INCOTERMS (International Commercial Terms) emerged as a “common language” in international trade. Understanding INCOTERMS not only helps businesses avoid risks but also optimizes costs and enhances efficiency in import-export transactions.
So, what are INCOTERMS? Why are INCOTERMS so important? Let’s explore this in this article.
1. What are INCOTERMS? Why are INCOTERMS Important in International Trade?
a. What are Incoterms?
INCOTERMS, short for “International Commercial Terms,” is a set of standardized rules published by the International Chamber of Commerce (ICC).
INCOTERMS are sets of rules that define the obligations of sellers and buyers regarding delivery, costs, risks, insurance, transportation, etc., in international commercial contracts.
For example, when conditions like FOB, CIF, DDP… are referenced in a contract, the parties are applying exactly the obligations according to INCOTERMS.
b. Role of Incoterms
- Play an important role in creating clarity in the division of responsibilities and costs between sellers and buyers
- Minimize commercial disputes and misunderstandings during contract execution
- Incoterms create a common language for international trade, allowing businesses from different countries to transact easily and efficiently
2. Overview of INCOTERMS Delivery Conditions
a. Commonly Used INCOTERMS Versions Today
To date, INCOTERMS has gone through many versions: 1936, 1953, 1967, 1976, 1980, 1990, 2000, 2010, and the latest is Incoterms 2020.
Each version reflects new global trade practices.
For example, INCOTERMS 2010 reduced the number of conditions from 13 to 11 to suit multimodal transport, while Incoterms 2020 added regulations on insurance and security, changed DAT to DPU, and raised the insurance level for CIP condition to comprehensive insurance under Clause A.
In practice, INCOTERMS 2000, 2010, and 2020 are the three versions most widely used today.
b. Overall Comparison Between INCOTERMS Versions 2000 – 2010 – 2020
Each version has different numbers of delivery conditions, with additions or removals aimed at optimizing practical application efficiency. For easy visualization of changes between versions, please refer to the summary table below:
| Condition Group | Delivery Condition | 2000 | 2010 | 2020 | Main Changes |
|---|---|---|---|---|---|
| Group E (Delivery at factory) | EXW – Ex Works | X | X | X | No change |
| Group F (Buyer arranges main transport) | FCA – Free Carrier | X | X | X | 2020 adds option for seller to obtain onboard bill of lading |
| FAS – Free Alongside Ship | X | X | X | No change | |
| FOB – Free On Board | X | X | X | Should be used for bulk cargo, not recommended for containers | |
| Group C (Seller arranges main transport) | CFR – Cost and Freight | X | X | X | No change |
| CIF – Cost, Insurance & Freight | X | X | X | 2020 requires ICC-C level insurance | |
| CPT – Carriage Paid To | X | X | X | No change | |
| CIP – Carriage & Insurance Paid To | X | X | X | 2020 requires ICC-A level insurance, higher than CIF | |
| Group D (Seller bears all risks to destination) | DAF – Delivered At Frontier | X | Removed from 2010 version | ||
| DES – Delivered Ex Ship | X | Removed 2010 | |||
| DEQ – Delivered Ex Quay | X | Removed 2010 | |||
| DDU – Delivered Duty Unpaid | X | Removed 2010 | |||
| DAP – Delivered At Place | X | X | Added new 2010, kept until 2020 | ||
| DAT – Delivered At Terminal | X | Renamed to DPU in 2020 for clarity on unloading | |||
| DPU – Delivered at Place Unloaded | X | New condition replacing DAT; only condition requiring seller to unload | |||
| DDP – Delivered Duty Paid | X | X | X | No change |
>>>> Related article: What is Logistics? Key Differences from Import-Export
3. Responsibilities and Risks Between Seller and Buyer
When participating in international goods purchase contracts, defining responsibilities, costs, and risks between sellers and buyers is very important.
Division of responsibilities usually follows:
- Transportation costs and responsibilities
- Customs and taxes
- Insurance
To illustrate more clearly, below is the Table of Responsibilities and Risks of sellers and buyers according to each condition of INCOTERMS versions 2000 – 2010 – 2020:
| Condition | Version | Main transport cost | Risk transfer | Insurance buyer (if any) | Notes |
|---|---|---|---|---|---|
| EXW | 2000/2010/2020 | Buyer | At seller’s premises | Buyer | Seller prepares goods, buyer handles the rest |
| FCA | 2000/2010/2020 | Buyer | When delivered to first carrier | Buyer | Risk transfers when delivered to first carrier |
| FAS | 2000/2010/2020 | Buyer | When goods placed alongside ship at export port | Buyer | Applied for bulk cargo, non-containerized goods |
| FOB | 2000/2010/2020 | Buyer | When goods pass ship’s rail | Buyer | 2020 no longer requires “pass ship’s rail”, just “loaded on ship” |
| CFR | 2000/2010/2020 | Seller | When goods loaded on ship | Buyer | Seller pays transport cost, buyer bears risk |
| CIF | 2000/2010/2020 | Seller | When goods loaded on ship | Seller | Seller buys minimum insurance (ICC-C) |
| CPT | 2000/2010/2020 | Seller | When delivered to first carrier | Buyer | Seller handles costs, risk transfers early |
| CIP | 2000/2010/2020 | Seller | When delivered to first carrier | Seller | From 2020 requires seller to buy higher level insurance (ICC-A) |
| DAF | 2000 | Seller | At import country border (not cleared) | Buyer | Removed from 2010 version |
| DES | 2000 | Seller | When goods placed on ship at destination port | Buyer | Removed from 2010 version |
| DEQ | 2000 | Seller | When goods unloaded from ship at destination port | Buyer | Replaced by DPU in 2020 |
| DDU | 2000 | Seller | When goods delivered at destination (taxes not paid) | Seller | Replaced by DAP/DDP in new version |
| DAP | 2010/2020 | Seller | When goods ready for delivery to buyer at destination | Seller | Risk and cost borne by seller to delivery point |
| DPU (formerly DAT) | 2010 (DAT)/2020 (DPU) | Seller | When goods unloaded from vehicle at destination | Seller | DPU replaces DAT from 2020, requires seller to unload |
| DDP | 2000/2010/2020 | Seller | After goods delivered and import clearance completed | Seller | Seller bears all responsibilities, costs, taxes, risks to delivery point |
4. Current Status of Delivery Conditions Used by Vietnam
a. Export – Mainly Using FOB
In most export transactions, Vietnamese businesses often choose FOB (Free On Board) conditions. With FOB, the seller delivers goods on board the ship at the designated port; from then on, the buyer bears all risks and arising costs.
Theoretically, this condition is simple and easy to implement. The seller doesn’t need to worry about chartering ships or buying international insurance. However, since the buyer controls the international logistics part (from shipping lines, schedules to freight costs), Vietnamese businesses are easily passive in delivery time and pressured with low purchase prices.
FOB Condition: The seller must deliver goods to the carrier (designated by the buyer), and the buyer arranges and pays for the transport vehicle and buys insurance. Therefore, the buyer will bear most of the risks when importing goods.
b. Import – Preferring CIF and CFR
When importing, domestic businesses often choose CIF (Cost, Insurance and Freight) or CFR (Cost and Freight). Both require foreign sellers to bear the cost of transporting goods to Vietnamese ports. With CIF, the seller must also buy cargo insurance.
However, what few people notice is: risk still transfers to the buyer from the moment goods are loaded on the ship at the departure port. If there are incidents like ship delays, loss, cargo damage – Vietnamese businesses are still the party that must handle it, sometimes without sufficient tools to claim compensation from foreign shipping companies or insurance.
CIF Condition: The seller is responsible for chartering ships and paying freight costs to the destination port, and must buy insurance for goods throughout the transport process. However, risk still transfers to the buyer right at the moment goods are loaded on the ship at the departure port. Thus, while the buyer doesn’t bear freight and insurance costs, they still bear the main risk if incidents occur during transport.
CFR Condition: The seller is responsible for chartering ships and paying transport costs to the destination port. However, there’s no obligation to buy insurance for the shipment. Like CIF, risk transfers to the buyer from when goods are loaded on the ship at the departure port. This means the buyer will bear losses if goods encounter risks during transport and there’s no insurance compensation.
c. Causes of Current Situation
The main cause stems from Vietnamese businesses being limited in company scale and negotiation capacity, so they choose FOB when exporting and CIF when importing to avoid having to manage ship chartering or insurance purchasing.
This leads to restricted transportation and often suffering more losses in pricing compared to foreign partners.
5. Solutions for Businesses Using Incoterms to Minimize Logistics Costs and Risks
To optimize logistics costs and minimize risks, businesses need to choose and negotiate appropriate Incoterms conditions from the start or select a suitable consultant like UNI Consultings.
Solutions include:
a. Choose Appropriate Incoterms Conditions
Strategic negotiation of delivery conditions not only helps control costs but also creates competitive advantages in price negotiations.
For example, if a business wants to minimize costs, using FOB (Free on Board) conditions in exports will transfer main transport responsibilities and costs to the buyer.
Conversely, when businesses want to control the entire process and negotiate insurance prices, consider CIF (seller pays freight and insurance).
b. Contract Management and Legal Risk Minimization:
Before signing, both parties need to carefully check the INCOTERMS conditions used, including version and specific delivery location.
If there are changes in transport plans or markets, timely updates are needed to avoid future disputes.
c. Professional Consulting Solutions from UNI Consulting in INCOTERMS Application
In the increasingly complex international trade context, effective INCOTERMS application requires deep understanding of legal regulations and market practices.
UNI Consulting, with a team of experts experienced in international trade, has accompanied businesses in optimizing logistics costs and minimizing risks through scientific Incoterms application.
UNI Consulting’s comprehensive consulting services include:
- Analysis and selection of optimal Incoterms conditions based on industry characteristics, import-export markets, and business logistics capabilities
- Review and optimization of commercial contracts to ensure legality and minimize dispute risks
- Support in providing solutions when issues arise during contract execution
With scientific approach and practical experience, UNI Consulting not only helps businesses save significant logistics costs but also builds a solid foundation for sustainable import-export activities. Let UNI Consulting become your trusted partner in your business’s international trade development journey.
📞 Contact UNI Customs Consulting for free consultation:
📧 Email: uni@eximuni.com
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