What Are Incoterms? The 11 Incoterms 2020 Rules and What They Mean for Indonesian Export-Import

Incoterms (International Commercial Terms) are a set of standard international rules published by the International Chamber of Commerce (ICC) that govern the responsibilities, costs, and risks between the seller (exporter) and the buyer (importer) in international trade. Understanding Incoterms properly is the key to avoiding disputes and keeping a transaction fair and efficient.

Misunderstandings about Incoterms are still a common source of international trade disputes. Many exporters and importers do not fully understand how risk and costs are allocated under each term, which leads to unexpected costs and litigation. This article gives a comprehensive, practical guide to the 11 Incoterms.

Incoterms work together with the other documents and rules in an international transaction. To complete your customs chain, also learn how to find an HS Code, how long customs clearance takes in Indonesia, and the role of a freight forwarder in international shipping.

What Are Incoterms and Why Do They Matter?

Incoterms is short for "International Commercial Terms", a series of standard rules recognized worldwide since 1936. Each term clearly defines:

• Cost Allocation

  Who pays for transport, insurance, and customs duties at each stage of the shipment

• Risk Allocation

  The point at which ownership of and risk over the goods pass from the seller to the buyer

• Documentation Responsibility

  Who is responsible for the paperwork, the export and import licenses, and customs clearance

Why Incoterms matter: By choosing the right Incoterm you can minimize costs, avoid disputes, and make sure the transaction runs the way both parties expect.

The History and Evolution of Incoterms

Incoterms have evolved since the International Chamber of Commerce first introduced them in 1936, and they continue to be updated to keep pace with modern trade practice. Here is how they have developed:

1936

Incoterms first introduced, with 7 basic terms

1980-2010

Several revisions to keep up with changing trade practice

2010

Incoterms 2010 introduced, adding new terms

2020

Incoterms 2020 launched, adapted for digital trade and emerging practices

The 11 Incoterms 2020 Rules: A Complete Explanation

Incoterms 2020 consists of 11 terms grouped into two categories: 7 terms for any mode of transport, and 4 terms for sea transport only.

Category I: Any Mode of Transport (7 Terms)

1. EXW (Ex Works)

   Definition: The seller makes the goods available at its own premises (a warehouse or production facility). The buyer bears all costs and risks from the moment the goods are handed over.

   Division of Responsibility:

   • Seller: Prepares the goods at its premises
   • Buyer: Arranges transport, insurance, customs, and bears all risks

   <strong>When to Use It:</strong> When the buyer has logistics expertise or wants full control over the shipment

2. FCA (Free Carrier)

   Definition: The seller hands the goods to a carrier nominated by the buyer at an agreed location. Risk passes once the goods are handed to the carrier.

   Division of Responsibility:

   • Seller: Prepares the goods and hands them to the buyer's chosen carrier
   • Buyer: Arranges onward transport, insurance, and customs

   <strong>When to Use It:</strong> For multimodal transport, or when the buyer uses its own freight forwarder

3. CPT (Carriage Paid To)

   Definition: The seller pays the transport cost to the destination. Risk, however, passes to the buyer once the goods are handed to the carrier.

   Division of Responsibility:

   • Seller: Pays transport costs to the destination
   • Buyer: Bears the risk in transit and arranges insurance

   <strong>When to Use It:</strong> When the seller wants the goods to reach a particular location with the transport cost covered

4. CIP (Carriage and Insurance Paid To)

   Definition: Like CPT, but the seller must also cover cargo insurance to the destination.

   Division of Responsibility:

   • Seller: Pays transport and insurance to the destination
   • Buyer: Bears the risk after the goods are handed to the carrier

   <strong>When to Use It:</strong> When the importer wants insurance cover provided by the exporter

5. DAP (Delivered at Place)

   Definition: The seller bears all costs and risks until the goods arrive at the agreed destination, ready to be unloaded from the arriving vehicle.

   Division of Responsibility:

   • Seller: Bears all costs until the goods are ready for unloading at the destination
   • Buyer: Handles only import customs and the release of the goods

   <strong>When to Use It:</strong> When the buyer wants delivery to a specific location without being responsible for transport

6. DPU (Delivered at Place Unloaded)

   Definition: The seller bears all costs and risks, including unloading the goods at the destination. A new term in Incoterms 2020, replacing DES and DEQ.

   Division of Responsibility:

   • Seller: Bears all costs, risks, and unloading at the destination
   • Buyer: Handles only import customs once the goods are unloaded

   <strong>When to Use It:</strong> When the seller takes on maximum responsibility on the buyer's behalf

7. DDP (Delivered Duty Paid)

   Definition: The seller bears all costs and risks, including customs duties and import taxes, until the goods reach the buyer. This is the fullest responsibility a seller can take on.

   Division of Responsibility:

   • Seller: Bears all costs, risks, customs duties, and import taxes
   • Buyer: Simply receives the goods, ready to use

   <strong>When to Use It:</strong> For a buyer who wants it hassle-free, or when the seller has customs clearance expertise

Category II: Sea Transport Only (4 Terms)

1. FAS (Free Alongside Ship)

   Definition: The seller delivers the goods alongside the vessel at the port of shipment. The buyer bears the loading cost and all risks from that point.

   <strong>Note:</strong> This term is rarely used today because the split of responsibility is unclear

2. FOB (Free on Board)

   Definition: The seller bears the costs and risks until the goods are loaded on board the vessel at the port of shipment. Once loaded, risk passes to the buyer.

   Division of Responsibility:

   • Seller: Bears costs and risks until the goods are on board
   • Buyer: Bears onward transport, insurance, and customs

   <strong>Common Use:</strong> FOB is one of the terms most often used for sea shipments

3. CFR (Cost and Freight)

   Definition: The seller bears the transport cost until the goods reach the port of destination. The buyer bears insurance and the risk once the goods are loaded on board.

   Division of Responsibility:

   • Seller: Pays the costs until the goods arrive at the port of destination
   • Buyer: Bears the risk, insurance, and customs

4. CIF (Cost, Insurance, and Freight)

   Definition: The seller bears the transport and insurance costs until the goods reach the port of destination. The buyer bears the risk and customs once the goods are loaded.

   Division of Responsibility:

   • Seller: Pays transport and insurance to the port of destination
   • Buyer: Bears the risk while the goods are at sea, and customs

   <strong>Important Note:</strong> CIF is also widely used, especially when the buyer wants the seller to arrange insurance to the port of destination

How to Choose the Right Incoterm

Choosing the right Incoterm means weighing several factors:

1. Consider Your Logistics Capability

   If you (as the seller) have customs clearance and logistics expertise, consider DDP. If not, use FOB or CIF, which divide the responsibilities more clearly.

2. Analyze the Mode of Transport

   Use the Category II terms (FOB, CIF, CFR) for sea shipments. Use the Category I terms for multimodal, air, or land shipments.

3. Evaluate the Risk Allocation

   Decide at which point you want risk to transfer to the buyer. The further you carry the risk (as with DDP), the higher your costs, but the more control you have.

4. Consider the Business Relationship

   For a new or less trusted buyer, use an Incoterm that gives you more control (such as CIF or DDP). For an established buyer, FOB can be acceptable.

5. Price and Competition

   A DDP price is higher than an FOB price because you bear every cost. Take your competitors' prices and your own margin into account.

Common Mistakes and How to Avoid Them

• Common Mistakes to Avoid

  • Using an Incoterm that does not match the mode of transport (e.g., FOB for an air shipment)
  • Being unclear about cost allocation, which leads to disputes later
  • Forgetting to state the "named place" (e.g., FOB Tanjung Priok vs FOB Jakarta)
  • Using Incoterms 2010 when the buyer expects 2020
  • Ignoring specific regulations in the destination country (e.g., restricted items)
  • Choosing DDP without understanding customs clearance in the destination country

• Best Practices for Avoiding Mistakes

  • Always state the Incoterm with "Incoterms 2020" explicitly in the contract
  • Specify the "named place" precisely (e.g., "FOB Port of Jakarta", not just "FOB")
  • Include a detailed cost breakdown in the proposal or quotation
  • If you use DDP, make sure you have customs clearance expertise or work with a customs broker
  • Record every Incoterm agreement in the purchase order and invoice
  • Talk to your freight forwarder about the Incoterm you have chosen