What Are Incoterms? International Commercial Terms, Explained

Incoterms (International Commercial Terms) are a set of standard trade rules published by the International Chamber of Commerce (ICC). They define who, between buyer and seller, pays for and bears the risk on goods at each stage of an international shipment.

Each Incoterm is a three-letter code that fixes the split of duties on a shipment. EXW (Ex Works) puts almost everything on the buyer; DDP (Delivered Duty Paid) puts almost everything on the seller. In between sit terms like FOB (Free On Board) and CIF (Cost, Insurance and Freight), each drawing the line at a different point in the journey. The current edition is Incoterms 2020, revised roughly every ten years.

What they settle is precise: the point where risk passes from seller to buyer, who arranges and pays for carriage, who handles export and import clearance, and who buys insurance. What they deliberately leave out matters just as much. Incoterms do not transfer ownership of the goods, do not set the price, and do not decide payment terms. Those live in the sales contract itself.

They show up on quotes, invoices, and customs paperwork worldwide. A Belgian importer buying "FCA Shenzhen" knows exactly where its responsibility begins, which shapes freight cost, insurance, and the customs declaration that follows.

Why it matters for custom software

An Incoterm quietly drives a chain of downstream data: the EDI customs message, the freight cost calculation, the insurance flag, the point where liability shifts. Software that treats it as a free-text field invites errors on every order. We model Incoterms as structured data in our logistics software, so the right costs, documents, and risk rules follow automatically from the term on the deal.