A practical guide to using and choosing Incoterms rules correctly for global trade

From the March-April 2025 edition of Supply Chain Management Review.

March-April 2025

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In his 1983 radio address to the nation, President Ronald Reagan said: “The winds and waters of commerce carry opportunities that help nations grow and bring citizens of the world closer together.” At the time, the world’s trade industries were already almost 50 years into an experiment meant to help deliver on this promise: a unified code of communication called “Incoterms rules” or “International Commercial Terms.” Incoterms are standardized rules that describe the roles and responsibilities of each partner in a trade, regardless of nation, and they succinctly summarize what would otherwise be a verbose explanation indeed. Incoterms make the mechanics of a trade quickly visible to all and truly grease the wheels of world exchange.

Despite their importance, Incoterms rules are not commonly understood, nor are they commonly used with expertise. It is well documented by now in academic literature that industry personnel tend to use Incoterms rules out of convenience, inertia, or expedience in making a trade, rather than out of careful consideration of a rule’s impact on the end customer or the total landed cost. This is usually because those choosing the rules are, typically, procurement or sales experts, rather than experts on trade compliance, logistics, or the law. A non-expert making a decision on a complex topic will tend to use what has been used in the past, regardless of its suitability to the present circumstances. Moreover, a non-expert will introduce errors and oddities in the process simply by virtue of not understanding all the complexities. A 2021 survey of supply chain industry professionals revealed that many use Incoterms rules inappropriately indeed, or use rules that do not exist, such as “EXW International” and “FOB Delivered,” or declare that they utilize the Incoterms 2015 ruleset, which does not exist. If you find yourself wondering what is wrong with those rules, then this article is for you.

The correct use of the Incoterms rules for each trade is not just a guess or a cookie-cutter standard, but chosen to give the best delivery time, highest reliability and the lowest landed cost, creating a powerful competitive advantage. Securing this advantage requires detailed knowledge of the trade circumstances, the routes involved, the capabilities of each trade partner, and the Incoterms ruleset itself. This is not at all trivial, so we offer the following to give supply chain practitioners a leg up toward achieving excellence in Incoterms rule choice. 

The challenge: Four levels of Incoterms excellence

There is a knowledge and selection gap in many or most organizations that introduce problems. These can be roughly summarized as follows:

• a disconnect between those making the trade (usually procurement or sales) and the logistics team that has to implement it;
• a shallow understanding of how each rule preserves or discards advantage;
• standardized, one-size-fits-all rules that ignore the specific needs of any given trade;
• an over-reliance on third parties (trade partner, freight forwarder).

The challenge, therefore, is to develop useful tools to help guide professionals toward better outcomes. The authors are currently exploring heuristics, algorithms, and AI tools to assist professionals but in the meantime, until these are released, there are many easily applied ideas that will help you select Incoterms rules that preserve your strategic advantage.

Before we look at the four levels, let’s explore what Incoterms rules influence. The rules define the obligations (and hence roles and responsibilities), as well as the risks and costs to be borne by the logistics functions of the seller and buyer. While the entirety of each trade partner’s organizations may be engaged, it is the logistics functions that house the knowledge, skills and capability which is the most affected by the choice of Incoterms rules because these concern the handling, moving, booking of passage, and handoff of the cargo itself. This means that within your logistics department, there must be a core of well-trained, skilled logisticians who are really experts in the Incoterms rules, trade and customs requirements, regardless of who it is within your organization that picks the rules.

Level 1: Match Incoterms to appropriate trade uses

The first idea is to simply ensure that Incoterms rules are applied to situations that call for them. This sounds simple and straightforward, but it is the one that can be the hardest to detect for novice users. Here, a listing of common pitfalls will go a long way.

• Geography. If your trade is international, be sure to pick a rule that obligates your partner to provide what you need and gives you the best chance of complying with trade laws. Consider that the Incoterms rule must also define the customs authority implications as well as the logistics requirements. Here are some dos and don’ts.

- EXW is inappropriate for international trades, period. The presumption of this rule is that of a domestic trade, and the signals that normally prompt a seller to ensure trade-law due diligence are not present. Furthermore, the paperwork needed for customs clearance is not a baked-in requirement under EXW. Violations of customs laws from the subsequent export by the buyer can reverberate back on the supplier. EXW is only safely useful for courier parcels where the courier collects from the seller’s premises.

- F rules and only F rules are for domestic deliveries. Truly domestic trades should use FCA either with the place of transfer at the seller’s premises or at the final destination where the buyer takes responsibility for the goods.

- D rules are international, not domestic. The presumption is that the goods are clearing export and import customs.

margin-left: 200px;">- DDP requires foreign payments to third parties. This is risky, time-consuming and costly if your company does not have an entity in the receiving country that can disburse payments in the foreign currency.

• Mode of transport. Certain rules are designed to support certain modes of transport and fail at others. Be aware and use the ones that apply to your mode.

- FOB is a water-only rule (as is FAS) and these are used for loading in ports onto ships. FOB and FAS are useful for bulk and breakbulk cargo. They should not be used for land movements. Use FCA instead.

- FCA and DAP are purpose-built container rules, with FCA being utilized where the containers are delivered to a container terminal for export and DAP for the import into a foreign country.

- FOB is inappropriate for containers. FOB creates ambiguity when damage occurs during a voyage because the container cannot be opened for inspection once loaded onboard the ship. As such, any damage occurring during the voyage cannot be distinguished from damage occurring during loading, even though the liability changes after loading onto the ship. The payment to the container terminal handling the container will also complicate this significantly, as this is usually included in the overall shipping costs to the container shipping line (paid by the buyer under FOB), but the seller must handle loading under FOB.

- EXW is completely inappropriate for heavy cargo. Sellers must usually operate the equipment on their own facility for efficiency, liability and practical reasons, but EXW requires the buyer to load. This creates an inherent mismatch between behavior and the description of responsibility, generating unnecessary risk. Use FCA instead, which requires the seller to load within the seller’s facility and neatly sidesteps this problem.

• The use of C terms means risk and responsibility are transferred at different places. Beware of this as the risk increases significantly if the seller has the right to send the goods via any route and any mode without advising the buyer. If you want your goods on time and not wandering around the world via the lowest cost movements, be precise when using these rules and specify in addition to the Incoterms rule on the route and mode. Specifically, be aware of: 

- The CFR and CIF terms are from a port of departure to a named destination, the choice of shipping line or port is that of the seller, as is the method and route to the port, leaving a large portion of the logistics undefined, which is less than optimal.

- The better choice is that of CPT or CIP as these are for all modes not just a port origin and allow better logistics flexibility.

- When a C rule is utilized, the agreement must specify the Incoterms rule as, for example: CIP (Named physical address where handover occurs) Incoterms 2020.

It is recommended that this follow with added details of the route, the modes and the service providers to be utilized in addition to the rule so the risk is known and minimized.

• Avoid limited or obsolete versions of trade rules. The incorrect use of “FOB (Loaded)” or “FOB (Delivered)” originates from the U.S. Commercial Code from the 1950s. This has no validity outside of the USA, has different interpretations in each state, and is not applicable in Louisiana which utilizes a different (and similarly obsolete) domestic code. These are not Incoterms rules in spite of the confusing use of the same three-letter code. There are also “phantom” U.S. domestic versions of EXW and FAS, which should be avoided as well in favor of the identically coded Incoterms rules.

Level 2: Involve the logistics group early

Many pitfalls can be avoided by bringing in the logistics personnel to get an opinion on the practicality of a trade. Too often a wild proposal has gone through sales and legal only to be signed and land on a logistics group that has no idea how to deliver. Logistics is left holding the bag and does its best, but this is hardly the most advantageous method. Instead, procurement and sales teams should consult with logistics on the following:

• Ensure appropriate risk allocation. Does your organization want the risk and revenue, or prefer to hand that to the other party? Logistics can help you understand the risk and contextualize the revenue.
• Optimize costs and delivery timelines. It may be possible to arrange transit into and across a country you’ve  done business in before, but logistics may tell you that ensuring the best cost and best time involves a delivery at the destination port and allowing the buyer to use their connections to do a better job during on-carriage. Remember that the aim of any logistics operation is to deliver on time, every time. That implies they must choose the methods and routes to do so.
• Comply with customs requirements. Every so often a trade is signed that simply cannot be executed profitably because sales have agreed to deliver, for example, DDP into a country that the logistics department lacks the rights to clear customs in. At this point the logistics team is forced to engage a third party (eating into profits unexpectedly) or the sales team is forced to renegotiate the deal. Even more egregious is the choice of DDP without knowing the duty rate. Some countries have 40% or higher, which has caused contracts to be costly disasters.

Level 3: Tailor rather than standardize (the choice is ideally for each buyer and seller to fit the associated trade)

Over 60% of companies use just one or two Incoterms rules for everything they do. Often this is one rule for sales and one rule for procurement. This approach is tempting because it feels safe, but it is quietly introducing risk or hidden extra costs each time a trade deviates from that rule’s application sweet spot.

• Cost savings and efficiency. Picking the right rule can best exploit the strengths of each trade partner. Walmart would not be smart for asking a supplier to deliver DDP because it would be failing to use its vast expertise in logistics, and the resulting trade would end up costing its customers more. In the same way, you and your trade partners will have strengths that should be used where one or the other has a comparative advantage.
• Risk management. Using a water rule for a land transport may work fine, until it doesn’t. Any dispute that arises out of such a trade has discrepancies between the actual trade and the intended use of the Incoterms rule, complicating matters. In addition, a mismatch may create legitimate confusion about who is meant to perform an action, slowing movements or placing cargo in unexpected “limbo.” Ensure a fit between the rule and the expected reality to avoid extra friction points in any dispute. In simple terms, use the right rule for the trade that is to be affected.

Level 4: A holistic approach to effectively select Incoterms rules.

Incoterms rules are not chosen, or at least are not correctly chosen, by one party demanding a shipping line or the one party performs all the logistics. To effectively select and apply Incoterms rules, organizations can follow this step-by-step approach.

1. Assess trade lane and logistics capabilities

• Identify the origin, destination, and key responsibilities (e.g., export/import clearances).
• Evaluate which party (buyer/seller) has the strongest logistics expertise and buying power in this lane. Yes, this is trade and lane-specific as one party may have greater skills and experience in heavy lifts, while the other may have more buying power for containers.

2. Consult logistics teams

• Include logistics personnel before the trade is cemented to identify the most appropriate rule for this route and trade. Take logistics’ time and its reliability into account in discussions about the trade. Also remember different Incoterm rules introduce different costs to the buyer or seller. The price must take this difference into account, which implies the Incoterms rule must be chosen before the final trade price is set.

3. Match Incoterms to transportation mode

• Use maritime terms like FOB or CIF for bulk shipments.
• Apply flexible rules like FCA or CIP for containerized or multi-modal transport.
• Use the CIP to require insurance for the movements, and make sure the CIP rule with its “all risks” insurance coverage is chosen not the CIF with its restricted insurance coverage.

4.  Avoid high-risk rules (unless really justified)

• Use DDP only if the seller has a local subsidiary to handle customs and payment in the foreign country.
• Avoid EXW, unless dealing with small parcels where the courier manages logistics.

5.  Review contracts for precision

• Always specify the Incoterms version (e.g., CPT, named location, Incoterms 2020).
• Clearly define delivery locations in the named location, transfer of risk, and responsibilities. For C terms, always specify the origin, the route in detail, the modes and timing to the named location so there are no surprises.

6.  Train stakeholders

• Provide regular, in-depth training to all the personnel involved in trade. Focus on practical scenarios and the correct application of both customs as well as Incoterms rules. Research has found that training is generally desired across the board for functional departments. The training was classified as ‘extremely’ or ‘very necessary’ for over 80% of all respondents. But training also has its problems. This is largely given by people or consultants who have utilized the ICC book on Incoterms rules, not done the research and performed trade as the authors here have. This means that issues such as EXW and DDP are not known or communicated to the trainees. While any improvement in the knowledge of the utilization of correct and appropriate Incoterms rules to the trade is welcome, this is only scratching the surface of the problem and not offering a correct solution if the research understanding is not added to the knowledge that is imparted. During the training done by the authors, it has been interesting to see that the people who come for the more advanced courses value not the simple regurgitation of the ICC book, but deeply appreciate the insights and the depth of understanding provided by research and practice married together.

With the above set, companies can choose an Incoterms rule that benefits the trade and promotes their competitive advantage. But there are a few other issues to consider, and we address them in the next section.

The role of freight forwarders and external advisers involved in the trade: Asset or liability?

One solution often argued is that freight forwarders (or other parties involved in providing services in the trade) routinely engaged will be able to navigate this complex topic reliably for their customers. In some ways this is true, but their influence comes with risks. It is tempting for small to medium businesses to hire a forwarder and trust them to make any terms of trade work, in part because the freight forwarder will simply “fix it” if things go awry. Freight forwarders themselves are not immune to the prevailing challenges of Incoterms rule selection and will happily offer FOB for non-maritime locations such as inland warehouses or prefer EXW for an international trade (when FCA in both scenarios would better protect everyone involved).

Freight forwarders may indeed smooth over problems that arise, but their good works do not undo the risks associated with contracting for something impossible, or establishing liability where none was intended or where, practically speaking, the liable party can’t manage the risk. Forwarders, in fact, may smooth over issues so they retain the business, but when issues arise the seller or buyer will be the ones who are required to pay fines or endure the operational shutdowns associated with delayed shipping. If you examine the indemnity clauses under your freight forwarders’ standard terms and conditions, you will likely find that they are maximally protected and you are not, including exposure to liens on your goods in cases of dispute or general average. Even major corporations will have a low liability limit with their freight forwarder.

Freight forwarders are not part of your company, and their salary and bonuses are paid based on their freight volume. Obviously, they want to offer your company a service and do not want to lose your business, but when faced with a choice forwarders will make a decision that maximizes their company’s profitability and thereby benefits themselves.

Risk, cost, and profitability

Incoterms rules can influence the risk, cost and profitability of any trade. If the price for a trade is set prior to defining the Incoterms rule, then fairly large changes in the costs to either the buyer or seller can occur when the Incoterms rule is chosen. The cost of the move to merely deliver a container to the nearest port is very different compared to the cost of delivering the container to a foreign country. These change the profitability of the trade. Even more problematic is the use of DDP where the customs duty rate and other taxes may be significant and may vary during the trade or even when goods are in motion. The seller will be liable for these increased costs, and this happens more frequently than many companies will admit.

The correct method is to have the price set from the source of supply initially. The choice of Incoterms rule is then between seller and buyer as to the role and responsibilities to ensure the goods are delivered on time with high reliability. The costs appropriate to the seller are then added to the sales price, and the buyer has responsibility for the rest.

Insurance varies between Incoterms rules when it is included in the two rules of CIF and CIP. Do not be fooled into thinking insurance covers everything in the preparation and movement. Incoterms rules insurance covers only the specific movement defined in the rule, and only to a value of 110% of the value of the goods. Where risks are higher, it may be appropriate to carry more comprehensive insurance.  And please remember, the insurance never covers the consequences of the loss of or damage to the goods to your business. You will get compensated for the value of the goods, not your loss of profit or other issues.

Conclusions

Any trade must be for the mutual benefit of the two parties—buyer and seller—if this is a long-term trading partnership. This implies both parties see the value in delivering the product to the correct location on time (an agreed time) and with high reliability at the most advantageous cost. Achieving this requires not just the sale price but also the movement costs to be agreed upon between both parties. This means Incoterms rules must be negotiated to utilize the best skills, knowledge and buying power between the seller and buyer to achieve this strategic objective.

The training of a core of logistics personnel to be experts—true experts—who can utilize the rules for maximum competitive advantage for the trade and the buyer and seller is essential. Without these skilled trade and Incoterms logistics professions, incorrect Incoterms rules will be chosen. While these may not reflect as a problem initially, eventually the probability is that the buyer and seller will see a problem and turn to the choice of Incoterms rule to determine who is responsible. If this is inappropriate, incorrect or just a poor choice, this can sour the relationship between buyer and seller very quickly. Always look beyond the nitty-gritty of the trade agreement and ask what logistics capabilities the buyer and seller have within this trade lane, who should do what and why, and then choose the most advantageous Incoterms rule to give the best delivery time with the highest reliability? It is in the answers to these questions that we will fulfill the promise of Incoterms as a streamlining force for global trade. Beware, caveat emptor applies to the choice of Incoterms rule as well.

About the authors

John Vogt has a Ph.D. (logistics), MBA, and B.Sc. (engineering) degrees, and is a European engineer (EUR ING), chartered engineer (UK), and a fellow of the Institute of Engineering and Technology (UK). His research focuses on global logistics, international trade, and Incoterms rules. He was a visiting professor at the University of Houston Downtown. Previously he was the CEO of a company running port terminals, a main board director for an international freight forwarding company, the head of a consulting company, and VP for global logistics at Halliburton, a Fortune 100 company where he had a spend exceeding $1.8 billion that involved 110 countries. He can be reached at [email protected].

Jonathan Davis is dean of the Marilyn Davies College of Business and professor of Supply Chain Management at the University of Houston Downtown. Dr. Davis previously served as chair of the General Business, Marketing, and Supply Chain department from 2017 until 2022. Dr. Davis received a Ph.D. in industrial technology from Purdue University, an MBA in operations management from St. Edward’s University, and a Bachelor’s degree in journalism from The University of Texas at Austin. He can be reached at [email protected].

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