Incoterms (International Commercial Terms) are a set of standardised three-letter trade terms published by the International Chamber of Commerce. They define who is responsible for goods, costs and risk at each stage of an international shipment. The current version in force is Incoterms 2020. Choosing the right term is one of the most consequential decisions in a China sourcing arrangement — and one of the least understood.
This guide covers the four terms you will see most often on a Chinese factory quote — EXW, FOB, CIF and DDP — explaining under Incoterms 2020 exactly who pays for each leg, where risk transfers, and which term gives a buyer the most control. It also flags the two things Incoterms deliberately do not settle: title to the goods and the payment terms. Get the term right and you protect both your money and your leverage; get it wrong and you can end up liable for a customs declaration you had no legal standing to file.
What Incoterms Do — and Do Not — Cover
An Incoterm answers three questions and only three: which party arranges and pays for each leg of transport and clearance; the precise point at which risk of loss or damage transfers from seller to buyer; and who is responsible for the export and import formalities. That is the whole scope.
Just as important is what Incoterms leave out. They do not transfer ownership or title — that is governed by your sales contract and payment terms, not the shipping term. They do not specify a currency, a price, or a payment method. And they are not, on their own, a contract. So an Incoterm always needs two things attached to mean anything: a named place ("FOB Shenzhen", not just "FOB") and a stated Incoterms version ("FOB Shenzhen, Incoterms 2020"). Without the named place the transfer point is undefined; without the version, an old edition's rules could apply by default. Pair the term with sound payment terms so that title, money and risk all move in a sequence you control.
The Four Terms You'll Encounter Most
EXW — Ex Works
The seller makes goods available at their premises. The buyer is responsible for everything from that point: loading, trucking to port, export clearance, ocean freight, import clearance, and final delivery.
In practice: EXW is the most buyer-unfriendly Incoterm for new buyers sourcing from China. You're responsible for export clearance in China — which you likely have no capacity to manage. Avoid unless you have a well-established freight forwarder relationship in China.
FOB — Free on Board
The seller is responsible for getting goods to the named port of loading and handling export clearance. Risk and cost transfer to the buyer once goods are loaded onto the vessel.
In practice: FOB is the most commonly used Incoterm for China-origin shipments, and generally the most appropriate for buyers. You take control of freight and insurance — which means you can shop for competitive freight rates and choose your own insurer.
CIF — Cost, Insurance and Freight
The seller arranges and pays for freight and insurance to the named port of destination. Risk transfers to the buyer when goods are loaded onto the vessel (same as FOB) — so despite paying for freight, the buyer bears the risk during transit.
In practice: CIF is simpler for buyers who don't want to manage freight arrangements. But you lose price transparency — factories often mark up CIF freight, and you can't compare their quote to market rates. For large shipments, the freight markup can be significant.
DDP — Delivered Duty Paid
The seller is responsible for everything — freight, insurance, import customs clearance and duties — all the way to the buyer's named destination. Maximum convenience for the buyer.
In practice: DDP sounds attractive but creates problems. Factories quoting DDP to US or EU destinations often use grey-channel freight arrangements or undervalue customs declarations to minimise duty — practices that create legal risk for the buyer. For high-value shipments, DDP can mean the factory is handling your import compliance. Be cautious.
Which Term Should You Use?
| Term | Who Arranges Freight | Risk Transfers At | Best For |
|---|---|---|---|
| EXW | Buyer | Factory gate | Experienced buyers with China freight agents |
| FOB | Buyer | On vessel at origin port | Most buyers — recommended default |
| CIF | Seller | On vessel at origin port | Buyers who want simplicity and small shipments |
| DDP | Seller | Buyer's premises | Very small orders; approach with caution |
Who Pays for What: Cost Responsibility by Leg
The table above shows the headline transfer points. This one breaks the journey into its individual cost legs so you can see exactly where each term hands the bill from seller to buyer. "S" means the seller bears the cost; "B" means the buyer does.
| Cost leg | EXW | FOB | CIF | DDP |
|---|---|---|---|---|
| Loading at factory | B | S | S | S |
| Inland transport to port | B | S | S | S |
| China export clearance | B | S | S | S |
| Origin port / loading on vessel | B | S | S | S |
| Ocean freight | B | B | S | S |
| Marine insurance | B | B | S (minimum) | S |
| Destination import clearance | B | B | B | S |
| Import duties / taxes | B | B | B | S |
The pattern is clear: cost responsibility shifts steadily from buyer to seller as you move left to right. But note the two rows that break the pattern's neatness — under CIF the seller pays freight and insurance yet the buyer still bears transit risk, and under DDP the seller nominally pays import duties in a country where it has no legal standing as importer of record, which is the crack that DDP problems fall through.
Risk Transfer vs Cost Transfer — Don't Confuse Them
The single most common Incoterm mistake is assuming that whoever pays for freight also carries the risk during that freight. They are separate questions. Under CIF the seller pays to move the goods all the way to your destination port, yet risk transfers to you the moment the goods are loaded on board the vessel in China — identical to FOB. If the vessel sinks halfway across the Pacific, the loss is legally yours under CIF, even though the seller booked and paid for that voyage. The only thing standing between you and that loss is the insurance policy. This is why the "I" in CIF matters, and why buyers who take CFR or FOB must arrange their own marine cover before the container leaves. The rule to memorise: on any of the "C" terms (CFR, CIF, CPT, CIP), the seller's cost obligation and the buyer's risk both exist at once, but they split at different points on the map.
Common Incoterm Mistakes When Sourcing from China
A handful of errors recur across new importers, and each is avoidable at the quotation stage:
- Quoting a term with no named port. "FOB China" is meaningless — Shenzhen, Ningbo and Shanghai have different trucking distances and terminal fees baked into the price. Always specify the port.
- Assuming CIF insurance is comprehensive. Under Incoterms 2020, CIF only obliges the seller to buy minimum cover (Institute Cargo Clauses C). For valuable or fragile goods, that is thin. Read the policy or arrange your own.
- Using FOB or CIF for air freight or LCL courier moves. Those terms are sea-and-inland-waterway only. For anything else the correct 2020 equivalents are FCA, CPT and CIP.
- Treating the Incoterm as if it settled payment or title. It does neither. Keep payment terms negotiated separately, with a balance payment held against a passed pre-shipment inspection.
- Accepting DDP to dodge import paperwork. You usually remain importer of record and thus liable for the declaration, however the factory's forwarder files it.
How the Incoterm Interacts with Inspection and Payment
An Incoterm decides logistics, but your protection as a buyer comes from stitching it together with quality control and payment. Whatever term you use, the sequence that keeps leverage on your side is: audit the factory before the first big order, book an independent pre-shipment inspection once production is complete and packed, and tie your balance payment to a passed inspection report. Under FOB, the goods are still in China and under the factory's care up to the vessel — which is precisely the window in which an inspection has teeth and your balance payment is still unpaid. If you have already released full payment under a convenient DDP arrangement, that leverage is gone before the goods even ship. The Incoterm and the payment milestone should be designed as one plan, not two.
One Practical Note on Freight Forwarders
Whichever Incoterm you use, building a relationship with a reliable freight forwarder is essential. They handle the operational complexity of international shipping, advise on documentation, and can be the difference between goods clearing customs smoothly and sitting in a bonded warehouse incurring storage fees. Under FOB they take over at the origin port; under EXW they must also arrange Chinese export clearance on your behalf, which is why EXW without a capable China-side forwarder is a trap.
For GBA-origin shipments, having a freight forwarder with a presence in both China and your destination market is ideal — one throat to choke across the whole chain, and no handoff gap where a lost document strands your container.
Frequently Asked Questions
What is the difference between EXW, FOB, CIF and DDP?
They differ in how much of the journey the seller handles. EXW: the buyer takes over at the factory gate. FOB: the seller delivers the goods loaded on the vessel at the origin port and clears export; risk passes on board. CIF: the seller also pays freight and minimum insurance to the destination port, but risk still passes on board at origin. DDP: the seller delivers to the buyer's door with import duties paid. Cost and risk shift progressively from buyer to seller across that range.
Which Incoterm is best for importing from China?
For most buyers, FOB [named Chinese port] is the best default under Incoterms 2020. The factory handles inland transport and export clearance in China, which it does daily, while you control ocean freight, marine insurance and import clearance in your own market. That gives you price transparency on freight and lets you insure the cargo to a level you have actually read.
Under CIF and FOB, when does risk transfer to the buyer?
Under both FOB and CIF (Incoterms 2020), risk transfers when the goods are placed on board the vessel at the origin port in China, not when they arrive. Under CIF the seller pays freight and insurance to the destination but does not carry the transit risk, so an uninsured loss at sea falls on the buyer.
Why do experienced buyers avoid DDP from China?
Under DDP the seller is responsible for import clearance and duties in the buyer's country. Some factories quoting DDP rely on grey-channel freight or under-declared customs values to keep the price low, which creates compliance and legal exposure for the buyer, who is usually the importer of record. DDP also hides the true freight and duty cost inside one number you cannot audit.
Do FOB and CIF work for air freight or courier shipments?
No. FOB, CFR and CIF are defined for sea and inland waterway transport only, where goods are loaded on a vessel. For air, courier or multimodal container moves handed over at a terminal, the correct Incoterms 2020 equivalents are FCA, CPT and CIP. Using FOB or CIF for a non-vessel move creates ambiguity about exactly when risk passes.
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