Incoterms in plain words: EXW, FOB, CIF, DDP

What Incoterms define and what they do not

They define:

• who arranges carriage and over which leg;
• who bears which costs, including port charges and unloading;
• at what point risk passes from seller to buyer;
• who handles export formalities in the country of departure and import formalities in the country of destination;
• who is obliged to insure the cargo and on what terms.

They do not define:

• when title to the goods passes to you;
• payment terms and deadlines;
• what happens if the goods turn out to be defective;
• the governing law and dispute resolution procedure.

Hence the main practical mistake: "we are on FOB, so we owe nothing until we receive the goods". Risk and payment are different things. Under FOB risk passes to you back in the Chinese port, and whether you have paid or not is decided by your contract.

The four terms you meet with China

EXW (Ex Works). The seller simply makes the goods available on their own premises. They are not even obliged to load them onto your vehicle and are not obliged to file an export declaration. Risk passes at the moment the goods are placed at your disposal at the factory. This is the term with the maximum buyer responsibility, and in China it has a trap of its own: a factory without an export licence cannot open a declaration, and you as a non-resident certainly cannot. We close this gap with an export declaration in China.

FOB (Free On Board). At their own cost the seller brings the goods to the port of shipment, completes export formalities, pays local port charges and loads the goods on board the vessel. Risk passes once the goods are on board. Freight, insurance and everything after that is yours. This is the most common term in Chinese exports. Important: FOB applies only to sea and inland waterway transport. "FOB Shenzhen airport" in a quotation is an incorrect formulation; for air, rail and road the correct terms are FCA, CPT or CIP.

CIF (Cost, Insurance and Freight). The seller additionally pays ocean freight to the named destination port and minimum insurance. The key subtlety: risk still passes to you on board in China, not at the destination port. In other words, the seller bears costs further than risk. The second subtlety: under Incoterms 2020 the minimum cover for CIF is Institute Cargo Clauses (C) at 110% of the contract value. These cover a narrow list of events and do not cover, for example, ordinary damage during handling or theft. If you need full cover, it has to be written into the contract separately or arranged by you.

DDP (Delivered Duty Paid). The maximum responsibility for the seller: they deliver the goods to the stated address, complete import formalities and pay duty and taxes. For an importer this means one figure and one contractor. The practical condition under which DDP makes sense is that the import is official and gives you documents and a VAT credit, not just boxes in a warehouse. We handle DDP in exactly this form.

An example with figures: one consignment on different terms

A consignment of furniture fittings from Yiwu: 5 m³, 800 kg, goods value $9000.

One more practical point. Customs value in Ukraine is calculated including delivery to the border. Under FOB you add freight and insurance to the invoice value yourself and support them with the freight forwarder's documents. Under CIF they are already inside the invoice. The base for duty and VAT ends up roughly the same — choosing a term is not a way to reduce payments. How those payments are calculated is covered in the article on the HS code.

We work on any terms: we collect cargo from the factory under EXW, pick it up under FOB in a Chinese port, or move the whole chain for a single figure under DDP. If you are still agreeing the contract, send us the draft — we will advise which term works better for you and what to clarify with the supplier before signing.