What are Incoterms?

Incoterms (International Commercial Terms) are universal, pre-defined commercial rules published by the International Chamber of Commerce (ICC). They are universally used in international commercial transactions and procurement processes.

A three-letter Incoterm clearly dictates two massive factors in international trade: Cost (who pays for which part of the journey) and Risk (at what exact geographic point the responsibility for lost/damaged cargo shifts from the seller to the buyer).

The Four Most Common Incoterms Explained

• EXW (Ex Works): Maximum responsibility for the Buyer. The seller simply leaves the goods at their factory door. The buyer must hire trucks, clear export customs, pay for ocean freight, and handle import duties.
• FOB (Free On Board): The standard for Chinese manufacturing. The seller pays to truck the goods to the port and clear export customs. Once the goods are loaded onto the ship, all costs and risks transfer to the buyer.
• CIF (Cost, Insurance, Freight): The seller pays for everything (including marine insurance) all the way up to the destination port. However, once the goods arrive at the destination port, the buyer must pay import duties and hire a truck for final delivery.
• DDP (Delivered Duty Paid): Maximum responsibility for the Seller. The seller acts essentially like Amazon Prime—they handle all shipping, pay all import duties, and deliver the goods directly to the buyer's door.

Why Your Freight Invoice May Vary

If you switch a contract from FOB to CIF, your supplier will increase the price of the goods. They aren't paying the freight out of the kindness of their heart; they are simply baking the freight cost into the commercial invoice.

Many professional importers prefer FOB because it gives them total control over the main ocean freight. They can use their own trusted freight forwarders to negotiate better rates, rather than relying on the seller's forwarder (who may inflate the CIF price for extra profit).