Why the term decides who pays for what
An Incoterm is not a formality. It allocates cost, risk and — most importantly — the point at which responsibility for the goods passes from seller to buyer. Get it wrong and you can end up paying for insurance, freight and demurrage on goods that were never yours, or find yourself liable for damage that happened in transit on your account.
There are eleven terms in Incoterms 2020. You will use four or five of them. Here are those, in the order they come up.
EXW — Ex Works
Seller makes goods available at its premises. Buyer does everything. The buyer arranges collection, export clearance, main carriage, insurance and import clearance.
| Who pays | Item |
|---|---|
| Seller | Packing, inland loading at factory |
| Buyer | Everything from the factory gate onwards, including export declaration |
Real-world use: rarely the right choice for cross-border container shipments, because the buyer has to arrange export clearance in a country that is not theirs. It is common on domestic Chinese terms.
The risk with EXW
Under EXW the seller has no obligation to load the goods onto the collecting vehicle. In practice many sellers do load anyway, and this creates a mismatch: the buyer pays for the transport but the seller performs the loading. Where the goods are damaged during that loading, responsibility is genuinely unclear. If you see EXW on a quotation, ask who loads.
FOB — Free On Board
Seller delivers goods loaded on board the vessel at the named port. Risk passes at that moment. From there the buyer pays ocean freight, insurance, destination charges and import clearance.
| Point of risk transfer | Included in seller's price | Buyer takes over |
|---|---|---|
| On board the vessel at the named port | Export clearance, inland transport to port, terminal handling, loading on board | Ocean freight, marine insurance, destination terminal and demurrage, import clearance and duties |
Real-world use: the default for container shipments from Asia, and correctly so. The problem with FOB for a Chinese supplier is what it leaves unspecified, because the handover point is "on board" but the cost chain in China is not — and that gap is where disputes live.
What FOB does not tell you
FOB says nothing about who pays the trucking from the factory to the port, who handles export clearance, or whether the booking agent charges handling fees that get passed on. On a quotation priced FOB Ningbo, three things need confirming in writing: the truck cost from the factory, the export declaration, and whether any terminal or documentation charges are included in the FOB price or billed separately afterwards. Get that in writing and FOB is clean.
CFR — Cost and Freight
Seller pays for the goods and the main carriage to the named port. Risk still transfers when the goods are loaded on board, despite seller paying for the freight. This is the detail most people get wrong.
| Seller pays | Buyer pays |
|---|---|
| Goods, export clearance, inland transport, loading on board, ocean freight to destination port | Insurance, destination terminal charges, demurrage, import clearance, duties |
The critical warning: CFR means the seller buys the freight but carries the risk for the entire ocean journey. If the goods are damaged at sea, the seller has an insurance claim while the buyer has the broken goods. This is a genuinely buyer-unfriendly term and we rarely recommend it without insurance being explicitly arranged in the buyer's favour.
CIF — Cost, Insurance and Freight
CFR plus minimum marine insurance. Seller pays freight and insurance. Risk still transfers on board — the insurance does not change the risk transfer point, only who has to arrange cover.
| Who insures | Cover level | Who claims |
|---|---|---|
| Seller, as required by the term | Minimum Institute Cargo Clauses (C) — the lowest cover, which is all CIF requires | Buyer claims, against the seller's policy, which takes time |
CIF is the most widely used term in Chinese export practice and the most commonly misunderstood. Two things buyers need to know:
- Insurance is minimum cover. Institute Cargo Clauses (C) covers named perils only — fire, collision, water damage. It does not cover gradual deterioration, rust, or mould. For polymer pellets transported in hot conditions, that is a real gap.
- Risk passed weeks earlier. For a 30-day sea journey, the risk passed 30 days before arrival. Nothing the seller does afterwards changes that.
If you are quoted CIF, ask two questions
First: which Institute Cargo Clauses are covered — A, B, or C? Second: for polymer pellets, what covers the bags during transit and what happens on arrival if the material has absorbed moisture? A seller who cannot answer both precisely is quoting CIF by habit rather than by decision.
The terms you should actually use
| Term | Risk passes | Who arranges main freight | When to use it |
|---|---|---|---|
| EXW | Factory gate | Buyer | Domestic Chinese delivery, or buyer has a freight forwarder they insist on using |
| FOB | On board at origin port | Buyer | Default for containers from Asia. Clean risk split, buyer controls freight and insurance |
| CFR | On board at origin port | Seller | Buyer wants seller to book freight, with risk transfer renegotiated separately |
| CIF | On board at origin port | Seller | Buyer wants seller to arrange insurance as well; check the clauses |
| CIP | At the seller's premises — goods handed to carrier | Seller | Best for container shipments. Higher insurance cover required, and risk extends further in the buyer's favour |
| DAP | At named destination, unloaded | Seller | Competitive quote where you want no surprises on arrival |
| DDP | At named destination, unloaded, import cleared | Seller | Only where the seller can legally act as importer of record |
On Incoterms 2020 and containers
Incoterms 2020 added FCA as the recommended term for container shipments instead of FOB, because the "on board" handover no longer matches how container terminals actually work — goods are handed to the terminal before loading, and terminal handling charges can appear later. FCA named the terminal transfers risk at a point that is real. In practice most Chinese quotations still say FOB, and that is workable — but the handover, the terminal charges and the export clearance should all be confirmed in writing rather than assumed.
DDP and the trap underneath it
DDP looks buyer-friendly: seller delivers, clears and pays everything. For Chinese suppliers into most markets it is often not actually possible, because the seller cannot be the importer of record without a local entity or a licensed importer.
What happens in practice: the seller quotes DDP, clears the goods through a partner or agent, and either the price absorbs a broker fee or a charge appears on the invoice later. Or — more seriously — the importer of record remains the buyer, which means the buyer's customs registration, licence and tax obligations are engaged regardless of what the term says.
On DDP, always ask
Who is named as the importer of record on the customs entry? If the answer is your own company, then the obligations and the risk are yours no matter what the term says, and the DDP price is really an FOB price plus a broker fee. That is fine as a pricing arrangement, but it should be described accurately rather than presented as door-to-door delivered duty-paid.
What to put in the quotation
Whatever the term, these need to appear on the proforma invoice in writing. Missing any one of them creates a dispute at the worst moment:
- The named place. "FOB Ningbo" not "FOB". The port is part of the term.
- Who arranges export clearance and confirm it is included in the price.
- Inland trucking from factory to port — included, or billed separately, and at what rate.
- Terminal and documentation charges — state explicitly whether any are billed on top.
- Insurance, if CIF — which Institute Cargo Clauses, and who claims.
- Validity of the price — 7 days, 15 days, 30 days. Freight and resin prices move.
- Payment terms — 30% deposit, balance against copy of bill of lading, which is standard.
What to send us
Send your destination port or city, and the Incoterm you have been quoted on. We will return a quotation showing the term, the named place, what is included in the price, and what would be billed separately. If you have been quoted CIF or DDP and are unsure what that means in practice, ask — we will tell you what the exposure is, and FOB or CIP will often be cleaner for the same money.
Common questions
What is FOB and who pays for what?
FOB — Free On Board — means the seller delivers the goods loaded on board the vessel at the named port, and risk transfers at that moment. The seller pays export clearance, inland transport to port, terminal handling and loading. The buyer pays ocean freight, insurance, destination terminal charges and demurrage, import clearance and duties.
Is CIF better than FOB for the buyer?
Often not, despite feeling safer. Under CIF the seller buys freight and insurance, but risk still transfers on board — up to 30 or 40 days before arrival. The insurance is minimum cover (Institute Cargo Clauses C), covering named perils only, with no cover for gradual deterioration, rust or mould. For polymer pellets in hot conditions that is a real gap.
What is Incoterms 2020 and should I use FCA instead of FOB?
Incoterms 2020 is the current ICC set of trade terms. It added FCA as the recommended term for container shipments instead of FOB, because the on-board handover no longer matches how container terminals work. Most Chinese quotations still use FOB, which is workable provided the handover point, terminal charges and export clearance are confirmed in writing.
Is DDP safe to accept from a Chinese supplier?
Only after checking one thing: who is named as the importer of record. If it is your own company, your customs registration, licence and tax obligations are engaged regardless of the term, and the DDP price is really FOB plus a broker fee. That can still be fine pricing, but it should be described accurately rather than presented as duty-paid door-to-door.
What should be written on the quotation to avoid disputes?
The named place (FOB Ningbo, not FOB); who arranges export clearance; whether inland trucking is included or billed separately; whether terminal and documentation charges are extra; which Institute Cargo Clauses apply under CIF; the price validity period; and the payment terms. Missing any one creates a dispute at the destination port.