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Incoterms: who pays freight and when risk passes
1936; current edition 2020· Law or rule
Fact, law or dataA rule, statute, definition or measured number.
Eleven three-letter trade terms from the International Chamber of Commerce that say who pays freight, insurance and duties, and where risk passes.
See it on the Money & Finance map →How it works
First published in 1936 and revised about once a decade; the current edition is Incoterms 2020. Examples: EXW, the buyer collects at the seller's door; FOB, risk passes once goods are loaded aboard ship; CIF, the seller also pays freight and insurance to the destination port; DDP, the seller delivers duty-paid to the buyer's door. Contracts cite them as, say, 'CIF Los Angeles Incoterms 2020'. They do not decide when ownership passes or how payment is made; the sales contract does.
Why it matters
They prevent costly arguments over who pays what and who bears the loss if cargo is damaged, using a shorthand understood worldwide.
Think of it like
Like 'gross', 'modified gross' and 'triple net' in a lease: a short label that settles who pays which costs.
Facts, rules and data
ICC publications (Incoterms 2020, ICC Publication 723), court decisions interpreting the terms, and their routine use in letters of credit and customs declarations.
Debates and risks
What the next edition, expected around 2030, will change; electronic documents, container practice and tariff shocks are likely topics.
Connections (2)
▸Incoterms: who pays freight and when risk passes must match the documents in Commercial letters of credit (UCP 600) and confirmed LCsFact, law or data
The connection
The LC names the Incoterm, and the documents must fit it. Under 'CIF Los Angeles', the exporter must present an insurance certificate and a 'freight prepaid' bill of lading; under FOB, freight is normally collect and no insurance document is needed. A mismatch is a discrepancy the bank can reject.
When and why
In LC transactions worldwide; UCP 600's articles on transport and insurance documents apply alongside the chosen term.
How we know
ICC banking opinions and UCP 600 articles 20 and 28, which set what bills of lading and insurance documents must show.
Debates and risks
Why traders still use FOB and CIF for container shipments, where the ICC advises FCA or CIP, and how often that causes disputes.
▸Incoterms: who pays freight and when risk passes decide who bears duties in US tariff surge of 2025–26 and the IEEPA rulingFact, law or data
The connection
Under DDP the seller clears US customs and pays the duties; under the other ten terms the buyer does. When 2025 tariffs jumped, sellers who had quoted DDP absorbed sudden costs, and many moved to DAP or FCA. Legally, the importer of record still owes US Customs, whatever the sales contract says.
When and why
Across US imports in 2025–26, notably e-commerce and goods from China, where tariffs briefly reached 145%.
How we know
ICC Incoterms 2020 definitions, US Customs rules on the importer of record, and trade-press reports of renegotiated terms.
Debates and risks
Who gets refunds of the IEEPA tariffs struck down in February 2026: the importer of record that paid, or a seller that bore them under DDP.