Incoterms explained for online stores: FOB, CIF, EXW and DDP

Almost every order from abroad has three letters and a city name on it. FOB Ningbo, CIF Aarhus, EXW Shenzhen. That is an Incoterm, and it decides who pays for which part of the journey, and when the goods become your problem if something goes wrong on the way.

A lot of people skim past it. That is a mistake, because it also decides whether two quotes can be compared at all.

The short version

Incoterms are a set of rules from the International Chamber of Commerce, ICC. The edition in force now is from 2020. The rules say who books and pays for the transport, who clears customs, and where the risk passes from the supplier to you. They say nothing about when you have to pay, or what happens if the goods are wrong. That is covered by your agreement.

Always include the place and the edition, for example FOB Ningbo, Incoterms 2020. If it just says FOB, nobody knows where the supplier's responsibility ends.

The five you will meet most often

EXW

Ex Works means from the factory. The supplier has the goods ready at its door, and the rest is your responsibility, including getting them cleared for export in China. That last part is a pain to handle from here. If you want to control the freight yourself from the start, ask for FCA instead. Then the supplier takes care of the export papers and hands the goods over to the forwarder you have chosen.

FOB

Free On Board. The supplier gets the goods on board the ship at the port of loading and handles the export. From that moment, the sea freight, the risk and everything else are yours. It is the one I would choose myself if I imported regularly by sea, because you pick your own forwarder and can see what the freight costs. FOB only applies to shipping by sea. For air and courier, the equivalent is FCA.

CFR and CIF

Here the supplier pays the sea freight to the port of arrival, for example Aarhus, and with CIF an insurance policy as well. But the risk still passes at the port of loading, just as with FOB.

What you need to watch is the bill when the goods arrive. The supplier's forwarder has a partner in Denmark, and that partner sends you an invoice for port charges, release and handling that you never negotiated. With LCL it can be surprisingly large. The insurance under CIF, by the way, is only the minimum cover.

DAP

The supplier pays all the way to an address in Denmark, usually your warehouse. You pay for customs clearance, duty and import VAT. It is easy, but the freight is often hidden in the unit price, so you have no idea what it costs.

DDP

The supplier pays for everything, duty and VAT included. It sounds like the easiest option, but it is often the supplier or their partner who is listed as the importer. You get no customs documents in your own name, you usually can't reclaim the import VAT, and you have no say in how the goods are cleared through customs.

Side by side, it looks like this:

You will see the remaining four Incoterms less often. CPT and CIP match CFR and CIF, but for any mode of transport. DPU is like DAP, just with unloading. FAS is almost never used for containers.

When you compare quotes

An FOB quote and a DAP quote can't be compared directly, because the freight is included in one and not in the other. Add your own freight estimate to the FOB price first. And remember that with CIF, the local charges in Denmark are still missing. I have written about how it all ends up in the cost per product in How to calculate landed cost per product when importing.

The Incoterm, by the way, only says who pays duty and import VAT. How much depends on the product's commodity code, origin and value.

So which should you choose?

If you import regularly, choose FOB for sea and FCA for air. Then you can get quotes from several forwarders and you know what the freight costs. If you buy small quantities now and then, DAP is fine, but ask the supplier to put the freight on the invoice as a separate line.

If the supplier offers CIF, ask what it costs to get the goods out of the port in Denmark before you say yes. I would stay away from EXW and DDP unless you know exactly why you are choosing them.