Incoterms 2020 Explained: EXW, FOB, CIF, DDP and the Rest

What Incoterms actually are

Incoterms are a set of 11 standardized three-letter trade terms published by the International Chamber of Commerce, last updated in 2020. When you agree "FOB Shanghai" with a supplier, both sides instantly know who pays for export customs, who books the ocean freight, who buys insurance, and — critically — the exact point where the risk of loss or damage transfers from seller to buyer. Without an Incoterm, every one of those questions is a negotiation and a potential dispute.

Think of each Incoterm as a line drawn along the shipment's journey. Everything on the seller's side of the line is their cost and risk; everything on your side is yours. The terms run from EXW, where the seller does almost nothing beyond making goods available at their factory, to DDP, where the seller delivers all the way to your door with duties paid. Moving along that spectrum, the price you pay per unit goes up, but your workload and risk go down.

A common misconception: the Incoterm does not determine who "arranges" a leg of the journey in practice — freight forwarders do the physical work either way. It determines who pays for it and who bears the risk while it happens. Another misconception is that Incoterms cover payment terms or ownership transfer. They do not. Payment, title transfer, and breach remedies belong in your contract; the Incoterm only allocates delivery costs, tasks, and risk.

• Incoterms 2020: 11 standard terms defining cost, task, and risk allocation.
• They do NOT cover payment terms, ownership transfer, or dispute resolution.
• Always state the Incoterm plus the named place, e.g. "FOB Shanghai" or "DDP Austin, TX".

EXW — Ex Works: maximum responsibility for you

Under EXW, the seller's only obligation is to make the goods available at their premises (usually the factory) at an agreed time. You — the buyer — handle export customs clearance, inland transport in China, ocean or air freight, insurance, import customs, duties, and final delivery. The risk transfers to you the moment the goods are placed at your disposal, before they have even left the factory.

EXW gives you maximum control and often the lowest unit price, since the supplier is doing the least work. But for beginners importing from China it is usually the worst choice: you need an agent or forwarder in China to collect the goods and clear export customs, most factories are bad at preparing EXW shipments properly, and if anything goes wrong at the factory gate, the risk is already yours.

Use EXW only when you have a trusted freight forwarder or sourcing agent on the ground in China who can manage pickup and export clearance. If you do not have someone physically in China coordinating, move one step up the ladder to FCA or FOB.

Group F: FCA, FAS, and FOB

FCA (Free Carrier) means the seller delivers the goods to a carrier or named place you designate and clears them for export. It works for any mode of transport and is increasingly the recommended term for containerized freight. FAS (Free Alongside Ship) is for ocean freight only: the seller delivers the goods alongside the vessel at the port, and you take over from there. FOB (Free on Board) — the classic China export term — means the seller loads the goods onto the vessel you nominated and clears export customs; risk transfers once the goods are on board.

FOB is the default language of Chinese exporters for good reason: it is simple, every factory understands it, and it lets you control the expensive part (ocean freight) with your own forwarder. When a supplier quotes you "FOB Shanghai $2.40/pc," the price includes manufacturing, packaging, inland transport to the port, and export clearance — but not ocean freight, insurance, or anything after the ship leaves.

The practical difference between FCA and FOB matters less for beginners than one rule: with Group F terms, you choose the freight forwarder. That is where your leverage lives. Get two or three forwarder quotes for every shipment; the spread between a lazy quote and a competitive one can be 15-25% of your freight cost.

• FOB Shanghai is the standard quote basis from Chinese exporters.
• Risk transfers when goods go on board the vessel — insure from that point.
• With F terms you pick the forwarder: always get multiple quotes.

Group C: CFR, CIF, CPT, and CIP

Group C terms are where beginners get confused, because the seller pays for the main carriage but risk still transfers early. Under CFR (Cost and Freight), the seller pays to get the goods to your destination port, but risk transfers when the goods are loaded on board in China — the same point as FOB. CIF (Cost, Insurance and Freight) is CFR plus the seller buying minimum marine insurance. CPT (Carriage Paid To) is the any-mode equivalent of CFR, and CIP (Carriage and Insurance Paid To) is the any-mode equivalent of CIF with a higher default insurance level.

The key insight: in Group C, cost and risk split at different points. The seller pays the freight, but if the container falls off the ship mid-ocean, that loss is yours — you owned the risk since loading. This is why you should always arrange your own supplemental insurance under CIF/CFR unless you trust the seller's coverage (sellers typically buy the cheapest minimum policy).

CIF quotes from suppliers are often inflated — the factory adds a margin on freight and buys minimal insurance. Compare every CIF quote against an FOB quote plus your own forwarder's freight rate. More often than not, FOB plus your forwarder wins, and you keep control of routing and timing.

• Group C: seller pays freight, but risk transfers at loading — insure accordingly.
• CIF quotes often hide a freight markup; compare against FOB + your forwarder.
• CIP (any transport mode) carries a higher default insurance level than CIF.

Group D: DAP, DPU, and DDP

Group D is arrival terms: the seller bears cost and risk all the way to the destination. DAP (Delivered at Place) means the seller delivers to your named place, ready for unloading — you handle import customs and duties. DPU (Delivered at Place Unloaded) is DAP plus the seller unloads. DDP (Delivered Duty Paid) is the full package: the seller handles everything including import customs clearance and duty payment, delivering to your door.

DDP is the beginner-friendly champion. One price, one party responsible, goods show up at your warehouse. It is the standard for small first orders, Amazon FBA shipments where you lack an importer of record, and anyone who does not want to manage customs yet. The tradeoff: DDP quotes bundle freight, duties, and the agent's margin into one number, so you cannot see what anything costs — and some DDP agents under-declare customs values to cut duties, which creates compliance risk for you as the importer of record.

Ask any DDP provider for an itemized breakdown (product, freight, duties, fees) and confirm they declare full value at customs. Legitimate DDP forwarders will do this. Also confirm who the importer of record is — under DDP it is usually the forwarder's agent, but you remain commercially exposed if declarations are wrong.

• DDP: seller delivers to your door, duties paid — simplest for beginners.
• Always ask for an itemized DDP breakdown and confirm full-value customs declaration.
• DAP is DDP minus import customs/duties — useful if you have your own broker.

Which Incoterm should you choose?

For most importers buying from China, the decision tree is simple. First order, small volume, no customs experience? DDP — pay the premium for simplicity and learn the process. Regular ocean shipments where you want control and best pricing? FOB plus your own freight forwarder — this is the professional standard and what most experienced importers use. Air freight or multimodal? FCA or CIP. Buying from a factory deep inland with no export experience? DDP or DAP, because EXW/FOB will strand you at the factory gate.

One more consideration: your Incoterm should match your inspection plan. If you inspect before shipment (which you should), note that under FOB the risk transfers at loading — so your inspection must be complete and accepted before the container is sealed and loaded. Under DDP, the seller owns the risk longer, which is one reason DDP feels safer.

Whatever you choose, put it in the contract with the named place and the Incoterms 2020 version: "FOB Shanghai, Incoterms 2020." And when a supplier quotes without naming a term, ask — "is that EXW or FOB?" is the single most useful question in early supplier conversations, because a cheap EXW quote and an expensive DDP quote are not comparable until you normalize them.

• First order: DDP. Regular ocean freight: FOB + your forwarder. Air/multimodal: FCA/CIP.
• Match your Incoterm to your inspection plan — inspect before risk transfers.
• Never compare quotes until you know which Incoterm each one uses.

Insurance, documentation, and costly misunderstandings

Marine cargo insurance is cheap — typically 0.3-0.5% of cargo value for basic coverage — and skipping it is false economy. Under EXW, FCA, FAS, and FOB, you need your own policy from the risk-transfer point. Under CIF/CIP the seller provides minimum cover, which you should top up. Under DAP/DPU/DDP the seller insures the whole journey, but verify it.

Watch for these classic Incoterm misunderstandings. "FOB" quoted by a supplier who then adds "local charges" at destination — under true FOB there should be no seller-side charges after loading; destination charges belong to your forwarder's quote. "DDP" that excludes duties — that is not DDP, it is DAP; real DDP includes duty payment. And EXW where the factory refuses to load your truck — under EXW the seller is not obliged to load, which is exactly why FCA exists.

Finally, remember that the Incoterm is only as good as the contract around it. Specify the named port or place precisely ("FOB Ningbo" vs "FOB Shanghai" changes your inland cost), confirm who handles export licenses for regulated goods, and agree in writing what happens if the vessel is delayed. The three letters do a lot of work, but they cannot replace a clear one-page shipping clause.

• Cargo insurance costs ~0.3-0.5% of value — always buy it when you hold the risk.
• "DDP" without duties included is not DDP. "FOB" with seller destination charges is not FOB.
• Name the exact port/place: "FOB Ningbo, Incoterms 2020" — precision prevents disputes.