FOB, CIF or DDP: who pays, and who carries the risk.

The Incoterms rules are published by the International Chamber of Commerce (ICC), first in 1936. The current version, Incoterms 2020, entered into force on 1 January 2020. Each rule is a three-letter term that says where the seller delivers, when the risk passes to the buyer, who arranges and pays transport and insurance, and who handles export and import clearance.

Incoterms 2020 has 11 rules in two groups. Seven can be used for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are only for sea and inland waterway transport: FAS, FOB, CFR and CIF.

An Incoterm does not settle everything. The US International Trade Administration lists what the rules leave to the sales contract:

• +The price of the goods, and how and when you pay it.
• +When ownership of the goods passes to the buyer.
• +Which documents the seller must provide for customs clearance in your country.
• +Liability for goods that do not match the contract or arrive late, and how disputes are settled.

Write the rule with its named place and its version, for example FOB Shenzhen Incoterms 2020. Parties may still agree on an older version, provided the contract says which one.

1. 01

   EXW, Ex Works

   The seller makes the goods available at its factory or warehouse, not loaded and not cleared for export. From then on, everything is yours: loading, export clearance in China, freight, insurance, import clearance and duties. The ICC considers EXW suited mainly to domestic trade.

2. 02

   FOB, Free On Board

   The seller clears the goods for export and places them on board the vessel you nominate, at the named Chinese port. The risk passes once the goods are on board; ocean freight, insurance, import clearance and duties are yours.

3. 03

   CIF, Cost Insurance and Freight

   The seller clears the goods for export, pays the ocean freight to the named destination port and buys minimum insurance. The risk still passes when the goods are on board at the port of loading. Import clearance and duties are yours.

4. 04

   DAP, Delivered at Place

   The seller carries the goods, at its own risk, to the named place in your country, ready for unloading. Import clearance, duties and taxes are yours.

5. 05

   DDP, Delivered Duty Paid

   The seller delivers to the named place in your country, cleared for import, with import duties and taxes paid. Of the 11 rules, it puts the most obligations on the seller.

FOB and CIF are written for goods placed directly on board a ship. For goods that travel in containers or are handed to the carrier at a terminal, the ICC points to FCA rather than FOB, and to CIP rather than CIF.

The table shows the default split. Loading and unloading charges, terminal handling, container rental and customs processing fees still cause frequent disputes, so the ICC advises listing them in the contract.

Under FOB and CIF, the risk passes at the port of loading, once the goods are on board. Under CIF, the seller has delivered at that moment, whether or not the goods arrive in good condition: if the container is lost at sea, the loss is yours, and your claim is against the insurer.

That is why the CIF insurance matters. Incoterms 2020 requires the seller to buy cover complying with the Institute Cargo Clauses (C), or similar clauses, for at least the contract price plus 10%, that is 110%, in the currency of the contract, from the port of shipment to at least the port of destination. Clauses (C) is the limited level of cover; CIP requires the more extensive Clauses (A).

• +Ask for the insurance policy or certificate before you pay the balance, and check the insured value and the clauses.
• +If you want broader cover, agree on Clauses (A) in the contract, or buy CFR or FOB and insure the goods yourself.
• +Under EXW and FOB, neither party has to insure the goods for the other: arrange your own cover from the moment the risk is yours.

DDP is the only Incoterm under which the seller clears the goods for import in your country and pays the import duties and taxes. Under every other rule, import clearance and duties are the buyer's job. Under DAP, for instance, goods that you fail to clear wait at the port or terminal at your risk.

The ICC urges caution all the same. Practical realities can prevent a seller from clearing goods into your country, and its checklist warns small importers who buy only DDP, because it asks least of them, that the rule leaves room for complications. Before you accept a DDP price, ask:

• +Who will be declared as the importer to your customs, and on which documents.
• +Which tariff code (HS code) and which declared value the duties and taxes were calculated on.
• +What the total covers: freight, clearance, duties, taxes and delivery to the named address.
• +What happens if the product, the value or the code turns out to be wrong.

There is no single right answer. The ICC's guidance is to give the transport to whichever party can buy it more cheaply or efficiently, and to check what each rule requires of you at customs. For a first import from China, three situations cover most cases.

1. 01

   You work with a freight forwarder

   Buy FOB at the Chinese port, or FCA when the goods are handed over at a container terminal. You choose the transport and the insurance, and the price you compare is the price of the goods.

2. 02

   You want a delivered price and can clear customs

   Buy DAP to your address, and clear the goods yourself or through a customs broker. The seller carries the goods and the risk to the named place; you pay the duties.

3. 03

   You do not want to deal with customs at all

   Buy DDP, from a party able to clear goods into your country, and ask to see how the total was calculated.

Avoid EXW unless someone in China can load the goods and clear them for export on your behalf. Read a CIF price with care: it looks complete, but the risk is yours from loading and the insurance is the minimum level. And ask every supplier to quote on the same rule and the same named place, or the cheapest offer may simply be the one that leaves you the most costs.