Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC) that define who is responsible for shipping costs, insurance, customs clearance, and the precise point at which risk transfers from seller to buyer in international transactions. The current edition is Incoterms 2020.
Incoterms were first published by the ICC in 1936 and are updated periodically. Incoterms 2020 (the current edition) contains 11 rules organized into two groups: (1) Rules for any mode of transport — 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). (2) Rules for sea and inland waterway transport only — FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight), CIF (Cost, Insurance and Freight). The most commonly used terms in global trade: EXW (seller makes goods available at their premises; buyer arranges all transport, export clearance, insurance). FOB (seller delivers goods to the named port of shipment and clears for export; risk transfers to buyer when goods are loaded on the vessel — buyer arranges ocean freight and insurance). CIF (seller arranges ocean freight and minimum insurance to named destination port; risk transfers at same point as FOB — when goods pass ship's rail at origin). DDP (seller delivers goods at named destination, cleared for import and all duties paid — maximum obligation for seller). Incoterms do not cover: payment terms (those are in the sales contract and letter of credit), title transfer (governed by applicable national law and the sales contract), or consequences of breach (governed by contract law). For trade financing (letters of credit, invoice factoring, export financing), the Incoterms used in the underlying sale affect what documents are required. A CIF shipment requires evidence of insurance; an FOB shipment does not. The terms must be consistent between the sales contract, the letter of credit, and the transport documents.
There is no single 'best' term — it depends on your capability and risk tolerance. DDP is the simplest for importers: the seller handles everything including US import duties and customs clearance. However, DDP prices are higher (seller prices in their risk) and you have no control over customs broker or timing. DAP (Delivered at Place) is a good middle ground: seller handles all transport and insurance to your US location, but you handle import customs clearance and duties. FOB Origin gives you maximum control and often lower prices if you have a reliable freight forwarder.
Incoterms are legally binding when incorporated by reference into a sales contract — 'FOB Shanghai, Incoterms 2020' is a valid and enforceable contractual provision. They do not automatically apply — they must be expressly incorporated. Some confusion arises because US domestic law uses 'FOB' differently than Incoterms (under the UCC, 'FOB' has a different meaning). For international transactions, always specify 'Incoterms 2020' to avoid ambiguity.
The Incoterms in your sales contract determine what documentary evidence of shipment, insurance, and freight the seller must present under the L/C. CIF requires an insurance certificate. FOB or FCA with freight collect do not. CPT or CIP terms affect who presents the transport document and whether freight is prepaid. The L/C must be drafted consistently with the Incoterms — a mismatch is a common cause of documentary discrepancies that delay payment.