Every international trade transaction involves a point at which responsibility shifts from the seller to the buyer — for the goods, for the freight, for the insurance, and for customs. Incoterms (International Commercial Terms), published by the International Chamber of Commerce, define exactly where that point is.
There are 11 Incoterms in the current 2020 edition. For Asia-Europe trade, four terms dominate: EXW, FOB, CIF, and DDP. Understanding these four will cover the vast majority of transactions you'll encounter.
EXW — Ex Works
What it means: The seller makes the goods available at their premises (factory or warehouse). The buyer arranges and pays for everything from that point: export clearance in China, inland transport to the port, loading, ocean freight, insurance, import customs, and delivery to their warehouse.
Buyer's risk: Highest. Risk transfers at the factory gate.
When to use it: EXW gives the buyer maximum control over the logistics chain. It works well if you have an experienced freight forwarder in China who can handle the export side. For first-time importers without established China-side logistics, it adds complexity without corresponding benefit.
EXW prices look attractively low on a quote sheet. Remember that you are paying for everything else on top — including Chinese export customs, which can be surprisingly bureaucratic.
FOB — Free on Board
What it means: The seller delivers the goods onto the vessel at the named port of shipment (e.g., FOB Shanghai). The seller handles export clearance and inland transport to the port. From the moment goods are loaded on board, the buyer bears all costs and risks.
Buyer's risk: Moderate. Risk transfers when goods cross the ship's rail at the origin port.
When to use it: FOB is the most common Incoterm for Asia-Europe trade and is generally the recommended starting point for importers who want a clean split: the supplier handles China-side logistics, you handle the ocean leg and everything after.
FOB allows you to negotiate ocean freight directly with your freight forwarder, giving you full visibility and control over this significant cost. It also means you choose the shipping line and can manage cargo insurance yourself, which is typically better value than letting the supplier arrange it.
CIF — Cost, Insurance, Freight
What it means: The seller pays for freight and insurance to the named destination port (e.g., CIF Rotterdam). Risk, however, still transfers to the buyer when goods are loaded at the origin port — the same point as FOB. This is a commonly misunderstood distinction.
Buyer's risk: Moderate. Risk transfers at origin despite the seller paying freight.
When to use it: CIF simplifies the transaction for the buyer in terms of logistics coordination — you don't need to arrange or pay freight separately. However, the supplier's freight cost is built into their quote at a margin, so CIF prices are not necessarily cheaper than FOB + separately arranged freight. CIF insurance coverage is also typically minimal (Institute Cargo Clauses C — the most basic level).
For experienced importers with established freight relationships, FOB almost always works out better. CIF is useful for smaller buyers who lack logistics infrastructure.
DDP — Delivered Duty Paid
What it means: The seller delivers to the buyer's named premises with all duties and taxes paid. The seller handles everything: export clearance, ocean freight, insurance, import customs, duty payment, and final delivery. Risk transfers only when goods arrive at the buyer's door.
Buyer's risk: Lowest. All responsibility lies with the seller until delivery.
When to use it: DDP sounds ideal — the supplier handles everything and you receive goods at your warehouse with no additional costs. In practice it has significant drawbacks:
- The supplier controls all logistics decisions, including the freight forwarder, shipping line, and customs broker — you have no visibility or leverage
- The supplier's import VAT position in your country may be unclear, creating potential compliance risk for you
- DDP pricing obscures cost components — you cannot see what you're paying for freight, duties, or handling
- If goods are held at customs, the supplier manages the resolution — not you
DDP can work well for small, low-risk trial orders where simplicity matters more than cost optimisation. For regular, significant orders, it tends to create opacity and control problems.
Which Incoterm Should You Use?
For most European importers sourcing from China:
- First order / trial shipment: CIF or DDP — simplicity and lower administrative burden outweigh cost optimisation
- Regular, established orders: FOB — maximum visibility, control over freight costs, and clean risk allocation
- Large buyers with China-side logistics capability: EXW — maximum control over the entire supply chain
Whatever term you agree, make sure it is explicitly stated in your purchase order with the named location — for example "FOB Shanghai" or "CIF Rotterdam". A price quoted without an Incoterm is ambiguous and should always be clarified before you confirm an order.
If you'd like guidance on structuring your first order from Asia, including logistics and terms advice, get in touch with our team.
