Short answer first: Incoterms do two jobs — they decide who pays for each leg of the journey, and they decide where your risk of loss begins. The three terms Chinese suppliers quote most (FOB, CIF, DDP) all leave you exposed at a different point on that line, and the one that sounds safest — DDP, “everything delivered” — is frequently the one with the most padding hidden in it. For most buyers importing from China with any regularity, FOB is the strongest default: you control the freight, the freight rate is yours to audit, and your landed cost stops being a black box. The exception cases are small, and we name them below.
This matters more than most first-time importers realize: the quote you are comparing is only as comparable as the Incoterm underneath it. (Our guide to getting real factory quotes makes the same point from the price side — a quote is a bundle, and Incoterms decide which costs sit inside the bundle.)
What Incoterms Are (and What They Deliberately Leave Out)
Incoterms are eleven three-letter trade terms published by the International Chamber of Commerce, revised every decade — Incoterms 2020 is the current edition, and your contract should say which edition governs it. They are shorthand for a cost-and-risk split between seller and buyer on an international sale.
What they cover: who arranges carriage and insurance, who clears export and import customs, where risk transfers from seller to buyer, who pays loading and unloading.
What they pointedly do not cover: the price itself, transfer of title/ownership, payment terms, remedies for breach, and — worth knowing — they are not law. Nothing forces you to use them. They only work because courts and arbitrators worldwide recognize them as settled definitions. Put “FOB” in a contract and a judge already knows what neither party wrote.
All Eleven, Grouped by Where You Start Paying
EXW → your problem starts at the factory door (buyer arranges everything)FCA / FOB → seller delivers to carrier / loads on vessel; ocean freight is yoursCFR / CIF → seller pays freight (and insurance on CIF); risk still transfers at originDAP / DPU → seller delivers to destination, unloading on buyer / on sellerDDP → seller delivers landed, duties included; buyer opens the box
FOB in Incoterms 2020 is sea and inland waterway only — risk transfers when goods are placed on board the vessel at the named port. For containerized freight that is handed to a carrier at a terminal before vessel loading, the technically correct term is FCA — a detail that quietly matters when a container is damaged sitting in the yard awaiting the ship.
The Four Questions That Decide Each Term
Don’t memorize charts. For any term, answer four questions and you know what you bought.
- Who pays ocean freight? On FOB, you do — you book (or your agent books) the vessel space and the rate is yours. On CIF, the seller does. On DDP, the seller does. Whoever pays freight controls the freight rate — and freight is the line item where “we handled shipping for you” quietly becomes a margin on margin.
- Who pays insurance, and is it enough? This is CIF’s famous trap. Under Incoterms 2020, the seller’s CIF insurance obligation is still only the minimum cover — Institute Cargo Clauses (C): essentially major casualties like sinking, stranding and fire, not rough handling, not water damage in transit, not theft from a terminal, and the insured amount is typically just 110% of invoice value. (One change in the 2020 edition is often misremembered: ICC raised the default cover from (C) to (A) “all risks” — but that upgrade applies to CIP, not CIF. CIP is the container/multimodal term; CIF stayed the thin-cover term. Many suppliers — and many buyers — have not noticed the distinction.) The practical rule if you accept CIF: write “CIF, Incoterms 2020, insurance per ICC (A) for at least 110% of invoice value” into the contract, and demand to see the insurance certificate before the vessel sails. Otherwise you inherit the minimum by default. A full-value “all risks” extension on a container-load of consumer goods is a very small number.
- Where does risk transfer? On all of FOB, CFR and CIF, risk transfers at the port of shipment — even though on CIF and CFR the freight is paid to destination. Read that again: the seller pays the shipping but you own the cargo the moment it crosses on board. If the vessel has trouble in the Pacific, a CIF buyer is the one filing a claim — with a thin policy they did not choose. The term “cost, insurance and freight” does not mean “seller’s problem until arrival.” It means “seller’s problem until the origin port, then yours, with a receipt for the freight bill.”
- Who handles customs — export and import? On EXW (Ex Works), the buyer technically handles export clearance in China — an absurd arrangement for most importers, which is why FCA is almost always the better version of EXW. On DDP (Delivered Duty Paid), the seller handles both ends, including your import duties in your country. That means a Chinese supplier is estimating your VAT/GST, your tariff classification, your clearance fees — and pricing you for their uncertainty. The number they put in your quote for “all included, no surprises” is padded for exactly that reason, and the padding is yours whether the surprises happen or not.
Side by Side, the Three Terms You’ll Actually Be Quoted
| Your obligation as buyer under… | FOB | CIF | DDP |
|---|---|---|---|
| Ocean freight | You (rate is yours to control/audit) | Seller | Seller |
| Insurance to destination | You choose it | Seller’s — Incoterms 2020 CIF default is still minimum ICC (C); demand the certificate | Seller’s |
| Import customs, duties, taxes | You (at actual cost, you control it) | You | Seller |
| Unloading at destination port | You | Seller paid freight; unloading depends on contract details | Seller to your door |
| Risk transfers to you | On board, origin port | On board, origin port | At delivery to you |
| Where hidden margin most easily hides | — (fewest places) | Freight + thin insurance substitution | Freight, duty estimates, “convenience” |
| Quote comparability | High — price is production cost | Medium — freight bundles vary | Low — bundled, hard to audit |
So Which One Protects You?
FOB (or FCA for containers) protects you most often — for structural reasons, not just habit.
You control the freight booking, so the freight rate is auditable and yours when spot rates swing. The 2020–2021 container-rate chaos proved the point for a generation of buyers: on CIF/CFR quotes written before a spike, “seller pays freight” meant something very different than it did after.
You choose real insurance instead of inheriting a minimum policy.
The unit price in front of you is closest to pure production cost — which is exactly what you need it to be to compare suppliers honestly. This is the same principle as insisting on itemized factory quotations: see why the breakdown is the deal.
Because you handle import clearance, duties are paid at the true rate on a classification you can check — not a supplier’s guess with a margin on it.
Pick CIF when it genuinely fits: a first order or a small LCL shipment where you have no freight channel yet, and the seller’s freight deal is cheaper than anything you can get alone — and you immediately add your own ICC (A) cover for the difference. CIF is a convenience term, not a protection term; take the convenience, fix the coverage.
Pick DDP only when: the value is low, the volume is small (samples, e-commerce test batches), and you want zero logistics involvement. If DDP starts covering most of your order book, you have outsourced your supply chain’s most volatile cost line to someone who profits when you don’t look at it. Ask for the FOB price plus your own landed-cost calculation and compare — the DDP premium will usually announce itself.
Avoid EXW unless you have someone on the ground in China physically handling the factory-to-port movement — which, if you are reading this site, is exactly the kind of arrangement a buyer-side sourcing firm exists to provide. And if a supplier insists on quoting EXW to you, FCA at the same port costs them little and removes you from the export-clearance fire they will not actually control.
The Dispute Question: If the Goods Are Damaged, Whose Claim Is It?
Run the risk-transfer line on each term: cargo damaged on the water arrives on an FOB quote as your claim against your carrier and insurer — with full-value cover you chose. On CIF, it is also your claim (risk transferred at origin!), but against the seller’s minimum ICC (C) policy — which does not cover most of the ways containers actually get hurt short of a catastrophe. On DDP, the claim is the seller’s until delivery — and if the seller is slow, insolvent or simply unresponsive, so is your recovery, and your goods sit at the port accruing storage while you wait.
“Which term protects you” therefore has a sharper translation: which term leaves you holding a claim you can actually execute? FOB with your own proper insurance is the answer for anyone shipping more than occasionally.
Quote Hygiene: Compare Landed Cost, Not Terms
The practical rule: before you compare two supplier prices, normalize both to the same basis — FOB + your own freight + your own insurance + your actual duty and clearance — i.e., a landed cost per unit. A CIF number that “looks cheaper” than an FOB number is often the same factory price wearing the freight bill you will have paid twice to book. We walk the full arithmetic with a worked container example in our landed cost calculator guide.
And whatever you choose, write it as: “[term], [named port], Incoterms® 2020” on the purchase order. The named port and the edition are not decoration — “FOB Shenzhen” vs “FOB Yantian” and a 2010-vs-2020 gap are both real money in disputes.
What This Means in Practice
Choosing an Incoterm is choosing who controls the two most volatile cost lines in importing and who holds the claim when things break. FOB puts both in your hands; CIF and DDP hand one or both to the supplier, usually in exchange for convenience you may be paying for twice.
If managing freight, insurance and customs on top of factories feels like too many balls at once — that is precisely the load our logistics and export coordination service carries for buyers: freight booked in your name at rates you see, insurance you actually control, consolidation from multiple suppliers into one container, and every line item attributable on your landed-cost sheet.
WhatsApp: +852 46401579 · Email: info@ezysourcing.com — bring your current quotations and we will tell you, in writing, what each term is actually charging you.
Written by the founder of EzySourcing, a Hong Kong-based sourcing firm working exclusively for buyers — after more than a decade advising foreign importers on sourcing and doing business in China. Terms references follow ICC Incoterms® 2020; this article is general guidance, not legal advice for your specific transaction.