For a shipment moving from Shanghai factories to New York shelves, one critical question defines business relationships: Who pays, who risks, and who controls? The answers lie in three-letter Incoterms®—universal codes that prevent costly misunderstandings in cross-border trade.

Developed by the International Chamber of Commerce (ICC), Incoterms® 2020 standardizes 11 key terms across four groups. Unlike vague contractual language, they assign concrete responsibilities for:

• Risk transfer (when does liability shift from seller to buyer?)

• Cost allocation (who pays transport, insurance, tariffs?)

• Document control (who handles customs, licenses, tracking?)

Core Concepts: The Three Pillars of Incoterms®

Every term answers these fundamental questions:

Example:

• EXW (Ex Works) → Minimal seller risk. Buyer assumes all costs/risks upon pickup at the seller’s warehouse.

• DDP (Delivered Duty Paid) → Maximal seller risk. Seller pays all costs (including import taxes) until goods reach the buyer’s doorstep.

The 11 Incoterms® 2020 at a Glance

Designed for global readers—using plain English and universal examples:

Top 3 Terms in Real Global Trade

1. FOB (Free On Board) – The Ocean Classic

Scenario: Electronics from Seoul → Hamburg

• Seller (Seoul): Pays for goods + export clearance + loading onto ship.

• Buyer (Hamburg): Chooses carrier, pays sea freight/insurance + import duties.

• Risk shifts: When goods cross the ship’s rail at Busan Port.

• Why it’s global: 47% of Asia-Europe ocean shipments use FOB .

2. CIF (Cost, Insurance, Freight) – Seller-Managed Transit

Myth: “CIF means the seller guarantees delivery.”
Truth: Risk transfers at shipment (like FOB). Seller only pays freight/insurance to the destination port.

• ✅ Buyer benefit: Less coordination.

• ⚠️ Seller risk: Prepaid freight eats cash flow; limited insurance coverage.

3. EXW (Ex Works) – Buyer Control, Seller Simplicity

Ideal use: Walmart picking up goods from a Shenzhen supplier’s factory.

• Seller: Packs items; does nothing else.

• Buyer: Arranges trucks, export paperwork, shipping, insurance.

• Watch: Export clearance falls to the buyer. If they can’t handle it, use FCA .

Avoid These Costly Mistakes

❌ Mixing Transport Modes

• Wrong: Using FOB for air freight (no “ship’s rail” in air transport).

• Fix: Replace with FCA Incheon Airport .

❌ Adding Custom Obligations

• Wrong: “FOB Shanghai, seller handles destination unloading.”

• Fix: Use DPU if unloading is seller’s responsibility .

❌ Ignoring Insurance Gaps

• High risk: Using CFR/CPT without buyer purchasing full insurance.

• Solution: Choose CIP for seller-covered insurance .

How to Choose: A Data-Driven Framework

Help Your Brain Master the Terms

Use neuroscience-backed methods to retain complex terms:

• Memory Palace Technique: Link terms to locations in your office:

• Door = EXW (goods exit here)

• Loading dock = FOB (goods enter transport)

• Accounting desk = DDP (all costs settled) 

• Spaced Repetition: Apps like Anki drill terms at optimal intervals .

• Acronym Decoding:

• F-terms = Free of responsibility after delivery to carrier/ship.

• D-terms = Delivery completed at destination .