Incoterms: How Three Letters Reshape Price, Risk, and Control in Trade
When you request a quote from a supplier in China, unit price is never the full story. The three letters next to that price, such as EXW or FOB, decide who pays which costs, who carries which risks, and how much real control you have over the shipment. Treat them as a formality and you can meet surprise charges, uninsured damage, or documents that don’t satisfy your bank.
This guide explains Incoterms® 2020 for containerized shipments originating from China and destined worldwide in clear and practical terms. Our Incoterms series will continue with two upcoming guides.
Incoterms: What They Are and Aren’t
Incoterms are standardized delivery terms published by the International Chamber of Commerce that allocate;
Risk: The exact point when loss/damage risk shifts from seller to buyer
Costs: Who pays which segment; origin haulage(commercial transport of goods), export clearance, main carriage, insurance, arrival charges
Incoterms are not:
Title/ownership transfer (that belongs in your sales contract)
Payment terms or L/C (Letter of Credit) rules (contract and banking rules govern those)
Quality, warranty, or remedy
Governing law or jurisdiction
Keeping these boundaries prevents false assumptions that lead to disputes.
Four Incoterm Groups at a Glance
Incoterms groups are organized by who pays the main carriage and where risk passes.
Group E: EXW - Ex Works
Risk: passes when the seller makes goods available at their premises (not loaded).
Costs/Control: buyer arranges everything: pickup, export clearance, freight, insurance.
Reality check: buyers outside China often cannot legally handle export formalities; the “cheap” EXW quote frequently turns expensive once local origin costs are added.
Group F: FCA, FOB, FAS
FCA (Free Carrier, any mode): Risk passes when goods are delivered to the buyer’s nominated carrier at the named place. Seller clears export; buyer controls forwarder, routing, and insurance level. Cleanest fit for containers.
FOB (Free On Board, sea only): Risk passes when on board the vessel. Works well for bulk/break‑bulk. For containers, cargo typically enters the terminal days before loading, creating a terminal‑yard grey area if an incident occurs before loading.
FAS (Free Alongside Ship, sea only): Risk passes when goods are placed alongside the vessel. Niche use, typically non‑containerized cargo.
L/C note under FCA: If a bank requires an on‑board B/L (Bill of Landing), the 2020 rules recognize an option to obtain it under FCA (without misusing FOB) via buyer/carrier instructions captured in the contract.
Group C: CFR, CIF, CPT, CIP
Seller pays the main carriage but risk transfers at shipment (to the first carrier or when on board, per rule).
CFR (Cost and Freight): Seller pays ocean freight; buyer bears transit risk once on board.
CIF (Cost, Insurance and Freight): CIF can simply be defined as CFR plus seller-procured insurance. Buyer often faces destination charges and limited control over carrier/insurance quality.
CPT (Carriage Paid To): Seller pays carriage to named place; risk transfers on handover to the first carrier.
CIP (Carriage and Insurance Paid To): CIP can be simply defined as CPT plus insurance.
Practical note: Don’t confuse who pays (often seller) with who bears risk (often buyer after shipment). Destination‑side storage/demurrage/detention and documentation surprises are common under C‑terms.
Group D: DAP, DPU, DDP
DAP (Delivered at Place): Delivered ready for unloading at named place; buyer handles import clearance and duties.
DPU (Delivered at Place Unloaded): Same as DAP, but seller also unloads (unique). Helpful if truly intended; risky if unloading damage isn’t insured.
DDP (Delivered Duty Paid): Delivered after import clearance with duties/taxes paid by seller. In many destinations, foreign sellers cannot practically act as Importer of Record without registrations; shortcuts can create tax/customs exposure for the buyer later.
One Container, Four Outcomes
Consider the same FCL container from a factory at origin:
EXW (Factory at origin): Seller makes goods available; you handle loading, trucking, export clearance, freight, and insurance. A truck mishap en route? The risk is yours unless you arranged robust cover and documented handover.
FOB (Origin port): Risk passes when on board. But the container sits in the terminal before loading; if an incident occurs in the yard, determining responsibility can be debatable. You pay the freight/insurance but didn’t control the origin handoff.
CIF (Your destination port): Seller pays freight and buys minimum insurance, but risk still passed at origin. When the container lands, you may face destination fees (delivery order/doc fees, storage, demurrage/detention) from the seller’s carrier/agent that weren’t visible in the quote.
FCA (Origin terminal): Seller clears export and hands goods to your nominated carrier at the terminal; risk passes at that handover. Now your risk aligns with your control over carrier, routing, and insurance level. That’s why many importers prefer it.
Takeaway: If you carry the risk, you should control the carrier and the insurance. FCA typically enables that alignment for containers; CIF often breaks it; FOB can create a terminal‑yard grey zone.
Five Common Myths
“FOB is fine for containers.” FOB was designed for bulk/break‑bulk. For containers, the yard handover precedes loading; that mismatch is why FCA is a cleaner fit.
“C‑terms mean the seller is responsible until arrival.” Under CIF/CFR/CPT/CIP, risk transfers at shipment although the seller pays the freight.
“Incoterms transfer ownership.” They don’t; ownership/title lives in the sales contract.
“CIF includes full insurance.” By default it requires minimum cover (not “all risks”). Upgrade or place your own policy if you want broader protection.
“DDP is the easiest option for buyers.” If the seller cannot lawfully act as Importer of Record or misdeclares value, the buyer can inherit compliance exposure later.
What Changed in 2020 & Why it Matters
Incoterms® 2010 served the market for a decade, but global trade and logistics practices evolved. Incoterms® 2020 updates the rules to reflect today’s realities and common financing/documentation needs.
DAT → DPU (Delivered at Place Unloaded): The only rule where the seller is responsible for unloading. Helpful when truly intended; risky if unloading damage is likely and not insured.
FCA and the on‑board B/L option for L/Cs: An optional mechanism solves a longstanding banking mismatch: obtain an on‑board bill of lading even when using FCA, without misusing FOB for containers.
Insurance defaults diverge: CIF keeps narrow cover, while CIP requires “All Risks Cover.” If you need wider protection on sea shipments, specify it (or place your own policy) rather than relying on a CIF default.
10‑Point Checklist Before Accepting Supplier’s Price
Exact rule, version, and named place (e.g., “FCA [Origin CY/terminal], Incoterms® 2020”).
Export clearance in China: who has the license and responsibility?
Carrier control: who books and instructs the forwarder?
Insurance: ICC(A/B/C)? war/strikes add‑ons? proof of cover?
Origin charges: inland haulage, terminal handling (THC), booking/documentation fees—what’s included?
Destination charges: delivery order/doc fees, port storage, demurrage vs detention; who pays, how are rates triggered?
L/C compatibility: if the bank needs an on‑board B/L, is the FCA on‑board option captured in the contract instructions?
Mode specifics: FCL vs LCL handoff points; air shipments (AWB vs B/L).
If D‑terms proposed: who is Importer of Record; VAT/GST registrations; customs valuation basis.
Title transfer: is ownership addressed in the sales contract (separate from Incoterms)?
At FortuneSix, we treat Incoterms as a risk‑management framework. Our work is to align your risk with your control, selecting the right term, ensuring banking and insurance documents are satisfied, and preventing destination‑side surprises.
Share your next quote; we’ll translate the three letters into a clear risk, cost, and control profile and recommend safer terms tailored to your route.