Last Update: March 6th, 2023

Incoterms are a set of standardized rules that define the responsibilities and obligations of buyers and sellers in international trade transactions. These rules use three-letter codes to describe who is responsible for transportation costs, risk of loss, and other complications that may arise during shipment. Understanding these terms is essential, as they have legal implications that can significantly impact the price and outcome of your shipment.

The most commonly used Incoterms are EXW, FOB, CIF, and DDP. Below are the explanations of each term:

EXW (Ex-Works):

Under EXW terms, the importer is responsible for coordinating the pickup of the goods from the manufacturer’s facility and delivering them to their desired location. The manufacturer’s facility could be far away from the port where workers transfer an importer’s goods onto a cargo vessel, which means the importer will have to bear on-road transportation expenses as well. Whenever an importer’s merchandise manufacturer fails to provide valid trading authorization, the buyer will be held accountable. Additionally, the buyer will be responsible for all shipping services and other port/conveyance surcharges in their target country. In principle, EXW shipping terms would cost you significantly more than FOB freight conditions.

FOB (Free on Board):

FOB is a widely used shipping Incoterm. Under FOB terms, the seller is responsible for loading the goods onto the carrier and covering local transportation expenses in China. The buyer is responsible for the cost of transportation from the designated port to their destination, including import duties and inland transfer costs. Based on whether the goods are bought under FOB origin port or FOB destination port, the purchaser or dealer may incur all liability and conveyance expenses. FOB is a preferred type of shipping for most beginners as it is comparatively cheaper and provides fewer avenues for mistakes.

CIF (Cost Insurance and Freight):

In CIF shipping, the seller covers all expenses to transport the goods from their location to the buyer’s designated port. The seller also provides insurance for the goods during transportation. The buyer is responsible for clearing the goods for import and paying any associated customs fees, as well as the cost and liability of transporting the goods from the port to their facility. This shipping option is popular for beginners who want to import from China without incurring unnecessary freight charges and inland transportation costs.

DDP (Delivered Duty Paid):

DDP is a shipping option where the seller bears all risks and costs associated with delivering the goods to the buyer’s specified destination. This includes paying for transportation, customs duties, and taxes. DDP terms are advantageous for the buyer as they have no additional costs beyond the agreed-upon purchase price.

In summary, understanding the different Incoterms is crucial for any business engaging in international trade, particularly when doing business with China. By choosing the appropriate Incoterm for your transaction, you can avoid unnecessary expenses and ensure that your goods are transported efficiently and safely


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