Incoterms Explained: Who Pays for What in International Shipping
The first time you import or export, you meet a wall of three-letter codes — EXW, FOB, CIF, DDP — and quotes that look wildly different until you realize they're not comparable at all. These are Incoterms, the international rulebook for who pays for what and who carries the risk at each stage of a shipment. Misread one and a "cheap" quote turns expensive, or a lost container becomes your problem when you thought it was the seller's. Here's how to read them.
What Incoterms actually define
Incoterms are a standardized set of trade terms, published and periodically updated by the International Chamber of Commerce, that both sides reference in a contract. Each term answers three questions:
- Who pays for each leg — export handling, main freight, insurance, import duties, delivery?
- Where does risk pass from seller to buyer — at what precise point does a loss become the buyer's problem?
- Who handles the paperwork and clearance at each border?
They do not set the price of the goods, transfer ownership, or specify the payment method — those live elsewhere in your contract. Think of Incoterms as drawing a line on the map of the journey: everything before the line is the seller's cost and risk, everything after is the buyer's.
The handover point is the whole idea
The single concept that makes Incoterms click is the handover point: the spot where responsibility jumps from seller to buyer. The terms simply move that point further along the journey — from the seller's own door all the way to the buyer's warehouse, duties paid.
The terms you'll actually meet
- EXW (Ex Works) — Handover at the seller's door. The buyer arranges and pays for everything from that moment: loading, export, freight, insurance, import, delivery. The seller's quote looks cheapest here because it includes almost nothing. Great for experienced buyers with their own freight setup; a trap for beginners who don't realize how much they've just taken on.
- FCA (Free Carrier) — Seller delivers, cleared for export, to a carrier the buyer names. A flexible modern term that works for containers, air and road, which is why it's increasingly preferred over the older FOB for anything not on a traditional ship.
- FOB (Free On Board) — Seller handles everything until the goods are loaded onto the vessel; risk passes there. Common in sea freight and widely quoted, though technically meant for bulk/non-container sea shipments. Buyer arranges main freight and insurance onward.
- CIF (Cost, Insurance and Freight) — Seller pays freight and a minimum insurance to the destination port; but risk still passes to the buyer once goods are loaded at origin. This surprises people: under CIF you can bear the risk of a loss at sea even though the seller bought the freight and insurance. Check the insurance level — the required minimum is often thin.
- DAP (Delivered At Place) — Seller delivers to a named destination (often your premises), carrying cost and risk the whole way, but the buyer clears import and pays duties/taxes. A clean, common term for door delivery where the buyer handles their own customs.
- DDP (Delivered Duty Paid) — Maximum seller responsibility: delivered to your door with import duties and taxes paid. The buyer does almost nothing. Convenient, and the quote looks highest because it includes everything — but compare it fairly against an EXW quote plus all the costs EXW leaves out.
Why two quotes can't be compared until you check the term
An EXW quote and a DDP quote for the same goods can differ by 20–40% and both be honest — because they cover completely different amounts of the journey. Always normalize: either get every supplier to quote on the same Incoterm, or mentally add the missing legs (freight, insurance, duties, local delivery) to the cheaper-looking terms before deciding. The lowest headline number is frequently the most expensive once you finish the journey.
The mistakes that cause disputes
- Naming a term without a place. "FCA" means little; "FCA Shanghai Pudong Airport" is a contract. Always pair the term with a specific named location.
- Assuming "seller paid freight" means "seller carries the risk." Under CIF and CFR it doesn't — risk can sit with the buyer while the seller holds the freight contract. Know exactly where your risk begins.
- Ignoring insurance gaps. Terms that include only minimum insurance can leave you underprotected on high-value goods. Arrange your own cover for the legs you're responsible for.
- Forgetting duties in the budget. Under EXW, FCA, FOB, CIF and DAP, import duties and taxes are the buyer's — build them into your landed-cost math from the start.
How Incoterms tie back to currency and payment
The term you choose changes which costs you incur, in which currencies, and when — which feeds straight into your pricing and FX planning. A DDP purchase might be billed entirely in the supplier's currency; an EXW purchase scatters costs across freight, insurance and customs providers in several currencies. Once you know your Incoterm, you know your currency exposure, and can price and hedge accordingly — see Currency Risk for Small Businesses. And whichever way the costs fall, the actual payment to your supplier still has to move efficiently: How to Pay International Suppliers covers that half of the deal.
Eky Barradas holds a degree in International Relations from the University of Brasília and has spent more than a decade building and operating cross-border businesses across the United States, Brazil, Argentina, Chile, Mexico, Colombia, Peru and New Zealand. He deals with currency exchange, international invoicing and cross-border payments as part of his daily work — the experience behind every guide on TheRateNow.
Connect with Eky on LinkedIn →