FOB vs CIF vs EXW: Incoterms 2020 Guide for Importers

Your supplier sends you a proforma invoice. In the terms section it says: "CIF Los Angeles, $12,500." Your other supplier quotes "FOB Shenzhen, $9,800." Both are for similar orders. Which one is actually cheaper? Who's paying the freight in each scenario? If one of these shipments is damaged at sea, who files the insurance claim?

If you can't answer those questions immediately, you don't fully understand Incoterms — and that gap routinely costs importers money. Picking the wrong term, or accepting a supplier's default without understanding it, leads to unexpected costs, inadequate insurance coverage, and customs liability surprises.

What Are Incoterms?

Incoterms (International Commercial Terms) are standardised three-letter trade terms published by the International Chamber of Commerce (ICC). The current edition — Incoterms 2020 — was released in 2020, replacing Incoterms 2010.

Every Incoterm defines four things:

• Who arranges and pays for each leg of transport (inland haulage, export customs, ocean/air freight, import customs, delivery)
• When risk transfers from seller to buyer — the exact moment where cargo damage becomes the buyer's problem
• Who is obligated to obtain cargo insurance (and to what minimum standard)
• Who handles export and import customs formalities

Incoterms 2020 contains 11 terms. This guide focuses on the three that importers encounter most often: EXW, FOB, and CIF.

EXW — Ex Works

What EXW Means

EXW is the minimum obligation term. The seller's only responsibility is to make the goods available at their named premises — their factory, warehouse, or another specified location. Everything from that point forward — loading the truck at the seller's facility, inland transport to port, export customs, ocean freight, insurance, import customs, and delivery — is the buyer's responsibility.

EXW Cost Responsibilities

When Risk Transfers Under EXW

Risk transfers to the buyer at the moment the seller makes the goods available at the named place — even before any truck arrives to pick them up. This means if the goods are damaged while still at the seller's factory (but after they have been "made available"), it's theoretically the buyer's problem.

Why Importers Should Rarely Accept EXW

EXW sounds attractive because the quoted price is the lowest of any Incoterm — the seller has excluded all costs beyond having goods ready. But EXW creates serious practical problems for most importers:

1. Export customs compliance: In China and many other manufacturing countries, export customs clearance requires the exporter of record to hold an export licence. Under EXW, the buyer is technically responsible for export clearance — but as a foreign entity, you typically cannot hold a Chinese export licence. This creates a compliance gap that can lead to cargo delays, fines, or seizure.
2. No agent at origin: Handling loading at the seller's factory, arranging inland trucking, and coordinating with the origin port requires a local freight agent in the supplier's country. If you don't have one, EXW creates significant logistics risk.
3. Risk starts too early: Your risk exposure begins while goods are still at the factory. Standard marine cargo insurance typically covers from "warehouse to warehouse" but early risk transfer means you need broader coverage from an earlier point.
4. Limited control, maximum liability: You control nothing at origin but bear all the risk. FOB gives you almost the same control while keeping the seller responsible for getting cargo to the port.

Practical recommendation: Use EXW only if you have a trusted freight agent physically present at the origin location who can handle loading and export formalities. Otherwise, negotiate FOB.

FOB — Free On Board

What FOB Means

Under FOB, the seller is responsible for the goods until they are loaded on board the named vessel at the origin port. This includes inland transport to the port and export customs clearance. Once cargo is on board the ship, all costs and risks transfer to the buyer.

FOB is the most widely used Incoterm for ocean freight from Asia. It is the industry default for manufactured goods imports from China, Vietnam, India, and similar manufacturing origins.

FOB Cost Responsibilities

When Risk Transfers Under FOB

Risk transfers to the buyer when the goods are loaded on board the vessel at the named port of shipment. Once the cargo is on the ship, damage and loss become the buyer's responsibility — which is why marine cargo insurance (covering the ocean leg) is purchased by the buyer under FOB terms.

Why FOB Is Usually the Best Term for Importers

FOB gives the importer maximum control over the main cost — ocean freight — while keeping the supplier responsible for the export process they know well:

• You control the freight booking: With an established freight forwarder relationship, you can often negotiate better ocean freight rates than your supplier can. Under FOB, you book the freight — not the supplier.
• Transparent pricing: FOB prices strip out the ocean freight component. You can compare FOB quotes from multiple suppliers on a like-for-like basis, then add your own freight cost separately.
• Supplier handles export compliance: The seller manages export customs in their country — which is their regulatory domain, not yours.
• You control insurance: You choose your own insurance policy and coverage level rather than relying on minimum insurance provided by the seller.

CIF — Cost, Insurance, and Freight

What CIF Means

Under CIF, the seller is responsible for arranging and paying for ocean freight and a minimum level of cargo insurance up to the named destination port. The seller delivers when the goods are loaded on board the vessel at origin — the same physical point as FOB — but continues to bear the cost of freight and insurance even though risk has already transferred to the buyer.

This creates a notable peculiarity: under CIF, the seller pays for freight and insurance after risk has transferred to the buyer. The buyer bears the risk of loss but the seller holds the insurance policy. This structure is less intuitive than it sounds and creates real practical complications.

CIF Cost Responsibilities

The CIF Insurance Problem

CIF requires the seller to provide "minimum insurance cover" — specifically ICC (C) clauses, which cover only a narrow set of named perils: fire, explosion, sinking, stranding, collision, and a few others. ICC (C) does not cover theft, non-delivery, contamination, or the broad "all risks" coverage that ICC (A) provides.

Most importers need ICC (A) or ICC (B) coverage. Under CIF, you must either accept the seller's minimum ICC (C) policy or purchase your own supplemental policy — effectively paying for insurance twice. Under FOB, you simply purchase the right policy yourself from the start.

Why CIF Is Usually a Bad Deal for Importers

1. Hidden freight markup: The seller incorporates their ocean freight cost — plus a markup — into the CIF price. You cannot see what freight rate they used or negotiate it. You simply absorb whatever they charged.
2. You can't compare freight: With FOB, you add your freight cost and can benchmark it against the market. With CIF, the freight is bundled into the goods price — making supplier comparisons harder.
3. Inadequate default insurance: ICC (C) minimum coverage is insufficient for most cargo. You'll want to supplement, meaning two insurance policies for one shipment.
4. Claims complications: If cargo is damaged, you're claiming against the seller's insurance, not your own. The claims process involves the seller as an intermediary — slower, less transparent, and potentially adversarial.
5. Import duty implications: In many countries (EU, UK, Australia), customs duty is assessed on the CIF value — the goods cost plus freight and insurance. Under CIF, if the seller inflates the freight component, your dutiable value rises and you pay more duty.

FOB vs CIF: Real Cost Comparison

Example: Importing electronics from China to Germany, 8 CBM, 350 kg, goods value $7,500.

FOB saves $180 in this example — while giving the buyer better insurance, more transparent pricing, and control over the freight booking. The CIF "convenience" costs money.

What Changed in Incoterms 2020 vs 2010?

• DAT renamed to DPU (Delivered at Place Unloaded) — minor terminology update.
• FCA updated for letters of credit: FCA now allows the buyer to instruct the carrier to issue an on-board bill of lading to the seller — important for documentary credit (L/C) transactions where the seller needs an original on-board B/L.
• CIP insurance upgraded: CIP (the multi-modal equivalent of CIF) now requires ICC (A) all-risks coverage by default, not just the minimum ICC (C). Note: CIF itself was not changed — it still requires only ICC (C) minimum coverage.
• Security obligations: More explicit allocation of security-related costs, reflecting post-9/11 and post-pandemic supply chain security requirements.
• Own transport: DDP and FCA now explicitly acknowledge the use of seller's or buyer's own transport vehicles, recognising modern logistics realities.

Which Incoterm Is Right for Your Situation?

Frequently Asked Questions

Which Incoterm should I use for air freight?

Technically, FOB and CIF are defined only for ocean freight (they reference loading on board a vessel). For air freight, the correct equivalents are FCA (Free Carrier, replaces FOB for air) and CIP (Carriage and Insurance Paid, replaces CIF for air). In commercial practice, many contracts still use FOB for air shipments — technically incorrect but widely accepted. Using FCA for air freight is more precise and avoids ambiguity.

Can I negotiate Incoterms with my supplier?

Yes — Incoterms are negotiated commercial terms, not legal requirements. Most Chinese factories default to FOB because their freight forwarder relationships are at the origin port. FOB is typically easy to negotiate. Moving from CIF to FOB shifts the freight arrangement responsibility to you, which most suppliers welcome as it simplifies their work. EXW can be pushed by factories but carries the export compliance risks described above.

Does the Incoterm affect how much import duty I pay?

Yes, potentially significantly. Import duties in the EU, UK, Australia, and many other countries are assessed on the CIF value — goods cost + insurance + freight to the border. This is the customs valuation methodology, not just an accounting choice.

If you import on FOB terms, you are still required to declare the CIF value for customs purposes — you must add your freight and insurance costs to the FOB goods value when declaring to customs. If you import on CIF terms, the CIF value is on the invoice and is declared directly. There is no duty advantage to one Incoterm over the other for customs valuation purposes.

What is DDP and when should importers use it?

DDP (Delivered Duty Paid) is the maximum seller obligation term — the seller handles everything including import customs clearance and duty payment at the buyer's destination. It sounds maximally convenient, but creates problems: the seller controls the customs broker, you have no visibility into what duty rate was applied, you can't verify compliance, and you can't use your preferred broker's established relationships. DDP is occasionally appropriate for very small test orders, but gives experienced importers significant concern about customs compliance control.

Which Incoterm is best for an FBA (Amazon) importer?

FOB is the standard choice. You or your freight forwarder books the ocean freight, controls the routing to the US port, arranges customs clearance, and coordinates delivery to the Amazon fulfillment center. This gives you full control over the shipment timeline — critical for FBA where late delivery can cause listing suppression. CIF is generally unsuitable because it removes your control over the ocean routing.

Once you've confirmed your Incoterm and have your shipment dimensions, calculate your CBM and chargeable weight before confirming freight rates. Use our free CBM calculator to get your volume numbers in under 30 seconds.