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What Shipping Incoterms Are and Why They Matter to Importers

FOB, EXW, and CIF Explained

In international trade, there is something referred to as Incoterms. These are three-letter terms that outline who bears certain transportation costs and other risks. The most common ones you are going to come across are EXW, FOB, and CIF.

These terms have certain legalities attached with them, but for most importers, the important thing to know is that these terms can significantly alter how much you will pay for your shipment. Generally, EXW is the cheapest, and CIF is the most expensive.

If two suppliers give you nearly identical prices but one quotes EXW shipping incoterms and the other quotes FOB or CIF, the second quote will cost you significantly less. Not being aware of the cost implications of different shipment and Incoterms is where many new importers get burned.

Related Reading: The Ultimate Guide to Creating an Amazon FBA Shipping Plan

What Are Incoterms Used For?

The term Incoterms is short for “international commercial terms.” These are globally recognized terms published by the International Chamber of Commerce, and their main function is to identify the obligations of buyers and sellers.

For example, the incoterm Delivered at Place Unloaded (DPU) means that until the goods have arrived and have been unloaded, the seller bears the risks and costs. But after unloading, these risks and costs are transferred to the buyer until the goods reach the final destination.

The Incoterms and their meanings may be revised, depending on the governing authority. The list was revised in 2020, with the following Incoterms included:

Incoterms for All Modes of Transport
EXW Ex Works
FCA Free Carrier
CPT Carriage Paid to
CIP Carriage and Insurance Paid To 
DAP Delivered at Place
DPU Delivered at Place Unloaded
DDP Delivered Duty Paid
Incoterms for Sea and Inland Waterway Transport
FAS Free Alongside Ship
FOB Free on Board
CFR Cost and Freight
CIF Cost Insurance and Freight

This article will focus on the three most common Incoterms for importers: EXW, FOB, and CIF. 

EXW (Ex Works: Place of Supplier)

EXW means that you as the buyer are responsible for arranging to have your goods picked up at your supplier's factory and delivering them to your destination (and all of the other costs in between). Your supplier's factory may be hundreds of miles away from the seaport where they will be loaded onto a ship. This means you will be responsible for this overland freight. If your supplier lacks certain export documentation, you will be responsible for this as well. You will also pay for all sea freight and other import/transportation fees in your destination country.

Generally, EXW shipment terms compared to FOB shipment terms will cost you hundreds of dollars more.

FOB (Free on Board: Chinese Port of Shipment)

This is the most common shipment term. Your supplier pays to have your goods loaded onto a ship in China, including the local transport costs in China and the cost to clear the goods for export. You pay for the cost of sea freight and importing your goods into your country (e.g., customs, taxes, domestic transport, etc.).

exw vs fob

CFR (Cost and Freight: Your Home Port) and CIF (Cost Insurance and Freight: Your home port)

CIF and CFR are essentially the same, except that CIF includes the cost of insurance and CFR does not. For CIF and CFR freight, your supplier will pay all the costs to get your shipment from their destination to the desired port in your destination country. You will stay pay for any import fees and overland transportation in your destination country.

Related Podcast: Episode 24: Sourcing Inventory From China and the US

How to See How Much Your Competitors Are Importing from China

Want to see how much your competitors are importing from China?

Custom import records are public information in the United States, and there are multiple tools that allow you to simply search for a company name and see exactly how much these companies are importing from China.

jungle scout supplier database
Research tools which lean on public U.S. customs records can be extremely valuable for finding and verifying Suppliers.

My favorite tool for this is Jungle Scout's Supplier Database tool which costs less than $50 a month (other more expensive options include Import Genius and Panjiva). These tools will neatly summarize all of the information included on a particular company's Bill of Lading information such as product type, quantity, and supplier name/address.

A Real-World Example

Here is an example of a quote I received for EXW shipping terms for a couple of pallets of goods from Fujian province in China to Vancouver:

The total cost of sea freight is just $98. However, look at all the miscellaneous fees totaling $300. The bulk is for the truck freight to get the goods from my supplier’s factory to the port. Like in Canada or any other country, overland freight is expensive in China.

shipping incoterms

Most other fees are associated with preparing various documents, such as the Bill of Lading. Adding to the cost, I can expect to be hit with about another $150 in fees when the goods arrive in Canada from either the Freight Forwarder and/or the receiving warehouse. Ultimately the total cost of freight will be around $631, with only $98 of that cost being for sea freight. Read more about international sea freight in our step by step guide.

Disadvantages of EXW Freight

A big reason why the costs above are so high is that the shipping terms were EXW Fuzhou. As mentioned above, this means that the factory will manufacture all of the goods, and I have to come to their place to pick them up. They’ll handle almost nothing in terms of freight. It’s akin to buying a bed on craigslist with the stipulation “Must pick up.”

Now contrast the term people are more familiar with, FOB xyz Port. For an FOB shipment, say FOB Ningbo (a major port in China) the supplier will drive the goods from their factory to the local port, load it on the ship, and pay all of the document fees. I’ll pay for the sea freight and all of the fees associated with the shipment once it arrives in my port. Following the same craigslist example, it would be like buying a bed on craigslist with the stipulation “Will drop off at your house, but I won’t help move it up your stairs and into your bedroom.”

More Suppliers Are Quoting EXW Shipment Terms

As profit margins in China are being driven down, more and more suppliers are quoting prices with EXW shipment terms. If you are quoted EXW shipment terms, asking for FOB shipment terms should be your first negotiation point. If you are comparing prices from suppliers, ensure that you are always comparing similar shipment terms. If a supplier quotes you EXW, you can simply ask for their FOB price.

Junction in Kowloon, Hong Kong, China

Do Freight Forwarders Care About Shipping Incoterms?

No matter what your shipment terms are, nearly any freight forwarder will be able to easily handle the delivery of your shipment (including the pickup of your shipment from your supplier's factory if you have EXW shipment terms). However, they will charge you more or less, depending on your shipment terms.

Conclusion

What has your experience been with shipment terms: are you mostly quoted in FOB or EXW? Do you have any questions regarding Incoterms? If so, feel free to share and comment below.

For more information about shipping, you can watch this video:

Dave Bryant

Dave Bryant has been importing from China for over 10 years and has started numerous product brands. He sold his multi-million dollar ecommerce business in 2016 and create another 7-figure business within 18 months. He's also a former Amazon warehouse employee of one week.

6 Comments

  1. Hi Dave,
    What term would you recommend (EXW or FOB) if you wanted to split your shipment? (1/2 of the units via Air and the balance by Sea) . (Using a freight forwarder)

    1. Whichever the supplier gives you the best price on relative to your potential added shipping costs :) Probably will be EXW though.

  2. If you choose EXW and paid for most of the cost, shouldn’t that be the most expensive one instead of CIF? For CIF and FOB, as you mentioned above, don’t suppliers pay for part of the cost?

  3. Hi. From the FOB example, would it be an alternate analysis to say that its like the seller carrying the shipment from his house to a taxi cab and the buyer pays for the cab ride and gets to haul the product into his house? Or I misunderstood FOB?

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