Understanding Incoterms 2020: EXW, FOB, CIF Explained

Incoterms (International Commercial Terms) define exactly who pays for what, and — just as importantly — at what point risk transfers from seller to buyer during a shipment. Getting the Incoterm wrong in a contract doesn't just cause confusion; it can mean you're liable for cargo you thought was the other party's responsibility.

The current version is Incoterms 2020, published by the International Chamber of Commerce. There are 11 terms total, but in China-origin trade, a handful come up constantly. This guide explains all 11 Incoterms, compares the most commonly used terms, and shows how they affect your landed cost calculation.

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What Are Incoterms 2020?

Incoterms 2020, short for International Commercial Terms, are a set of standardized trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities of sellers and buyers in international transactions, including who arranges transportation, who pays specific costs, who handles customs clearance, and when the risk of loss or damage transfers from the seller to the buyer.

Incoterms do not determine the ownership of the goods, the payment terms, or the final purchase price. Instead, they clarify the division of costs, responsibilities, and transportation risks between the two parties.

There are 11 Incoterms 2020 rules. Seven can be used for any mode of transport, while four are specifically designed for sea and inland waterway transport.

For businesses buying vehicles, machinery, equipment, or other goods from China, understanding the difference between terms such as EXW, FOB, CIF, DAP, and DDP is particularly important because the selected Incoterm can significantly change the final landed cost.

For example, a supplier's FOB quotation may look higher than an EXW quotation, but the FOB price may already include export clearance and transportation to the port. Comparing only the quoted purchase price can therefore give a misleading impression of which option is actually cheaper.

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The 11 Incoterms 2020 Explained

Incoterms 2020 contains 11 rules covering different combinations of transportation, delivery, customs clearance, insurance, and risk allocation.

The rules can be divided into two groups:

• Rules for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU, and DDP
• Rules for sea and inland waterway transport: FAS, FOB, CFR, and CIF

Here is what each Incoterm means in practical international trade.

EXW — Ex Works

Under EXW, the seller makes the goods available at their premises, such as a factory or warehouse. The buyer is responsible for arranging transportation, export clearance, main carriage, import clearance, duties, taxes, and final delivery.

EXW gives the buyer maximum control over the logistics process, but it also places the greatest number of responsibilities on the buyer.

For China exports, buyers should be careful when using EXW because export customs procedures may be easier for a local Chinese seller or export agent to handle. In practice, EXW often appears cheaper on paper but can end up costing more than FOB once you add freight forwarder fees for export clearance and inland transport.

FCA — Free Carrier

Under FCA, the seller delivers the goods to a carrier or another location agreed upon by the buyer.

The seller is generally responsible for export clearance, while the buyer takes responsibility for the main international transportation.

FCA can be a useful alternative to EXW when the buyer wants control over international freight but still needs the seller to handle export formalities.

For containerized shipments, FCA can often be more appropriate than FOB because the goods may be delivered to a container terminal before being loaded onto the vessel.

CPT — Carriage Paid To

Under CPT, the seller pays for transportation to the agreed destination, but the risk transfers to the buyer when the seller hands the goods over to the first carrier.

This means that the seller pays the freight, but does not retain the transportation risk until the final destination.

CPT can be used for road, rail, air, sea, or multimodal transportation.

CIP — Carriage and Insurance Paid To

CIP is similar to CPT, but the seller must also arrange insurance for the goods during transportation.

Under Incoterms 2020, CIP requires a higher level of insurance coverage than CIF. This makes CIP particularly useful when the buyer wants the seller to arrange transportation and broader cargo insurance. CIP requires Institute Cargo Clauses A coverage, which is much more comprehensive than the minimum coverage under CIF.

Risk still transfers to the buyer when the goods are handed over to the carrier, rather than when the goods arrive at the final destination.

DAP — Delivered at Place

Under DAP, the seller arranges transportation and delivers the goods to the named destination.

The goods are delivered when they are placed at the buyer's disposal at the destination, ready for unloading.

The buyer is generally responsible for import clearance, import duties, taxes, and unloading unless otherwise agreed.

DAP is commonly used when the seller can arrange international transportation but the buyer wants to handle import customs and local taxes.

DPU — Delivered at Place Unloaded

DPU is the only Incoterm 2020 rule under which the seller is responsible for delivering the goods unloaded at the named destination.

The seller arranges transportation and bears the risk until the goods have been unloaded at the agreed destination.

The buyer is generally responsible for import customs clearance, duties, and taxes.

DPU can be useful when the seller has the logistics capability to manage the complete delivery and unloading process.

DDP — Delivered Duty Paid

DDP places the greatest responsibility on the seller.

The seller is responsible for transportation to the named destination, export clearance, import clearance, import duties, and applicable taxes.

Risk transfers when the goods are placed at the buyer's disposal at the named destination, ready for unloading.

For international buyers, DDP can provide a simple "delivered price" because many logistics and customs costs are handled by the seller. However, sellers must be able to legally and practically handle import formalities in the destination country. Buyers should confirm exactly which taxes, duties, and destination fees are included before accepting a DDP quotation.

FAS — Free Alongside Ship

FAS is used for sea and inland waterway transport.

The seller delivers the goods alongside the vessel at the named port of shipment. The buyer then takes responsibility for loading the goods onto the vessel and for the main ocean transportation.

FAS may be suitable for certain bulk or project cargo shipments, but it is less commonly used for standard containerized cargo.

FOB — Free On Board

Under FOB, the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment.

The seller handles export clearance and transportation to the port. Risk transfers to the buyer once the goods are loaded on board the vessel.

FOB is widely used in China-origin ocean trade because the seller, who is local to the origin port, is best positioned to handle export documentation and inland transport to the port. However, FCA can be more appropriate for many containerized shipments.

CFR — Cost and Freight

Under CFR, the seller pays the cost of transporting the goods to the named destination port.

However, risk transfers to the buyer once the goods are loaded on board the vessel at the port of shipment.

Unlike CIF, the seller does not have an obligation to arrange cargo insurance for the buyer.

CFR can therefore be thought of as similar to CIF without the seller-provided insurance obligation.

CIF — Cost, Insurance and Freight

Under CIF, the seller pays for the goods, export clearance, ocean freight to the named destination port, and the insurance required under the Incoterms rule.

However, risk transfers to the buyer once the goods are loaded on board the vessel at the port of shipment. The seller pays for the freight; the buyer bears the risk during transit.

This distinction between who pays for freight and who bears transportation risk is one of the most important concepts to understand when using CIF. CIF does not mean the seller is responsible if something happens to the cargo at sea. It only means the seller pre-paid the freight and a baseline insurance policy. If the cargo is damaged in transit, the buyer (as the insured party, depending on policy assignment) files the claim.

Buyers should also check the actual insurance policy rather than assuming that CIF provides comprehensive cargo insurance. Incoterms 2020 only requires minimum coverage (Institute Cargo Clauses C) under CIF, which is fairly limited. If you want broader coverage, negotiate for CIP instead, which requires the higher Institute Cargo Clauses A coverage.

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Quick Comparison

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EXW vs FOB

EXW and FOB are two of the most commonly compared Incoterms when buying goods from China.

The main difference is how much responsibility the seller takes before the goods leave the country of origin.

Which is cheaper: EXW or FOB?

EXW is not necessarily cheaper overall.

An EXW quotation may have a lower purchase price because the seller excludes more logistics costs. However, the buyer must then add export clearance, inland transportation, origin handling, and other charges.

For buyers importing from China, FOB can sometimes provide a more predictable total cost because the seller handles the origin-side logistics and export procedures.

The correct comparison is therefore not:

EXW price vs FOB price

but:

Total landed cost under EXW vs total landed cost under FOB.

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FOB vs CIF

FOB and CIF are both widely used for ocean shipments from China.

The biggest difference is that under CIF, the seller pays the ocean freight and arranges the required insurance, while under FOB, the buyer arranges and pays for the ocean freight.

Is CIF better than FOB?

Not necessarily.

CIF can make purchasing simpler because the seller arranges the main ocean freight and required insurance. However, buyers should compare the complete landed cost and check the freight rate and insurance coverage included in the CIF quotation.

A buyer may also prefer FOB when they have better freight rates through their own freight forwarder or shipping contracts.

The best option depends on the buyer's logistics network, destination port, cargo type, and total landed cost.

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CIF vs DDP

CIF and DDP represent very different levels of seller responsibility.

Under CIF, the seller pays for ocean freight and the required insurance to the named destination port, but the buyer remains responsible for import clearance, duties, taxes, and delivery beyond the agreed destination port.

Under DDP, the seller takes responsibility for transportation, import clearance, duties, and taxes up to the named destination.

When should you choose CIF?

CIF can be attractive when the buyer has its own customs broker, import license, local delivery network, or better control over destination costs.

When should you choose DDP?

DDP may be attractive when the buyer wants a more complete delivered solution and the seller is capable of legally handling import procedures in the destination country.

Before accepting a DDP quotation, buyers should confirm exactly which taxes, duties, customs charges, destination fees, and delivery services are included in the quoted price.

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DAP vs DDP

DAP and DDP are both destination-based Incoterms, but the major difference is who handles import clearance, duties, and taxes.

Under DAP, the buyer normally handles import customs clearance and pays the applicable import duties and taxes.

Under DDP, the seller takes responsibility for import clearance and the applicable duties and taxes.

DAP or DDP: Which is better?

DAP can be more practical when the buyer has an established import operation and understands local customs procedures.

DDP can be more convenient when the buyer wants the seller to manage most of the international logistics and import process.

However, DDP should only be used when the seller can properly perform the import obligations in the destination country. A low DDP quotation should not be accepted without confirming exactly what is included.

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How Incoterms Affect Landed Cost

The Incoterm on a supplier quotation directly affects how you calculate the final landed cost.

A purchase price alone does not tell you how much a shipment will actually cost.

The basic calculation is:

Landed Cost = Purchase Price + Origin Costs + International Freight + Insurance + Import Costs + Destination Delivery

The exact cost items you need to add depend on the Incoterm.

EXW Landed Cost

With EXW, the buyer may need to add:

• Inland transportation from the supplier to the export port
• Export customs clearance
• Origin handling charges
• International freight
• Cargo insurance
• Import customs clearance
• Import duties
• VAT or other import taxes
• Destination port charges
• Local transportation
• Final delivery

FOB Landed Cost

With FOB, the seller generally handles the origin-side export process.

The buyer normally needs to add:

• International freight
• Cargo insurance
• Import customs clearance
• Import duties
• VAT or other import taxes
• Destination port charges
• Local transportation
• Final delivery

CIF Landed Cost

With CIF, the quoted price generally includes the goods, ocean freight, and the insurance required under the rule.

The buyer may still need to add:

• Import customs clearance
• Import duties
• VAT or other import taxes
• Destination port charges
• Local transportation
• Final delivery

DAP Landed Cost

With DAP, the seller arranges transportation to the named destination, while the buyer normally remains responsible for:

• Import customs clearance
• Import duties
• VAT or other import taxes
• Unloading, depending on the agreed delivery arrangement

DDP Landed Cost

With DDP, the seller takes responsibility for most of the transportation and import-related costs up to the named destination.

However, buyers should always confirm the quotation carefully because the exact services and charges included in a commercial quote can vary.

Why the Incoterm Matters

Two suppliers can offer the same product at apparently similar prices but produce very different landed costs because they quote under different Incoterms.

For example:

Supplier A: $20,000 EXW

Supplier B: $21,500 FOB

At first glance, Supplier A appears cheaper by $1,500.

But after adding inland transportation, export clearance, origin handling, and other EXW costs, the difference may become much smaller.

This is why professional buyers should compare suppliers based on total landed cost, rather than simply comparing the quoted product price.

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Calculate Your Total Shipping and Landed Cost

Once you know the Incoterm on your supplier quotation, the next step is to calculate the actual cost of getting the goods from China to the final destination.

Our calculators can help you estimate the major logistics costs before placing an order.

Export Cost Calculator

Use the Export Cost Calculator to estimate your total landed cost based on the purchase price, Incoterm, shipping costs, import duties, taxes, and other expenses.

This is particularly useful when comparing EXW, FOB, CIF, DAP, and DDP quotations from different suppliers. The calculator walks through each cost line item step by step so nothing gets missed.

Freight Calculator

Use the Freight Calculator to estimate international shipping costs from China to your destination.

Compare estimated freight costs before deciding whether a supplier's shipping quotation is competitive.

Container Calculator

Use the Container Calculator to estimate container loading capacity and understand how many vehicles, cartons, or other cargo units may fit into a container.

Better container utilization can significantly reduce the transportation cost per unit.

RoRo Calculator

For vehicle exports, use the RoRo Calculator to estimate RoRo shipping costs for cars, SUVs, trucks, and other roll-on/roll-off cargo.

RoRo can be an important alternative to container shipping when exporting vehicles from China.

The most accurate purchasing decision is not based on the lowest supplier quotation. It is based on the lowest total landed cost after all transportation, customs, insurance, tax, and destination expenses are considered.

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Frequently Asked Questions About Incoterms 2020

What are the most commonly used Incoterms for China exports?

EXW, FOB, CIF, DAP, and DDP are among the Incoterms commonly encountered in China-origin international trade. The appropriate term depends on the product, transportation mode, destination country, customs requirements, and the responsibilities each party is prepared to handle.

What is the difference between EXW and FOB?

Under EXW, the buyer takes responsibility for most transportation and export procedures from the seller's premises. Under FOB, the seller handles export clearance and delivers the goods on board the vessel at the named port of shipment.

Does CIF include insurance?

Yes. Under Incoterms 2020, CIF requires the seller to arrange cargo insurance meeting the minimum coverage specified by the rule. Buyers should check the actual policy because minimum CIF coverage may not protect against every type of cargo loss or damage.

Does CIF mean the seller takes the risk during ocean shipping?

No. Under CIF, the seller pays the ocean freight and arranges the required insurance, but risk transfers to the buyer when the goods are loaded on board the vessel at the port of shipment.

What is the difference between DAP and DDP?

The main difference is import responsibility. Under DAP, the buyer normally handles import clearance, duties, and taxes. Under DDP, the seller takes responsibility for these import obligations.

Which Incoterm is cheapest?

There is no universally cheapest Incoterm. A lower quoted purchase price under EXW, for example, may become more expensive after adding origin transportation and export clearance. Buyers should compare total landed cost rather than the initial quotation alone.

Which Incoterm is best for importing cars from China?

The best Incoterm depends on the buyer's logistics capabilities, destination country, customs requirements, and shipping arrangements. FOB, CIF, DAP, and DDP may each be appropriate in different situations. Vehicle buyers should compare the complete landed cost, including ocean freight, insurance, destination charges, import duties, taxes, and local delivery.

Are Incoterms the same as shipping costs?

No. Incoterms define the responsibilities, costs, and risk allocation between buyer and seller. They do not determine the actual freight rate. The actual shipping cost depends on factors such as origin, destination, cargo type, volume, container size, shipping line, season, and market conditions.

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Final Takeaway

Incoterms 2020 are more than three-letter abbreviations on a supplier quotation. They determine where the seller's responsibilities end, where the buyer's responsibilities begin, which party pays specific logistics costs, and when transportation risk transfers.

For China-origin trade, understanding the practical differences between EXW, FOB, CIF, DAP, and DDP can prevent unexpected shipping, customs, insurance, and destination charges.

When comparing suppliers, always look beyond the quoted product price.

Calculate the total landed cost first — then decide which quotation actually offers the better deal.

Use the Export Cost Calculator to build your landed-cost estimate, the Freight Calculator to estimate international shipping, the Container Calculator to evaluate container utilization, and the RoRo Calculator when shipping vehicles by RoRo.