Incoterms

Incoterms, short for International Commercial Terms, are a set of 11 standardized trade definitions published by the International Chamber of Commerce (ICC). They define who pays for what, who bears the risk at each stage, and where responsibility transfers from seller to buyer during the physical movement of goods across borders. The current version, Incoterms 2020, took effect on January 1, 2020, and applies to contracts referencing that edition. Older versions remain valid if both parties agree to use them, so it is common to see “FOB Incoterms 2020” or “CIF Incoterms 2010” spelled out explicitly in purchase contracts.

The 11 Terms Grouped by Transport Mode

Seven of the 11 Incoterms apply to any mode of transport, including ocean, air, rail, and truck. These are 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), and DDP (Delivered Duty Paid). The remaining four apply exclusively to waterborne transport: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight), and CIF (Cost, Insurance, and Freight).

Each term shifts the balance of cost and risk differently. Under EXW, the seller’s only obligation is to make the goods available at their premises. The buyer handles everything from pickup through final delivery, including export clearance. Under DDP, the opposite is true: the seller delivers the goods cleared for import at the buyer’s specified destination, absorbing all transport costs, duties, and taxes along the way.

FOB and CIF: The Most Common Ocean Terms

FOB (Free on Board) is by far the most frequently used Incoterm for ocean freight between Asia and the United States. Under FOB, the seller is responsible for getting the goods onto the vessel at the port of origin. Once the cargo crosses the ship’s rail, risk transfers to the buyer. The buyer arranges and pays for ocean freight, marine insurance, customs clearance at destination, and inland delivery. Most Amazon sellers importing from China purchase on FOB terms because it gives them control over the freight forwarder selection and shipping costs.

CIF (Cost, Insurance, and Freight) shifts more responsibility to the seller. The seller arranges and pays for ocean freight and minimum insurance coverage to the destination port. Risk still transfers at the origin port once goods are loaded, which is a point many buyers misunderstand. Under CIF, the buyer bears the risk during transit even though the seller booked the freight.

Where Sellers Get Tripped Up

The single most common mistake is confusing cost responsibility with risk transfer. Under CFR and CIF, the seller pays for freight, but risk passes at the origin port. If a container falls overboard mid-Pacific under CIF terms, the buyer bears the loss, not the seller, even though the seller arranged the shipping. This is why marine cargo insurance policies and their coverage triggers matter as much as the Incoterm itself.

Another frequent error is using FOB or CIF for air freight. These terms are defined specifically for ocean or inland waterway transport. The correct equivalent for air shipments would be FCA (for the seller’s obligation to deliver to the carrier) or CPT (for the seller paying carriage to a named destination).

Incoterms and U.S. Customs Valuation

CBP uses the transaction value of imported goods to assess duties, and the applicable Incoterm directly affects how that value is calculated. If goods are purchased on FOB terms, the customs value is typically the FOB price. If purchased on EXW terms, the buyer needs to add the inland freight to the port of export to arrive at the correct customs value. Getting this wrong can trigger under-valuation penalties or overpayment of duties.

Practical Application for FBA Sellers

Most e-commerce importers purchasing from overseas suppliers negotiate on FOB or EXW terms. Under EXW, the buyer gets the lowest unit price but takes on all logistics coordination from the factory door. Under FOB, the factory handles local transport and export customs, simplifying the process for the buyer. Once goods arrive at a U.S. port, the importer coordinates drayage from the port to a prep center like MeisterPrep, where the cargo is inspected, labeled, and forwarded to Amazon fulfillment centers. Choosing the right Incoterm at the purchase order stage has downstream effects on landed cost calculations, insurance requirements, and the timeline for getting inventory into the FBA network.