What Are Incoterms?
Incoterms (International Commercial Terms) are a set of standardized trade terms published by the International Chamber of Commerce that define the responsibilities of buyers and sellers in international transactions. They specify who pays for transportation, insurance, and customs duties, and at what point the risk of loss or damage transfers from the seller to the buyer. Understanding Incoterms is essential for accurately calculating your total import costs and avoiding expensive misunderstandings.
The Most Common Incoterms in China Sourcing
EXW (Ex Works)
Under EXW, the seller makes the goods available at their premises (usually the factory). The buyer is responsible for everything from that point forward — loading, inland transportation to the port, export customs clearance, ocean or air freight, import customs clearance, and delivery to the final destination. EXW gives the buyer maximum control but also maximum responsibility. It is rarely the best choice unless you have a strong logistics team in China.
FOB (Free on Board)
FOB is the most commonly used Incoterm in China sourcing. The seller is responsible for delivering the goods to the named port of export and loading them onto the vessel. Once the goods pass the ship's rail, risk and cost transfer to the buyer. FOB is popular because it gives the buyer control over the international freight leg — allowing you to choose your own freight forwarder and negotiate shipping rates — while the seller handles the Chinese domestic logistics and export formalities they know best.
CIF (Cost, Insurance, and Freight)
Under CIF, the seller pays for freight and insurance to the named port of destination. Risk still transfers to the buyer at the port of export, but the seller arranges and pays for the ocean freight and minimum insurance coverage. CIF is convenient for buyers who prefer a single price that includes delivery to their destination port. However, the seller's insurance coverage is typically minimal, and their freight rates may not be competitive.
DDP (Delivered Duty Paid)
DDP places maximum responsibility on the seller. The seller delivers the goods to the buyer's premises, cleared for import, with all duties and taxes paid. DDP is the simplest option for the buyer but gives you the least control over logistics. It is most common with trading companies or suppliers serving the e-commerce market.
How Incoterms Affect Your Costs
The Incoterm you choose directly impacts the price you are quoted. An EXW price will be the lowest because it excludes all logistics costs. The same product quoted FOB will be higher because it includes inland transport and port handling. CIF will be higher still because it adds ocean freight and insurance. When comparing quotes from different suppliers, always ensure you are comparing on the same Incoterm basis.
Which Incoterm Should You Use?
For most buyers sourcing from China, FOB is the recommended starting point. It provides a good balance between cost visibility, risk management, and logistical control. Consider CIF if you want simplicity and do not want to manage freight arrangements yourself, but get your own cargo insurance regardless. Use EXW only if you have a logistics partner in China who can handle domestic transport and export customs. Consider DDP for small shipments or when your supplier offers competitive all-inclusive pricing.
Common Mistakes with Incoterms
- Comparing prices on different terms: An EXW quote of $5.00 is not cheaper than an FOB quote of $5.50 — you need to add inland transport and port charges to the EXW price.
- Assuming CIF insurance is adequate: CIF insurance covers only 110% of the invoice value with minimal coverage. Arrange your own comprehensive marine cargo insurance.
- Not specifying the exact location: "FOB" alone is incomplete — it should be "FOB Shenzhen" or "FOB Shanghai" to specify the port.
- Ignoring the risk transfer point: Under FOB and CIF, you bear the risk once goods are loaded onto the vessel in China, even though the goods have not yet reached you.
Incoterms and Your Purchase Contract
Always include the specific Incoterm and named location in your purchase contract or proforma invoice. This eliminates ambiguity about who is responsible for what. Combine Incoterms with clear payment terms, quality requirements, and delivery deadlines for a comprehensive commercial agreement.