One-line definition: Incoterms are a standardized set of international trade terms that define who the seller or the buyer is responsible for costs, risk, and logistics at each stage of a shipment's journey.
What they mean
Incoterms — short for International Commercial Terms — are a set of 11 standardized rules published by the International Chamber of Commerce (ICC). Each term is a three-letter code (EXW, FOB, DAP, DDP, and others) that defines a specific split of responsibilities between seller and buyer across three dimensions:
- Cost — who pays for transport, insurance, and handling at each leg
- Risk — at what point does the risk of loss or damage transfer from seller to buyer
- Logistics — who is responsible for arranging export clearance, main carriage, import clearance, and final delivery
Incoterms are not laws — they are a voluntary standard that parties agree to use in commercial contracts. But they are so universally recognized in international trade that referencing them in a contract or on a commercial invoice immediately communicates a precise set of obligations without lengthy negotiation. "Shipped DDP Helsinki" means something specific and unambiguous to any logistics professional worldwide.
The current version is Incoterms® 2020, published by the ICC. They are revised periodically — previous versions were published in 2010, 2000, and earlier — and the version should always be specified in contracts to avoid ambiguity.
Why it matters for e-commerce merchants
Most Shopify merchants encounter Incoterms in two contexts: in their supplier contracts when importing goods, and as a framework for deciding how to handle import duties and VAT for their international customers.
The second context is the more immediately relevant one. The choice between DAP and DDP — the two Incoterms most relevant to B2C e-commerce — determines whether import duties and taxes land on the customer at delivery (a potential customer experience problem) or are collected and managed by the merchant at checkout (a more controlled but operationally complex approach).
Understanding Incoterms also matters for supplier relationships. If you are importing stock from a manufacturer in Asia or elsewhere, the Incoterm in your purchase contract determines what you are actually buying — are you paying for goods at the factory gate, at the port, at the destination port, or delivered to your warehouse? Each term means a different total cost and a different set of logistical responsibilities for you.
The 11 Incoterms — a practical overview
Incoterms split into two groups: those that apply to any mode of transport, and those specific to sea and inland waterway freight.
Any mode of transport
EXW — Ex Works The seller makes goods available at their premises. The buyer arranges and pays for everything from that point — export clearance, all transport, import clearance, and final delivery. Maximum responsibility for the buyer. Rarely used in e-commerce; common in manufacturing contracts where the buyer has their own logistics operation.
FCA — Free Carrier The seller delivers the goods to a named place — typically their factory, warehouse, or a freight forwarder's depot — cleared for export. Risk transfers to the buyer at that named place. More flexible than EXW because the seller handles export clearance. Often used in air and container freight.
CPT — Carriage Paid To The seller pays for carriage to a named destination but risk transfers to the buyer once goods are handed to the first carrier. Common in air freight where the seller arranges the main carriage but the buyer manages the destination side.
CIP — Carriage and Insurance Paid To Same as CPT but the seller must also take out insurance covering the buyer's risk during main carriage. Incoterms 2020 increased the minimum insurance requirement under CIP to Institute Cargo Clauses (A) — the broadest coverage available.
DAP — Delivered at Place The seller delivers the goods to a named destination — the buyer's address or a named terminal — but does not handle import clearance or pay import duties and taxes. The buyer is responsible for import formalities and charges. This is the most common Incoterm for B2C e-commerce international shipments.
DPU — Delivered at Place Unloaded Like DAP but the seller is also responsible for unloading at the named destination. Rarely relevant for standard parcel e-commerce; more common for freight and pallet deliveries.
DDP — Delivered Duty Paid The seller is responsible for everything — export clearance, all transport, import clearance, and payment of all import duties and taxes. The buyer simply receives the goods. Maximum responsibility for the seller. Increasingly used in B2C e-commerce where merchants want to eliminate surprise charges for customers.
Sea and inland waterway only
FAS — Free Alongside Ship Seller delivers goods alongside the vessel at the named port of shipment. Buyer loads and takes on all subsequent risk and cost. Used in bulk cargo and some break-bulk freight.
FOB — Free On Board One of the most commonly used Incoterms in international trade. Seller delivers goods on board the named vessel at the port of shipment, cleared for export. Risk transfers when goods are on board. Used extensively in container shipping and commonly referenced in Asian manufacturing contracts.
CFR — Cost and Freight Seller pays freight to the named destination port. Risk transfers to the buyer when goods are loaded on the vessel — same as FOB, but the seller has arranged and paid the main carriage. Common in container trade.
CIF — Cost, Insurance and Freight Same as CFR but the seller must also provide minimum insurance coverage. The CIF value (Cost + Insurance + Freight) is the figure customs authorities in many countries use as the basis for calculating import duty and VAT — which is why it appears in customs documentation regardless of whether CIF was the agreed Incoterm.
The two that matter most for e-commerce: DAP and DDP
For Shopify merchants shipping to international consumers, the practical choice is almost always between DAP and DDP. The dedicated post on DAP vs DDP goes into detail on the decision, but the essential distinction is:
DAP — you ship, the customer handles import charges at delivery. Simpler operationally, but creates risk of surprise charges landing on your customer after they have already paid you.
DDP — you collect and manage all import duties and taxes at checkout. Better customer experience, but requires accurate duty and VAT calculation and a carrier or customs broker set up to handle DDP remittance on your behalf.
Most standard Shopify e-commerce shipments operate under DAP terms by default, even if the merchant has never explicitly chosen or named an Incoterm. When a merchant ships internationally and leaves import duty and VAT to be handled at the destination, that is DAP — the seller has delivered to the buyer's country and the buyer is responsible for customs charges.
Incoterms in supplier contracts
If you are importing stock — buying goods from a manufacturer in China, Turkey, or elsewhere and shipping them to your EU warehouse — the Incoterm in your purchase contract determines your total landed cost and your logistics responsibilities.
The most common terms in Asian manufacturing contracts:
FOB (origin port) — the supplier loads the goods on the vessel at the origin port. You pay for the freight from there, import clearance, and delivery to your warehouse. You need a freight forwarder to manage the ocean leg and EU customs clearance.
CIF (destination port) — the supplier arranges and pays for freight and insurance to your destination port. You handle import clearance and the final leg to your warehouse. Simpler, but you have less control over the shipping cost and carrier selection.
DDP (your warehouse) — the supplier handles everything, delivering to your door with all duties paid. The easiest option for you operationally, but the cost is embedded in the product price and you have no transparency over what was paid or how.
Understanding which Incoterm applies to your supplier contract — and what it implies about your costs and responsibilities — is foundational to calculating your true cost of goods.
Common misconceptions and mistakes
"Incoterms determine who owns the goods at each point." Incoterms govern risk and logistics responsibility, not ownership. The transfer of title (legal ownership) is a separate matter governed by the sales contract, which may or may not align with the risk transfer point in the Incoterm.
"Incoterms are legally binding in all countries." Incoterms are contractually binding when parties agree to use them — they are incorporated by reference into a contract. But they are not automatically part of any legal system. Their enforceability depends on the governing law of the contract and whether the specific version is clearly referenced.
"The latest version always applies." Not automatically. If a contract specifies Incoterms 2010, those rules apply — not the 2020 version. Always specify the version in contracts: "DAP, Incoterms® 2020" rather than just "DAP."
"FOB means the same thing in all contexts." In formal Incoterms usage, FOB has a specific meaning. But in US domestic trade and in some industry conventions, "FOB" is used loosely to mean "the seller pays freight" or "the buyer pays freight" in ways that contradict the Incoterms definition. When dealing internationally, always clarify which interpretation applies.
"EXW is the simplest option for sellers." EXW minimizes the seller's obligations, but it shifts the burden of export clearance to the buyer — who may not be set up to handle export formalities in the seller's country. In practice, FCA is often a better choice for sellers who want to limit their obligations while still handling export clearance, which is typically easier for the seller than the buyer to manage.
How this connects to your Shopify store
For most Shopify merchants, the Incoterms-relevant decision is the DAP vs DDP choice for international customer shipments — and specifically whether to collect import duties and VAT at checkout (DDP) or leave them to be assessed at the destination (DAP).
Packrooster supports DDP shipping through carriers that offer it as a service option on specific international routes. When DDP is selected, the carrier's customs brokerage handles import clearance and duty payment on the merchant's behalf, using the duty and VAT amounts collected at checkout. The customs documentation generated by Packrooster for international shipments — CN22, CN23, commercial invoice — forms the basis for the duty assessment that underpins DDP processing.
For merchants importing stock from overseas suppliers, the Incoterm in the purchase contract determines what the carrier or freight forwarder needs to handle on your behalf. If you are buying FOB from an Asian manufacturer, you need a freight forwarder to manage the ocean leg, destination port customs clearance, and final delivery — which is a separate logistics relationship from your outbound Shopify fulfillment through Packrooster.
Learn more about Packrooster →
Frequently asked questions
How many Incoterms are there? There are 11 Incoterms in the current Incoterms® 2020 edition: EXW, FCA, CPT, CIP, DAP, DPU, DDP (applicable to any mode of transport) and FAS, FOB, CFR, CIF (applicable to sea and inland waterway only). The previous 2010 edition also had 11 terms, but DPU replaced DAT between versions.
Which Incoterm is most commonly used in international e-commerce? DAP (Delivered at Place) is the most common in B2C e-commerce, because it reflects the standard model where the merchant ships to the customer's address and the customer handles any import charges. DDP is growing in use as merchants recognize the customer experience benefits of eliminating surprise charges at delivery. FOB is the most commonly used term in the upstream supply chain — manufacturing and ocean freight contracts.
Do I need to specify an Incoterm on my Shopify store? You do not need to display or reference Incoterms on your storefront for standard B2C sales. However, your terms and conditions or shipping policy should make clear whether customers may face additional import duties and taxes on international orders — which is the practical customer-facing communication of a DAP shipping policy, even if the term "DAP" is not used.
What is the difference between Incoterms and shipping terms? "Shipping terms" is an informal phrase used to describe the agreed responsibilities between buyer and seller. Incoterms are a specific, standardized framework for defining those terms. A contract might specify "shipping terms: FOB Shanghai, Incoterms 2020" — the Incoterm is the standardized reference, and "shipping terms" is the general category it falls into.
Can Incoterms be modified or customized? Incoterms are standard terms designed to be used as written. Modifying individual Incoterms creates ambiguity and can lead to disputes — if you change the meaning of DDP in a specific contract, the other party may interpret it based on the standard definition rather than your modification. If the standard terms do not fit your arrangement, using a different Incoterm is preferable to modifying one.
Are Incoterms relevant for domestic shipments? Incoterms are designed for international trade. For domestic shipments within a single country, they are technically applicable but rarely used — domestic commercial contracts typically use simpler delivery terms without the customs and transport complexity that Incoterms are designed to address.
