Incoterms® 2020

Incoterms® 2020 provides a standardized framework for defining these responsibilities in contracts for the sale of goods. Published by the International Chamber of Commerce (ICC), the rules contain 11 three-letter trade terms that help buyers and sellers understand their respective obligations. ^[1]

For businesses importing products from China, understanding Incoterms® is especially useful when comparing supplier quotations, planning shipping arrangements, and estimating the costs and responsibilities associated with an order.

What Are Incoterms® 2020?

Incoterms® stands for International Commercial Terms. The rules clarify three main aspects of a transaction:

• Obligations: Who arranges transportation, handles export or import formalities, provides specified documents, and fulfills other delivery-related responsibilities.
• Risk: Where and when the seller delivers the goods for the purposes of the rules, and when the risk of loss or damage transfers to the buyer.
• Costs: Which party is responsible for specified transportation, delivery, insurance, handling, and other costs under the selected rule.

Incoterms® 2020 entered into force on January 1, 2020. It contains seven rules for any mode or modes of transport and four rules specifically intended for sea and inland waterway transport. ^[1][2]

Incoterms® rules become part of a transaction when the parties incorporate them into their sales contract. A clear reference should identify the selected rule, the named place or port, and the edition. For example:

DAP Buyer's Warehouse, Chicago, IL, USA, Incoterms® 2020

The named place matters because it helps define the seller's delivery obligations and the point at which risk transfers under the chosen rule.

The 11 Incoterms® 2020 Rules

The 11 rules are divided into two groups according to the modes of transport for which they are intended.

Rules for Any Mode or Modes of Transport

These seven rules can be used for road, rail, air, sea, or multimodal transport, as appropriate to the transaction:

• EXW — Ex Works
• FCA — Free Carrier
• CPT — Carriage Paid To
• CIP — Carriage and Insurance Paid To
• DAP — Delivered at Place
• DPU — Delivered at Place Unloaded
• DDP — Delivered Duty Paid

Rules for Sea and Inland Waterway Transport

These four rules are intended specifically for sea and inland waterway transport:

• FAS — Free Alongside Ship
• FOB — Free On Board
• CFR — Cost and Freight
• CIF — Cost, Insurance and Freight

Choosing a rule that matches the actual transport arrangement is important. For example, FOB and CIF are not intended as general-purpose terms for every type of shipment. For containerized cargo handed to a carrier before loading onto a vessel, FCA may be more appropriate, depending on the circumstances. ^[1][2]

Incoterms® 2020 Comparison Table

The following table provides a practical overview of the 11 rules. It summarizes typical responsibilities rather than replacing the detailed requirements of each rule.

Important: The party paying for transportation is not always the party bearing the risk during the entire journey. Under CPT, CIP, CFR, and CIF, the seller pays for carriage to the agreed destination, but risk generally transfers earlier, at the point specified by the rule.

How Do Incoterms® Allocate Shipping Costs and Risk?

A common misunderstanding is that the party paying for shipping must also bear the risk until the goods arrive. Incoterms® distinguishes between cost allocation and risk transfer.

Under some rules, the seller pays for the main transportation even though the risk has already transferred to the buyer. CPT and CIP are examples for any mode of transport; CFR and CIF are the corresponding sea and inland waterway rules.

Other rules define delivery at a destination. Under DAP, the seller bears the risk until the goods are placed at the buyer's disposal at the named destination, ready for unloading. Under DPU, delivery occurs after unloading. Under DDP, the seller bears the delivery obligations specified by the rule, including import clearance and applicable import duties and taxes.

Insurance is another separate consideration. Under CIP, the seller must arrange the higher level of insurance cover specified by Incoterms® 2020, subject to the rule's requirements. Under CIF, the default insurance requirement is narrower. Buyers who need greater protection should review the coverage and agree on any additional insurance requirements. ^[1]

These distinctions are important when negotiating quotations. A seller's offer to pay freight does not automatically mean the seller bears every risk or cost until final delivery.

Who Handles Export and Import Customs Clearance?

The selected Incoterm generally establishes which party is responsible for export and import clearance between the buyer and seller. However, customs authorities apply the laws of the country where the goods are exported or imported.

In general:

• EXW: The buyer generally bears responsibility for export and import formalities under the rule. In practice, export clearance may be difficult for a foreign buyer, so FCA may be worth considering.
• FCA, CPT, CIP, DAP, DPU, and FOB, CFR, CIF: The seller handles export clearance, while the buyer generally handles import clearance.
• DDP: The seller is responsible under the rule for both export and import clearance, including applicable import duties and taxes.

The parties must still confirm whether the party expected to handle customs formalities can legally fulfill those obligations in the relevant country. Importer registration, tax requirements, local customs procedures, and other legal restrictions may affect how the transaction should be arranged. ^[1][3]

Incoterms® does not automatically determine every party's legal liability to customs authorities, nor does it replace the destination country's customs laws.

How to Choose the Right Incoterm When Importing from China

The right rule depends on the transport mode, the buyer's logistics experience, the seller's capabilities, and the parties' preferred division of responsibility.

EXW: When the buyer wants control from the seller's premises

EXW places relatively extensive obligations on the buyer. It may suit a buyer with the resources to arrange pickup and manage the relevant export and import formalities. However, the buyer should assess whether it can practically handle export clearance in China.

FCA: When the seller can handle export clearance

FCA may be suitable when the buyer wants to arrange the main carriage but the seller is better positioned to complete export formalities and hand the goods to the nominated carrier at the agreed place.

FOB: For suitable sea shipments

FOB is commonly used for sea freight when the seller can deliver the goods on board the vessel at the named port of shipment and the buyer arranges the main carriage. For containerized shipments handed over before vessel loading, FCA may be more appropriate.

CIF: When the seller arranges sea freight and insurance

CIF can be useful when the seller pays for sea carriage and arranges the required insurance to the named destination port. The buyer should remember that risk transfers at the port of shipment, not on arrival.

DAP: When the seller arranges delivery but the buyer handles import clearance

DAP may suit buyers who want the seller to arrange transportation to a named destination while retaining responsibility for import clearance and applicable duties and taxes.

DPU: When the seller is responsible for unloading at the destination

DPU requires the seller to arrange delivery and unloading at the named destination. Buyers should confirm that the destination can accommodate the agreed unloading arrangements.

DDP: When the seller can handle import formalities

DDP can simplify the buyer's responsibilities because the seller undertakes import clearance and applicable duties and taxes under the rule. However, the seller must confirm that it can legally and practically fulfill these obligations in the destination market.

No single Incoterm is best for every transaction. The parties should compare the total cost, delivery arrangement, risk transfer point, and customs responsibilities before agreeing on a term.

What Incoterms® Do Not Cover

Although Incoterms® defines important delivery responsibilities, it does not replace the sales contract or resolve every issue in an international transaction.

Incoterms® does not, by itself, determine:

• The product specifications, quality requirements, or acceptance criteria.
• The contract price, payment currency, or payment schedule.
• When ownership or title to the goods transfers.
• All remedies for breach of contract or delayed delivery.
• The applicable law or dispute resolution procedure.
• The exact tariff rate or whether a product is subject to import restrictions.

These matters should be addressed separately in the sales contract and reviewed against applicable law. ^[1][2]

For example, a contract might specify DAP delivery to the buyer's warehouse but say little about product acceptance, late delivery, or payment milestones. Incoterms® helps clarify delivery responsibilities, but those other terms still need to be agreed.

Common Mistakes When Using Incoterms®

Using the term without naming the place

A term such as “DAP USA” may be too vague. Specify the relevant destination address, port, terminal, or other named place so the delivery arrangement is clear.

Confusing freight payment with risk transfer

Under CPT, CIP, CFR, and CIF, the seller pays for carriage to the agreed destination, but risk transfers at an earlier point specified by the rule. Buyers should understand this distinction before agreeing to a quotation.

Using FOB or CIF for every transport mode

FOB and CIF are intended for sea and inland waterway transport. For air freight or many containerized and multimodal arrangements, another rule may better match the actual handover point.

Assuming DAP includes import duties

Under DAP, the buyer generally handles import clearance and pays applicable import duties and taxes. DDP is the rule under which the seller undertakes those responsibilities.

Assuming DDP eliminates all customs-related uncertainty

DDP allocates contractual responsibilities to the seller, but it does not override local law or guarantee that the goods will clear without delay, inspection, or additional questions.

Failing to specify the Incoterms® edition

Include the edition in the contract, for example, “FCA Shanghai, China, Incoterms® 2020.” This helps avoid uncertainty about which version the parties intended to apply. ^[1]

Frequently Asked Questions

1. How many Incoterms® 2020 rules are there?

There are 11 rules: seven for any mode or modes of transport and four for sea and inland waterway transport. ^[1]

2. Which Incoterm is best for importing from China?

It depends on the transport mode, the buyer's logistics capabilities, the seller's responsibilities, and the destination country's requirements. FCA, FOB, CIF, DAP, and DDP are often considered, but each has different cost, risk, and clearance implications.

3. Which Incoterm requires the seller to pay import duties?

Under DDP, the seller is responsible under the rule for import clearance and applicable import duties and taxes. The seller must ensure that it can legally and practically fulfill these obligations in the destination country.

4. Under which Incoterms® does the buyer generally handle import clearance?

The buyer generally handles import clearance under EXW, FCA, CPT, CIP, DAP, DPU, FAS, FOB, CFR, and CIF. Under DDP, the seller is responsible for import clearance under the rule.

5. Does CIF mean the seller bears all risk until the goods arrive?

No. Under CIF, the seller pays for carriage and arranges the required insurance cover to the named destination port, but risk generally transfers when the goods are loaded on board the vessel at the port of shipment. ^[1]

6. Do Incoterms® determine when ownership transfers?

No. Incoterms® defines delivery obligations and risk transfer under the selected rule, but it does not determine the transfer of ownership or title. The sales contract should address ownership separately. ^[1][2]

Conclusion

Incoterms® 2020 provides a standardized way for buyers and sellers to define delivery obligations, transportation costs, risk transfer, and certain customs responsibilities. Understanding the 11 rules can help importers compare quotations, plan shipments, and clarify who is responsible at each stage of a transaction.

For businesses sourcing products from China, the chosen Incoterm should be clearly stated in the purchase contract together with the named place or port and the applicable edition. Buyers should also confirm customs requirements, tariff classification, taxes, and any other obligations that Incoterms® does not determine.

NewBuyingAgent helps global buyers source products from China according to their purchasing needs. Before placing an order, buyers should confirm the delivery term and ensure that the quotation and contract clearly explain the responsibilities and costs assigned to each party.

References

[1] International Chamber of Commerce (ICC). Incoterms® 2020. https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/

[2] International Chamber of Commerce (ICC). Incoterms® and Commercial Contracts: Frequently Asked Questions. https://library.iccwbo.org/clp/clp-incoterms-qa-2020.htm

[3] International Trade Administration, U.S. Department of Commerce. Know Your Incoterms. https://www.trade.gov/know-your-incoterms

Disclaimer: This article is for general informational reference only and does not constitute legal, customs, tax, or shipping advice. The obligations under each Incoterm depend on the selected rule and named place, while customs and tax obligations are governed by applicable law. Confirm contract terms and destination-country requirements with qualified professionals where necessary.