3 May 2025
Incoterms® 2020 help businesses manage tariff and compliance risks in global trade by clearly defining who is responsible for transport, insurance, and customs duties. Strategic use can reduce seller exposure to tariffs, making these terms crucial tools in navigating today’s volatile trade environment.
New Insight: Managing Tariff Risk with Incoterms®
As outlined in our April 2025 guidance note “Using the Incoterms® 2020 Rules to Manage Tariff Risk in International Trade,” businesses can use Incoterms strategically to reduce exposure to unpredictable tariff changes.
While Incoterms do not affect tariff schedules directly, they clearly allocate responsibility for customs duties and import formalities. This clarity becomes critical in volatile trade environments.
Key Takeaways:
Only DDP (Delivered Duty Paid) places full tariff risk and cost on the seller.
All other rules (EXW, FCA, CPT, CIP, etc) shift import tariffs to the buyer.
Smart selection between DAP and DDP can make a difference when negotiating long-term contracts under changing trade regimes.
Use cases:
Avoid seller exposure to future tariffs by shifting from DDP to DAP.
Use FCA or EXW to pass compliance burdens to better-prepared buyers.
Define roles clearly to reduce friction between logistics, legal, and finance.
Understanding Incoterms® 2020: More Than Just Shipping Terms
Incoterms® 2020 — shorthand for “International Commercial Terms” — are globally recognized rules to standardize obligations in international sales contracts. Incoterms clarify the responsibilities of sellers and buyers regarding transport costs, risk allocation, and logistics obligations at each point in the supply chain. While Incoterms do not govern ownership transfer or payment mechanisms, they serve as a common legal and commercial language that reduces ambiguity and friction in cross-border trade.
• Who arranges and pays for transport and insurance?
• Who handles customs clearance?
• At what point does the risk transfer from seller to buyer?
These are not trivial distinctions. Choosing the wrong Incoterm can lead to costly disputes, unpaid claims, or disrupted deliveries. The 2020 revision introduced updated insurance requirements, clearer allocation of security obligations, and a stronger recommendation to match Incoterms with the realities of modern logistics (like containerization).
There are 11 terms, grouped as follows:
Multimodal terms:
EXW, FCA, CPT, CIP, DAP, DPU, DDP
Sea/inland waterway-only terms:
FAS, FOB, CFR, CIF
Understanding the practical application of these rules is where professionals gain the most value — and where costly misconceptions often arise.
Incoterms Gone Wrong: 5 Real Mistakes to Learn From
Choosing the wrong Incoterm might seem like a small slip — until it leads to costly delays, damaged goods, legal disputes, or unexpected tax bills. Below are five real-world examples, often used in trade compliance training, that show just how easy it is to get it wrong — and how to avoid the same fate.
Misapplying Incoterms® can create costly confusion over responsibility, risk, and compliance — even in otherwise well-structured contracts. While the examples above are fictional, they reflect common pitfalls seen in international trade and logistics.
Understanding Incoterms® isn’t just a legal formality — it’s a frontline tool for avoiding preventable disputes in global commerce.
Incoterms® in Action: Would You Get It Right? Test yourself!
Incorrect use of Incoterms isn’t just academic — it leads to costly errors, disputes, and legal risk. Think you’re covered? Take this quick quiz and test your instincts on three real-world scenarios.
You’ll find the correct answers and explanations at the end of this newsletter!
