Incoterms in Plain English

Incoterms define who pays for what, who controls what and who is responsible when things go wrong. This is the version I use when I explain shipping terms to European SMEs that are new to importing from China and do not want a legal textbook, just clear rules and fewer surprises.

Why Incoterms matter

The price you get from a supplier is not useful until you know which Incoterm it is based on. Two quotes with the same unit price can end up very different once you include inland trucking, export documents, sea freight, port charges and final delivery.

Incoterms are not full contracts, they are short codes that decide where responsibility moves from the seller to the buyer on the physical route from factory to your warehouse.

EXW, Ex Works

You pick up the goods at the factory gate. Almost everything else is on you.

• You handle all inland trucking from the factory.
• On paper you handle export clearance and documents. In practice local exporters or their agents often still help, since they are the entity allowed to file export declarations.
• You handle sea or air freight, import, duties and final delivery.

FOB, Free On Board

Under FOB the supplier is responsible until the goods are on board the vessel at the agreed port. After that, responsibility moves to you.

• The supplier handles inland trucking to the port and export clearance.
• The supplier delivers the goods to the vessel at the named port.
• You handle main freight, insurance if you want more than the basic level and everything in Europe.

FOB is the default term for most SMEs importing from China.

It gives you control over the expensive parts of the journey while letting the supplier use their local network for things they are good at, like trucking and export documents.

CIF, Cost, Insurance and Freight

Under CIF the supplier arranges and pays for the main freight to your destination port and provides transport insurance up to that point. On paper this sounds attractive, since you receive one bundled price.

• The supplier books sea freight to the agreed destination port.
• The supplier includes insurance, usually a very basic level that may not cover the full cargo value.
• You handle import, duties, port handling and local delivery from the destination port.

A short note on other Incoterms

Formally, FOB and CIF are designed for sea or inland waterway transport. For containerised inland or air shipments you often see FCA, Free Carrier, and CIP, Carriage and Insurance Paid, in contracts instead. In day to day China trade many people still say FOB and CIF even when they technically mean these other terms, which is why I focus on the practical effects in this article rather than on every term in Incoterms 2020.

How risk moves along the route

One useful way to think about Incoterms is to follow the line of responsibility on a simple map. The question is always the same, if something goes wrong at this point, who is responsible and who talks to the insurance company.

• Under EXW the line is almost flat, you carry risk from the factory door onwards.
• Under FOB the line moves at the loading point, the factory shares more of the early risks.
• Under CIF the seller pays for freight and basic insurance to your destination port, but risk still passes when the goods are loaded on the vessel at the port of shipment.

When you compare quotes, you want to compare the full cost for the same end point and the same slice of risk, not just the number in the supplier email. The split between who pays and who carries risk under CIF is easy to miss, so I always read the fine print on insurance.

FOB versus CIF for SMEs

• FOB gives more control, more transparency and smoother cooperation with your own freight forwarder.
• CIF gives less work on paper, but often higher freight cost and less visibility on schedules and carriers.

For most SMEs with a reliable freight partner, FOB is the better long term choice. It lets you compare shipping offers across all your suppliers and negotiate from a stronger position.

Common mistakes with Incoterms

• Not confirming the exact loading port. Ningbo and Shanghai are different ports with different costs.
• Assuming the insurance included under CIF will cover real life damage in full. It is often very basic.
• Leaving export clearance vague and then discovering nobody clearly owns it.
• Letting the supplier choose freight and carrier without asking for copies of bookings and bills of lading.
• Using FOB or CIF in contracts for pure air freight where FCA or CIP would be a better formal fit, then discovering the details are unclear when a claim appears.

Hidden charges to watch

Even with the right Incoterm you can be surprised by local fees. A quick checklist before you confirm a shipment helps.

• Document and handling fees at the destination port.
• Terminal handling charges and port security fees.
• Local haulage from port or terminal to your warehouse.
• Customs clearance fees and any extra inspections.

How to choose for your next shipment

The best Incoterm is not always the same for every company or shipment, but you can use a simple rule of thumb.

• Start with FOB as your default when you work with a trusted freight forwarder.
• Use CIF only when you lack freight support and need to move a small, one off shipment.
• Avoid EXW unless you have a strong local team in China that can take over from the factory gate.

Before you say yes to any quote, ask both your supplier and your forwarder to write the full Incoterm and named port in plain text. That single line avoids a lot of misunderstandings later.

Closing thoughts

For most SMEs, FOB from a named Chinese port is the safest and most predictable Incoterm. It strikes a balance between control and simplicity and makes landed cost comparisons much easier across suppliers.

If you want help comparing quotes, building a simple landed cost model or choosing the right structure for your next shipment, I am happy to look at real numbers and walk through the options with you.