Master all 11 Incoterms 2020: from EXW to DDP, with practical examples of when to use each term, their impact on customs value, and common mistakes to avoid.
Incoterms (International Commercial Terms) are a set of international rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade transactions. They precisely establish who pays for transportation, who arranges insurance, at what point the risk of loss or damage to the goods transfers, and who handles export and import customs formalities.
The current version, Incoterms 2020, entered into force on January 1, 2020, and comprises 11 terms. These are divided into two categories: seven that apply to any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four exclusive to sea and inland waterway transport (FAS, FOB, CFR, CIF). Using the correct Incoterm is essential not only for the commercial relationship between buyer and seller, but also for the correct determination of customs value.
Incoterms do not regulate the transfer of ownership of goods, do not determine the sale price, do not define payment terms (the sales contract does that), and do not apply to service contracts. Their scope is limited to the distribution of costs, risks, and logistical and customs obligations between buyer and seller.
EXW (Ex Works) represents the minimum obligation for the seller. The seller makes the goods available to the buyer at the seller's premises (factory, warehouse, depot), without loading them onto any vehicle and without clearing them for export. From that point, all costs and risks are the buyer's: loading, local transport, export clearance, international freight, insurance, import clearance, and final delivery.
EXW is appropriate when the buyer has presence or representation in the seller's country and can manage export clearance. It is NOT recommended for importers buying from suppliers in Asia or Europe, as they would need to handle export clearance in a foreign country, which is impractical. In these cases, FCA or FOB are better options.
In Group F Incoterms, the seller delivers the goods to the carrier nominated by the buyer. The seller bears costs and risks up to the agreed delivery point, and the buyer is responsible for the main carriage (international freight) and all subsequent costs.
The seller delivers the goods to the carrier nominated by the buyer at an agreed place. If delivery is at the seller's premises, the seller handles loading. If at another place (terminal, warehouse), the seller delivers goods without unloading from the transport vehicle. The seller clears goods for export. A 2020 innovation: under FCA, buyer and seller can agree that the buyer instructs the carrier to issue a bill of lading with on-board notation, needed for letters of credit.
Maritime transport only. The seller delivers goods alongside the vessel nominated by the buyer at the named port of shipment. The seller clears goods for export. Risk transfers when goods are alongside the ship. Used primarily for bulk cargo or goods loaded directly onto the vessel (not in containers).
Maritime transport only. The seller delivers goods on board the vessel nominated by the buyer at the named port of shipment and clears for export. Risk transfers when goods are on board. FOB is one of the most widely used Incoterms, especially for containerized cargo, although the ICC technically recommends FCA for containerized shipments.
In Mexico, customs value is calculated on a CIF basis (cost, insurance, and freight). If you buy FOB, you must add international freight and insurance costs to the invoice value up to the point of entry into Mexico. Failing to declare these costs as additions is a frequent error that creates problems with customs authorities.
In Group C Incoterms, the seller contracts and pays for the main carriage to the agreed destination, but risk transfers to the buyer at an earlier point (generally when delivering to the carrier or placing on board the vessel). This separation between the cost transfer point and the risk transfer point is the defining characteristic of Group C.
The seller delivers goods to the carrier, clears for export, and pays freight to the agreed destination. However, risk transfers to the buyer when goods are delivered to the first carrier. The buyer should arrange their own insurance if desired. Applies to any transport mode.
Same as CPT, but the seller must also arrange transport insurance covering the buyer. Incoterms 2020 raised the minimum coverage level in CIP to Institute Cargo Clauses (A) (all-risks coverage), unlike CIF which only requires minimum coverage. Applies to any transport mode.
Maritime transport only. The seller delivers goods on board the vessel, clears for export, and pays maritime freight to the destination port. Risk transfers when goods are on board at the port of shipment. The buyer arranges insurance if desired.
Maritime transport only. Same as CFR, but the seller also contracts and pays minimum maritime insurance (Institute Cargo Clauses C). CIF is the most commonly used Incoterm for imports to Mexico and the basis on which customs value is calculated. When buying CIF, the invoice value generally already includes the freight and insurance costs needed for customs value determination.
Incoterms 2020 differentiated insurance levels: CIF only requires minimum coverage (Clauses C — named risks), while CIP now requires maximum coverage (Clauses A — all risks). If your cargo has high value, consider using CIP instead of CIF to ensure broader coverage.
In Group D Incoterms, the seller bears costs and risks to the agreed destination. These are the terms with the greatest obligation for the seller and the least for the buyer. They are especially relevant when the seller has global logistics capability and wants to offer a door-to-door service.
The seller delivers goods placed at the buyer's disposal at the agreed destination, ready for unloading from the arriving transport, without clearing for import. The seller bears all costs and risks to that point, including international transport, any insurance arranged, and export formalities. The buyer is responsible for import clearance, payment of duties and taxes, and unloading.
Formerly known as DAT (Delivered at Terminal) in Incoterms 2010. The seller delivers goods unloaded at the agreed destination. It is the only Incoterm where the seller is responsible for unloading. The place can be a port terminal, warehouse, or any other point. The buyer is responsible for import clearance and duty payment.
Represents the maximum obligation for the seller. The seller delivers goods at the agreed destination, cleared for import, with all duties, tariffs, and taxes paid. The buyer only needs to receive the goods. It is the exact counterpart of EXW: everything falls on the seller.
When a foreign seller sells DDP to Mexico, they must consider that they need a legal representative or customs broker in Mexico to handle import clearance. Additionally, VAT paid on importation can only be credited if the importer of record is registered with the SAT. For foreign sellers, DDP can be complicated in Mexico; DAP is usually more practical.
The choice of Incoterm has a direct impact on how customs value is calculated in Mexico. Under the Customs Law, customs value must include transportation and insurance costs to the point of entry into national territory. Depending on the agreed Incoterm, these costs may already be included in the price or must be added as additions.
It is essential that the commercial invoice clearly indicates the agreed Incoterm and, preferably, breaks down the different price components. A clear breakdown facilitates customs value determination and avoids adjustments by customs authorities.
Below is a comparative summary of all 11 Incoterms 2020 showing the main obligations of each party. S = Seller, B = Buyer.
(*) In DAP, DPU, and DDP the seller is not obligated to arrange insurance, but bears the risk throughout the journey, so insurance is normally arranged. In FCA, the seller transports to the agreed place if different from their premises.
Despite their importance, Incoterms are frequently misused or misunderstood. The following are the most common errors seen in international trade practice.
For most imports, the most practical Incoterms are CIF (maritime) or CIP (multimodal) because they include freight and insurance, facilitating customs value determination. If you prefer to control logistics, FOB (maritime) or FCA (multimodal) give you that flexibility, but remember to add freight and insurance to the customs value.
Choosing an Incoterm should not be arbitrary or based on habit. It should be based on an analysis of each party's logistics capabilities, the type of merchandise, the trade route, relative transportation and insurance costs, and customs value implications.
“The best Incoterm is not the most well-known, but the one that best fits the parties' logistics capabilities, the nature of the merchandise, and the specific trade route.”
— International Chamber of Commerce (ICC)
Camtom Team
Editorial Team
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