Incoterms 2020, From A to Z: The Complete Guide for Sellers and 3PL
Three letters in a sales contract decide who pays for freight, who eats the loss if a container falls off a ship, who clears customs, and who gets stuck with a duty bill they didn't expect. Those three letters are an Incoterm — and most sellers pick one by copying whatever their supplier wrote on the last invoice, with no idea what they just agreed to.
This is the full breakdown. What Incoterms are, what they don't cover, all eleven of them explained in plain English, the two mistakes that cost people the most money, and how to choose the right one when you're shipping from a factory in China to a prep center in the U.S. and then into Amazon FBA.
What an Incoterm actually is
Incoterms — "International Commercial Terms" — are a standardized set of three-letter rules published by the International Chamber of Commerce (ICC). They define, for any shipment, exactly three things between buyer and seller:
Who arranges and pays for transport at each leg of the journey.
Where risk transfers — the precise point where, if the goods are lost or damaged, it stops being the seller's problem and becomes the buyer's.
Who handles export and import formalities — customs clearance, duties, and required documents.
The current version is Incoterms 2020, in force since January 1, 2020 (the ICC revises them roughly every decade; the next edition is expected around 2030). Older terms like Incoterms 2010 can still be used if a contract names them explicitly — which is why you should always write the year: "FOB Shenzhen (Incoterms 2020)," not just "FOB."
What Incoterms do NOT cover
This trips people up constantly. Incoterms say nothing about:
Transfer of ownership / title — that's governed by your sales contract, separately.
Price or payment terms — when and how you pay is a different clause.
What happens in a breach or dispute — not an Incoterms matter.
Insurance levels beyond two specific terms (CIF and CIP, covered below).
An Incoterm is a logistics-and-risk rule, not a complete contract. Treat it as one piece.
The single most important concept: risk vs. cost
Here's the idea that separates people who understand Incoterms from people who don't: the point where risk transfers and the point where cost transfers are not always the same place.
Under some terms, the seller keeps paying for freight all the way to the destination port — but risk already passed to you the moment the goods were loaded back at origin. So if the vessel sinks mid-ocean, the seller paid for the voyage, but you eat the loss of the cargo. Sounds insane until you see it written down. Keep this split in mind for every term below.
The two families of Incoterms
The eleven terms split into two groups by transport mode.
Group 1 — Any mode of transport (7 terms): EXW, FCA, CPT, CIP, DAP, DPU, DDP. Use these for air, road, rail, courier, and — critically — containerized sea freight.
Group 2 — Sea and inland waterway only (4 terms): FAS, FOB, CFR, CIF. These were built for bulk and break-bulk cargo loaded directly onto a vessel — grain, oil, machinery. They are not designed for containers, even though everyone misuses them that way (more on that disaster later).
All 11 terms, explained
Going from least seller responsibility to most.
Group 1 — Any mode
EXW — Ex Works. Seller's only job is to make the goods available at their factory or warehouse. From the front door onward — loading, export clearance, freight, import, delivery — everything is the buyer's. Maximum risk and effort for the buyer. Looks cheap on the quote, but you're now responsible for export customs in a country where you may have no presence. Rarely a good idea for cross-border.
FCA — Free Carrier. Seller delivers the goods, cleared for export, to a carrier or place nominated by the buyer (could be the seller's dock, could be a terminal). Risk transfers at that handover. This is the modern, correct term for containerized shipments where you want the seller to handle export but you control the main freight. Incoterms 2020 added an option for the buyer to instruct the carrier to issue an on-board bill of lading to the seller — a fix for letter-of-credit situations.
CPT — Carriage Paid To. Seller arranges and pays freight to the named destination — but risk transfers to the buyer as soon as the goods are handed to the first carrier, not at destination. Classic risk/cost split: seller pays the freight, you carry the risk for the whole journey.
CIP — Carriage and Insurance Paid To. Same as CPT, plus the seller must buy insurance. Under Incoterms 2020, CIP insurance was upgraded to all-risk cover (Institute Cargo Clauses A) — broad protection. Risk still transfers at the first carrier; the insurance just protects the buyer's interest during the seller-paid leg.
DAP — Delivered at Place. Seller delivers to a named destination, ready for unloading, bearing all risk and cost up to that point. Buyer handles import clearance and duties, and unloads. Good when you want goods brought to your door but you'll handle customs.
DPU — Delivered at Place Unloaded. Same as DAP but the seller also unloads the goods at destination. This is the only Incoterm that obligates the seller to unload. (DPU replaced the old "DAT — Delivered at Terminal" in the 2020 edition, broadening "terminal" to "any place.")
DDP — Delivered Duty Paid. Maximum seller responsibility. Seller handles everything — freight, export, and import clearance plus all duties and taxes — delivering goods ready to unload at the buyer's door. Looks like a dream for the buyer, but it's a trap (see below).
Group 2 — Sea / inland waterway only
FAS — Free Alongside Ship. Seller delivers by placing goods alongside the vessel (on the quay or in a barge) at the named port. Risk transfers there. Buyer loads, ships, and imports. Mostly used for bulk commodities.
FOB — Free On Board. Seller delivers when goods are loaded on board the vessel at the named port of shipment; risk transfers as they cross the ship's rail. Seller handles export. The most famous Incoterm in the world — and the most misused.
CFR — Cost and Freight. Like FOB, but the seller arranges and pays freight to the destination port. Risk still transfers when goods are on board at origin. Another risk/cost split.
CIF — Cost, Insurance and Freight. CFR plus seller-provided insurance. But under Incoterms 2020, CIF insurance is only minimum cover (Institute Cargo Clauses C) — the bare minimum. If you want real protection on a CIF shipment, negotiate higher cover or insure it yourself. Risk transfers on board at origin.
Where risk transfers: the 11-term cheat sheet
Any mode of transport (use these for containers):
EXW — risk passes the moment goods sit ready at the seller's door. Buyer does literally everything else.
FCA — risk passes when goods are handed to the carrier. The correct term for containers.
CPT — seller pays freight to destination, but risk passes at the first carrier.
CIP — same as CPT, plus seller buys all-risk insurance (Clause A).
DAP — seller delivers to destination, ready to unload; buyer clears customs.
DPU — like DAP, but seller also unloads. The only term that forces the seller to unload.
DDP — seller does everything, including import duties. Convenient, but a trap — you lose control of customs and the cost is hidden.
Sea / inland waterway only (not for containers):
FAS — risk passes when goods are placed alongside the ship.
FOB — risk passes when goods are on board the vessel. Famous, and famously misused on containers.
CFR — like FOB, but seller pays freight to destination port. Risk still passes on board at origin.
CIF — CFR plus insurance — but only minimum cover (Clause C), so top it up.
The one rule to remember: under CPT, CIP, CFR, and CIF the seller pays the freight, but the risk already left them earlier. Cost and risk are not the same point.
The two mistakes that cost real money
Mistake 1: Using FOB for containerized cargo. This is everywhere, especially China-to-US. FOB transfers risk only when goods are on board the vessel. But containerized cargo is handed over at a terminal days before it's loaded — it sits in a yard, gets stacked, gets moved. If your container is damaged at the terminal before loading under FOB terms, you're in a gray zone: technically still the seller's risk, but in practice a nightmare to claim. The correct term for containers is FCA, where risk transfers cleanly at handover. The ICC has been saying this for years; the market keeps ignoring it out of habit. Don't.
Mistake 2: Accepting DDP without thinking. DDP looks generous — the supplier handles everything, including U.S. import duties. But: (a) you lose all visibility and control over customs, (b) the supplier bakes their duty estimate plus a margin into your price, often unfavorably, and (c) the supplier may not be properly set up as the U.S. importer of record, creating compliance risk that lands back on you anyway. With the U.S. de minimis exemption gone as of 2026, duties on China-origin goods are no longer trivial, and DDP hides that cost inside a single number you can't audit. For most importers, taking control of customs (FCA, FOB, or CFR) and clearing it yourself is cheaper and safer.
Choosing an Incoterm for the FBA supply chain
If you're sourcing from China and selling on Amazon, your chain now usually looks like: factory → ocean freight → U.S. customs → prep center → Amazon FBA. That extra prep-center node matters, because since Amazon ended in-house FBA prep, your goods must hit a prep center or your own facility before FBA, not go straight to a fulfillment center.
A practical default for most small-to-mid sellers:
FCA (named Chinese port or the factory) if you want maximum control: you book freight through your own forwarder, clear U.S. customs yourself, and route the container to your chosen prep center. Most control, usually best total cost, more work.
FOB (named port) — acceptable and common in practice if your forwarder handles containers carefully, though FCA is technically cleaner. Familiar, suppliers quote it readily.
CIF if you want the supplier to handle freight and basic insurance to the U.S. port and you'll clear customs from there — but remember CIF insurance is minimum cover, so top it up.
Avoid DDP unless you have a supplier you deeply trust and a reason to offload customs entirely — and even then, audit the numbers.
The key insight: your Incoterm should deliver goods to a point where you still control the prep and inbound step. Don't let an Incoterm push goods all the way to a place where your prep center can't intercept them.
The takeaway
An Incoterm is a three-letter contract clause that quietly allocates thousands of dollars of cost and risk. Get the family right (any-mode terms for containers, not FOB), understand that risk and cost can transfer at different points, dodge the DDP trap, and pick a term that keeps your prep step in your hands. Do that, and you've turned a line nobody reads into a lever you actually control.
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