EXW, FOB, CIF, DDP — every international shipment runs on Incoterms. Here's exactly what each one means, who bears the risk, and which to choose for your trade lane.
Every international trade contract relies on one critical piece of shared language: Incoterms. Short for International Commercial Terms, Incoterms are a set of 11 standardised trade rules published by the International Chamber of Commerce (ICC) that define exactly where the seller's responsibility ends and the buyer's begins.
Get them wrong and you face unexpected freight bills, uncovered cargo losses, or customs delays that grind a shipment to a halt. Get them right and both parties know precisely what they owe each other — from the factory floor to the buyer's warehouse door.
This guide covers every Incoterm in plain language, including who pays what, who bears the risk at each stage, and when each term makes sense for your trade.
When a buyer in Sydney places an order with a factory in Ho Chi Minh City, dozens of questions immediately arise: Who books the freight? Who pays the port handling fee? If the container is damaged at sea, who files the insurance claim? Who handles customs clearance at origin — and at destination?
Incoterms answer all of these questions in a single agreed abbreviation. A contract that says "FOB Ho Chi Minh City" tells both parties everything they need to know about their respective obligations for that leg of the journey.
Incoterms do not cover:
- Transfer of ownership or title
- Payment terms (net 30, LC, etc.)
- Consequences of breach of contract
They cover only: delivery obligations, risk transfer, and cost allocation.
The current version is Incoterms® 2020, published January 2020. Always specify the version year in your contract.
Incoterms are split into two groups:
Rules for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) — these work for road, rail, air, and sea.
Rules for sea and inland waterway only (FAS, FOB, CFR, CIF) — these apply specifically to port-to-port ocean freight.
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Risk transfers: At the seller's premises (factory, warehouse, or named place)
Who pays freight: Buyer pays everything — domestic trucking, export clearance, ocean freight, import clearance, final delivery
In plain terms: The seller makes the goods available at their door. The buyer does literally everything else.
EXW represents the maximum obligation for the buyer and minimum for the seller. The seller doesn't even need to load the truck.
Best for: Experienced importers with their own freight forwarder who want full control over the supply chain and the best possible factory gate price. Common when buying from manufacturers who don't deal with exports regularly.
Caution: EXW means the buyer is responsible for export clearance in the seller's country — which can be complicated if you don't have a local customs agent. Many experienced buyers prefer FCA over EXW for this reason.
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Risk transfers: When goods are handed to the buyer's nominated carrier at the named place
Who pays freight: Seller handles export clearance and delivery to the named point; buyer handles everything from there
In plain terms: The seller clears export and delivers to a named location — usually a freight forwarder's depot or the port terminal. From that point, risk and cost pass to the buyer.
Best for: Container shipments and air freight. FCA is the most flexible and widely applicable Incoterm. It's often better than EXW because the seller handles export clearance in their own country, and better than FOB for containerised cargo because risk transfers before goods are loaded onto the vessel (important for container terminal operations).
Incoterms 2020 update: FCA now allows the buyer to instruct their bank to issue an on-board bill of lading to the seller — enabling letters of credit for FCA shipments, which wasn't cleanly possible before.
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Risk transfers: When goods are placed alongside the vessel at the named port of shipment
Who pays freight: Seller delivers to the quay; buyer handles loading, ocean freight, insurance, import clearance, delivery
In plain terms: Seller gets the cargo to the dock. Buyer takes it from there, including the cost and risk of loading.
Best for: Bulk commodities, break-bulk cargo, or charter shipments where the buyer controls vessel loading. Rarely used for containerised trade.
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Risk transfers: When goods pass the ship's rail at the port of shipment
Who pays freight: Seller handles export clearance and gets goods on board; buyer pays ocean freight, insurance, and import costs
In plain terms: The seller loads the goods onto the vessel. Once on board, risk passes to the buyer.
FOB is the most commonly used Incoterm in Asian manufacturing trade — particularly between China, Vietnam, and Western buyers. When a factory quotes "FOB Hai Phong" or "FOB Shanghai," the price includes getting goods to the named port and loaded onto the ship.
Best for: Buyers who want a simple, well-understood price point and have their own freight forwarder. Works well for full-container-load (FCL) shipments.
Common misconception: Many buyers think FOB means the seller is responsible until the goods arrive at the destination port. It doesn't. Risk transfers the moment goods are on board at origin — not at the destination.
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Risk transfers: On board the vessel at the port of shipment (same as FOB)
Who pays freight: Seller pays ocean freight to the named destination port; buyer pays insurance, import clearance, and inland delivery
In plain terms: The seller pays to ship the goods to your destination port, but risk transfers at origin when they board the vessel. You pay insurance.
Key nuance: Under CFR, the seller pays the freight but the buyer bears the risk during transit. This is a split that catches people out — if cargo is damaged at sea, the buyer makes the claim even though the seller arranged the shipping.
Best for: Situations where the seller has better freight rates (common when dealing with large manufacturers who ship regularly). Less ideal for buyers who want to control their own insurance.
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Risk transfers: On board the vessel at the port of shipment (same as FOB and CFR)
Who pays freight and insurance: Seller pays ocean freight and minimum insurance (Institute Cargo Clauses C — the most basic coverage) to the named destination port
In plain terms: Like CFR but the seller also buys cargo insurance — at the minimum level required.
CIF is widely quoted by Asian manufacturers and is popular in commodity trading. However, buyers should know that "minimum insurance" under CIF means Institute Cargo Clauses C — which excludes many common risks including theft and improper packing. Most buyers are better off arranging their own comprehensive coverage.
Best for: Transactions where the seller's freight and insurance rates are competitive, or where the buyer's bank requires CIF for a letter of credit. Common in bulk commodity trades.
Watch out for: Sellers sometimes prefer CIF because they control freight and insurance — and can profit from marking these up. If buying CIF, always ask for the freight and insurance cost breakdowns separately.
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Risk transfers: When goods are handed to the first carrier (same risk transfer point as FCA)
Who pays freight: Seller pays freight to the named destination; buyer pays insurance and import costs
In plain terms: The multi-modal equivalent of CFR. Seller pays to move the goods to the destination, but risk passes when the first carrier takes custody at origin.
Best for: Air freight, multimodal shipments, or any non-vessel cargo where CFR doesn't apply.
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Risk transfers: When goods are handed to the first carrier at origin
Who pays freight and insurance: Seller pays freight and comprehensive insurance to the named destination
In plain terms: The multimodal equivalent of CIF — but with a key upgrade. Unlike CIF, CIP requires the seller to purchase Institute Cargo Clauses A insurance (all-risks coverage, the most comprehensive level), not just the minimum.
This was changed in Incoterms 2020 specifically because the ICC recognised that CIF's minimum insurance requirement was inadequate for most manufactured goods.
Best for: High-value goods shipped by air or multimodal transport where all-risks insurance is appropriate. A better default than CIF for most manufactured product shipments.
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Risk transfers: When goods arrive at the named destination, ready for unloading
Who pays: Seller pays everything up to delivery — freight, insurance, all charges — except import duties and taxes at destination
In plain terms: The seller delivers to your door (or your named location). You handle import clearance and duties, then unload.
Best for: Buyers who want goods delivered close to their warehouse but prefer to handle their own import clearance — often because they have preferential duty rates, a trade agreement classification to claim, or a customs broker relationship they trust.
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Risk transfers: When goods are unloaded at the named destination
Who pays: Seller pays everything including unloading; buyer pays import duties and clearance
In plain terms: Like DAP, but the seller is also responsible for unloading the goods at the destination. DPU is the only Incoterm where the seller is responsible for unloading.
DPU was renamed from DAT (Delivered at Terminal) in Incoterms 2020 to clarify that the named place doesn't have to be a terminal — it can be any agreed location.
Best for: Situations where the destination is a specific terminal, warehouse, or port facility and the seller has the equipment or arrangements to unload.
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Risk transfers: When goods are ready for unloading at the named destination
Who pays: The seller pays everything — freight, insurance, import duties, taxes, and customs clearance at destination
In plain terms: The seller delivers goods cleared through customs and ready to use. Maximum seller obligation; minimum buyer effort.
DDP is the easiest option for the buyer but the most complex for the seller. The seller must navigate the buyer's country customs — which many manufacturers are not equipped to do.
Best for: Buyers who want a fully landed cost with no surprises. Common in e-commerce (Amazon FBA shipments often request DDP) and retail supplier relationships where the buyer wants one all-in price.
Caution for sellers: DDP requires the seller to pay import duties in the buyer's country. If the duty rate is higher than expected — or the goods are classified under a different tariff code — the seller absorbs the extra cost. Sellers accepting DDP terms should calculate duties carefully.
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There is no universally "best" Incoterm. The right choice depends on four factors:
1. Your experience level. New importers often do better with CIF or CIP — the seller handles more logistics complexity. Experienced importers with established freight forwarders typically prefer FOB or FCA for cost control.
2. Mode of transport. Use FOB, CFR, or CIF only for ocean freight. Use FCA, CPT, or CIP for air or multimodal shipments.
3. Who has better rates. Large manufacturers ship thousands of containers per year and often have freight rates far below what a small buyer can negotiate independently. In those cases, CIF or CFR may produce a better landed cost even though you're paying for the convenience.
4. Where you want risk to transfer. If your cargo is high-value, you want insurance coverage from origin. CIP gives you all-risks coverage paid by the seller. FOB puts that risk on you from the moment goods board the ship.
The single most common Incoterm error is using FOB for containerised cargo and assuming risk doesn't transfer until the container arrives. It transfers the moment the container is loaded at origin. A fire in the port after loading, a container falling off the vessel — these become the buyer's problem under FOB.
If you're shipping containers and want risk to transfer later in the journey, use CIF, CIP, or a DAP/DDP arrangement. If you want risk to transfer early but want comprehensive insurance, use FCA and arrange your own all-risks policy.
Banks use Incoterms when processing letters of credit (LCs). The Incoterm in your LC must match your shipping documents exactly. A mismatch — even something as minor as "FOB" vs "F.O.B." or the wrong port name — can result in a discrepant LC and payment delays.
If you're using an LC, confirm the exact Incoterm and named place with your bank and supplier before issuing.
Buyer pays most → Seller pays most
EXW → FCA → FAS → FOB → CFR → CIF → CPT → CIP → DAP → DPU → DDP
Risk transfers at origin (buyer bears transit risk):
EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP
Risk transfers near destination (seller bears transit risk):
DAP, DPU, DDP
All-risks insurance required from seller:
CIP only (upgraded in Incoterms 2020)
Suitable for ocean freight only:
FAS, FOB, CFR, CIF
Understanding Incoterms is one of the highest-leverage skills an importer can develop. A single term in a purchase order determines who pays for freight, who bears thousands of dollars in transit risk, and who handles the paperwork at two different customs borders. Getting it right from the start is far simpler than resolving a dispute after cargo has gone missing at sea.
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