Understanding Incoterms®: Their Role, Benefits, and Flexibility in International Sales

When engaging in international trade, one of the most common sources of confusion is determining who is responsible for what — who pays for transportation, who handles customs clearance, and when the risk passes from seller to buyer. To simplify these logistics-related questions, the International Chamber of Commerce (ICC) developed a standardized set of rules known as Incoterms® (short for International Commercial Terms).

At Cosmo Freight, we help our clients integrate Incoterms® into their international contracts with clarity and confidence. Here’s what you need to know:

🔍 What Are Incoterms®?

Incoterms® are a globally recognized set of 11 trade terms that define the responsibilities of buyers and sellers in international sales contracts — specifically for the delivery of goods. The latest version, Incoterms® 2020, was published by the ICC and is widely adopted worldwide.

It’s essential to note that Incoterms® are not mandatory. However, they are highly recommended because they offer a clear, universal shorthand to define the logistics responsibilities in a transaction.

🧩 The Three Key Functions of Incoterms®

Each Incoterm® addresses responsibilities in three essential areas of a sale:

1. Cost Allocation – Who Pays What?

Incoterms define which party pays for transportation, loading/unloading, export/import duties, insurance, terminal handling, and more. For example:

• FOB (Free On Board): The seller pays until the goods are loaded on the ship.
• DAP (Delivered at Place): The seller covers nearly all transport costs until final delivery.

2. Task Division – Who Does What?

They clarify responsibilities for logistics actions like:

• Booking freight
• Arranging export documents
• Customs clearance
• Insurance

3. Risk Transfer – Who Bears the Risk and When?

Incoterms also state when the risk of loss or damage to goods transfers from seller to buyer. For example:

• EXW (Ex Works): The buyer assumes all risk from the seller’s premises.
• CIF (Cost, Insurance, and Freight): The risk transfers when goods are loaded on the vessel, even if the seller pays for insurance.

📌 Incoterms® Are Optional, But Powerful

While Incoterms® are not legally required, they offer a reliable framework that:

• Reduces misunderstandings
• Minimizes disputes
• Simplifies negotiations
• Provides a clear summary of logistics obligations

Most importantly, parties remain free to customize their contract beyond the scope of the Incoterm used.

💼 Real-World Flexibility: The EXW Example

Under EXW, the seller’s only obligation is to make goods available at their premises. However, in practice, a seller might choose to assist the buyer by:

• Loading goods onto a truck
• Handling export documentation
• Stuffing the container

This is perfectly acceptable — as long as it’s agreed upon in writing. Incoterms set the baseline, but real-world logistics often go beyond.

💡 Why Incoterms® Matter for Your Business

At Cosmo Freight, we help clients choose the most suitable Incoterm® for their shipment based on their operational capabilities and risk tolerance.

Whether you’re exporting goods from Europe or managing supply chains from Asia, selecting the right Incoterm® ensures that responsibilities are clearly defined and your international contracts run smoothly.

✅ Key Takeaways

• Incoterms® are optional but highly useful for structuring the logistics portion of a sales contract.
• They define who pays, who does what, and when risk transfers.
• Parties can always negotiate beyond the Incoterm — for instance, loading goods under an EXW deal.
• They improve transparency, reduce risk, and streamline global trade.

📞 Need Expert Help?

Need help choosing the right Incoterm®? Contact Cosmo Freight — your trusted partner in global logistics and international sales support.