Incoterms explained: EXW, FOB, CIF and DDP when you buy from China

Two quotes for the same product arrive on the same day. One says $4.20 EXW, the other $4.45 FOB Shenzhen. The first looks like the better deal. It usually isn’t. The $4.20 leaves out the truck to the port, Chinese export customs, terminal handling and paperwork, and by the time you have paid for those separately you are often above $4.45, with more ways for the shipment to be delayed.

The three letters after the price are an Incoterm. They decide who pays for each leg of the journey from the factory to your warehouse, and at what point the goods become your risk. The current rules are Incoterms 2020, published by the International Chamber of Commerce. There are eleven terms, but if you buy from China and import into the UK or EU, you need to understand six.

The six terms that matter, at a glance

The pattern is simple once you see it: each term moves the handover point further along the journey. EXW hands over at the factory gate. FOB hands over on board the ship in China. DDP hands over at your door with duty paid.

Two details catch buyers out:

• Under CIF, the seller pays the freight but risk still passes to you in China, when the goods are loaded. If the container is damaged at sea, you claim on the insurance the seller bought, which is minimum cover.
• Under EXW, you are responsible for Chinese export clearance, the step you are least equipped to handle from Manchester or Munich.

FOB: the sensible default

FOB (Free on Board) means the factory delivers the goods loaded on the vessel at a named Chinese port, with export clearance done. From the ship’s rail onwards, the freight, insurance, import clearance and delivery are yours.

It is the most common term for China imports, and with good reason:

• Quotes are comparable. Three suppliers quoting “FOB Shenzhen” are quoting the same scope, so you can compare the prices directly.
• Each side does what it is good at. The factory handles the truck, export customs and port in its own country and language. You handle freight and import, where you have the relationships.
• You control the freight. You choose the forwarder, the carrier, the routing and the destination agent. On a container, that is where most of the money and most of the problems sit.

Always check the named port. “FOB Shenzhen” and “FOB Ningbo” are different prices for a reason, and a factory inland may quote FOB at the port that suits it, not you.

FOB or FCA for containers?

The ICC itself says FOB is meant for goods loaded directly onto a ship. Containers are handed to the carrier at a terminal, days before loading, so the ICC recommends FCA (Free Carrier) for them. Under FCA the factory delivers to your carrier at an agreed place, export cleared.

In practice most Chinese factories still quote FOB for container loads, and it works if the contract is clear about where the handover happens. If a dispute over damage at the terminal would worry you, use FCA with a named terminal.

EXW: cheaper on paper, dearer in practice

EXW (Ex Works) means the factory makes the goods available at its premises and does nothing else. It doesn’t even have to load your truck.

The costs left out of an EXW price don’t disappear. You pay them separately:

• loading and the truck to the port;
• Chinese export customs declaration and documents;
• origin terminal handling charges;
• origin agent fees.

There is a further snag. Chinese exporters reclaim VAT on exported goods, and many factories want their own name on the export declaration to do it. An EXW deal can mean the export runs through a third-party agent, adds cost, or leaves the factory reluctant to quote the same price.

EXW earns its place in one situation: you have a team or forwarder in China who collects from several factories and consolidates them. Then you are recreating FOB with a partner you chose. Our shipping and logistics service works this way for clients buying from more than one supplier.

CIF: convenient, not cheap

CIF (Cost, Insurance and Freight) means the factory also books and pays the sea freight and minimum insurance to your destination port. Suppliers like offering it because they choose the carrier.

That is the problem. When the supplier books the freight:

• the supplier’s forwarder picks your destination agent, and that agent charges you to release the container at a UK or EU port, at rates you never agreed, when your leverage is zero;
• the insurance is minimum cover (Institute Cargo Clauses C), which excludes a lot of what importers assume is covered;
• the risk is still yours from loading in China.

CIF suits a first small shipment when you have no forwarder. Most importers switch to FOB once they ship regularly.

DAP and DDP: delivered to your door

DAP (Delivered at Place) means the seller delivers to your named address, ready for unloading. You clear import customs and pay the duty and VAT.

DDP (Delivered Duty Paid) means the seller also clears import customs and pays the duty and VAT. You receive the goods with nothing more to pay.

DDP sounds like the easiest option. For a VAT-registered UK or EU business buying stock, it often isn’t the cheapest:

• Import VAT you can’t reclaim. In the UK, import VAT is reclaimed by the importer, using the C79 certificate or the postponed VAT statement in its name. If the seller’s forwarder is the importer and pays the VAT, that VAT is buried in your price and you usually can’t recover it.
• Someone else’s customs decisions under your goods. The DDP provider chooses the commodity code and declares the value. If it gets them wrong, the goods can be held, and questions come back to the business named on the paperwork.
• A legal grey area. A seller acting as importer into the UK or EU needs the right registrations there, such as an EORI number and often a VAT registration. Cheap “DDP” offers sometimes skip that.

DDP does have a place. It is the standard for parcels sent direct to consumers, so your customer never gets a bill at the door. For stock going into your own warehouse, importing in your own name is normally safer and cheaper.

Incoterms don’t change how customs values your goods

A common belief is that buying CIF or DDP changes your duty. It doesn’t. Both UK and EU customs work out duty on the value of the goods including freight and insurance to the border, whatever term you bought on.

So on a FOB purchase, your broker adds the freight and insurance to the FOB price to find the customs value. On a CIF purchase, they are already in the price. Import VAT is then charged on top of the customs value plus the duty. Our guide to importing from China to the UK works through a full example.

What Incoterms don’t do

Incoterms are a commercial agreement between buyer and seller. That is all they are. They do not:

• decide who legally owns the goods or when ownership passes;
• set payment terms;
• decide who is the importer for customs purposes;
• make a product legal to sell in the UK or EU.

Each of those needs its own line in your purchase contract. A factory agreeing to “DDP” has not taken on your product safety duties as the importer, and a “FOB” price says nothing about when you pay.

Which term at which stage

The bottom line

Default to FOB with a named port, or FCA for containers, and use your own forwarder so you control the freight and the destination charges. Treat EXW as FOB with extra work unless you have people in China. Treat CIF as a convenience you are paying for. Use DDP for consumer parcels, not for stock you import as a business. And write ownership, payment and product compliance into the contract, because the three letters don’t cover them.

If you want a team in China that books freight on FOB terms and consolidates your suppliers, send us your order details and we will price it door to door.