Incoterms are the standardized three-letter trade terms published by the International Chamber of Commerce — currently Incoterms 2020 — that define who pays for transport and insurance, where risk passes from seller to buyer, and who handles export and import clearance. They do not cover price, payment or title; they slot into a sales contract alongside those terms.
Why it matters
In China trade, the Incoterm you choose quietly reallocates thousands of dollars and several legal duties per shipment. Under EXW, the buyer must arrange Chinese export clearance — which a foreign buyer without a Chinese entity often cannot lawfully do, and which hides whether the supplier can obtain export licenses or VAT rebates. Under CIF, the supplier controls the freight and insurance choices that determine your risk. Under DDP, the seller imports into your country, which creates duty and tax problems if it has no local presence. For most buyers purchasing from Chinese factories, FOB at a named Chinese port is the balanced default: the supplier clears export, the buyer controls the main carriage, insurance and the HS code declaration on import. The term also interacts with payment: under a letter of credit, the required documents must match the Incoterm chosen.
Example
A Spanish retailer buys furniture EXW Foshan to "save money". At shipment, the factory has no export license, so a third-party export agent must be hired, the buyer bears trucking and clearance it never priced, and the supplier loses the VAT rebate it had silently built into the price. Switching to FOB Shenzhen on the next order put export clearance back on the party equipped to do it.
Common mistakes
- Using EXW with Chinese suppliers and discovering export clearance is your problem
- Writing FOB without a named port, leaving the loading point ambiguous
- Accepting CIF without minimum insurance terms or a say in carrier choice
- Mixing Incoterms 2010 and 2020 language in the same contract
- Forgetting the term must match the documents required under the letter of credit