International Trade Terms (Incoterms 2020) and Logistics Responsibility Allocation

1. What are Incoterms?

Incoterms (International Commercial Terms) are standard international trade rules established by the International Chamber of Commerce (ICC) to define the division of responsibilities, costs, and risks between buyer and seller in the transportation of goods.

The current version is Incoterms 2020 (effective January 1, 2020), which includes 11 trade terms.

2. Quick Overview of the 11 Trade Terms by Category

By Mode of Transport

For any mode of transport (7 terms):

For sea and inland waterway transport only (4 terms):

3. Detailed Explanation of the Three Most Common Trade Terms

FOB (Free On Board)

Seller's responsibilities: Factory → Port of loading → Load onto vessel

Buyer's responsibilities: Unload → Destination port → Consignee's factory

When to use: The buyer has import/export rights and works with a freight forwarder and customs broker. This is the most common trade term for Chinese exports.

CIF (Cost, Insurance and Freight)

Seller's responsibilities: Factory → Port of loading → Sea transport → Unload at destination port

Buyer's responsibilities: Consignee's factory

When to use: The seller manages transport and insurance; the buyer handles destination customs clearance and delivery.

DDP (Delivered Duty Paid)

Seller's responsibilities: Factory → Port of loading → Sea transport → Destination port → Consignee's factory

├──────────────── Door-to-Door All-inclusive ────────────────┤

When to use: The buyer is unfamiliar with the import process or wants an all-inclusive quote (common in cross-border e-commerce B2C).

4. Cost Comparison Example

Case Study: Shenzhen → Hamburg, 1×20GP, Cargo Value $20,000

5. Lessons Learned: Choosing Wrong Trade Term Costs $3,000 Extra

Case Study: What? CIF doesn't include destination port charges?

Background: A machinery exporter from Jiangsu signed a CIF Santos contract with a Brazilian customer. Machinery value $50,000, ocean freight $3,000.

Issue: Upon arrival at the port, the buyer demanded the seller pay the following:

Destination port THC: $500

Terminal handling charge: $300

Import customs clearance: $400

Dutty (15%): $7,500

Destination port trucking: $600

────────────────

Total extra costs: $9,300

Seller's confusion: "Isn't CIF all-inclusive? Why do I have to pay these?"

Answer: CIF (Cost + Insurance + Freight) only covers up to unloading at the destination port. Subsequent DTHC, clearance, duties, and trucking are not included. The seller ended up paying $9,300 in "unexpected" costs.

✅ Correct approach: If the buyer wants "all-inclusive," use DDP (Delivered Duty Paid), or at least clarify in the quote "CIF to port, destination port charges are extra."

Case Study: The "Free" Trap of FOB

Background: A clothing factory in Guangzhou signed an FOB Guangzhou contract with a UK customer.

Issue: The forwarder appointed by the buyer quoted much higher trucking and customs clearance fees – 40% more than what the factory's own forwarder would charge.

Root cause: Under FOB, the buyer has the right to nominate the forwarder. But if the fees from the buyer's appointed forwarder are unreasonable, the seller has no bargaining power.

✅ Correct approach: Agree in the contract that "Under FOB, the seller may use its own forwarder, or the fees charged by the buyer's appointed forwarder shall not exceed 120% of the market rate."

6. How to Choose a Trade Term?

What is the buyer's capability?

│

├─ Buyer has customs clearance capability and a forwarder partner → FOB (most common export option)

│

├─ Buyer can handle clearance but wants seller to arrange transport → CIF

│

├─ Buyer has no clearance capability or is unfamiliar with the process → DDP (all-inclusive option)

│

└─ Not sure yet → Consult a freight forwarder to compare all-inclusive quotes under different terms

Tip: In many cases, even if the buyer requests FOB or CIF quotes, they may still need to use the seller's forwarder for destination services. Regardless of the term chosen, it is recommended to ask the forwarder to provide an end-to-end quote to avoid hidden destination charges.

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