What Is an Incoterm?
Discover how Incoterms define responsibilities for shipping, insurance, and customs between buyers and sellers in international trade.
Key Takeaways
- Incoterms are standardised trade terms published by the ICC that define who pays for shipping, insurance, and customs.
- The 2020 revision includes 11 terms divided into rules for any transport mode and rules specifically for sea freight.
- Choosing the wrong Incoterm can leave a business bearing unexpected costs, risks, or insurance gaps.
What Incoterms Are
Incoterms (International Commercial Terms) are a set of 11 standardised trade terms published by the International Chamber of Commerce. They define the responsibilities of buyers and sellers for the delivery of goods under sales contracts. Specifically, they clarify who arranges and pays for transport, who obtains insurance, who handles export and import customs formalities, and at what point the risk of loss or damage transfers from seller to buyer. The current version is Incoterms 2020.
Commonly Used Incoterms
FOB (Free on Board) means the seller delivers goods onto the vessel, and risk transfers at that point. CIF (Cost, Insurance, Freight) means the seller pays for transport and insurance to the destination port, but risk still transfers at loading. EXW (Ex Works) places maximum obligation on the buyer, who collects goods from the seller's premises. DDP (Delivered Duty Paid) places maximum obligation on the seller, who delivers goods cleared for import at the buyer's location.
How to Choose the Right Incoterm
The choice depends on negotiating power, risk appetite, and logistics capability. An experienced exporter with established shipping relationships might prefer CIF to control the supply chain. A buyer with better freight rates might insist on FOB to arrange their own shipping. Small African exporters often start with FOB because it limits their responsibility to loading the goods. As businesses grow and gain logistics expertise, they may shift to CIF or CFR to capture more of the supply chain value.
Incoterms and African Trade
Misunderstanding Incoterms is a common and costly mistake for African businesses entering international trade. A seller quoting CIF without factoring in insurance and freight costs may find their margins eroded. Conversely, a buyer accepting DDP terms without understanding the seller's markup on duties may overpay significantly. Training programmes from organisations like the ITC and national chambers of commerce are helping African traders use Incoterms correctly to negotiate better deals.