What Are Incoterms? A Quick Guide for Importers 2026

What are Incoterms? They're a basic set of shipping terms that explains who is responsible for freight, who bears the risk and where the responsibility falls from the seller to the buyer. Incoterms answer the question of who pays customs duty or when it transfers to you if you ever wondered.

These codes of three letters will definitely face each new importer, exporter, and e-commerce retailer sooner or later. There can be additional costs, delays, and even a quarrel with the supplier as a result. In this guide, we will discuss all the Incoterms 2020 and try to help you find out which one is better for you in 2026.

What Are Incoterms?

Incoterms are internationally recognized trade terms that define the responsibilities of buyers and sellers in a shipping agreement. Three letter terms, such as FOB or DDP, which define rules and costs, risks and delivery.

Incoterms have been created and managed by the International Chamber of Commerce (ICC). They were published in 1936 by the ICC to help reduce the confusion in international trade, where buyers and sellers might have different legal systems and different languages.

Before Incoterms, contracts were required to provide the details of freight responsibility from first principles. This resulted in expensive misinterpretations. To overcome this hurdle, Incoterms provided traders with a common language.

The current version is what is Incoterms 2020? It is the ICC rule set which comes into force from 1st January 2020 onwards. This is the official version until updated by ICC. One should note that Incoterms outline the responsibilities in trade, not a sales contract and do not provide legal counsel. They should always be accompanied by a strong contract.

Did You Know? Incoterms are recognized in over 140 countries, but they only cover shipping responsibilities. They do not include payment terms, title transfer or contract law.

What Are Incoterms in Shipping? Why They Matter 

The use of Incoterms answers three questions with each shipment: who arranges the transport, who insures the cargo and where the risk of loss or damage is transferred. Whether you're sourcing from China or exporting to Europe, they apply to raw materials, finished products and even machinery.

Knowing about what are incoterms in shipping is important because it will directly impact your landed cost and risk exposure.

Let's have a look at what they mean:

• Costs – Who pays for freight, loading and delivery?
• Risk – Actual point of liability transfer from seller to buyer
• Delivery point – Where the seller's job ends and the buyer's begins
• Insurance – Will cargo insurance be needed and who will provide it?
• Customs responsibilities – who will take care of import/export clearance.
• Buyer vs seller obligations – Clearly defined responsibilities for buyer and seller

When there is no shipping term agreed upon between buyer and seller, one may easily believe that the other party is bearing a cost or risk. That difference frequently comes to light in the middle of a shipment, when a container is "trapped" at the port.

Quick Tip: Make sure to always have the trade term verified in writing on your purchase order, invoice and bill of lading. Mistakes are commonly caused by verbal deals.

What Is Incoterms 2020? What Changed from 2010 

Incoterms 2020 is the latest version by the International Chamber of Commerce (ICC) and is an official list of 11 trade terms, which was effective since 1 January 2020 and replaced the 2010 Incoterms. It is the most updated version as of 2026. The ICC hasn’t released another new edition to the market, so if any contract mentions the use of the Incoterms 2010, it is out of date.

The ICC implemented several practical changes to the 11 rules, which remained largely the same in spirit:

Quick Tip: A lot of people mess up the renaming of DAT to DPU. “DAT” is a term that should be ignored in a contract today because it is an old term and should now be replaced with DPU.

Did You Know? One of the reasons why CIP and CIF are not interchangeable, even though they sound similar, is because the insurance change under CIP is a significant event for those who are purchasing high value goods such as electronics or machinery.

What Are the 11 Incoterms?

ICC divides Incoterms 2020 into two categories: rules for all modes of transport, and rules for sea and inland waterway transport only.

Check out the specifics of 11 Best Incoterms for Air & Ocean Freight Explained 2026.

Understanding the Most Common Incoterms

What Is EXW Incoterms?

Ex Works (what is ex works incoterms) makes a buyer take most of the responsibility. The seller only makes goods available at their own facility.

• Who pays shipping: Buyer from pick up and onwards
• Who pays customs: Buyer pays export and import clearance.
• Who pays insurance: Buyer
• Risk transfer: When goods are made available on the premises of the seller
  

Best for: Those who has experience in importing and their own freight forwarder and customs broker. Watch out: New importers, they often think that export clearance happens on the side of the seller, but that isn’t always the case.

What Is FCA Incoterms?

One of the most flexible Incoterms 2020 terms and most recommended is Free Carrier (what is fca incoterms).

• Who pays shipping: Seller delivers to a named place and the Buyer is responsible for shipping costs.
• Who pays customs: Seller pays for export clearance; Buyer pays for import clearance
• Who pays insurance: Buyer, though optional for either party
• Risk transfer: When goods are delivered to the buyer's carrier.
  
  

Ideal for: Shipments in containers and buyers who wish to have more control than EXW but who are not ready to assume the origin responsibility.

What Is DDP Incoterms?

Delivered Duty Paid (what is ddp incoterms) places the maximum responsibility on the seller.

• Who pays shipping: Seller, up to Buyer's door
• Who pays customs: The seller will also be liable for import duties and taxes.
• Who pays insurance: normally the seller will arrange this
• Risk transfer: At final delivery to the buyer
  
  

Best for: Buyers who want a hands-off experience.

Common mistake: believing that DDP includes all possible taxes. If there are any destination-specific fees like VAT registration requirements, these may also be due by the buyer, depending on local rules.

What Is DAP Incoterms?

Delivered at Place (what is dap incoterms) is like DDP, except that the buyer carries out import duties.

• Who pays shipping: Seller to named destination
• Who pays customs: Export customs paid by the seller; import customs paid by the buyer. 
• Who pays insurance: Negotiable, often the seller's choice
• Risk transfer: Upon arrival at the named destination, before unloading
  

Ideal for customers who need door delivery but want to handle the customs clearance by themselves. 

What Is CIF Incoterms?

Cost, Insurance and Freight (CIF) is a widely used term in Ocean Freight for bulk and containerized goods.

• Who pays shipping: Seller pays freight to the destination port
• Who pays customs: Buyer will do import clearance 
• Who pays insurance: Seller at a minimum level of coverage.
• Risk transfer: When goods are put on the ship.
  

Best for: Buyers that wish to have basic insurance but are aware that it is not comprehensive.

What Is CIP Incoterms?

Carriage and Insurance Paid To (what is cip incoterms) is applicable to all modes of transport and provides better insurance than CIF.

• Who pays shipping: Seller to the named destination 
• Who pays customs: Buyer handles  for import clearance
• Who pays insurance: Seller at level of insurance more than CIF 
• Risk transfer: When goods are given to the first carrier
  

Ideal for: People who buy expensive items that need more insurance coverage. 

EXW vs FOB: Which Should You Choose?

Both are extremes of the spectrum of seller involvement; either one is preferable depending on the degree of control (and risk) you wish to have as the buyer.

In summary, only use EXW if you (or your freight forwarder) are capable of arranging pickup and export clearance in the seller's country — otherwise it adds more risk than value in terms of cost.

If you want the seller to deal with origin-side difficulties (export clearance and loading), then you take responsibility for freight and insurance from the port. FOB is the most widely used, more flexible option for most novice ocean freight importers. 

CIF vs DDP: Which Should You Choose?

These two are similar in that both include multiple costs in a single price, but distribute risk in very different ways. 

Bottom line: If you have a customs broker and inland transportation already booked, and you do not mind accepting risk once the goods are in your country of origin, then you should opt for CIF. Opt for DDP and you will be paying a little more for simplicity and predictability — the seller will own virtually everything, including freight, duties, and final delivery. 

Ocean Freight vs Air Freight Incoterms

Not all trade terms are applicable to all modes of transportation. One of the most common misunderstandings is this one. 

Important note: FAS, FOB, CFR and CIF are used for sea and inland waterway shipment only. Instead, for air freight use FCA, CPT, CIP, DAP, DPU or DDP.

How to Choose the Right Incoterm?

Choosing the right incoterm depends not only on the cost but also on other factors.

1. Shipping method – Ocean-only terms (FOB/CIF) do not apply to air cargo.
2. Experience level – If you are a new importer, you can prefer FCA/DDP over EXW. 
3. Budget – DDP is easier to get the costs right at the start, but normally the unit cost is higher. 
4. Insurance needs – CIP over CIF for high-value electronics may be needed for coverage.
5. Customs expertise – DDP or DAP will minimize burden if a broker relationship does not exist. 
6. Delivery expectations – Door is preferable to DAP or DDP, port is preferable to CIF or CFR. 

For example, if a small business is importing electronics for the first time from China, they might opt for FCA delivered with a trusted freight forwarder, as it is a cost-effective option with less risk. 

Example: A manufacturer that is sending large equipment to Europe may opt for DPU as the seller is responsible for delivery and the equipment's unloading at the final destination, which is perfect for large goods.

Common Mistakes Importers Make with Incoterms

1. Choosing EXW without knowledge of export clearance requirements 
2. If DDP includes all taxes like local VAT or special duties 
3. Ignoring cargo insurance because a term sounds "safe"
4. For air freight shipments, where they don't apply, use FOB/CIF 
5. Not reading the full contract of sale alongside with the trade term 
6. Mixing up Incoterms “delivery” with courier delivery.
7. Not specifying the exact location or port in the contract. 
8. Assuming the trade term, if it exists, dictates who owns the goods (it does not — see above) 
9. Avoiding overdue charges for demurrage and detention over the agreed period 
10. Choosing the term by the price, not the risk tolerance. 
    

Why Businesses Choose Sky2C

After understanding what are incoterms and how it moves responsibility the next step is having a freight partner who can take that responsibility. Sky2C provides importers and exporters with all the major Incoterms.

Sky2C's team assists companies in navigating:

-> Ocean freight shipments under FOB, CIF, CFR, FCA & other types, see Ocean Freight Services | Sky2C International Shipping

-> Air freight services for time critical cargo under FCA, CIP & DAP, see: Top Air Freight Services | Air Freight Price | Sky2C 

-> Domestic FTL & LTL trucking to ship goods from port to final destination — Sky2C — U.S. #1 FTL & LTL Freight Shipping  | Sky2C Freight Trucking

-> Coordination of customs clearance to minimize delays at clearance. 

-> Shipment visibility so you never have any doubt about where cargo is. 

-> From pickup at origin to last mile delivery, the end-to-end freight management.

For further information on ocean freight, refer to What Is Ocean Freight: A Quick Guide 2026.

Conclusion

So, in short, what are Incoterms? They're the rulebook for international shipping that makes it fair and predictable, who pays, who insures, and when the risk is transferred. When it comes to shipping electronics, or machinery, by air or by sea, the right term can help protect your budget and the goods. 

Incoterms 2020 is the most recent update, but they are best used in with a comprehensive sales contract and a seasoned freight partner. Before you sign a purchase order, it is essential that you grasp what are incoterms before you go under any unforeseen cost. 

Frequently Asked Questions:

Q1 . What does Incoterms mean?

Incoterms, short for International Commercial Terms, are standardized trade rules that define the responsibilities, costs, and risks of buyers and sellers in international and domestic shipments.

Q2 . What is FOB, CIF, and DDP?

FOB, CIF, and DDP are standard global trade terms (Incoterms) that define exactly when the transfer of risk, cost, and responsibility happens between a buyer and a seller. 

Q3 . Is Incoterms 2020 the latest?

Yes, Incoterms 2020 is the latest updated incoterms till now.

Q4 . What is the purpose of Incoterms? 

Incoterms establish a common global shipping terminology, mitigating conflicts and misunderstandings between buyers and sellers in international trade contracts. 

Q5 . Which Incoterm is best for importers?

There is no one right answer. FCA and DAP are best suited for first-time importers, as they are cost-effective while still keeping the customs and shipping obligations manageable. 

Q6 . Which Incoterm includes insurance?

Seller-arranged the insurance is both CIF and CIP. CIP provides wider cover; more suitable for high value goods, such as electronics.