Comprehensive Incoterms 2020 Guide: Choosing the Right Delivery Term

Incoterms 2020: The Common Language of International Trade

Incoterms (International Commercial Terms) are standard trade rules established by the International Chamber of Commerce (ICC) that define the allocation of responsibilities, costs, and risks between buyer and seller in international trade. First published in 1936, these rules were most recently updated in 2020 and have been in effect since January 1, 2020.

Selecting the correct Incoterm is one of the most critical decisions in international trade. An incorrect choice can lead to unexpected costs, insurance gaps, customs problems, and commercial disputes. This guide provides a detailed explanation of each of the 11 Incoterms 2020 rules, illustrating with practical examples when each term should be used.

Important: Incoterms deal only with the delivery of goods, risk transfer, and cost allocation. Issues such as payment terms, transfer of ownership, and dispute resolution are not covered by Incoterms; these must be separately addressed in the sales contract.

7 Incoterms Suitable for All Modes of Transport

1. EXW (Ex Works)

Definition: The delivery term with the least responsibility for the seller. The seller makes the goods available at their premises (factory, warehouse) for the buyer. All subsequent processes are the buyer's responsibility.

Responsibility allocation:

• Seller: Packaging and making goods available at their premises
• Buyer: Loading, inland transport, export customs clearance, international shipping, insurance, import customs clearance, final delivery

Advantages:

• The simplest and lowest-cost option for the seller
• Pricing transparency (net factory price)

Disadvantages:

• High risk and operational burden for the buyer
• The buyer may find it difficult to handle customs formalities in the exporting country
• Export customs clearance issues may arise in practice

Best suited for? Situations where the buyer has a strong logistics partner in Turkey and wants to control the entire process.

2. FCA (Free Carrier)

Definition: The seller delivers the goods to the carrier at the named place (their own premises or another location) and handles export customs clearance.

Two modes of application:

• At the seller's premises: The seller loads the goods onto the vehicle
• At another location: The seller places the goods at the carrier's disposal for unloading

2020 update: Under FCA, the buyer can request the carrier to issue a transport document (such as a bill of lading) and forward it to the seller. This is a significant convenience for L/C-based transactions.

Advantages:

• More practical than EXW (export customs clearance is on the seller)
• Suitable for all modes of transport
• Buyer retains control over shipping

Disadvantages:

• Risk transfers to the buyer upon delivery to the carrier
• International shipping is the buyer's responsibility

Best suited for? Buyers who have their own shipping arrangements and want to control logistics.

3. CPT (Carriage Paid To)

Definition: The seller pays the freight charges for transport to the named destination. However, risk transfers to the buyer upon delivery of the goods to the first carrier.

Critical point: The cost and risk transfer points are different. The seller pays freight to the destination, but risk transfers at the initial delivery point.

Advantages:

• Seller organizes the shipping
• Operational convenience for the buyer
• Suitable for all modes of transport

Disadvantages:

• Different risk and cost transfer points (can be confusing)
• Insurance is not included (buyer must arrange their own)

4. CIP (Carriage and Insurance Paid To)

Definition: Same as CPT, but the seller also arranges transport insurance.

2020 update: The insurance coverage under CIP has been upgraded to ICC (A) — all risks. This provides much broader protection compared to the minimum (ICC C) coverage in the previous version.

Advantages:

• Seller organizes both shipping and insurance
• Comprehensive insurance coverage (ICC A)
• Suitable for all modes of transport

Disadvantages:

• Higher cost than CPT
• The seller's insurance policy may not meet the buyer's expectations

Best suited for? Situations where the buyer wants comprehensive protection but prefers to leave shipping arrangements to the seller.

5. DAP (Delivered at Place)

Definition: The seller delivers the goods at the named destination, ready for unloading. Import customs clearance and unloading are the buyer's responsibility.

Advantages:

• Minimal operational burden for the buyer
• Seller manages the entire transport process
• Door-to-door service approach

Disadvantages:

• High risk and responsibility for the seller
• Delays in the importing country affect the seller
• Cost control may be difficult

Best suited for? When the seller has strong logistics capabilities and the buyer wants to minimize operational burden.

6. DPU (Delivered at Place Unloaded)

Definition: Similar to DAP, but the seller is also responsible for unloading the goods. In Incoterms 2020, this replaced DAT (Delivered at Terminal).

2020 update: The term "Terminal" was replaced with "Place," allowing delivery to be made at any location, not just a terminal.

Advantages:

• Minimal responsibility for the buyer (excluding import customs clearance)
• Full service including unloading

Disadvantages:

• Highest operational burden for the seller
• Damage risk during unloading lies with the seller
• High cost

7. DDP (Delivered Duty Paid)

Definition: The delivery term with the most responsibility for the seller. The seller delivers the goods at the named destination in the importing country with customs duties and taxes paid.

Advantages:

• "Door delivery" experience for the buyer
• Buyer handles no customs or logistics processes
• Total cost is known in advance

Disadvantages:

• Highest risk and cost for the seller
• Seller may need customs registration in the importing country
• VAT and import taxes are the seller's responsibility

Best suited for? E-commerce, small-volume shipments, and situations where the buyer has limited trade experience.

4 Incoterms for Sea and Inland Waterway Transport Only

8. FAS (Free Alongside Ship)

Definition: The seller delivers the goods alongside the vessel (on the quay or barge) at the named port of shipment.

Advantages:

• Simple risk transfer point (alongside the vessel)
• Common in bulk cargo trade

Disadvantages:

• Sea transport only
• Not suitable for container shipping

Best suited for? Preferred in bulk cargo trade (grain, minerals, coal).

9. FOB (Free on Board)

Definition: The seller loads the goods onto the vessel at the named port of shipment. Risk transfers to the buyer when the goods are on board the vessel.

One of the most commonly used Incoterms, but applicable only to sea transport.

Advantages:

• Simple and understandable risk/cost allocation
• Very widely used in global trade
• Buyer retains control over shipping and insurance

Disadvantages:

• Can cause issues in container shipping (risk transfer point is ambiguous)
• Sea transport only

Caution: FOB is not recommended for container shipping. When containers are typically delivered to the terminal, the risk transfer point becomes unclear. FCA should be preferred for container shipments.

10. CFR (Cost and Freight)

Definition: The seller loads the goods onto the vessel and pays the freight to the named destination port. However, risk transfers to the buyer when the goods are loaded onto the vessel at the port of shipment.

Advantages:

• Seller organizes shipping
• Operational convenience for the buyer

Disadvantages:

• Different risk and cost transfer points
• Insurance not included
• Sea transport only

11. CIF (Cost, Insurance, and Freight)

Definition: Same as CFR, but the seller also arranges marine transport insurance.

Insurance coverage: Under Incoterms 2020, the minimum insurance coverage for CIF is set at ICC (C). This is narrower than the ICC (A) coverage under CIP.

Advantages:

• One of the most commonly used sea transport Incoterms
• Seller organizes both shipping and insurance

Disadvantages:

• Minimum insurance coverage may be insufficient
• Risk transfers at the port of loading
• Sea transport only

Key Changes in Incoterms 2020

DAT Replaced by DPU

DAT (Delivered at Terminal) from Incoterms 2010 has been changed to DPU (Delivered at Place Unloaded) in Incoterms 2020. This change allows delivery to be made at any location, not just a terminal.

Bill of Lading Option Under FCA

An option has been added to the FCA rule allowing the buyer to request the carrier to issue an on-board bill of lading and forward it to the seller. This facilitates the use of FCA in L/C-based transactions.

Increased Insurance Coverage Under CIP

The minimum insurance coverage under CIP has been upgraded from ICC (C) to ICC (A). This is the broadest insurance coverage, covering all risks. For CIF, the ICC (C) coverage has been maintained.

Transport Using Own Vehicles

Under FCA, DAP, DPU, and DDP rules, it is explicitly stated that the seller or buyer may carry out transport using their own vehicles.

How to Choose the Right Incoterm

By Transport Mode

Sea transport (bulk cargo): FAS, FOB, CFR, CIF Container shipping: FCA, CPT, CIP (FCA preferred over FOB) Road transport: FCA, CPT, CIP, DAP, DPU, DDP Air freight: FCA, CPT, CIP, DAP, DDP Multimodal transport: FCA, CPT, CIP, DAP, DPU, DDP

By Level of Control

• Buyer wants control: EXW, FCA, FOB
• Seller will organize: CPT, CIP, CFR, CIF
• Full service required: DAP, DPU, DDP

By Transaction Type

• First-time trade: CIP or CIF (insurance included)
• Regular trade: FCA or FOB (flexibility)
• E-commerce: DDP (convenience for the buyer)
• Large-volume bulk cargo: FOB or CIF

Practical Recommendations and Common Mistakes

Common mistakes:

1. Using FOB for container shipping — FCA should be preferred
2. Not checking insurance coverage — ICC (C) under CIF may be insufficient
3. Overlooking tax obligations under DDP — VAT and taxes in the importing country
4. Not clearly specifying the Incoterm in the sales contract — Always include the reference "Incoterms 2020"
5. Confusing the risk transfer point — Risk and cost transfer points differ under CPT/CIP and CFR/CIF

Practical recommendations:

• Always use the phrase "Incoterms 2020" (to avoid confusion with previous versions)
• Specify the delivery point as specifically as possible (port/address rather than just a city)
• Clearly specify the insurance coverage in the contract
• Clarify who bears the customs costs
• Arrange payment terms independently of the Incoterm in the contract

Conclusion

Incoterms 2020 is an indispensable tool for managing the complexities of international trade. The right Incoterm choice should be made based on the transport mode, the experience of the parties, risk tolerance, and the specifics of the trade.

At Toko Trading, we provide comprehensive support from selecting the most appropriate Incoterm to customs processes, logistics planning to risk management for each of your commercial transactions. Our experienced team stands by you at every stage of international trade.