International trade involves many responsibilities between buyers and sellers. When goods are sold across borders, both parties need to understand who is responsible for transportation, export and import procedures, insurance, costs and the risk of loss or damage during delivery.

This is where Incoterms® 2020 become important.

Incoterms, short for International Commercial Terms, are standardized trade rules published by the International Chamber of Commerce (ICC). They are used in contracts for the sale of goods to clearly define certain responsibilities between buyers and sellers.

For exporters in Pakistan, including manufacturers and exporters in Sialkot, understanding Incoterms is essential when negotiating international orders. Choosing the wrong Incoterm or misunderstanding where risk transfers can lead to unexpected costs, disputes and delivery problems.

This guide explains Incoterms in international trade, the 11 Incoterms® 2020 rules, their differences, practical examples and how Pakistani exporters can use them correctly.

What Are Incoterms?

Incoterms® are standardized three-letter trade terms developed by the International Chamber of Commerce (ICC).

They help define important responsibilities between the seller and buyer, including:

• Where the goods are delivered
• When risk transfers from seller to buyer
• Which party arranges transportation
• Which party pays specific transportation costs
• Export and import clearance responsibilities
• Insurance responsibilities under certain rules
• Loading and unloading responsibilities in applicable situations

For example, when a Pakistani exporter agrees to sell goods under FOB Karachi, Incoterms® 2020, the term establishes important responsibilities relating to delivery and risk at the named port.

However, Incoterms do not determine everything in an international sales contract.

They do not, by themselves, determine:

• Ownership or transfer of title
• The price of the goods
• Payment terms
• Quality requirements
• Contract breach remedies
• Dispute resolution
• Product specifications

These matters should be addressed separately in the sales contract.

Is Incoterms® 2020 Still the Current Version?

Yes.

Incoterms® 2020 is the current edition of the ICC Incoterms rules. It came into effect on January 1, 2020.

The 2020 edition contains 11 Incoterms rules divided into two groups:

Rules for Any Mode of Transport

These seven rules can be used for road, rail, air, sea or multimodal transportation:

• EXW
• FCA
• CPT
• CIP
• DAP
• DPU
• DDP

Rules for Sea and Inland Waterway Transport

These four rules are specifically intended for sea or inland waterway transport:

• FAS
• FOB
• CFR
• CIF

When selecting an Incoterm, the transport method and actual delivery arrangement should be considered rather than choosing a term simply because it is commonly used.

Why Are Incoterms Important in International Trade?

Incoterms help reduce misunderstandings between international buyers and sellers.

Without clearly defined responsibilities, disagreements can arise over questions such as:

• Who pays for transportation?
• Who arranges export clearance?
• Who pays import duties?
• When does the buyer take the risk?
• Who arranges insurance?
• Who is responsible if goods are damaged during transportation?
• Where exactly does the seller’s delivery obligation end?

For example, an exporter in Sialkot may agree to supply sportswear to a buyer in Germany. If the contract simply states that the goods will be shipped to Germany without clearly defining the responsibilities of each party, misunderstandings can occur.

Using an appropriate Incoterm with a clearly named place or port helps establish the agreed delivery responsibilities.

The 11 Incoterms® 2020 Explained

1. EXW – Ex Works

Under EXW, the seller makes the goods available at a named location, such as the seller’s factory or warehouse.

The buyer generally takes responsibility for arranging transportation and handling the goods from that point.

Seller’s responsibility

The seller generally:

• Prepares the goods
• Makes them available at the named location
• Provides the required commercial documentation

Buyer’s responsibility

The buyer generally handles:

• Loading
• Transportation
• Export clearance where applicable
• Main carriage
• Import clearance
• Duties and taxes
• Delivery to the final destination

Example

A Sialkot manufacturer agrees to sell sportswear on:

EXW Sialkot, Incoterms® 2020

The buyer arranges the transportation and other logistics from the agreed location.

Important consideration

For international exports, exporters should carefully evaluate whether EXW is appropriate because the buyer may face practical difficulties handling export formalities in the seller’s country.

In some export situations, FCA may be more appropriate.

2. FCA – Free Carrier

Under FCA, the seller delivers the goods to the carrier or another person nominated by the buyer at the agreed place.

FCA can be used with different modes of transportation and is particularly useful for many modern containerized shipments.

Seller generally handles

• Preparing the goods
• Export clearance
• Delivery to the agreed location
• Delivery to the carrier according to the agreed arrangement

Buyer generally handles

• Main transportation
• Import clearance
• Import duties and taxes
• Further transportation

Example

A Sialkot exporter delivers packed goods to a nominated carrier at an agreed location under:

FCA Sialkot, Incoterms® 2020

The exact delivery point should be clearly identified.

3. CPT – Carriage Paid To

Under CPT, the seller arranges and pays for transportation to the named destination.

However, an important distinction is that the cost of transportation and the transfer of risk occur at different points.

Risk transfers when the goods are delivered to the carrier according to the rule, rather than when the goods reach the final destination.

Example

A Pakistani exporter sells goods under:

CPT Dubai, Incoterms® 2020

The seller pays the agreed carriage to Dubai, but risk transfers earlier according to the delivery arrangement.

This is why exporters should never assume that the party paying for transportation is automatically carrying the risk until the goods reach the destination.

4. CIP – Carriage and Insurance Paid To

CIP works similarly to CPT regarding carriage and risk transfer, but the seller also arranges insurance as required by the rule.

The seller arranges transportation to the named destination while risk transfers at the earlier delivery point defined by the rule.

Example

A Sialkot manufacturer ships goods to a European buyer under:

CIP Frankfurt, Incoterms® 2020

The seller arranges carriage and the required insurance, while the buyer handles responsibilities allocated to the buyer under the rule.

CIP has specific insurance requirements under Incoterms® 2020, so exporters should understand the required level of coverage rather than simply assuming that any insurance policy is sufficient.

5. DAP – Delivered at Place

Under DAP, the seller delivers the goods to the named destination, ready for unloading.

The seller generally bears the costs and risks involved in getting the goods to that destination.

The buyer is generally responsible for unloading and import clearance, including applicable duties and taxes.

Example

A Pakistani exporter agrees to:

DAP Berlin, Incoterms® 2020

The seller arranges transportation to the named destination in Berlin.

The buyer handles import clearance and related import responsibilities.

6. DPU – Delivered at 40Unloaded

DPU is different from DAP because under DPU the seller is responsible for delivering the goods unloaded at the named destination.

The seller therefore has the responsibility for unloading at the agreed destination.

Example

A Pakistani exporter agrees to:

DPU Buyer’s Warehouse, Berlin, Incoterms® 2020

The seller arranges delivery and unloading at the agreed destination.

The buyer generally handles import clearance and related import obligations.

7. DDP – Delivered Duty Paid

DDP places a high level of responsibility on the seller.

The seller generally handles transportation to the destination as well as export and import formalities and applicable duties and taxes, subject to the terms and circumstances of the transaction.

Example

A Pakistani seller agrees:

DDP Dubai, Incoterms® 2020

The seller takes responsibility for delivering the goods to the agreed destination and handling the responsibilities allocated to the seller under DDP.

Important consideration

DDP should not be selected casually.

Before offering DDP, an exporter should understand the destination country’s import regulations, customs requirements, tax obligations and whether the seller can legally and practically complete the required import formalities.

8. FAS – Free Alongside Ship

FAS is used for sea and inland waterway transport.

The seller delivers the goods alongside the vessel at the named port of shipment.

Once the goods are delivered alongside the vessel according to the rule, the buyer takes responsibility for the next stages.

Example

FAS Karachi Port, Incoterms® 2020

The seller delivers the goods alongside the nominated vessel at Karachi Port.

The buyer generally handles loading onto the vessel and subsequent transportation.

9. FOB – Free On Board

FOB is one of the best-known Incoterms among international traders.

Under FOB, the seller delivers the goods on board the vessel at the named port of shipment.

Risk transfers when the goods are delivered on board the vessel according to the rule.

Example

A Sialkot sportswear exporter sells goods to a buyer under:

FOB Karachi, Incoterms® 2020

The seller is responsible for getting the goods to the agreed port and delivering them on board the vessel.

After the delivery point specified by FOB, responsibilities allocated to the buyer apply.

Important: FOB and Containers

FOB should not automatically be used for every sea shipment.

For goods transported in containers, FCA can often be more appropriate, because containers may be delivered to a carrier or terminal before being loaded onto the vessel.

This is an important distinction for exporters to understand.

10. CFR – Cost and Freight

Under CFR, the seller arranges and pays the cost of transporting the goods to the named destination port.

However, risk transfers earlier when the goods are delivered on board the vessel at the port of shipment.

Example

A Pakistani exporter agrees:

CFR Hamburg, Incoterms® 2020

The seller pays the agreed freight to Hamburg, but the transfer of risk occurs when the goods are delivered on board the vessel at the shipment port.

The seller does not automatically carry the risk throughout the entire voyage simply because the seller pays the freight.

11. CIF – Cost, Insurance and Freight

CIF is similar to CFR but includes an insurance obligation for the seller under the rule.

The seller arranges:

• Delivery to the vessel
• Export formalities
• Freight to the named destination port
• Required insurance

Risk still transfers when the goods are delivered on board the vessel at the shipment port.

Example

A Sialkot exporter sells goods under:

CIF Hamburg, Incoterms® 2020

The seller pays the freight and arranges the insurance required under CIF, while risk transfers according to the CIF delivery point.

Incoterms Comparison Table

The exact responsibilities should always be determined by the selected Incoterm and the named place or port.

Cost and Risk Are Not the Same

One of the most important concepts to understand about Incoterms is that the party paying for transportation is not necessarily the party carrying the risk throughout that transportation.

This is particularly important with the C-rules:

• CPT
• CIP
• CFR
• CIF

For these rules, the seller may pay transportation costs beyond the point where risk has already transferred to the buyer.

For example, under CFR, the seller pays the freight to the destination port, but risk transfers when the goods are delivered on board the vessel at the shipment port.

Therefore, exporters should always distinguish between:

Who pays the cost?

and

When does risk transfer?

These are not always the same point.

Incoterms for Sialkot Exporters

Sialkot has a large manufacturing and export ecosystem, including sports goods, sportswear, surgical instruments, leather products and other manufactured goods.

Exporters may encounter different Incoterms depending on:

• Product type
• Buyer requirements
• Transport method
• Destination country
• Shipping arrangement
• Negotiated responsibilities
• Insurance requirements
• Customs procedures

For example, a Sialkot sportswear manufacturer may negotiate FOB Karachi with an overseas buyer, while another buyer may request a delivered arrangement such as DAP.

The correct Incoterm should therefore be selected according to the actual transaction rather than assuming that one term is always best for Sialkot exporters.

Practical Example: Incoterms for a Sialkot Sportswear Exporter

Imagine a sportswear manufacturer in Sialkot receives an order from a buyer in Germany.

The buyer and seller agree to:

FOB Karachi, Incoterms® 2020

The exporter must understand exactly where delivery and risk transfer occur under FOB and which transportation and customs responsibilities belong to each party.

Now imagine the buyer instead requests:

CIF Hamburg, Incoterms® 2020

The seller’s responsibilities change because CIF involves freight and insurance obligations that do not apply in the same way under FOB.

This demonstrates why an exporter should understand the Incoterm before agreeing to an international quotation.

How to Write Incoterms Correctly in Export Contracts

Do not simply write:

FOB

or:

CIF

Instead, identify the relevant named place or port and the edition of the rules.

Examples:

FOB Karachi, Incoterms® 2020

CIF Hamburg, Incoterms® 2020

DAP Berlin, Incoterms® 2020

CIP Frankfurt, Incoterms® 2020

The named place or port is important because it helps establish where the seller’s delivery obligation occurs.

The sales contract should also clearly address matters that Incoterms do not determine, such as price, payment terms, product specifications, delivery schedules and dispute resolution.

Incoterms vs Payment Terms

Incoterms and payment terms are not the same thing.

Incoterms determine responsibilities related to:

• Delivery
• Transportation
• Costs
• Risk
• Export/import formalities
• Insurance under applicable rules

Payment terms determine:

• When the buyer pays
• How payment is made
• Whether advance payment is required
• Whether a letter of credit is used
• Whether payment is made against documents
• Other agreed payment conditions

For example, an exporter might agree to:

FOB Karachi, Incoterms® 2020

while separately agreeing on a payment method such as advance payment or documentary credit.

The two issues should not be confused.

For more information, see our guide to Payment Terms for Export Shipments.

Incoterms and Customs Duties

Incoterms allocate certain responsibilities for export and import formalities, but they do not themselves determine the actual customs duties or taxes imposed by a country.

The amount of duty or tax depends on the destination country’s customs laws, product classification, customs value and other applicable regulations.

For example, under DDP, the seller takes on significant responsibility for import clearance and duties/taxes according to the rule.

Under DAP, the buyer generally handles import clearance and related import duties and taxes.

Exporters should always check the destination country’s actual customs and tax requirements before agreeing to a delivered term.

How to Choose the Right Incoterm

There is no single Incoterm that is best for every international shipment.

Before selecting one, consider:

1. What transport method will be used?

Determine whether the shipment is by:

• Air
• Road
• Rail
• Sea
• Multimodal transport

2. Where should delivery take place?

Clearly identify the appropriate location, terminal, warehouse or port.

3. Who will arrange transportation?

Decide whether the buyer or seller should arrange the main carriage.

4. Who should carry the risk?

Understand exactly where risk transfers under the selected rule.

5. Is insurance required?

CIP and CIF include insurance obligations for the seller under the applicable Incoterms® 2020 rules.

6. Who handles import clearance?

This is especially important when considering DAP versus DDP.

7. Can the seller legally perform the required obligations?

Before agreeing to DDP or other arrangements involving foreign-country obligations, exporters should ensure they can practically and legally meet those responsibilities.

Common Incoterms Mistakes Exporters Should Avoid

Using FOB for Every Shipment

FOB is specifically intended for sea and inland waterway transport and may not be the most appropriate choice for containerized shipments.

Confusing Cost With Risk

A seller paying freight does not necessarily mean the seller carries the risk until the goods arrive.

Writing Only the Three-Letter Term

Writing only “FOB” or “CIF” can create ambiguity.

Always specify the named place or port and the applicable edition.

Ignoring the Transport Method

Some Incoterms are designed for any mode of transport, while FAS, FOB, CFR and CIF are specifically for sea and inland waterway transport.

Assuming Incoterms Determine Payment

Incoterms do not replace payment terms.

Choosing DDP Without Understanding Import Requirements

DDP can place significant responsibilities on the seller. Exporters should understand the destination country’s requirements before offering it.

Treating Incoterms as a Complete Sales Contract

Incoterms address specific delivery-related responsibilities but do not replace the complete sales contract.

Frequently Asked Questions About Incoterms

What are Incoterms in international trade?

Incoterms are standardized trade rules published by the International Chamber of Commerce that define specific responsibilities between buyers and sellers in contracts for the sale of goods.

How many Incoterms are there?

There are 11 Incoterms® 2020 rules.

Seven apply to any mode of transport and four are specifically intended for sea and inland waterway transport.

What is the current version of Incoterms?

Incoterms® 2020 is the current edition of the ICC Incoterms rules.

What is the difference between FOB and CIF?

Under FOB, the seller delivers the goods on board the vessel at the named port of shipment. Under CIF, the seller also arranges and pays for freight to the named destination port and provides the insurance required by the rule.

What is the difference between EXW and FOB?

EXW places comparatively fewer delivery responsibilities on the seller, while FOB requires the seller to deliver goods on board a vessel at the named port of shipment.

Which Incoterms can be used for air shipments?

The Incoterms rules designed for any mode of transport can be used for air shipments, including FCA, CPT, CIP, DAP, DPU and DDP.

Which Incoterms are used for sea shipments?

FAS, FOB, CFR and CIF are specifically designed for sea and inland waterway transport. Other Incoterms can also be used for sea shipments when their requirements are appropriate to the actual transaction.

Does an Incoterm determine payment terms?

No. Incoterms and payment terms address different aspects of an international transaction. Payment arrangements should be separately agreed between buyer and seller.

Who pays import duties under DDP?

Under DDP, the seller generally takes responsibility for import clearance and applicable duties and taxes according to the rule, subject to the destination country’s laws and the seller’s ability to complete those obligations.

Which Incoterm is best for Pakistani exporters?

There is no universal best Incoterm for Pakistani exporters. The appropriate choice depends on the transport method, destination, buyer requirements, delivery location, risk allocation, insurance and the responsibilities each party is prepared to handle.

Conclusion

Understanding Incoterms in international trade is essential for anyone involved in importing or exporting goods.

For Pakistani exporters, particularly businesses operating in Sialkot, knowledge of Incoterms can help when preparing quotations, negotiating with international buyers and planning shipments.

The most important concepts to remember are:

• Incoterms define specific delivery responsibilities between buyers and sellers.
• Incoterms® 2020 contains 11 rules.
• Seven rules apply to any mode of transport.
• Four rules are specifically for sea and inland waterway transport.
• Cost and risk do not always transfer at the same point.
• FOB should not automatically be used for container shipments.
• EXW may not always be the most practical choice for international exports.
• CIF and CIP include specific insurance obligations.
• Payment terms are separate from Incoterms.
• The Incoterm should always be written with the appropriate named place or port and the applicable edition.

If you want to learn Incoterms, export documentation, customs procedures, international payments and other practical import-export skills, explore our Import Export Course in Sialkot.

Note: Incoterms® rules are published by the International Chamber of Commerce (ICC). Always verify the applicable rule and contractual requirements for your specific transaction and seek professional advice where necessary.