Why Understanding Incoterms Matters
Over 85% of global trade uses standardized terms like FOB and CIF. Mastering these 3-letter codes helps you:
- Clearly allocate risks between buyers/sellers
- Calculate total shipment costs accurately
- Avoid disputes over responsibility
- Optimize international contracts
⚠️ Key Insight: Responsibilities can be negotiated beyond standard terms but must be explicitly written in contracts
What Are Incoterms Rules?
Created by the International Chamber of Commerce (ICC), Incoterms are:
“Globally recognized trade terms defining risk transfer points, cost allocation, and customs obligations in goods delivery”
The latest Incoterms 2020 features 11 terms categorized by transport mode:
Sea Freight Terms Explained (With Examples)
FOB (Free On Board)
Risk Transfer: When goods pass ship’s rail at origin port
Seller Must:
- Deliver goods to port (e.g., Shanghai)
- Handle export clearance & pay local costs
- Cover pre-shipment risks
Pricing Formula: FOB Price = Product Cost + Inland Transport + Export Fees
📌 Practical Case: Shanghai to Los Angeles shipment – seller responsible until loading at origin port
CIF (Cost, Insurance & Freight)
Key Differences vs FOB:
| Responsibility | FOB | CIF |
|---|---|---|
| Ocean Freight Payment | Buyer | Seller |
| Cargo Insurance | Buyer’s obligation | Seller purchases |
Cost Calculation: CIF Price = FOB Price + Ocean Freight + Insurance
Multi-Modal Terms (Sea/Air/Road/Rail)
EXW (Ex Works)
Maximum buyer responsibility: Pickup at seller’s location, all export formalities, and transportation
⚠️ Risk Alert: Only suitable for buyers experienced in exporter’s country regulations
DDP (Delivered Duty Paid)
Seller’s maximum obligation: Complete door-to-door delivery including import duties and clearance
💡 E-commerce Favorite: Amazon FBA sellers’ preferred term for hassle-free shipping
Decision-Making Guide
Choosing the Right Incoterm
- New Importers: Choose CIF – fewer responsibilities
- Experienced Traders: Opt for FOB + preferred freight forwarder
- E-commerce: Select DDP for seamless delivery
Freight Payment Classification
Freight Collect Terms
- EXW
- FCA
- FOB
- FAS
Bill of Lading Note: “Freight Collect”
Freight Prepaid Terms
- CFR
- CIF
- CPT
- CIP
- DAP/DPU/DDP
Bill of Lading Note: “Freight Prepaid”
Platform-Specific Guidance
Using Incoterms on Alibaba
- Product pages typically show EXW or FOB prices
- Always negotiate CIF/DDP quotes directly with suppliers
- Supplier limitations: Many can’t handle DDP without import licenses
🗝️ Negotiation Strategy: Even with FOB, request sellers arrange insurance as added service
Incoterms 2020 Comparison Chart
ICC Responsibility Matrix (Red = Seller | Blue = Buyer)
Extended Learning Resources
- ICC Official Incoterms® 2020 Handbook
- HS Code Lookup Tool
- Global Trade Risk Case Studies