What Are Incoterms? FOB, CIF, EXW and DDP in China Sourcing

Incoterms are the three-letter trade terms often used in international trade. They answer questions such as who arranges transport, who pays which cost, who handles customs, who buys insurance, and when the risk of loss moves from seller to buyer.

When buying from China, suppliers often quote FOB, CIF, EXW, or DDP. Problems usually arise not because the words are impossible, but because buyers assume they solve every issue.

The short definition

Incoterms means International Commercial Terms. The International Trade Administration and International Chamber of Commerce describe them as rules allocating transport, cost, and risk responsibilities between seller and buyer.

Incoterms 2020 has 11 rules . For most China sourcing buyers, the first four to understand are EXW, FOB, CIF, and DDP.

Term Incoterms 2020: the 11 ICC rules

The International Chamber of Commerce publishes the Incoterms rules; the 2020 edition took effect on 1 January 2020 and contains 11 rules. See the ICC Incoterms pageICC - International Chamber of CommerceIncoterms® rules - ICC - International Chamber of CommerceFirst published by ICC in 1936, Incoterms® rules are a set of eleven three-letter trade terms, reflecting business-to-business practice in contracts for the sa…iccwbo.org↗.

Four common terms

EXW usually means the seller makes the goods available at its premises, and the buyer handles more of the transport, export, and downstream work . For overseas buyers without China logistics support, EXW can be more difficult than expected.

Term EXW: export clearance stays with the buyer

Under EXW the buyer also bears export clearance in China. Foreign buyers without a China entity or agent often cannot complete export formalities, so FCA is usually the safer minimum term.

FOB is common for sea freight. The supplier is responsible for delivering goods to a named Chinese port and handling the relevant export side. Risk usually transfers once the goods are loaded on board .

Term FOB: risk passes on board

Under FOB, risk passes when the goods are on board the vessel nominated by the buyer at the named port of shipment. FOB applies only to sea or inland waterway transport, per the U.S. International Trade AdministrationInternational Trade Administration | Trade.govKnow Your IncotermsIncoterms® are internationally recognized terms that clarify the tasks, costs, and risks for buyers and sellers in transactions.www.trade.gov↗.

CIF means the seller arranges cost, insurance, and freight to the destination port . It does not mean the seller handles import clearance or destination-country duties.

Term CIF: minimum insurance only

Under CIF the seller must buy cargo insurance to the destination port, but Incoterms 2020 requires only minimum cover (Institute Cargo Clauses C). Buyers needing broader protection must agree that separately.

DDP is easier for the buyer because the seller takes more delivery responsibility, including import-related arrangements . In practice, not every Chinese supplier can truly perform DDP well.

Term DDP: seller bears import clearance

Under DDP the seller bears import clearance and duties in the destination country. If the supplier lacks a local entity or tax registration, clearance can still fail and delay or block delivery.

What Incoterms do not solve

Incoterms do not decide whether goods are conforming. They do not decide when payment is safe. They do not decide what happens if the supplier is late. They do not decide where disputes are resolved.

For example, FOB Shanghai, Incoterms 2020 can clarify transport and risk transfer. It does not say whether the goods must pass third-party inspection or whether the supplier must refund for quality defects.

Why place and version matter

Writing only FOB or CIF is not enough. A better clause states the place and version, such as FOB Shanghai, Incoterms 2020.

Place affects the responsibility boundary. Version affects interpretation. The trade term in the contract, PI, commercial invoice, and shipping documents should match where possible.

Tariff and customs risk

When tariffs rise, customs costs increase, or goods are damaged in transit, Incoterms are among the first terms to review.

But they provide default allocation, not always a complete commercial answer. For tariff-change issues, see: Tariff Jumped: Who Bears the Loss?.

The bottom line

Incoterms are basic infrastructure in a China sourcing contract. They make shipping and customs responsibilities clearer, but they do not replace quality terms, payment terms, or dispute terms.

Before placing an order, confirm three things: the trade term, the named place, and the Incoterms version.

If you are unsure what FOB, CIF, EXW, or DDP in a supplier quotation means for you, contact me.

References

1. International Chamber of Commerce, Incoterms rules (Incoterms 2020, in force 1 January 2020): https://iccwbo.org/business-solutions/incoterms-rules/ICC - International Chamber of CommerceIncoterms® rules - ICC - International Chamber of CommerceFirst published by ICC in 1936, Incoterms® rules are a set of eleven three-letter trade terms, reflecting business-to-business practice in contracts for the sa…iccwbo.org↗
2. U.S. International Trade Administration, Know Your Incoterms: https://www.trade.gov/know-your-incotermsInternational Trade Administration | Trade.govKnow Your IncotermsIncoterms® are internationally recognized terms that clarify the tasks, costs, and risks for buyers and sellers in transactions.www.trade.gov↗

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This article is part of the China Legal Glossary series. Related reading: Tariff Jumped: Who Bears the Loss?, What Is a China Purchase Order?, and Before You Pay a Chinese Supplier, Check These 10 Things.