What Are Incoterms?
Incoterms are a set of standardised three-letter trade terms, published by the International Chamber of Commerce (ICC), that define exactly who is responsible for the cost and the risk of goods at each stage of an international shipment. When a contract says "FOB Shanghai" or "DDP Rotterdam," both parties know precisely where the seller's responsibility ends and the buyer's begins.
Incoterms answer three questions: who arranges and pays for each leg of transport, at what point does the risk of loss or damage pass from seller to buyer, and who handles export and import formalities. They do not set the price, the payment method, or when legal ownership transfers; those belong in the rest of your contract. The current version is Incoterms 2020.
Why Incoterms Matter to Buyers
The Incoterm you agree to determines how much of the logistics chain, and how much of the risk, lands on you. Get it wrong and you can be caught paying for freight, insurance, customs duties, or a damaged container you did not expect.
A quoted unit price means little without the Incoterm attached. A supplier quoting "$10 EXW" and one quoting "$12 DDP" may be offering very similar real economics once you add freight, insurance, duties, and handling to the first quote. To compare suppliers fairly, you have to normalise every quote to the same delivery point.
Incoterms also decide who controls the freight. Buyer-controlled terms (like FOB or EXW) let you choose your own forwarder and often get better rates; seller-controlled terms (like CIF or DDP) are simpler but bundle the seller's freight margin into your price.
The Four Most-Used Incoterms Compared
Most B2B import deals use one of four rules. The table shows who is responsible for each major cost and where risk transfers. "Buyer" means the buyer arranges and pays; "Seller" means the seller does.
Note the key trap with CIF: the seller pays for freight and insurance, but the risk still passes to you when the goods are loaded at origin, not when they arrive. If the cargo is damaged mid-voyage, you carry the loss and claim against the (often minimal) insurance the seller arranged.
| Responsibility | EXW (Ex Works) | FOB (Free On Board) | CIF (Cost, Insurance, Freight) | DDP (Delivered Duty Paid) |
|---|---|---|---|---|
| Export packing | Seller | Seller | Seller | Seller |
| Loading at origin | Buyer | Seller | Seller | Seller |
| Origin inland transport | Buyer | Seller | Seller | Seller |
| Export customs clearance | Buyer | Seller | Seller | Seller |
| Main freight (sea/air) | Buyer | Buyer | Seller | Seller |
| Insurance on main carriage | Buyer | Buyer | Seller (minimum cover) | Buyer (optional) |
| Import customs and duties | Buyer | Buyer | Buyer | Seller |
| Delivery to final destination | Buyer | Buyer | Buyer | Seller |
| Risk transfers when... | Goods made available at seller's premises | Goods loaded on the vessel | Goods loaded on the vessel | Goods delivered, ready to unload, at destination |
When to Use Each One
EXW (Ex Works). The seller just makes the goods available at their door; you handle everything else, including export clearance. It gives you maximum control but maximum responsibility, and arranging export formalities in a foreign country is hard. Best for experienced buyers with a strong forwarder in the origin country, or for domestic deals.
FOB (Free On Board). The seller delivers, clears for export, and loads the goods onto your vessel; you take over from there. FOB is the workhorse of container sea freight because it cleanly splits the deal at the port of loading and lets you control and price the main freight yourself. Use it for sea or inland-waterway shipments.
CIF (Cost, Insurance, Freight). The seller arranges and pays freight and basic insurance to the destination port, but risk still passes to you at loading. It is convenient if you do not want to arrange freight, but you give up freight control and the bundled insurance cover is usually minimal. Sea freight only.
DDP (Delivered Duty Paid). The seller handles everything, including import duties, and delivers to your door. It is the simplest term for the buyer and good for samples or when you lack import capability, but you pay a premium and rely on the seller to clear customs correctly in your own country, which can go wrong.
A practical note: EXW, FOB, and CIF are written against a named place. Always pair the rule with that place and the version year, for example FOB Ningbo (Incoterms 2020).
Container vs Sea-Only Terms
Incoterms 2020 splits the rules into two families, and choosing from the wrong family is a common mistake.
The four "any mode of transport" rules (EXW, FCA, CPT, CIP, DAP, DPU, DDP) work for road, rail, air, sea, or multimodal shipments, including containers handed over at a terminal rather than loaded onto a ship by you.
The four "sea and inland waterway only" rules (FAS, FOB, CFR, CIF) assume the goods physically cross a ship's rail at a port. For containerised cargo handed to a carrier at a terminal, the ICC actually recommends FCA over FOB and CPT/CIP over CFR/CIF, because the container leaves your control before it is loaded on the vessel. In practice FOB and CIF remain widely used for containers by habit; just know the risk-transfer point may not match where you lose physical control.
When you are sourcing and comparing suppliers, agree the Incoterm early. You can browse manufacturers and distributors by category and country on Hell of a Partner and raise delivery terms in your first message, so quotes arrive on a comparable basis.