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Incoterms 2020 Guide
Incoterms 2020 Guide
Understanding Incoterms 2020 — A Practical Guide for Importers
Incoterms (International Commercial Terms) are a set of 11 standardised trade terms published by the International Chamber of Commerce that define the responsibilities of buyers and sellers in international transactions. They specify who is responsible for freight costs, insurance, export clearance, import clearance, and the point at which risk passes from seller to buyer. Choosing the right Incoterm can save you money and reduce your risk significantly. This guide explains each Incoterm in plain English.
The Four Incoterms Most Importers Use
EXW — Ex Works
The buyer (you) bears all costs and risks from the seller's factory gate. The seller does nothing more than make the goods available at their premises. While it sounds like maximum control, EXW is complex in practice — you need a freight forwarder to arrange export customs clearance in the seller's country, which requires local agent representation.
FOB — Free on Board
The seller delivers goods to the named port and completes export clearance. Risk passes to you when the goods are on board the vessel. You arrange and pay for ocean freight from that point. FOB is the most popular Incoterm for China imports — it gives you control of the freight cost while keeping export customs the seller's responsibility.
CIF — Cost, Insurance, Freight
The seller arranges and pays for ocean freight and minimum insurance to the named destination port. Risk actually passes to you when goods are loaded on the vessel (the same point as FOB) — meaning you bear the risk even though the seller has arranged freight. CIF gives you less visibility into freight costs. Avoid it for high-value cargo.
DDP — Delivered Duty Paid
The seller delivers goods to your named destination, duties paid and cleared through import customs. Sounds convenient, but you lose control of freight costs and customs valuation. Suppliers sometimes over-declare value on DDP shipments to inflate freight margins. Use with caution for large-volume imports.
When Risk Passes from Seller to Buyer
At Seller's Premises
For EXW: risk passes the moment goods are available at the seller's factory. You are responsible from that point — including the risk of damage during container loading.
At Origin Port
For FOB, CFR, CIF: risk passes when goods are on board the vessel at the origin port. If goods are damaged during loading, it is the buyer's risk under FOB.
At Named Destination
For DAP, DPU, DDP: risk passes at the named destination. The seller bears all transport risk to that point, including during ocean transit.
Which Incoterm Should You Use?
FOB Recommended for China
For most China imports, FOB gives you the best balance — your supplier handles export clearance, and you control the freight from origin port. You choose your freight forwarder, you know the exact freight cost, and you arrange your own insurance.
Avoid EXW for Small Volumes
EXW requires you to have a licensed customs agent in China to handle export clearance on your behalf. This is manageable for large importers with China offices, but adds complexity for smaller operations. Ask your supplier to quote FOB instead.
Avoid DDP Without Audit
DDP transfers all control to your supplier. Some suppliers inflate DDP freight and duty costs, or use cheaper carriers and pocket the margin. If your supplier insists on DDP, audit the actual freight invoices as part of your agreement.
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