Incoterms 2020 Explained Simply: FOB vs CIF vs EXW and All 11 Rules

Incoterms are to international trade what traffic signs are to driving: ignoring them is possible, but sooner or later you crash. Every commercial invoice crossing a border names one of eleven three-letter codes, and each code decides who pays the freight, who buys the insurance, and who has to explain the loss when a container falls off a ship.

The rules are written and published by the International Chamber of Commerce (ICC). The latest edition, Incoterms 2020, is still the binding version in 2026 (the 2030 update is drafting but not yet in force). This guide walks through all eleven rules in plain English, focuses on the practical differences that matter in negotiations, and shows you which rule to pick for which kind of deal.

The two families of Incoterms

Incoterms 2020 divides the eleven rules into two families by mode of transport:

Any mode of transport (seven rules)

• EXW — Ex Works
• FCA — Free Carrier
• CPT — Carriage Paid To
• CIP — Carriage and Insurance Paid To
• DAP — Delivered at Place
• DPU — Delivered at Place Unloaded
• DDP — Delivered Duty Paid

Sea and inland waterway only (four rules)

• FAS — Free Alongside Ship
• FOB — Free On Board
• CFR — Cost and Freight
• CIF — Cost, Insurance and Freight

Pick the right family first. Using FOB on an air shipment is a contractual mismatch that courts have consistently refused to rescue.

The three concepts every Incoterm controls

Every rule decides three things. If you can answer these three questions, you understand the rule.

1. When does risk transfer from seller to buyer? Risk means "who pays for the damaged goods".
2. Who pays for carriage? Seller-paid or buyer-paid freight changes the invoice.
3. Who handles export and import clearance? Clearance is paperwork plus fees; assign it to the wrong party and the shipment sits at the border.

Our interactive Incoterms tool shows all three dimensions as a responsibility matrix you can scan in seconds.

EXW — Ex Works

Minimum seller obligation. The seller places the goods at the buyer's disposal at the seller's premises. The buyer handles loading, export clearance, main carriage, import clearance, and delivery.

When to use: domestic-like transactions where the buyer has a freight forwarder in the seller's country.

When to avoid: cross-border deals where the buyer has no agent to handle export paperwork locally. FCA is almost always better.

FCA — Free Carrier

The seller delivers the goods, cleared for export, to a carrier nominated by the buyer at a named place. If the place is the seller's premises the seller loads; otherwise the goods are ready for unloading from the seller's vehicle.

When to use: containerised cargo where the buyer arranges freight. This is the modern replacement for FOB.

Tip for 2026: for LCs (letters of credit) the 2020 FCA variant allows the buyer to instruct the carrier to issue a bill of lading with an on-board notation, fixing a long-standing documentary problem.

CPT — Carriage Paid To

The seller arranges and pays for carriage to the named destination, but risk transfers as soon as the goods are handed to the first carrier. The buyer bears in-transit risk even though the seller paid for the truck, ship, or plane.

When to use: the buyer wants an all-in freight quote but can handle transit risk (self-insurance or own cargo policy).

CIP — Carriage and Insurance Paid To

As CPT, but the seller must also buy insurance covering the buyer's risk from origin to destination. Under Incoterms 2020 the seller must buy Institute Cargo Clauses A (the maximum cover), unless the parties agree otherwise.

When to use: the buyer wants a fully-bundled cost including insurance.

DAP — Delivered at Place

The seller delivers the goods to a named place in the destination country, ready for unloading. The seller bears all risk and cost up to that point, including main carriage, but the buyer handles import clearance and duty.

When to use: the buyer is a local importer of record and has a broker in place. This is the default for most modern B2B deals in 2026.

DPU — Delivered at Place Unloaded

The only Incoterm where the seller must unload. As DAP but the seller is responsible for unloading at the named destination. The buyer still clears for import.

When to use: specialist cargo where unloading is complex (project cargo, heavy lift) and the seller has the equipment.

DDP — Delivered Duty Paid

Maximum seller obligation. The seller delivers the goods, cleared for import and with duty and VAT paid, at the buyer's place.

When to use: the buyer is a consumer or a small business without import capability. Many e-commerce platforms require DDP.

When to avoid: the seller has no VAT registration in the destination country. DDP without a VAT number in an EU country is legally awkward and usually results in the buyer's freight forwarder fronting the VAT at a premium.

FAS — Free Alongside Ship

Sea only. The seller delivers the goods alongside the nominated vessel at the named port of shipment, cleared for export. Risk transfers alongside the ship.

When to use: bulk commodities loaded by ship's gear (grain, ore, timber).

FOB — Free On Board

Sea only. The seller delivers the goods on board the nominated vessel at the named port of shipment, cleared for export. Risk transfers as the goods cross the ship's rail (in practice, once loaded).

When to use: non-containerised sea freight, or when contract culture demands FOB (common in Asia).

When to avoid: containerised cargo — use FCA instead. FOB on containers creates a risk gap between the container yard and the ship's rail that no insurer wants to cover.

CFR — Cost and Freight

Sea only. As FOB but the seller also arranges and pays ocean freight to the destination port. Risk still transfers at the origin port.

When to use: commodities and project cargo by sea where the seller has better freight rates than the buyer.

CIF — Cost, Insurance and Freight

Sea only. As CFR but the seller also buys insurance. Minimum cover under Institute Cargo Clauses C is required; most buyers top up.

When to use: sea-freight deals where the buyer wants a bundled port-to-port price.

Watch out for: buyers often think CIF means the seller is on the hook until the goods reach them. It does not. Risk transfers at the port of origin; the seller's insurance is there to protect the buyer's risk in transit.

Choosing the right rule

Three quick decisions narrow the field:

1. Is the cargo containerised? If yes, stay in the "any mode" family (FCA, CPT, CIP, DAP, DPU, DDP). Avoid FOB/CIF.
2. Who has local customs expertise? If only the seller, use DDP. If only the buyer, use FCA or DAP. If neither, hire a broker and use DAP.
3. Who wants to buy insurance? If the seller wants to control cover, CIP or CIF. If the buyer prefers their own policy, FCA or DAP.

A simple default for modern B2B trade is FCA for buyers with their own freight forwarder and DAP for buyers who want the seller to handle freight but keep import clearance in-house. Reserve DDP for e-commerce and small-parcel trade, and reserve FOB/CIF for genuine port-to-port sea freight of bulk or break-bulk cargo.

Documenting the Incoterm correctly

Incoterms should always be written in full: the code, the named place, and the edition. "CIF" alone is ambiguous. "CIF Los Angeles Incoterms 2020" is not. A missing edition reference can drop your contract into the 2010 or earlier rules, which differ in important ways (notably DAT no longer exists).

Paired with the duty calculation

The chosen Incoterm changes the valuation base for customs duty. Under CIF the freight and insurance are already in the invoice; under FCA or FOB they must be added to get the CIF value used in most import jurisdictions. Run the final figure through our import duty calculator before signing the contract and there will be no nasty surprises on the landing bill.