Incoterms Explained: What exporters need to know to avoid shipping risks

When it comes to shipping goods to international customers, your sales contract needs to answer three important questions: Who pays for shipping insurance or duties, where and when delivery happens and whether the buyer must collect the goods aboard ship.  

This is why a clear understanding of Incoterms is essential. 

Incoterms are three-letter acronyms that clarify buyer and seller responsibilities in a domestic or international sales contract. They reduce misunderstandings over logistics and clearly pinpoint when risk transfers from seller to buyer.  

Used universally, Incoterms help both parties understand costs, risks and obligations. That matters for exporters managing supply chain disruption, entering new markets and negotiating contracts across different languages and business practices.  

A contract alone isn’t enough if terms are interpreted differently by each party. Incoterms provide clear, shared definitions to prevent disputes in your commercial contract terms.

Incoterms clearly spell out who does what in a shipment such as who arranges transport, who pays which costs and when risk transfers. That clarity helps protect margins and avoid delays, especially when goods cross borders and involve multiple parties—illustrating the growing importance of customs brokers in a rapidly changing global trade environment. 

Problems often arise when a contract doesn’t reflect how the shipping will be done. Confusion about the delivery location, unloading, or duties can lead to unexpected costs. Incoterms identify these issues early

Incoterms describe obligations, risks and costs in a trade transaction. Only one Incoterm is used at a time and the negotiated contract should clarify and refine the chosen term.  

Incoterms specify which party must: 

• organize transportation  
• arrange insurance for goods, depending on the term 
• obtain shipping documents or permits 

Incoterms also define the date, time and location of the delivery and when risk transfers from seller to buyer, as well as who pays for transportation, packaging, unloading and duties.  

These obligations, risks and costs are described in the Incoterms 2020 book, as these rules of trade impact your revenue.  

Delivery can occur at different points during the physical movement of cargo. That’s why it’s critical that everyone involved understands the delivery details, including location and time, to avoid trouble later. 

Even when an Incoterm is selected, it doesn’t: 

• address all conditions of a sale  
• identify the goods being sold or list the contract price  
• set the method or timing of payment  
• define when title or ownership passes from seller to buyer  
• specify all documents required to support customs clearance in the buyer’s country  
• address liability for failure to provide conforming goods, delayed delivery or dispute-resolution mechanisms  

The most up-to-date: Incoterms 2020

Last revised in 2020, the 11 Incoterms are divided into two groups based on mode of transport. 

Incoterms can affect the financial risks you carry as an exporter, including what insurance coverage you may need based on the term negotiated. 

The Incoterms 2020 rules set specific insurance coverage expectations for CIF and CIP. Under CIF (intended for sea freight trade), Institute Cargo Clauses are the default level of coverage. Parties can agree to higher coverage, but it must be in writing, so a policy can be underwritten.  

Under CIP, the rules were updated to a higher level of insurance coverage intended to align with Institute Cargo Clauses (A).  

Get up to speed on the latest edition of Incoterms and learn how to properly incorporate them into sales contracts and invoices. 

Before widely recognized standards, global trade often relied on informal practices. After the First World War, the International Chamber of Commerce (ICC) was founded and the industry standard emerged.  

Incoterms have evolved with changes in trade regulations and business practices, and revisions are added to the Incoterms book over time to reflect commerce trends and innovations.  

If you want to learn more, official tools and training can help you apply Incoterms consistently: 

• The ICC’s Incoterms 2020 app for practical information on mobile devices 
• An Incoterms 2020 online course presented by the Forum for International Trade Training (FITT) and the Canadian Chamber of Commerce, positioned for beginners and as a refresher for experienced professionals  
• The Incoterms 2020 wall chart as a quick reference, to be used alongside the rule book  
• ICC registered trainers of the Incoterms rules, with a pathway to find a trainer in Canada via FITT. 
• Export Development Canada’s (EDC) four-part article series that explains the Incoterms 2020 rules with examples.  

In summary

Incoterms are standardized terms used in sales contracts to help exporters and buyers clarify responsibilities for costs, logistics and risk transfer. They don’t replace a full contract or cover payment terms and title transfer. But using the right Incoterm, with a clearly defined delivery place, helps prevent disputes, delays and surprise costs. Always consult the Incoterms 2020 book published by the ICC, before implementing them in your export contracts.