What are Incoterms?
Incoterms are standard three-letter trade terms published by the International Chamber of Commerce (ICC). The current edition is Incoterms 2020. They don’t cover price, payment terms, or transfer of ownership, only responsibilities, costs, and risk at each stage of delivery.
EXW (Ex Works)
The seller makes the goods available at their own premises. The buyer arranges everything after that, including loading, export clearance, freight, and import clearance.
- Best for: buyers with an experienced forwarder and full control needs
- Watch out for: export clearance is technically the buyer’s job, which is difficult in a foreign country
FOB (Free On Board)
The seller delivers goods on board the vessel at the named port of shipment and clears them for export. Risk passes to the buyer once goods are on board.
- Best for: buyers who want to choose their own freight forwarder and control ocean freight costs
- Note: FOB is for sea and inland waterway transport only. For containerised cargo, ICC guidance generally suggests FCA is more appropriate.
CIF (Cost, Insurance and Freight)
The seller pays freight and minimum insurance to the named destination port. Risk still transfers to the buyer once goods are on board at the origin port, even though the seller has paid for carriage.
- Best for: buyers who want a simpler quote
- Watch out for: the seller’s minimum insurance cover (Institute Cargo Clauses C under Incoterms 2020) may be limited, and destination charges are still the buyer’s cost
EXW vs FOB vs CIF: comparison
| EXW | FOB | CIF | |
|---|---|---|---|
| Export clearance | Buyer | Seller | Seller |
| Main freight paid by | Buyer | Buyer | Seller |
| Insurance | Buyer’s choice | Buyer’s choice | Seller (minimum cover) |
| Risk transfers | Seller’s premises | On board vessel | On board vessel |
| Transport mode | Any | Sea/waterway only | Sea/waterway only |
Which should a small importer choose?
- New to importing: consider FOB or FCA so the seller handles export formalities.
- Want predictable costs: CIF or CIP can look simpler, but compare total landed cost.
- Have a trusted forwarder: EXW can give maximum control but requires experience.
Always compare landed cost (product + freight + insurance + duties + local fees), not just the headline price.
Key takeaway: The Incoterm you agree on determines your costs and who holds risk if something goes wrong.
FAQ
Is CIF cheaper than FOB? Not necessarily. CIF bundles freight into the price, and the seller’s markup may exceed what you’d pay directly.
Which Incoterm is best for air freight? FOB, CIF and CFR don’t apply. Use FCA, CPT, or CIP.
Who is responsible for import duties under these terms? The buyer, under EXW, FOB and CIF.
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