Understanding Incoterms: FOB, CIF, EXW Explained for Importers

Incoterms determine who pays for what and who carries the risk when something goes wrong. Get them wrong and you’ll either pay too much or lose control of your shipment.

This guide explains the Incoterms that matter most for electronics importers: EXW, FOB, CIF, and DDP. You’ll learn which one to use and why it affects your bottom line more than you might expect.

What Are Incoterms?

Incoterms (International Commercial Terms) are a set of 11 standard trade terms published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020.

They define two things: who pays the freight and at what point the risk of loss or damage transfers from the seller to you.

Incoterms don’t cover payment method, product quality, or what happens if your supplier sends the wrong goods. They only cover logistics risk and cost. For everything else, you need a solid purchase agreement.

Always specify the Incoterm and the named location in your contract. “FOB” alone isn’t enough. It should be “FOB Shenzhen Port” or “FOB Shanghai.”

The Four Incoterms Importers Use Most

EXW (Ex Works)

Under EXW, the supplier’s responsibility ends the moment goods are ready at their factory door. You pay for everything after that.

That means you arrange:

• Factory pickup and trucking to the Chinese port
• Export customs clearance in China
• Loading onto the vessel or aircraft
• Ocean or air freight
• Import customs and duties in the US
• Last-mile delivery

EXW gives you maximum control but maximum responsibility. You need a freight forwarder in China to handle export customs, which most new importers don’t have set up.

When EXW makes sense: You have a trusted freight forwarder in China who handles everything. You want full visibility and control over every cost.

When it doesn’t: You’re new to importing. You don’t have a China-based logistics contact. Your supplier’s local trucking options are cheaper than anything you can arrange.

FOB (Free on Board)

FOB is the most common Incoterm for importing from China, and for good reason. It’s a clean split.

Under FOB, the supplier pays for:

• Inland trucking from factory to the Chinese port
• Export customs clearance
• Loading onto the vessel

You pay for:

• Ocean or air freight from the Chinese port
• Marine insurance (if you want it)
• Import customs and duties in the US
• Last-mile delivery

Risk transfers to you when the goods cross the ship’s rail at the origin port. If something gets damaged on the water, that’s your insurance claim to handle.

FOB makes sense almost all the time. It gives you control over freight booking, which means you choose the carrier, the route, and the forwarder. You’re not stuck with whoever your supplier uses.

When you control freight booking, you can negotiate your own rates. Freight forwarders often offer better rates than whatever the supplier is marking up on a CIF or DDP quote.

For most electronics importers, FOB is the default. Learn to negotiate it well by reading our negotiating guide.

CIF (Cost, Insurance, and Freight)

Under CIF, the supplier arranges and pays for ocean freight and insurance to the destination port. You take over from there.

The supplier pays for:

• Inland trucking in China
• Export customs clearance
• Ocean freight to destination port
• Marine insurance

You pay for:

• Destination port charges
• Import customs and duties
• Last-mile delivery

CIF sounds convenient, but there’s a catch. The supplier books the freight, which means they choose the forwarder. They often mark up freight costs 10% to 30% as hidden profit. You pay more for freight than you would if you booked it yourself.

You’re also responsible for the cargo the moment it boards the ship, even though the supplier paid for the freight. That’s a confusing risk and cost split.

When CIF makes sense: You’re buying a small order and don’t want to manage freight booking. You’re early in the process and still learning. The convenience is worth the slight markup.

When it doesn’t: You’re doing regular, larger orders where freight cost control matters.

DDP (Delivered Duty Paid)

DDP means the supplier handles everything, including import duties. Your goods arrive at your door, fully cleared.

On paper, DDP is the simplest option. In practice, it creates real problems.

Suppliers offering DDP often undervalue goods on the customs declaration to reduce the duty they pay. This is customs fraud. If CBP catches it, you’re liable as the importer of record, even if your supplier did the paperwork.

You also have zero visibility into the actual freight, duties, and clearance costs. You can’t verify that your supplier paid the correct duty rate or used the right HTS code.

DDP suppliers also often use small, informal couriers that don’t issue proper customs documentation. This can cause problems if CBP ever audits your import history.

When DDP makes sense: Small, one-off orders where simplicity is worth the risk. Some platforms like DHgate use DDP-style pricing. Just understand what you’re getting into.

When it doesn’t: Any regular importing operation where you’re building a real business. The liability risk isn’t worth the convenience.

FOB vs CIF: The Cost Impact in Real Numbers

Here’s an example with 500 Bluetooth speakers.

Your supplier quotes:

• FOB Shenzhen: $8.00 per unit ($4,000 total)
• CIF Los Angeles: $8.60 per unit ($4,300 total)

The supplier is charging $300 more under CIF. You check with your freight forwarder and learn the actual LCL ocean freight for this shipment is $220. The supplier is making $80 on the freight.

Under FOB, you pay $4,000 plus $220 in actual freight. Under CIF, you pay $4,300 and trust your supplier’s freight cost. FOB wins.

This gap grows with shipment size. On a $40,000 container order, a supplier marking up freight 20% might add $800 to $1,500 in hidden freight charges.

How to Negotiate Incoterms

Always request both FOB and CIF quotes. Compare them to freight quotes from your own forwarder.

If the supplier insists on CIF or DDP, ask for the freight cost line item separately. A legitimate supplier will share it.

Be direct. Tell them you prefer FOB because you have an existing relationship with a freight forwarder. This is standard practice and a serious supplier won’t push back.

Make sure your purchase order states the Incoterm and named location clearly. “FOB Shenzhen Port, Incoterms 2020” leaves no ambiguity.

Also confirm your payment terms match your Incoterm. Paying 100% upfront on EXW terms gives you maximum exposure.

Incoterms and Customs Duties

Regardless of which Incoterm you use, you’re the importer of record if you’re bringing goods into the US commercially. You’re responsible for paying the correct duties.

Under DDP, a supplier may pay duties on your behalf, but CBP still looks to you if something is wrong. Under FOB or EXW, you control what gets declared, which is much safer.

See our US customs duties guide to understand what you’ll owe and how to calculate your landed cost. And read our sea vs air vs express guide to see how your freight mode choice interacts with Incoterms.

Frequently Asked Questions

What does FOB mean when importing from China? FOB (Free on Board) means your supplier covers trucking to the Chinese port and export customs. You cover ocean or air freight, US customs, and last-mile delivery. Risk transfers to you when goods are loaded onto the vessel. It’s the most common Incoterm for China imports.

Why is FOB better than CIF for importers? With FOB, you book and control your own freight. With CIF, your supplier books it and often marks it up 10% to 30%. FOB also gives you better visibility into total costs and lets you pick your own freight forwarder and insurance provider.

Is DDP from China safe? DDP is risky for regular importers. Suppliers offering DDP sometimes undervalue goods on customs declarations to lower the duty they pay, which exposes you to CBP liability. You’re also blind to the actual freight and duty costs. Use DDP only for small, occasional orders.

What is the difference between EXW and FOB? Under EXW, your supplier’s responsibility ends at the factory door. You arrange everything, including trucking to the Chinese port and export customs. Under FOB, the supplier handles the China side of logistics and you take over once goods are on the ship.

Do Incoterms affect what I pay in US import duties? No. Your US import duties are based on the declared value of the goods and the applicable HTS code tariff rate, not the Incoterm. However, which Incoterm you use affects whether you or your supplier controls the customs declaration, which matters for accuracy and compliance.