Incoterms 2020: The three letters that can save—or complicate—an international transaction

Executive summary. Incoterms 2020 are not just three letters added to an invoice: They determine who pays for transport, who assumes the risk, who handles the customs process, and what documents each party needs to keep. In practice, many companies use EXW, FOB or CIF out of habit, even though they are not always the best option. Two key ideas: Don't confuse cost with risk, and don't automatically use EXW or FOB; in many operations, especially with shipping containers or when you need to control the export customs declaration, FCA can be a much safer alternative.

When a company starts exporting, it usually considers the price, the customer, the transport, the documentation and the payment method. But it often leaves a key question for last: which Incoterm will we use for the sale? And that's where the problems start.

Because an Incoterm is not just a three-letter abbreviation that is put on a trade offer, it is a rule that defines who pays for what, who assumes the risk, and at what point the merchandise ceases to be the seller's responsibility and becomes the buyer's responsibility. Simply put: Incoterms 2020 are the separation of tasks in an international transaction.

Incoterms—International Commercial Terms—are rules created by the International Chamber of Commerce that allow buyers, sellers, freight forwarders, banks and insurers to speak the same language in an international sale.

The current version is Incoterms 2020, in force since January 1, 2020. There are 11 rules and they are divided into two main groups:

This is one of the most common mistakes. Many companies think, “If I pay for the transport, the risk is also mine until it reaches the destination.” But that's not always the case.

For example, in a CIF or CIP agreement, the seller pays for transport—and also insurance—to the agreed destination. But the risk can be passed on much earlier, at the source. In other words: The seller pays, but the risk may have already passed to the buyer.

Key Concept 1: Incoterm means more than just "who pays for transport." It also means "who assumes the risk and from when."

In international practice, the same terms keep appearing time and time again: EXW, FOB, CIF, FCA and DAP. DHL Global Forwarding identified FOB, EXW, FCA, CFR and CIF as the most popular, while Allianz Trade highlighted in 2025 that FOB and CIF continue to be among the most widespread in trade between companies.

The interesting fact is that some of the most commonly used Incoterms are not always the most recommended. The clearest example is FOB: Everyone knows about it, but it's not always used correctly.

FOB is intended for non-containerized maritime goods, such as bulk or general cargo. For containerized goods, it is usually more appropriate to use FCA, because the seller delivers the goods to a terminal, not directly “on board the ship.” In other words: Many companies use FOB because "it's always been done that way," not because it's the most correct Incoterm.

A Spanish company sells goods in containers and includes the following in its offer: FOB Valencia, Incoterms 2020. Sounds okay, right? Well, it isn't always.

If the goods are shipped in a container, the seller usually delivers the goods to a container terminal. From that point on, it does not control exactly when it is loaded onto the ship. As a result, using FOB can create confusion about the actual delivery time and transfer of risk.

The best approach is usually to use a formula like this:

FCA Container Terminal, Port of Valencia, Spain, Incoterms 2020.

The difference is not only aesthetic. The difference is legal, logistical and insurance-based.

EXW—Ex Works—is very tempting for an exporter. It seems to say: "I can leave the merchandise in my warehouse and let the buyer sort it out." But be careful: And that's exactly why it can be dangerous.

In EXW, the seller makes the goods available to the buyer at their premises. In principle, it is not obliged to load the goods onto the buyer's truck, nor does it handle export clearance.

Where's the problem? In Spain, if the sale is a VAT-exempt export, the seller needs to be able to prove that the goods have left EU territory. If the foreign buyer does not provide the export customs declaration (DUA), the exporter may lack sufficient proof during an inspection.

Therefore, for many transactions it is safer to use FCA factory instead of EXW. With FCA factory, the seller loads the goods onto the first carrier's vehicle and carries out the export clearance, which allows them to have the DUA as proof of the goods leaving the premises.

Key Concept 2: EXW might seem convenient, but it can leave the exporter without documentary control. When it comes to exporting, FCA factory is often more cautious.

Another classic: simply writing “DAP France” or “FOB Spain.” This is not enough. The Incoterm must be accompanied by a specific location and, whenever possible, the applicable version.

“DAP Paris, France” is not the same as “DAP 18 Rue de la Paix, 75002 Paris, France, Incoterms 2020.” The more precise the location, the less room there is for discussion.

Incoterms are not usually of much interest when everything is going well. But when the merchandise arrives damaged, is lost, delayed, is blocked at customs, or the tax authorities ask for supporting documentation, those three letters become extremely important.

A poor choice of Incoterm can lead to arguments about who should arrange transport, who should arrange insurance, who should assume the risk at the time of damage, who should handle export clearance, who should pay for unloading, or who should justify the goods leaving the EU.

Choosing the right Incoterm is not just a matter of transportation. It is a commercial, financial, tax and risk management decision.

For an exporting SME, the criterion should not be "to use the Incoterm that sounds right," but to understand three very basic things: where I actually deliver the merchandise, from what point it ceases to be my risk, and what documents I need to keep to protect myself.

Don't confuse who pays with who assumes the risk. Do not use Incoterms out of habit.

Because when it comes to international trade, three well-chosen letters can prevent any number of problems.

• OFTEX International Sales Incoterms 2020 Guide, internal working document.
• ICC - Incoterms® rules and Incoterms® 2020.
• DHL Global Forwarding - Incoterms® Explained. 
• Allianz Trade - Using Incoterms to secure international transactions, 2025.

NOTE: [this document / this publication] is not intended as advice on which Incoterm to use. The specific circumstances of each case make it crucial that you make your decisions in the most reasoned way possible. The information presented here may become outdated. References to third-party pages were made on a specific date; the content may have been modified and superseded by subsequent changes in the guides.