If you are new to international trade, Incoterms can seem confusing. But understanding them is essential, and over the years we have helped hundreds of importers and exporters at Bofeng Logistics navigate trade term decisions that directly impacted their bottom line.
This guide explains all 11 Incoterms 2020 in plain language, with practical examples to help you choose the right term for your shipment.
What Are Incoterms?
Incoterms are a set of 11 standardized international trade terms published by the International Chamber of Commerce (ICC). They define:
- Who arranges and pays for transportation at each stage
- Where risk transfers from seller to buyer
- Who handles customs clearance at origin and destination
- Who is responsible for insurance
Important: Incoterms do NOT cover ownership transfer, payment terms, or price — they only address logistics responsibilities. They also do not define where title to the goods passes — that is determined by the sales contract and applicable law (typically the law of the seller's country for China exports).
The five key Incoterm obligations (what each term defines):
- Carriage: Who arranges and pays for main transportation (seller or buyer)
- Risk: At what point does the risk of loss or damage transfer from seller to buyer
- Costs: Which costs are included in the seller's price vs the buyer's responsibility
- Customs: Who handles export clearance and import clearance
- Insurance: Who is responsible for arranging cargo insurance, and to what level
Quick Reference: All 11 Incoterms 2020
Incoterms are grouped into two categories based on the mode of transport.
For any mode of transport (7 terms):
| Term | Full Name | Risk Transfer | Seller's Obligation |
| EXW | Ex Works | At seller's premises | Make goods available for pickup |
| FCA | Free Carrier | At carrier (seller's premises or named location) | Deliver goods to carrier |
| CPT | Carriage Paid To | At carrier upon first carriage | Pay for main carriage |
| CIP | Carriage and Insurance Paid To | At carrier upon first carriage | Pay for main carriage + insurance |
| DAP | Delivered at Place | At destination (named place) | Deliver goods to destination |
| DPU | Delivered at Place Unloaded | At destination after unloading | Deliver and unload at destination |
| DDP | Delivered Duty Paid | At destination after customs clearance | Deliver, clear customs, and pay duties |
For sea and inland waterway only (4 terms):
| Term | Full Name | Risk Transfer | Seller's Obligation |
| FAS | Free Alongside Ship | Alongside vessel at port of loading | Deliver goods alongside ship |
| FOB | Free on Board | On board vessel at port of loading | Load goods onto vessel |
| CFR | Cost and Freight | On board vessel | Pay freight to destination port |
| CIF | Cost, Insurance and Freight | On board vessel | Pay freight + insurance to destination |
The 4 Most Commonly Used Incoterms
In practice, over 90% of international shipments use one of these four terms.
1. EXW (Ex Works)
What it means: The seller makes goods available at their factory or warehouse. The buyer arranges and pays for everything — trucking, export clearance, main carriage, import clearance, and final delivery.
Best for: Buyers who have strong logistics networks in the seller's country and want full control over shipping.
Risk for buyers: You bear all risk from the moment goods leave the factory. We have seen cases where an EXW shipment arrived at the Chinese port with damaged cargo, and the buyer had no recourse because the risk had already transferred at the factory gate — the supplier claimed it left in good condition, and the buyer had no proof to the contrary. Always arrange inspection at the point of loading under EXW.
2. FOB (Free on Board)
What it means: The seller delivers goods onto the vessel at the port of loading. Risk transfers to the buyer once goods are on board. The seller handles export clearance; the buyer arranges ocean freight and import clearance.
Best for: Containerized cargo where the buyer wants to control freight rates but does not want to handle origin logistics.
Note: FOB is the most commonly used Incoterm in China trade because it aligns with how many Chinese exporters operate.
3. CIF (Cost, Insurance and Freight)
What it means: The seller arranges and pays for ocean freight and insurance to the destination port. Risk transfers to the buyer once goods are on board the vessel (same as FOB), but the seller pays for transportation.
Best for: Buyers who want a simple, all-inclusive price from the seller and do not have established carrier relationships.
Caution: The seller controls the carrier selection. If issues arise during transit, the buyer has limited recourse.
4. DDP (Delivered Duty Paid)
What it means: The seller is responsible for everything — transportation, export clearance, ocean freight, import clearance, duties and taxes, and final delivery to the buyer's door.
Best for: Buyers who want a truly door-to-door experience with no customs involvement.
Cost: This convenience comes at a premium. Sellers typically charge a markup on duties and freight.
How to Choose the Right Incoterm
Decision framework:
```
Do you have a freight contract with competitive rates?
├── YES → Use FOB (buyer controls ocean freight)
└── NO → Consider CIF or DDP
Are you experienced with import customs procedures?
├── YES → Use FOB or EXW (you handle import clearance)
└── NO → Use DDP (seller handles everything)
Is your cargo high-value or fragile?
├── YES → Use CIF or CIP (includes insurance coverage)
└── NO → FOB or CFR is sufficient
Do you have reliable logistics partners at origin?
├── YES → EXW or FCA (full control)
└── NO → FOB or CIF (seller manages origin)
```
Common scenarios in China trade:
| Scenario | Recommended Term | Why |
| First-time buyer, small shipment | CIF | Seller handles everything until destination port |
| Experienced buyer, regular shipments | FOB | You control ocean freight rates |
| Door-to-door, no local presence | DDP | All-inclusive, no customs involvement needed |
| Factory pickup, own logistics | EXW | Maximum control, lowest product price |
Real cost comparison: FOB vs CIF
To understand the actual financial difference between FOB and CIF, here is a typical cost breakdown for a 20GP container of electronics from Shenzhen to Los Angeles:
| Cost Item | FOB (Buyer Pays) | CIF (Seller Includes) |
| Product price (ex-factory) | Included in supplier price | Included in supplier price |
| Inland trucking: factory → port | — | Included |
| Export customs clearance | — | Included |
| THC (terminal handling at origin) | — | Included |
| Ocean freight (Shenzhen → LA) | Buyer arranges and pays | Included in CIF price |
| Cargo insurance (0.2% of value) | Buyer arranges separately | Included |
| Total Seller's Quote | USD 12,000 (FOB Shenzhen) | USD 14,200 (CIF Los Angeles) |
| Difference | — | + USD 2,200 |
| Buyer's additional freight cost | USD 2,800 (typical spot rate) | — |
| Total Buyer Cost | USD 14,800 | USD 14,200 |
Key insight: In this scenario, CIF is USD 600 cheaper for the buyer — but the buyer loses control over carrier selection. If the seller selects a carrier with poor service or longer transit time, the buyer has limited recourse. For experienced importers with their own carrier relationships, FOB typically offers better long-term value despite appearing more expensive on a single shipment.
Incoterms by Industry: How Different Sectors Use Trade Terms
The "right" Incoterm varies significantly by industry. Here is how common sectors typically approach trade term selection:
| Industry | Preferred Incoterm(s) | Why |
| Electronics / high-value consumer goods | FOB or CIF | Standard for China OEM/ODM; buyers often have preferred carriers for FOB; CIF works for smaller importers |
| Industrial machinery | FOB or FCA | Sellers often handle loading (FCA at factory preferred for over-sized cargo); EXW is risky for remote factories |
| Commodities (raw materials, steel, chemicals) | CFR or CIF | Sellers secure bulk shipping at competitive rates; CFR gives buyer insurance control |
| Fashion / apparel | FOB | Standard industry practice; buyers consolidate multiple suppliers' goods |
| Food and perishables | CIF or CIP | Seller-controlled cold chain from origin to destination port; ensures temperature management |
| E-commerce / express parcels | DAP or DDP | Door-to-door with clear responsibility; DDP avoids customs delays for small shipments |
Which Incoterm you choose also affects your cash flow — FOB shifts freight costs to the buyer but requires the buyer to manage carrier relationships and negotiate rates. CIF lets the seller handle freight but the seller will include freight costs in the product price — often at a margin.
When NOT to Use Each Common Incoterm
| Term | Avoid When |
| EXW | You have no logistics presence in the seller's country; the factory is in a remote area with limited trucking options |
| FOB | Your cargo is containerized and you want clear risk transfer at origin (FCA is technically more appropriate but FOB is industry practice) |
| CIF | You have your own carrier contracts with better rates than the seller can offer; you need control over carrier selection |
| DDP | The destination country has complex import regulations; the seller lacks experience in destination customs; the value-to-duty ratio is high |
Common Misunderstandings
| Myth | Reality |
| "FOB means the seller loads the container" | FOB risk transfers when cargo passes the ship's rail — for containerized cargo, this point is ambiguous. FCA is often more appropriate for container shipments. |
| "CIF means the seller is responsible until arrival" | Risk transfers at the port of loading — if cargo is damaged during transit, the buyer must claim insurance. |
| "DDP includes everything" | DDP includes all normal costs but not VAT or unexpected customs charges caused by incorrect documentation. |
| "Incoterms are the same everywhere" | Incoterms are standardized, but local practices and port customs vary. Always clarify expectations in writing. |
FAQ
Q: Which Incoterm is best for importing from China?
A: FOB is the most common and recommended for experienced importers. CIF works well for first-time buyers. DDP is ideal for door-to-door shipments.
Q: Who pays for insurance under CIF?
A: The seller pays for minimum insurance coverage (ICC Clause C) under CIF. CIP 2020 requires higher-level insurance (ICC Clause A).
Q: Can I use FOB for air freight?
A: No. FOB is for sea freight only. Use FCA for air freight or any non-maritime transport.
Q: Do Incoterms cover payment terms?
A: No. Incoterms only cover logistics responsibilities. Payment terms (T/T, L/C, etc.) are separate agreements.
Q: What changed in Incoterms 2020?
A: Key changes include: DPU replaced DAT; higher insurance requirement for CIP; and revised cost allocation in FCA regarding on-board notations.
Unsure which Incoterm is right for your shipment? Bofeng Logistics advises on trade terms as part of our freight forwarding service. Contact our team for guidance.
Bofeng Logistics
Phone/WhatsApp: 13075678958
Email: info@zhbfwl.com
Contact us for a personalized shipping solution.
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