Incoterms

Incoterms (International Commercial Terms) are a set of eleven standard rules published by the International Chamber of Commerce (ICC) that define, in an international sales contract, how costs, risks and responsibilities are split between the seller and the buyer. Each rule is a three-letter code (EXW, FOB, CIF, DDP, among others) that sums up, in a single acronym, how far the seller's obligation goes and where the buyer's begins.

Their purpose is to remove ambiguity: instead of arguing case by case over who books the freight, who pays for export clearance or at what point along the route the goods pass to the buyer's risk, the parties agree on an acronym plus a named place (for example, "FOB Buenos Aires" or "DDP Asunción") and that settles the split. They are the contractual foundation of any foreign trade operation, which is why they are part of the daily vocabulary of anyone who manages international logistics.

It is key to understand what Incoterms do not define: they do not set the price, they do not transfer ownership of the goods, they do not replace the sales contract and they do not govern the payment method. They only settle the logistics and the risk of transport. The edition in force is Incoterms 2020, although the parties can still agree on earlier versions by contract if they state so expressly.

Incoterms were born in 1936 and are updated roughly every ten years to reflect changes in transport and global trade. The Incoterms 2020 edition contains eleven rules and is the reference used by importers, exporters, customs brokers, freight forwarders and banks around the world. Each rule answers three questions, in order: who pays for each leg of the transport? who takes out the insurance? and, above all, at what exact point does the risk of loss or damage pass from the seller to the buyer? That risk transfer point is the heart of the concept and the most common source of disputes when the wrong acronym is chosen.

The two big families of Incoterms

The eleven rules are divided into two groups according to the mode of transport:

• Rules for any mode of transport (road, air, sea or multimodal): EXW, FCA, CPT, CIP, DPU, DAP and DDP. These are the recommended ones when there are containers, air cargo or combined legs.
• Rules exclusively for sea and inland waterway transport: FAS, FOB, CFR and CIF. Historically the best known, but their correct use is limited to cargo delivered "on board the vessel," not to containers handled at a terminal.

A very common mistake in Latin America is using FOB or CIF for container shipments, when technically FCA or CIP would apply. The ICC says so explicitly: with containers, the goods are delivered at the terminal before being loaded onto the ship, so FOB misallocates the risk of that intermediate leg.

The eleven Incoterms 2020 rules

At one end, with EXW (Ex Works) the seller only makes the goods available at its warehouse and the buyer takes on everything else. At the other end, with DDP (Delivered Duty Paid) the seller delivers at destination with all import duties and taxes paid, taking on almost all of the cost and the risk. The rest of the codes sit between those two poles.

Why they matter in practice

Choosing the right Incoterm has a direct impact on three fronts. First, on the total cost: an "FOB origin" price and a "CIF destination" price are not comparable, because the second already includes international freight and insurance. Second, on risk management: if the goods are damaged at the port and the agreed acronym transferred the risk before that point, the buyer absorbs the loss, not the seller. Third, on the customs tax base: the customs value, on which tariffs are calculated, is usually built from the CIF value, so the Incoterm affects how much you pay in import taxes (in the United States, by contrast, customs value is based on the transaction value without international freight and insurance, closer to FOB).

A concrete example in Argentina

A small company in Rosario imports machinery from Italy. If it negotiates EXW Milan, it gets the lowest factory price, but it is responsible for booking road transport in Europe, Italian export clearance, ocean freight, insurance and all of the customs clearance in Argentina: maximum control, maximum operational complexity. If it negotiates CIF Buenos Aires instead, the Italian supplier takes care of everything until the cargo reaches the Argentine port with freight and insurance included, and the company only handles the import clearance: simpler, but with less room to optimize freight costs. The decision depends on the importer's experience and its negotiating power with the supplier.

Common mistakes to avoid

• Not stating the named place next to the acronym (saying just "FOB" without a port leaves the delivery point undefined)
• Using FOB or CIF for containers instead of FCA or CIP
• Assuming the Incoterm defines when ownership transfers (it does not; the contract and the applicable law govern that)
• Forgetting to state the version (Incoterms 2020, 2010, etc.) in the contract
• Assuming CIF includes "all risks" insurance: under Incoterms 2020, CIF requires only minimum coverage, while CIP was changed to require broad coverage

Mastering Incoterms is a basic requirement for any team that manages imports or exports, because in a few letters they settle a negotiation that would otherwise be endless and prone to costly misunderstandings.