Incoterms for Small Parcel Sellers

What Incoterms are

Incoterms are a set of standard trade terms published by the International Chamber of Commerce. Each is a short abbreviation, such as EXW or DAP, that sets out who arranges and pays for transport, who handles export and import clearance, and at what point risk passes from seller to buyer. They are reference terms agreed between the parties in a sales contract, which means they apply only if the seller and buyer choose to use them. The rules are revised about every ten years, and the current edition is Incoterms 2020, though older editions may still be quoted.

Incoterms are not a law, and they do not govern everything. They do not say when ownership passes, they do not decide what happens if the goods are faulty, and they are not a substitute for insurance. They cover three practical questions: who does what, who pays what, and who bears the risk of loss or damage during transport.

Why small parcel sellers meet them

Large exporters use Incoterms in contracts as a matter of routine. A small online seller usually never signs a contract with a buyer, but the same questions still come up: who pays the duties, who is the importer, who is responsible if the parcel is lost? Marketplaces, carriers and shipping tools often present these choices in terms of Incoterms-style options. Understanding them makes the settings in those tools less mysterious, and it helps when dealing with a wholesale customer or a freight forwarder who uses the vocabulary naturally.

The three things a term allocates

1. Costs. Transport to the border, export clearance, main carriage, import clearance, duties, taxes and delivery at the end.
2. Risk. The point at which responsibility for loss or damage moves from seller to buyer.
3. Tasks. Who arranges the transport, who files the export declaration, and who files the import declaration.

A common surprise is that cost and risk do not always transfer at the same point. Under some terms the seller pays for carriage but the buyer bears the risk once the goods are handed to the carrier. That affects who files a claim when something goes wrong.

The terms most relevant to parcels

The 2020 set has eleven terms. Some are for any mode of transport and some only for sea and inland waterway freight. For parcels, a handful matter most.

• EXW (Ex Works). The seller makes the goods available at their own premises. The buyer arranges everything else, including export clearance. It places the most responsibility on the buyer and is awkward for cross-border e-commerce, since a private consumer is rarely able to handle export clearance.
• FCA (Free Carrier). The seller delivers the goods to a carrier named by the buyer, cleared for export. Risk passes at that point. It is a practical term when a business buyer uses its own forwarder.
• CPT (Carriage Paid To). The seller pays for carriage to a named destination, but risk passes when the goods are handed to the first carrier. The buyer handles import clearance.
• CIP (Carriage and Insurance Paid To). Like CPT, with the seller also arranging insurance.
• DAP (Delivered at Place). The seller delivers to a named place and bears risk until the goods are ready to unload. The buyer handles import clearance and pays duties and taxes.
• DPU (Delivered at Place Unloaded). Like DAP, with the seller also responsible for unloading.
• DDP (Delivered Duty Paid). The seller bears nearly all costs and risks, including import clearance, duties and taxes.

In practice the choice for most B2C parcels comes down to DAP, where the buyer settles import duties on arrival, or DDP, where the seller has paid them beforehand; the second spares the customer a bill at the door but moves the estimation risk to the seller. The sea-only terms, such as FOB and CIF, are intended for bulk cargo and containers, so they rarely fit a parcel sent by courier or air. People do use them loosely, and valuation rules for duty, which often refer to CIF or FOB, are a separate matter from the contract term.

Using terms sensibly in a small business

• Name the term and the place. A term is incomplete without a named location, such as “DAP, recipient’s address”.
• Choose one default per market. Many sellers use DAP for most destinations and offer DDP where they can estimate charges accurately.
• Say it to the buyer. State in the checkout, the product page and the confirmation which charges the customer must handle.
• Match your carrier service. A carrier’s “duties paid” or “recipient pays” option may or may not correspond neatly to the Incoterm you name. Confirm what is included.
• Do not confuse the term with insurance. A term tells you who bears risk, not whether a claim will be paid. Shipping insurance and carrier liability still need separate attention.
• Use current wording. If you refer to Incoterms 2020, say so, because the terms differ between editions.

Limits of this overview

Incoterms are a framework, and their interpretation in a particular dispute can depend on the contract and the law that governs it. Importing countries also impose their own rules that the terms cannot override, and a customs authority will usually hold the importer of record responsible regardless of what the sale terms say. For larger or recurring trade, check the contract wording with a forwarder, broker or lawyer.