Incoterms is one of those terms everyone in international trade uses, but few take the time to explain. The acronym stands for International Commercial Terms, and behind that technical name lies a very simple question it answers: when you buy or sell goods to another country, who pays for what, and at what point do you assume the risk?
The International Chamber of Commerce created these rules in 1936, almost a century before shipping containers existed as we know them today. The world of transportation has changed completely since then, but the logic behind the acronym remains: to clearly define, in three letters, who does what.
In this article, we’ll explore the origin of the term, how it became the standard it is today, and what it means to choose the right Incoterm for your contract. Here are the essentials:
Key Points
Incoterms stands for “International Commercial Terms.”
The International Chamber of Commerce created them in 1936.
These rules distribute costs, obligations, and risks.
Meaning and Historical Origin of Incoterms
Essentially, Incoterms do one thing: they establish what each party must do in an international sale, when the risk changes, and how costs are shared.
Definition of International Commercial Rules
Incoterms is the abbreviation for International Commercial Terms. The International Chamber of Commerce (ICC) developed them with a specific objective: to clarify the obligations of the seller and the buyer in the delivery of goods, without leaving it to individual interpretation.
When you choose an Incoterm, you are actually deciding several things at once: the place of delivery, the transport that each party must arrange, the export and import procedures, and the exact moment when the risk passes to the buyer.
What it doesn’t define is the price, the method of payment, or the transfer of ownership, so don’t expect a three-letter acronym to resolve the entire contract.
Therefore, you should always include the Incoterm along with a specific location and the applicable version: CIP Madrid, Incoterms® 2020, for example. You can review this definition of the obligations, risks, and costs that these rules govern.
Created by the International Chamber of Commerce
The story begins before 1936. During the 1920s, terms like FOB were already circulating among traders in different countries, but each country interpreted them differently: what in one port meant “the seller pays up to this point” could mean something slightly different in another. This type of ambiguity, multiplied by hundreds of contracts, generated disputes that no one needed.
It was then that the ICC began to study these commercial practices with a clear objective: to reduce differences in interpretation. The result came in 1936, when the organization published the first official edition of the Incoterms rules, with six terms designed primarily for maritime transport, which was, after all, almost the only viable way to move goods between countries at that time.
Essentially, what the ICC did was take existing informal practices and turn them into written rules recognizable in any language. The history of Incoterms chronicles how this work began.
Evolution and Updates of the Rules
Since 1936, the ICC has returned to the drawing board eight times: in 1953, 1967, 1976, 1980, 1990, 2000, 2010, and most recently, in 2020. Each revision addresses the same issue: transportation changes, technology changes, and the rules must be updated.
The Incoterms® 2020 edition, the one currently in force, introduced eleven rules: seven applicable to all modes of transport and four specific to maritime and inland waterway transport. It also adjusted details that are highly relevant today, such as insurance levels in CIP and transport-related security.
Important: Previous versions do not automatically disappear. If your contract uses Incoterms® 2010, it remains valid, provided both parties clearly state this in writing alongside the term.
The historical evolution of the Incoterms rules details each revision, should you wish to see exactly what changed in each edition.
Practical Function in Sales Transactions
All this theory translates into something very practical: Incoterms allow you to specify who organizes each stage and who pays certain expenses, and they help you draft international sales contracts with less ambiguity. However, it only works if you indicate the chosen rule and the exact place of delivery; without these two pieces of information, it’s of little use.
Distribution of Responsibilities Between Seller and Buyer
Think of Incoterms as a division of tasks: the rule you choose determines who does what. The seller can handle packaging, loading, main transport, export formalities, or arranging insurance.