Incoterms Explained: FOB, CIF, EXW and When to Use Each

Incoterms (International Commercial Terms) are a set of 11 standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities, costs, and risks between buyer and seller in international trade transactions.

The current version is Incoterms 2020. Using the correct Incoterm in your purchase contract prevents costly disputes about who pays for freight, insurance, customs, and who bears risk if cargo is damaged.

The 11 Incoterms at a Glance

Incoterms are divided into two groups:

Rules for Any Mode of Transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP

Rules for Sea and Inland Waterway Transport Only: FAS, FOB, CFR, CIF

The Most Commonly Used Incoterms

EXW — Ex Works

Risk transfers: At seller's premises Seller's responsibility: Make goods available at their factory/warehouse Buyer's responsibility: Everything — export customs, loading, freight, import customs, delivery

EXW gives the buyer maximum control but maximum responsibility. It is rarely practical for ocean freight because the buyer must handle export formalities in a foreign country.

FOB — Free On Board (Sea transport only)

Risk transfers: When goods are loaded onto the vessel at origin port Seller's responsibility: Export customs clearance + delivery to vessel at origin port Buyer's responsibility: Ocean freight + insurance + import customs + delivery

FOB is the most common Incoterm for ocean freight. The seller delivers to the port and clears exports; the buyer arranges and pays for the vessel. This gives the buyer full control over freight costs and carrier selection — ideal for working with platforms like Portway.

CFR — Cost and Freight (Sea transport only)

Risk transfers: When goods are loaded onto the vessel at origin port (same as FOB) Seller's responsibility: Export customs + ocean freight to destination port Buyer's responsibility: Insurance + import customs + delivery from destination port

Under CFR, risk transfers at loading (same as FOB) but the seller arranges and pays for freight. The buyer still bears risk during ocean transit but doesn't control the freight.

CIF — Cost, Insurance and Freight (Sea transport only)

Risk transfers: Same as CFR — at loading Seller's responsibility: Export customs + ocean freight + minimum insurance Buyer's responsibility: Import customs + delivery from destination port

CIF is similar to CFR but adds minimum insurance. Note: the minimum insurance under CIF is only 110% of invoice value on Institute Cargo Clauses C (all-risks coverage is not included). Buyers should consider additional insurance.

DDP — Delivered Duty Paid

Risk transfers: At buyer's named place Seller's responsibility: Everything — export, freight, import customs, duties, and delivery Buyer's responsibility: Nothing (unloading at destination)

DDP is the most seller-responsible Incoterm. The seller delivers goods cleared through customs at the buyer's door. It is convenient for buyers but gives them no control over costs or carrier selection.

DAP — Delivered At Place

Risk transfers: At buyer's named place (before unloading) Seller's responsibility: Everything except import customs, duties, and unloading Buyer's responsibility: Import customs + duties + unloading

Choosing the Right Incoterm

Critical Tip: Incoterm ≠ Payment Terms

Incoterms define cost and risk allocation — they do not define payment terms (30 days, LC, etc.), ownership transfer, or title. Always specify both Incoterms and payment terms separately in your purchase contract.

Always cite the specific version: "FOB Shanghai, Incoterms 2020" to avoid ambiguity.