Incoterms® result from long-term practice and gradually form unified rules that define the obligation between buyers and sellers to deliver commodities under sales agreements. Here, we explain the 5 most important Incoterms® when exporting or importing goods from or to China, what they mean and what their advantages and disadvantages are:
1. What does FOB (Free on Board) mean in China, and what are the Pros and Cons?
Generally, this is the term most often used if you are importing from China. With FOB, the seller's responsibilities end when the goods board the ship transporting them to your chosen destination. The seller's delivery is completed when the goods are across the ship's rail.
2. What does EXW (Ex Works) mean in China – and what are the Pros and Cons?
The delivery is completed when the buyer picks up the goods from the seller at the named place, such as a warehouse or factory. The buyer takes over ownership and responsibilities once the goods are available for you to transport. This term is used for ocean freight and air freight.
We suggest you take serious consideration when you choose EXW. The hassle of dealing with inland transportation in China and customs clearance in Chinese ports and other related issues may create a lot of work that needs to be managed.
3. What does CIF (Cost, Insurance and Freight) mean in China, and what are the Pros and Cons?
Under CIF, the buyer takes over ownership of the goods only at the destination port. The sellers control the freight. This term only applies to ocean freight, not air freight. It gradually became less recommended when importing goods from a Chinese supplier.
4. What is the meaning of CFR (Cost and Freight) in China, and what are the Pros and Cons?
The CFR or Cost and Freight is an Incoterm® exclusive to ocean freight. As mentioned above, the difference between a CFR and CIF agreement is minimal. The difference between CFR and CIF then is insurance is mandatory to be provided by sellers under CIF. With CFR, however, insurance is optional.
If you choose to work under CFR, we strongly recommend that you as a buyer clearly define and specify the insurance terms in the sales contract.
5. What is the meaning of DDP (Delivered Duty Paid) in China, and what are the Pros and Cons?
This term sounds quite challenging for sellers. With DDP, the seller is obliged to cover everything during the freight. The buyer only needs to unload the goods at the final destination.
Which Incoterm® is the best one when importing from China?
Even industry experts cannot tell which is the best Incoterm when importing from China. Both FOB and EXW have their supporters. For new importers, we suggest you should not commit yourself to the CIF Incoterm® unless you are familiar with the seller's practices. Choose FOB Incoterm if the situation permits to avoid any unpleasant surprises upon cargo arrival.
Generally, whoever has control or responsibility for the freight controls the price. While having more control over transportation gives you more power to negotiate prices and minimizes the risk of unexpected fees. A solid understanding of Incoterms® and careful negotiation between you and your Chinese supplier can make your trade go smoothly.
Which Incoterm® is the best one when exporting to China?
The exporters and importers may have different perceptions about this question. As pointed out above, no Incoterm® can fit all situations. Whatever Incoterm you pick, you should ensure both sellers and buyers enter a mutually benefitting position.
As an exporter with limited knowledge about Chinese customs clearance or other related importing rules, FOB could minimize your transportation obligations and risk at the highest level. However, as an experienced seller and your Chinese buyer doesn't competent to handle the transportation, DDP could also be a good choice. Then, you will have complete control of the transport and have more advantages to maximize your profit.
An overview of the 5 most important Incoterms® when shipping to or from China
We're here to support you with Incoterms® in China
For more information about Incoterms in China, check our easy guide to Incoterms®, including a full breakdown of who is responsible for what.
Twill can become your trusted logistical partner for any Incoterms® you agree with your Chinese business partner. At Twill, we offer inland transportation, ocean freight, and Customs Clearance services to cover all processes during the freight transportation to ease your business.