapest one with no regard for reliability
2. The insurance the seller provides is typically minimum coverage — often just 110% of invoice value with a high deductible
3. You have no visibility or control over the shipment until it arrives

If you are currently buying on CIF terms, switch to FOB as soon as your freight volume justifies it.

DDP (Delivered Duty Paid) — Maximum Simplicity, Maximum Cost

What it means: The seller is responsible for everything, including import duties and delivery to your door.

When it makes sense: For small, infrequent purchases where you do not want to manage the import process. E-commerce businesses sometimes buy on DDP from suppliers who have the capability.

The cost: DDP prices from suppliers are usually heavily padded. The seller builds in a margin for the freight, duties, and their administrative costs. You almost always pay more on DDP than if you handled the freight yourself.

The Most Common Incoterm Mistake: Using Maritime Terms for Air Shipments

FOB, CFR, and CIF are maritime-only terms. They apply when goods are loaded onto a vessel at a port.

For air freight, road freight, or multimodal shipments, you should use FCA (Free Carrier) instead of FOB. This is a change from Incoterms 2010 and many traders still make this error.

When you ship by air on "FOB" terms, risk technically transfers when the goods are "on board" — but for air, this creates an ambiguity about when exactly that is. FCA eliminates the ambiguity by defining a specific named place (e.g., the freight forwarder's warehouse or the airport cargo terminal).

Practical Recommendations

• For most US B2B importers: Use FOB origin port for ocean, FCA for air
• For exports from the US: Use FCA or DAP depending on your relationship with the buyer
• Never buy CIF from Chinese suppliers unless you have no alternative — you lose cost visibility and control
• Always confirm Incoterms are explicitly stated in your purchase order with the specific named place (e.g., "FOB Shanghai Port")

Contact our team to discuss how your current Incoterm structure might be costing you money.