Are you one of those people who are new to the world of the shipping process? Then you know how the terminology can feel overwhelming. Experienced sellers, buyers, and shippers may even sound like they speak a foreign language.
One group of terms that causes massive confusion is Incoterms. In case you didn’t know, incoterms are a set of rules by the International Chamber of Commerce. It identifies the responsibilities of sellers and buyers around importing goods or delivering goods.
The ICC updates that set of rules every 10 years, along with the most recent update—the aptly named Incoterms 2020 rules, which was released in 2020.
This article will walk you through the different Incoterms you need to know, their meaning, and their key differences. Without further ado, let’s dive in.
FOB (Free on Board)
What is FOB Shipping?
FOB means the sellers will ship the goods to a ship of the buyer’s choosing and pay for it to get loaded onboard. The buyer will pay for everything from there, including sea shipping. That might be the most cost-efficient option for you, depending on the price you negotiate with your Suppliers and freight forwarder.
Remember that this Incoterm applies to sea or inland waterway transport.
This shipping method needs the shipper to be in charge of all the shipping expenses and FOB prices until the shipment is safely on the ship and ready to sail. Once the shipment is on board, the buyer is accountable for the rest of the trip.
Frequently, there’s an equal sharing between buyer and shipper of all the FOB prices and costs related to the cargo’s movement. That includes the cost of shipping, the cargo’s insurance, and the absorption of any risks present throughout the shipment’s completion.
FOB Shipping – Buyer’s Responsibility
When a buyer agrees to buy goods under this Incoterm, they consent to the following responsibilities:
FOB price and FOB shipping charges to the cargo from the port of loading to the destination
Destination Terminal Handling Charges
Pay the final shipping fee
Unloading at destination
Import duties, taxes, and customs clearance
FOB Shipping – Supplier’s Responsibility
When entering into a shipping term with this Incoterm, the seller assumes the following responsibilities:
Paying the shipping expenses incurred to load the cargo into the carriage
Origin Terminal Handling Charges
Make sure the shipment is exported properly
Trucking fees are incurred while moving the cargo from the warehouse to the nearest port.
Any expenses incurred throughout the loading process at the warehouse of the seller
Arranging all packaging
Is FOB Recommended for New Buyers or Experienced Buyers?
FOB is recommended for buyers if they like to use a freight forwarder or their own shipping agent to arrange the international logistics.
The FOB price is low for the cargo sold while enabling the seller to take partial responsibility for the cargo for as long as it stays within their country. Cooperate with China Shipping Companies with experience for your goods, it will make the best offer for each of your shipments even though you don’t know any type of Incoterms.
EXW (EX Works)
What is EXW?
Under this Incoterm, you are responsible for everything—picking up the item at the seller’s warehouse through delivering it to the final destination where you need it. This may be the cheapest option up front, but it may cost you more at the end of the day.
Consider that you need to pay for a dedicated delivery to ship your single order when the Chinese supplier might take multiple consolidated deliveries daily that they’d charge you less for.
This is used for all types of shipping, irrespective of the mode of transport. Under this Incoterm, the buyers assume all the shipment responsibilities once the cargo is packed in export packaging and collected.
Remember that EXW works by obliging the buyer to arrange all transport export documentation, cover all freight costs, and fulfill the important delivery process. After the goods are collected from the seller’s location, the risk is transferred to the buyer.
This form of transport leaves the buyer’s responsibility and risk, so new buyers unfamiliar with exporting are recommended to use freight forwarders to prevent unforeseen costs and errors associated with transporting and shipping the goods.
EXW shipping – Buyer’s Responsibility
The buyer assumes the liabilities once they collect the goods from the seller.
Loading the cargo at the pickup location so the goods can move to the port for export.
Shipping the goods to the port of origin
Provide all the paperwork needed and pay duty to export the cargo
Loading on carriage
All shipping expenses are associated with moving the freight from port to port.
Ensuring the freight is protected against loss or damage
The destination port and terminal charge all additional fees.
EXW shipping – Supplier’s Responsibility
Under these export processes, the seller’s duties are low. Their responsibility is to guarantee the cargo is packed so it is ready for export, and the freight can be collected from the location.
For most air express, the goods are packed into export cartons or small shipments. Once the cargo is ready, it should be where the buyer can collect it from the seller.
Is EXW Recommended for New buyers or Experienced buyers?
EXW is suggested for established buyers planning to ship through air freight express. Express couriers collect the cargo from the seller’s location and build it into their services, including all the export and transport formalities.
If you are routinely buying from a particular nation, and don’t have an export license, then EXW could be a good choice. Remember that there is more risk involved in this Incoterm. We suggest beginner buyers rely on a trusted shipping company or freight forwarder to handle everything on their behalf.
CIF (Cost Insurance and Freight)
What is CIF?
This Incoterm applies only to sea freight and inland waterway transport. Like FOB, the seller is responsible for arranging shipment, delivering it to the vessels, and loading it on board.
Apart from the requirements of FOB, the seller should pay the sea freight and the insurance. Once the vessels arrive at the destination port, the buyer is accountable for the costs involved, such as unloading the goods from the ship. CIF is often used in B2C and B2B transactions.
When shipping under this term, the transfer of possession is once the goods are loaded into the ship, but the seller is in charge of paying freight costs and procuring the shipping insurance. That indicates the seller pays for all charges associated with moving the shipment until the goods arrive at the desired destination port.
Note that CIF applies only to a waterway or sea shipments and no other types of shipping. The shipment method is often used when shipping full containers, but it’s possible to use this Incoterm on small shipment loads too.
CIF shipping – Buyer’s Responsibility
Here are the obligations of buyers under this Incoterm:
Cost of importance clearance pre-shipment inspection
Import duties and formalities
Payment for goods as stated in the sales contract
CIF shipping – Supplier’s Responsibility
Below are the obligations of the supplier under this Incoterm:
Minimum insurance coverage
Cost of pre-shipment inspection
Proof of delivery
Pre-carriage and delivery
Export licenses and customs formalities
Export packaging and marking
Goods commercial invoice and documentation
Is CIF Recommended for New Buyers or Experienced Buyers?
For those new buyers, CIF can work as it enables them to know the importing process before needing to learn the export shipping process. the costs will be substantially higher than if you planned these services by depending on a dedicated freight forwarder to help you determine the most cost-efficient way to ship your goods.
DDP (Delivery Duty Paid)
What is DDP?
This is the polar opposite of EXW, where the seller agrees to handle all the costs of getting the air freight to the location of the buyer’s choosing. The seller pays for any duties involved. It’s the most expensive option, but it involves the least amount of coordination and logistics on the buyer’s part.
Remember that this shipping incoterm is the scenario where the seller accepts all the risks, costs, and responsibilities for the cargo’s safe shipment from the point of origination to the agreed-upon destination.
This term includes the payment of import and export duties, shipping costs, insurance, and any other related or emergency costs incurred while the shipment travels from one point to another.
With this term, the seller fully accepts the maximum responsibility for the cargo. They should organize all modes of transportation throughout the shipment, including the export and import clearances, fees, and negotiations if there are delays and the cargo’s security through proper insurance coverage.
DDP Shipping – Buyer’s Responsibility
The buyer is not responsible for any part of the shipping terms, including the shipping cost and customs fees, until the goods arrive at the buyer. Part of receiving the goods is the unloading shipping process.
Any unloading costs are the buyer’s duty, so they need to know such costs, mainly when shipping to fulfillment warehouses.
DDP Shipping – Supplier’s Responsibility
Normally, the seller will bundle the overall shipping costs (landing costs) as a cumulative service estimate. The seller’s responsibilities include:
Proof of delivery
The cost of government inspections
All shipping costs
Paying for all export and importing process duties and taxes
Meeting all export and import requirements
Drawing up sales contracts and related paperwork
The supplier is responsible for the event of damage or loss in transit
Is DDP Recommended for New Buyers or Experienced buyers?
If the buyer can efficiently structure their purchase agreement and shipping terms to lessen the risk of unqualified freight forwarders and shipping delays, DDP becomes advantageous to experienced buyers.
FOB VS. EXW
Goods bought at EXW conditions often have cheaper costs in rare cases. It can be helpful for people who wish to purchase wholesale from China. Nonetheless, the issue changes if shipping costs increases, nullifying the savings on the cost of goods.
If you pick this shipping term, you can pay less and save on the overall cost. However, you assume that the supplier has all the authorizations for the export, and you should find shipping companies that provide an Ex Works service.
Meanwhile, although FOB shipping may look less beneficial than EXW, the reality might be different. The price estimated by the supplier to ship the goods to the port of departure could be lower than that of the freight forwarder and customs clearance. The export documents are charged to the supplier, making the process easier.
Nonetheless, things could go quite wrong for the supplier, which makes the supplier refuses to pay the local costs as agreed or calculates extra costs that can raise the recently agreed cost.
FOB VS. DDP
Both the FOB and DDP shipping terms are popular because, in FOB, the FOB prices of shipping are shared. That also means that both the buyer and seller share the costs and the risks of ensuring the shipment arrives safely.
That can be a good option for a buyer wishing to keep some control over the process and potentially even save time and money if they have a network of transportation options.
In the case of DDP shipping terms, the buyer pays for the drop of stress that the seller can provide by managing every aspect of the shipment. Similarly, the seller could save money by good planning and networking. The buyer will pay a little more as they’ve given up the risk and responsibility associated with the shipment.
As a buyer, if you’re a newbie to international trade or simply ship a small shipment of goods to and from overseas, CIF removes most of the risks and possible hassles for you.
Under CIF, most suppliers are in charge of polishing most of the details about the exportation, shipping, and cost insurance. You only need to consider paying importing charges and transporting the freight from the destination port to your warehouse.
Nonetheless, that also indicates the seller can pick the freight forwarder that ships your goods, and that service isn’t needed to communicate directly with you. In short, you depend on the seller for information or updates about your cargo’s status.
You may find FOB a more appealing solution as you purchase more and gain further knowledge and awareness of international trade laws. Although it imposes more responsibilities and risks on you, it becomes a more cost-efficient approach.
Under FOB, you get to pick your freight forwarder. That means you’re likelier to have your interests in mind than your Chinese suppliers. Also, you get access to more information on your goods throughout the transit, enabling you to address any concerns more easily.
Q: What is the difference between FOB and CIF?
The major difference between FOB and CIF is the party accountable for the goods while they’re in transit. With a CIF agreement, the seller’s full responsibility is to deliver the goods. With a FOB, the buyer is responsible for the goods during transit. Meanwhile, there’s not a key difference between the two.
Q: What is the difference between FOB and DDP?
FOB is when the goods pass the rail of the ship at the port of export. On the other hand, the DDP term is when the freight is placed at the buyer’s disposal. Gap responsibilities between DDP and FOB terms include import duty and taxes, delivery to destination, insurance, carriage charges, and destination terminal charges.
Q: What is the difference between FOB and EXW
EXW means Ex Works, an incoterm where the buyer of the shipped product pays for the goods when they’re delivered to a particular location. Meanwhile, FOB (Free on Board) ships the responsibility of the goods to the buyer as soon as they’re loaded onboard the ship. By cooperating with a shipping company, EXW with your supplier will be the best Incoterms for you to save cost. Under FOB pricing shipping terms, sellers need to arrange shipment to the needed port, arrange the export customs clearance, but cost insurance paid by the buyer. and shipping charges under buyers charge.
Q: What does FOB Shenzhen mean?
To clarify, FOB Shenzhen indicates the manufacturer will deliver the shipment to Shenzhen port. Hence, the customer is responsible for the freight, insurance, and more, beginning from Shenzhen Port after the goods loading board. That Means under FOB Shenzhen, Seller’s responsibility is to undertake all the costs before the goods loading on the Shenzhen port board. the insurance paid by the buyer.
Q: Who pays shipping fees under FOB shipping terms?
Under these shipping terms, the seller is solely responsible for guaranteeing that the shipment is loaded in a vessel and delivered straight to the buyer. Irrespective of the party responsible for paying the exact rate of shipping and insurance, the same costs will apply to any cargo going under FOB:
Last-time delivery charges
Cargo transport to the buyer’s warehouse
Customs clearance duties and taxes
Freight transport costs
Loading into the vessel charges
Transport costs from the warehouse to the port of shipment
Regarding who pays for shipping, the above costs can be divided or fully paid by one of the parties involved depending on the FOB agreement stated on the surcharge order.
To sum up, Trade terms communicate a binding term between the seller and buyer, outlining the responsibilities between the purchaser of goods and manufacturer regarding product delivery.
While sellers do not need to quote an Incoterm when involved in international trade, the benefit of doing so helps prevent confusion over responsibilities and roles between the two parties.
DFH Global Logistics has many years of expertise and knowledge working with different Incoterm. We specialize in moving your shipment and cargo as efficiently as possible through proven and efficient logistics planning and professional follow-through expected. if you import products from China and do EXW price with your China Supplier, then we can be your own forwarder in China and help you make the customs declaration for both import and export. Choose us as one of your Freight forwarders to be your Plan B. We are sure to quote without hidden costs, without Hidden charges to each of your Ex works shipments, and the free on Board terms, delivered duty paid as well.
Feel free to contact us today for a consultation on the best shipping method for your shipment! We will be happy to explain to you any kind of trade terms. No matter your handle, EXW pricing, FOB shipping, or Delivery Duty Paid with your standard suppliers. It is easy for us to provide shipping options for your reference.