Hello, this is Hamamoto from TIMEWELL. Today, rather than introducing a tech service, I want to write about "Incoterms 2020" — an absolutely essential term for anyone involved in trade practice.
For those just starting out in trade work, the parade of three-letter abbreviations can feel like a foreign language. FOB, CIF, EXW. You hear them daily, but can you explain with confidence exactly what each one means and how they differ? When I first stepped into the world of trade, I remember holding my head in my hands thinking "why are there so many abbreviations?"
This article explains Incoterms from the basics — through all 11 terms in the current Incoterms 2020, and how to choose among them in practice — in a way that's accessible to beginners. By the end, the allocation of risk and costs in trade transactions should be clear, and you should feel confident tackling your daily work.
What Are Incoterms?
The "Common Language" of Trade Transactions
Incoterms is an abbreviation for International Commercial Terms. They are international rules for trade conditions and their interpretation, established by the International Chamber of Commerce (ICC), headquartered in Paris, with the first version created in 1936 [1]. They have been revised approximately every decade to reflect changes in commercial practice, and the current version — Incoterms 2020 — came into effect on January 1, 2020 [1].
Why are such international rules necessary? In domestic transactions, following Japanese law and commercial practice generally avoids major problems. But in cross-border trade, the laws and commercial practices of the seller's country (the exporter) and the buyer's country (the importer) can be completely different. If each party insists on its own country's rules, misunderstandings arise on questions like "who pays the shipping costs?" or "who bears responsibility if goods are damaged in transit?" — potentially escalating into serious disputes.
Incoterms were created to give everyone around the world a common framework for conducting transactions. They are, quite simply, the common language of trade.
The 3 Key Points Incoterms Define
Incoterms clearly define the following three aspects of the arrangement between buyer and seller:
| Point | Specific content |
|---|---|
| Allocation of costs | Up to which point does the seller bear costs (freight, insurance, port handling, import/export customs), and from which point does the buyer bear them? |
| Transfer of risk | At which point does responsibility for loss or damage in transit transfer from seller to buyer? This is called the "transfer of risk." |
| Obligations to arrange | Who — seller or buyer — is responsible for arranging the carrier, taking out marine insurance, and handling customs clearance? |
By packaging these conditions into three-letter codes, complex contract terms can be expressed simply. That is Incoterms' greatest advantage.
What Incoterms Do Not Cover
Useful as these rules are, they are not all-encompassing.
For example, the question of when title (ownership) of goods transfers is outside the scope of Incoterms [2]. The method of payment (advance, deferred, letter of credit, etc.) and the terms for damages in the event of a breach of contract are also not covered. These must be separately agreed upon by the parties and explicitly stated in the sales contract, independently of Incoterms. Surprisingly many people misunderstand this point, so it is worth remembering.
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Learn about TRAFEED (formerly ZEROCK ExCHECK) features and implementation benefits in our materials.
Features of Incoterms 2020 and Changes from the 2010 Version
Incoterms are periodically updated to reflect the evolution of commercial practice. Incoterms 2020 is the current standard, reflecting the latest commercial realities. Here are the main changes from the previous Incoterms 2010 version, focusing on those most relevant to beginners.
Renaming DAT to DPU
"DAT (Delivered at Terminal)" from Incoterms 2010 was abolished and replaced by the newly introduced "DPU (Delivered at Place Unloaded)" [1].
DAT presupposed delivery at a designated terminal, but in practice there were many cases where goods were unloaded and delivered at locations other than a terminal — such as the buyer's warehouse or a construction site. To clarify that the delivery point is not limited to a terminal, the name was changed to DPU, allowing any location to be designated.
Expanded Insurance Coverage Under CIP
CIP (Carriage and Insurance Paid To) is the term under which the seller bears both freight and insurance costs. Under the 2010 version, the seller was only required to arrange the minimum level of insurance coverage (ICC(C) conditions).
Under the 2020 version, the required level of insurance under CIP has been raised: sellers are now required in principle to arrange the most comprehensive coverage — ICC(A) conditions covering essentially all risks [3]. This revision provides greater peace of mind for buyers. Note that for CIF, the previous minimum coverage level remains acceptable. The fact that insurance requirements differ between CIP and CIF is a point worth noting.
Recognition of Own Means of Transport
Previous versions of Incoterms implicitly assumed that goods would be transported by a third-party carrier. In practice, however, it is not uncommon for the seller or buyer to transport goods using their own trucks.
Incoterms 2020 reflects this reality by formally recognizing that under FCA, DAP, DPU, and DDP, the seller or buyer may use their own means of transport [1]. The rules have caught up with operational reality.
All 11 Incoterms 2020 Terms Explained
Now for the main content. Here is an overview of the characteristics and cost/risk allocation for all 11 terms specified in Incoterms 2020.
The 11 terms are divided into two groups based on which mode of transport they apply to.
The first is "Rules for Any Mode or Modes of Transport" — 7 terms — usable for any mode of transport (including multimodal transport): container, air, rail, truck, and more. The second is "Rules for Sea and Inland Waterway Transport" — 4 terms — limited to waterborne transport, such as conventional (break-bulk) vessel shipping.
Group 1: Rules for Any Mode or Modes of Transport (7 Terms)
For container or air freight shipments — the mainstream of modern trade — choose from this group as a rule.
EXW (Ex Works)
The term placing the lightest burden on the seller and the heaviest on the buyer. The seller's obligation is fulfilled when the goods are made available for collection at the seller's factory or warehouse. From that point on — loading onto a truck, export customs clearance, ocean freight, import customs, and delivery to the destination — all costs and risks are borne by the buyer.
FCA (Free Carrier)
Risk transfers when the seller delivers the goods to a designated place (such as a container yard at the export port or an air cargo terminal) and hands them over to the buyer's nominated carrier. Export customs clearance is the seller's responsibility, but the main freight costs and insurance beyond that point are the buyer's responsibility. FCA is highly convenient for container shipments and has in recent years been actively recommended by the ICC.
CPT (Carriage Paid To)
In addition to FCA, the seller bears the cost of carriage to the designated destination (the place of destination in the importing country). The important point here is that the timing of cost responsibility and risk transfer differs. The seller bears costs all the way to the destination in the importing country, but risk transfers to the buyer at the point the goods are handed over to the carrier in the exporting country. This "gap between costs and risk" is where beginners often get confused, so keep it clearly in mind.
CIP (Carriage and Insurance Paid To)
In addition to CPT, the seller bears the cargo insurance premium to the destination. As noted above, Incoterms 2020 requires the seller to arrange ICC(A) condition insurance — the broadest possible coverage. The timing of risk transfer is the same as CPT: when the goods are handed over to the carrier in the exporting country.
DAP (Delivered at Place)
The seller transports the goods to the designated destination and delivers them to the buyer ready for unloading from the arriving transport vehicle. The seller bears the cost and risk of transport to the destination, but unloading costs and risk, import customs procedures, and payment of duties are the buyer's responsibility.
DPU (Delivered at Place Unloaded)
One step beyond DAP: the seller performs unloading at the destination, with risk transferring upon completion of unloading. DPU is the only one of the 11 terms that imposes an obligation on the seller to unload. Import customs clearance and payment of duties remain the buyer's responsibility.
DDP (Delivered Duty Paid)
The opposite of EXW — the term placing the heaviest burden on the seller and the lightest on the buyer. The seller bears not only all transport costs and risks to the destination, but also import customs procedures, duties, and consumption tax in the importing country. The buyer simply receives the goods at their warehouse.
Group 2: Rules for Sea and Inland Waterway Transport (4 Terms)
These terms are used for bulk cargo such as grain and ore transported on conventional vessels. For container shipments, the Group 1 terms (FCA, CPT, CIP, etc.) are recommended.
FAS (Free Alongside Ship)
Risk transfers when the seller places the goods alongside the named vessel at the export port. Export customs clearance is the seller's responsibility, but loading costs and ocean freight are the buyer's responsibility.
FOB (Free On Board)
Risk transfers when the seller loads the goods on board the named vessel at the export port. One of the most frequently seen terms in Japanese trade practice. The seller bears costs and risks up to and including loading, while ocean freight and import customs costs are the buyer's responsibility.
CFR (Cost and Freight)
In addition to FOB, the seller bears the ocean freight to the port of import. Formerly known as C&F (Cost and Freight) — veterans may still use this term, so knowing they refer to the same thing will help you follow conversations. The seller bears costs to the port of import, but risk transfers — as with FOB — at the point of loading on board at the export port.
CIF (Cost, Insurance and Freight)
In addition to CFR, the seller bears the marine insurance premium to the port of import. Used frequently in practice alongside FOB. Under Incoterms 2020, the minimum coverage level (ICC(C) conditions) remains acceptable for CIF. The timing of risk transfer is the same as FOB and CFR — at loading on board.
Frequently Used Terms and How to Choose Between Them
With 11 terms to choose from, beginners do not need to memorize all of them at once. The terms that appear most frequently in practice are to some degree predictable.
The 4 Terms to Learn First
The four terms that appear most often in trade practice are:
| Term | Characteristics | Common use case |
|---|---|---|
| FOB (Free On Board) | Seller responsible up to loading; buyer takes on from there | Most popular; standard for Japanese imports and exports |
| CIF (Cost, Insurance and Freight) | Seller also pays freight and insurance on top of FOB | Standard alongside FOB; when the exporter wants to control logistics |
| EXW (Ex Works) | Buyer arranges everything | Small-volume samples, transactions involving inexperienced exporters |
| DDP (Delivered Duty Paid) | Seller arranges everything | Cross-border e-commerce, intra-group transfers to overseas branches |
From the Exporter's and Importer's Perspectives
As an exporter, choosing EXW eliminates the need to arrange anything yourself and removes transport risk — that is convenient. From the buyer's perspective, however, it is a burden to arrange everything, and you may find yourself at a disadvantage in negotiations. Insisting "we only sell EXW" can drive counterparties away.
Choosing CIF allows you to select your own carriers and insurers, making it easier to control logistics costs using relationships you already have. The trade-off is the added administrative burden and exposure to fluctuating ocean freight rates.
As an importer, choosing DDP means you simply wait for goods to arrive with no risk of customs complications. However, because the seller incorporates all costs into the product price, you often end up paying more in the end. My personal view is that if you have sufficient transaction volume, you are better off buying on FOB terms and arranging carriers yourself — obtaining competitive quotes from multiple freight forwarders can substantially reduce total import costs.
The Risk of Using FOB or CIF for Container Shipments
As a side note, there is a persistent problem in Japanese trade practice: FOB and CIF — rules designed for conventional vessel shipping — continue to be used reflexively for container shipments.
The ICC strongly recommends using Group 1 terms such as FCA, CPT, and CIP for container shipments. The reason is straightforward: for container cargo, the seller typically hands goods over to the carrier at a container yard (CY) at the port. But under FOB, risk transfers at "the point of loading on board the vessel." This creates a gap: if an incident occurs between delivery to the container yard and loading on the vessel, the seller bears the risk even though the goods have already left the seller's hands. This "dangerous gap period" is precisely the problem.
For container shipments, use FCA instead of FOB, CPT instead of CFR, and CIP instead of CIF. Consider making this update to your practice.
How to State Incoterms in Contracts and Practical Notes
Must Be Stated in the Contract
Incoterms are not an international law or treaty. They are rules established by a private organization (the ICC). They do not apply automatically to trade transactions — they take effect only when both contracting parties agree and the terms are explicitly stated in the contract.
Be sure to include the applicable terms in sales contracts, invoices, and other relevant documents.
Correct Format for Contract Statements
When stating terms in a contract, the correct format includes three elements together:
- The chosen Incoterms rule (the three-letter abbreviation)
- The designated place (port name, city, etc. — as specific as possible)
- The version of Incoterms being applied
Examples:
- FOB Tokyo Incoterms 2020 — FOB terms with Tokyo as the port of loading
- CIP Los Angeles Incoterms 2020 — CIP terms with Los Angeles as the named destination
- EXW 1-2-3 Minato-ku, Tokyo, Japan Incoterms 2020 — EXW terms with the specified address in Tokyo as the delivery point
If the place is vague, it can cause disputes over "exactly where in Tokyo is delivery?". Omitting the version risks the terms being interpreted under an older ruleset. Always state "Incoterms 2020" explicitly.
Applicable to Domestic Transactions As Well
Incoterms may seem like rules for international trade only. But since the 2010 version, it has been clarified that they can also be used in domestic sales transactions [1].
Even for domestic Japanese transactions involving long-distance transport, stating Incoterms in the contract is a valid way to clearly specify who bears freight costs and who bears the risk of loss or damage in transit.
Using AI to Streamline Risk Management in Trade Transactions
Selecting the right Incoterms is just the entry point to a trade transaction. When you factor in export classification, end-user screening, and regulatory compliance verification across the full scope of export control, the operational burden is enormous.
TIMEWELL's export control AI agent TRAFEED (formerly ZEROCK ExCHECK) uses AI to streamline these operations and reduce compliance risk. If you are looking to reduce the operational burden of trade management or improve the efficiency of your regulatory compliance — please feel free to reach out.
Summary
Incoterms are the common language for defining cost allocation, timing of risk transfer, and obligations to arrange in cross-border trade. Understanding them correctly and choosing terms that match your business model and mode of transport is the first step in avoiding unnecessary disputes.
There is no need to memorize all 11 terms at once. Start by mastering the terms your company uses most frequently, and gradually expand your knowledge in practice. Two things to keep in mind: always specify the named place and "Incoterms 2020" in contracts; for container shipments, consider using FCA or CIP rather than FOB or CIF. Keeping just those two points in mind will meaningfully improve the confidence your counterparties have in you.
Trade is a deep world, but understanding Incoterms opens the door to it considerably. I hope this is useful in your business.
[1] https://www.jetro.go.jp/world/qa/J-200309.html "Incoterms 2020 - JETRO" [2] https://service.shippio.io/glossary/terms-incoterms-ja/ "Incoterms does not transfer ownership - Shippio" [3] https://www.mitsui-gl.com/column/article_10253/ "What is Incoterms 2020? Differences and changes from the 2010 version - Mitsui Warehouse Group"