Incoterms: what sits behind EXW, FOB and CIF

What the three letters actually settle

Incoterms are standard delivery terms published by the International Chamber of Commerce. They exist so that a seller in Ningbo and a buyer in Almaty take the same obligations from the same three letters without drafting them from scratch. Three letters and a place name stand in for a page of clauses.

Every term answers three questions. Who arranges and pays for carriage on each leg. Who handles export and import formalities. And — the one people skip — at exactly which point the risk of loss or damage moves from seller to buyer.

Cost is visible in the quotation straight away. The risk transfer point stays invisible until a container is dropped, a pallet is soaked or a truck is stopped. Then it decides who carries the loss and who has anyone to claim against.

The 2020 edition has eleven rules. Four or five of them account for what comes back from a Chinese factory, and those are worth knowing properly rather than skimming a table of all eleven.

A term is only complete with a place and an edition: “FOB Ningbo, Incoterms 2020”. Without the place it says nothing about where risk passes. Without the edition each side is relying on whichever version it has in mind, and the rules are revised from time to time.

EXW: the price at the factory gate

EXW is the cheapest-looking line in any comparison. The seller makes the goods available at its own premises and does nothing further — it is not even obliged to load your truck. Loading, the run to the port, export clearance in China, freight, insurance and import all sit with you.

The catch is that export clearance. Under EXW the formality falls to the buyer, and a foreign company with no presence in China is in no position to file it. There are two ways round it: either the factory files the declaration for a separate charge, or your own representative in China does. With neither in place, EXW is a price at which the goods cannot legally leave the country.

EXW earns its place when you already have someone in China who can collect the cargo and handle the export declaration: a buying office, an agent, a consolidator. Without that, the low number is not a price you can act on.

FCA: the term for everything that is not a ship

FCA covers the ground FOB was never written for. The seller delivers the goods, cleared for export, to a named place — its own works, a carrier’s terminal, a rail yard — and risk passes when they are handed to the carrier you nominated.

Two variants matter, and the contract has to say which one applies. If the named place is the seller’s premises, delivery happens when the goods are loaded onto your collecting vehicle. If it is anywhere else, delivery happens when they arrive at that place on the seller’s vehicle, ready for unloading; unloading itself is not the seller’s job.

FCA fixes the problem EXW creates. Export clearance sits with the seller, who can actually do it, while you keep control of the main carriage and choose your own forwarder. For a container leaving Chengdu by rail or crossing out of Xinjiang by road, this is the term that fits. The 2020 edition also lets the parties agree that the buyer will instruct its carrier to issue a bill of lading with an on-board notation, at the buyer’s cost, which closes an old gap for buyers paying by letter of credit.

FOB: the sea term factories quote

Under FOB the seller moves the goods to the named port at its own cost, clears them for export and loads them on board the vessel. From the moment they are on board the risk is yours, and freight and insurance are yours to arrange.

This is the term Chinese factories are set up to quote, and the reason is practical rather than tactical: every obligation inside it happens in China, in a system the seller deals with week in, week out. It also gives the buyer a clean split. The seller does what it can do at home; you control the sea leg and pick the forwarder.

One detail is worth holding on to. FOB was written for goods loaded on a vessel. Applied to a train or a truck it has no meaningful on-board moment, so the argument about where risk passed happens after the damage rather than before it. For anything that is not a ship, ask for FCA.

Containers complicate FOB even at sea. A box is handed to the terminal days before it goes on board, which leaves a stretch where the seller no longer controls the cargo but still carries the risk for it. The ICC’s own guidance for containerised cargo points to FCA rather than FOB.

CIF: freight included, control handed over

CIF adds two things to FOB. The seller pays for carriage to the named port of destination and takes out insurance on the cargo. It reads as all-in, and that is what makes it attractive on the page.

Two things sit behind it. First, risk still passes on board at the port of shipment. The seller is insuring goods that are already at your risk, and CIF obliges it to buy only minimum cover — Institute Cargo Clauses (C), a narrow named-perils policy rather than the all-risks protection buyers assume they have. Wider cover exists, but it has to be written into the contract.

Second, the seller books the carriage. You do not choose the line, you do not see the freight rate, and charges at the port of arrival reach you on the terms the seller’s carrier has set. A factory quoting CIF is selling you freight with its own margin inside it, and the margin is invisible because it is folded into a single number.

This is where “the factory says it will ship it itself” stops being a saving and turns into a question you can answer with arithmetic. Put CIF against FOB plus your own freight and the comparison comes down to whose rate is better. If you have a forwarder and a rate of your own, you can price both sides. If you have not asked, you are taking the seller’s freight price on trust.

Ask the factory to quote FOB and CIF for the same shipment. The gap between the two numbers is what it charges for the sea leg and the cargo insurance, and you can put that figure next to your forwarder’s.

DAP and DDP: delivered, but on whose declaration?

DAP means the seller brings the goods all the way to a named place in your country and puts them at your disposal on the arriving vehicle. Unloading is yours. So is import clearance, along with duty and import VAT — DAP stops short of the border formalities.

DDP goes the whole way. The seller clears the goods for import, pays the duty and the import VAT and delivers to your door. On paper it is the most comfortable arrangement a buyer can be offered.

It is also the label a particular kind of offer hides behind. Grey carriers sell “door to door, customs included” and call it DDP: one price, goods on your dock, no paperwork. What that means legally is that the declaration is filed by somebody else’s company. You hold no import declaration in your own name — the document your accounts, your input VAT and any future audit all rest on — and in your books the goods arrived from nowhere.

Genuine DDP from a bona fide supplier exists, but it asks a great deal of the seller. A factory in Ningbo has no legal presence in the EAEU, so acting as importer of record means buying that role from someone who has one, registering for the taxes involved and carrying the liability that comes with the declaration. A real DDP price has all of that inside it.

If you are offered DDP, ask two questions: which legal entity will be named as declarant, and will you be given a copy of the customs declaration. The answers tell you immediately which kind of delivery is on the table.

Where the delivery term meets your customs value

Importing into the Eurasian Economic Union runs on the same principle as importing into the EU: duty is charged on the price plus the cost of getting the goods to the border. What differs is where that border runs, and it is the part a buyer arriving from EU-to-EU trade has no reason to expect.

Duty is charged on the customs value. Import VAT is charged on that value with the duty added on top — and excise, where the goods carry it. Neither starts from the invoice total, which starts from the price actually paid for the goods and then has the cost of moving them as far as the customs border added to it.

Which border? Not the Chinese one, and not the gate of your warehouse. The line that counts is the point where the goods arrive on the customs territory of the Eurasian Economic Union — Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan form one customs territory with a single external frontier. For a container off a ship that point is the port of arrival: Novorossiysk, Vladivostok, St Petersburg. For a train or a truck out of China it is the land crossing where it enters the Union.

Everything spent up to that point — main carriage, handling, insurance — belongs in the customs value. Everything spent beyond it, such as the run from the port to your warehouse in Moscow, can be left out of it, but only where the contract and the invoices state that leg separately and it can be documented. Whether the exclusion stands is for the customs authority to assess on the evidence, which is exactly why the evidence has to exist before the declaration is filed rather than after.

That is the practical consequence of the delivery term. An EXW price with freight billed separately and a CIF price that swallows the freight can arrive at the same customs value. A bundled DAP or DDP figure with no breakdown gives the declaration nothing to subtract, and your domestic last mile can end up inside the taxable base.

Ask the seller to split the price three ways: the goods, carriage to the point of arrival on the Union’s territory, and carriage after it. Then ask for that split to survive into the invoice. It is a request worth making before the cargo ships.

How to compare quotes

The mistake that costs the most is comparing prices written on different terms. An EXW number from one factory and a FOB number from another differ by more than the figure: the second already contains the run to the port and the export declaration.

1. Put every quote on one termFOB is the easiest common denominator for sea freight, FCA for rail and road. Either ask each factory to requote on it, or price the missing legs yourself and add them in.
2. Carry the number through to your own dockAdd freight, insurance, terminal charges, customs payments and inland delivery. The figure worth comparing is the landed one, not the line in the quotation.
3. Check who can actually clear the exportIf the term puts Chinese export clearance on you and you have nobody in China, the price is not a working price, however good it looks against the others.
4. Get the risk transfer point in writingIt decides who you claim against and whether you need cover of your own. The question reads as theoretical right up to the first damaged pallet.
5. Ask for the price broken downGoods, carriage to the point of arrival, carriage beyond it. Without that split you cannot check the customs value, and you cannot see what the seller is charging for freight.