FOB vs CIF vs DDP vs EXW: Incoterms 2020 Explained for China Importers

Incoterms are the international rules — published by the International Chamber of Commerce, current edition Incoterms 2020 — that define who pays for what and where risk transfers in a cross-border sale of goods. They sit at the centre of every China sourcing transaction and they're routinely misunderstood.

This guide focuses on the four Incoterms that account for almost all China-import volume: FOB, CIF, DDP, and EXW. Other terms (FCA, CPT, CIP, DPU, FAS) exist and have niche uses; we'll cover them briefly at the end.

Table of contents

1. What an Incoterm actually does
2. The four-stack model: who pays for what
3. FOB (Free On Board)
4. CIF (Cost, Insurance, Freight)
5. DDP (Delivered Duty Paid)
6. EXW (Ex Works)
7. Side-by-side comparison
8. Worked example: $20,000 order under each Incoterm
9. The Incoterms most importers should never use
10. Which one to pick — a decision flowchart

1. What an Incoterm actually does

An Incoterm answers two questions on every shipment:

Who pays for what? Origin transport, export clearance, ocean freight, insurance, destination port handling, customs clearance, import duty, last-mile delivery — each has a defined party (buyer or seller) responsible.

Where does risk transfer? At what point does responsibility for damage/loss switch from seller to buyer? This matters enormously for insurance claims and for liability when something goes wrong.

The Incoterm doesn't determine ownership of the goods (that's the contract) and doesn't determine who pays import duty as a tax matter (that's customs law) — but it determines payment responsibility under the commercial contract.

The crucial misunderstanding to clear up first: under several Incoterms, risk transfers earlier than payment responsibility ends. CIF is the famous example — the seller pays for shipping and insurance to the destination, but the goods are at the buyer's risk from the moment they're loaded onto the ship in China. If a container is lost at sea, the buyer files the insurance claim, not the seller, even though the seller bought the policy.

2. The four-stack model: who pays for what

Every shipment from China has roughly twelve cost line-items. The Incoterm assigns each to either seller or buyer.

S = Seller (the Chinese supplier) pays. B = Buyer (you) pays. *DDP technically includes VAT, but practical handling varies.

The mental model: as you move EXW → FOB → CIF → DDP, you're sliding the responsibility line further toward your destination. EXW puts maximum responsibility on you; DDP puts maximum responsibility on the supplier.

3. FOB (Free On Board)

FOB is the workhorse of China sourcing. The supplier delivers the goods onto the ship at the Chinese port (named in the order: "FOB Shenzhen" or "FOB Ningbo" or "FOB Shanghai") and hands you the bill of lading.

Seller pays: factory-to-port inland transport, origin port handling, export clearance, loading. Buyer pays: ocean freight, insurance, destination port handling, import clearance, duty, last-mile. Risk transfers: when goods are loaded onto the vessel at the Chinese port.

Why FOB is the default for sea-freight orders. It splits the responsibility cleanly at the boundary where the supplier's local knowledge ends and the buyer's logistics chain begins. The supplier knows Chinese inland trucking, export clearance, and the local port; the buyer (or their freight forwarder) knows ocean freight rates and the destination side. Each party does what they're good at.

The pitfall. FOB risk transfers at origin — meaning if the container is damaged or lost on the ocean, it's the buyer's problem and the buyer's insurance claim. If you ordered FOB and didn't buy your own marine insurance, you have no coverage. Always buy marine insurance for FOB shipments (typically 0.3–0.5% of cargo value).

When to use FOB: any sea-freight order where you have a freight forwarder lined up. Probably 80% of China-import orders by volume.

4. CIF (Cost, Insurance, Freight)

CIF moves the freight + insurance responsibility back to the seller, but — critically — keeps the risk transfer at the origin port.

Seller pays: everything FOB pays for + ocean freight + minimum-coverage marine insurance. Buyer pays: destination port handling, import clearance, duty, last-mile. Risk transfers: when goods are loaded onto the vessel at the Chinese port. (Same as FOB — this is the famous quirk.)

Why CIF exists. It's traditional in commodity trade and works for buyers who don't have a freight forwarder relationship and want a simpler quote. The supplier handles the freight booking and provides the insurance certificate.

The two pitfalls.

First, the "minimum coverage" insurance under Incoterms is Institute Cargo Clauses (C) — the lowest tier, covering only major risks (sinking, collision, fire). Theft, water damage, mishandling are all excluded. If you want real coverage you need to either negotiate ICC (A) on the order or buy your own supplemental insurance. Many CIF importers don't realise their insurance is essentially nominal.

Second, the freight rates a Chinese supplier negotiates are often higher than what you'd get directly with a freight forwarder, and you can't easily compare without breaking the CIF quote apart. So CIF often hides 5–15% in marked-up freight.

When to use CIF: rarely — only when you genuinely have no freight relationship and want one quote. Even then, FOB + your own freight forwarder is usually cheaper and more transparent.

5. DDP (Delivered Duty Paid)

DDP transfers maximum responsibility to the supplier: they handle everything from the factory floor to your destination address, including paying import duty and VAT.

Seller pays: every cost line — origin, freight, insurance, destination port, customs, duty, VAT, last-mile. Buyer pays: nothing additional after the unit price. Risk transfers: at the buyer's destination address.

Why importers love it (at first). One number, one invoice, no surprises at the border. Particularly attractive to first-time importers who don't have customs broker relationships set up.

Why we recommend caution.

Hidden margin on duty. Suppliers offering DDP almost always build in 8–15% margin over the actual duty cost. They're handling your customs entry, taking on duty risk, and they're not doing it for free. Compare a DDP quote against (FOB price + your real freight + your real duty) and you'll typically find DDP costs 5–15% more for the same service.

Grey-channel risk. Many DDP arrangements from China use under-declared customs entries to reduce the duty bill (and therefore the supplier's cost). The goods enter the destination country with declared values well below the actual transaction value. If the destination customs authority audits the entry — sometimes years later — the buyer is often pursued as the importer of record, even though the supplier handled the paperwork. Penalties can be substantial.

Limited control. When something goes wrong (customs hold, document discrepancy, freight delay) you're depending entirely on the Chinese supplier to fix it remotely. You don't have a relationship with the customs broker; you can't escalate directly. Resolution is slower.

When to use DDP: small replenishment orders to a known address where convenience is genuinely worth the markup, and where you're confident the supplier is using clean (not grey-channel) entries. Less appropriate for first orders, large orders, or orders to commercial addresses that customs may scrutinise.

6. EXW (Ex Works)

EXW is the opposite end of the spectrum: the supplier makes the goods available at their factory and you handle everything from there.

Seller pays: nothing beyond making the goods available at the factory (and packing). Buyer pays: factory pickup, all inland transport in China, export clearance, port handling, freight, insurance, destination side. Risk transfers: at the factory door.

Why EXW gives the lowest unit price. The supplier strips out all logistics responsibility, so the unit number is essentially the production cost.

Why it's a trap for most foreign buyers. To execute EXW you need a Chinese-side agent or freight forwarder who can: pick up from the factory in China, transport to the port, file Chinese export clearance (which requires a registered Chinese export company), and load the vessel. Unless you have that infrastructure, you can't actually move the goods.

In practice, EXW orders to overseas buyers usually convert to FCA Free Carrier (similar concept but with the supplier handling export clearance) or to FOB once the buyer engages a Chinese freight forwarder.

When to use EXW: only if you have a Chinese-side agent or your freight forwarder has full origin-side capability including Chinese export clearance.

7. Side-by-side comparison

8. Worked example: $20,000 order under each Incoterm

Same goods (general consumer merchandise, $20,000 FOB-equivalent), 30 CBM sea LCL, US destination. Numbers are illustrative — your actuals will vary by category, season, and route.

Conclusions from the example:

• EXW and FOB total landed cost is essentially the same — the supplier's "savings" on EXW are offset by the buyer's added origin-side costs. For most buyers FOB is simpler.
• CIF total cost matches FOB at the headline level because the freight rate is comparable. The risk is that the supplier marks up freight significantly — if the supplier's $2,500 is actually $3,200 with $700 margin baked in, CIF total becomes $26,800.
• DDP costs ~$1,900 more than FOB (about 7%). That's the convenience premium plus typical duty margin. For some buyers it's worth it; for most repeat importers it isn't.

The takeaway: Incoterm choice doesn't change the fundamental landed cost as much as people think — it changes who handles each piece and how much margin the supplier can hide.

9. The Incoterms most importers should never use

A few Incoterms exist that almost no one should use for China sourcing:

FAS (Free Alongside Ship). The supplier delivers to the side of the ship at origin port but you pay for loading. Niche bulk-cargo use case; for container shipments it's pointlessly worse than FOB.

CFR (Cost and Freight). Same as CIF but no insurance. Almost always a worse deal than FOB + your own insurance.

CPT/CIP (Carriage Paid To / Carriage and Insurance Paid To). Multimodal versions of CFR/CIF. Useful in air freight or container-rail scenarios. Niche.

DAP (Delivered At Place). Like DDP but the buyer handles import clearance and duty. Useful when the buyer wants to control customs but doesn't want to manage freight; can be cleaner than DDP for VAT-registered businesses that want to recover VAT directly.

DPU (Delivered at Place Unloaded). Like DAP but seller unloads at destination. Niche.

For 95% of China-import orders, the choice is FOB, CIF, DDP, or EXW. Anything else, ask why before agreeing.

10. Which one to pick — a decision flowchart

Do you have a freight forwarder you trust?
├── Yes → FOB. Use them. Done.
└── No
    ├── Is the order small (<$5,000) and going to a residential address?
    │   └── DDP from a known supplier is fine. Accept the convenience premium.
    └── Is the order larger or going to a commercial address?
        ├── CIF is the lowest-friction option, but get a separate freight quote
        │   to see how much the supplier is marking up freight.
        └── If supplier's CIF freight is reasonable, use it. If they're marking
            it up >15%, find a freight forwarder and switch to FOB.

The "no freight forwarder" state is temporary for most serious importers. Set one up after the first 1–2 shipments and switch to FOB permanently. Forwarder fees (typically $100–$300 per shipment) are far less than what suppliers mark up on CIF or DDP.

The bottom line

FOB is the right default for most China-import orders. It splits responsibility cleanly, keeps cost transparent, and works with any reasonable freight forwarder.

CIF is fine for one-off small orders without freight infrastructure but watch for marked-up freight.

DDP is convenient and sometimes worth the premium, but understand what you're paying for and verify the customs entries are clean.

EXW is rarely the right answer unless you have a Chinese-side agent.

Whatever Incoterm you use, get marine insurance with proper coverage (ICC A, not C), name the port explicitly in the order ("FOB Shenzhen", not just "FOB"), and put the Incoterm on the proforma invoice and the commercial invoice.

If you want help structuring an Incoterm choice and freight plan for your next order, get a quote — it's part of every sourcing project we run.

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