FOB vs CIF vs EXW: Incoterms Explained for Beginners

Incoterms define buyer and seller responsibilities in global trade. EXW means the buyer handles all shipping; FOB means the seller loads the goods on the ship at the origin port; CIF means the seller pays for freight and insurance to the destination port. For new exporters, FOB is generally the safest and most balanced term to start with.

What are Incoterms?

Incoterms (International Commercial Terms) are a set of 11 standard rules published by the International Chamber of Commerce (ICC). They define the exact responsibilities of buyers and sellers for the delivery of goods under international sales contracts. They dictate who pays for freight, who pays for insurance, and at what exact physical point the risk of loss or damage transfers from the seller to the buyer. Understanding them is crucial to avoid unexpected costs and legal disputes.

Common Incoterms Explained

EXW (Ex Works)

Under EXW, the seller simply makes the goods available at their own premises (factory or warehouse). The buyer is responsible for everything else: arranging the truck, export customs clearance, international freight, and import clearance. Risk transfer: At the seller's premises.

• Pros for Seller: Minimum risk and minimum effort.
• Cons for Seller: You lose control over the export customs process. If the buyer's agent fails to provide you with the Shipping Bill, you cannot claim your export incentives or close your EDPMS.

FOB (Free On Board)

FOB is only used for sea or inland waterway transport. The seller is responsible for the goods until they are safely loaded onto the vessel nominated by the buyer at the named port of shipment (e.g., FOB Nhava Sheva). The seller handles the domestic transport and export customs clearance. Risk transfer: Once the goods cross the ship's rail.

• Pros for Seller: You control the domestic logistics and customs, ensuring your paperwork (Shipping Bill) is perfectly in order for claiming incentives. You do not have to worry about ocean freight fluctuations.
• Cons for Seller: You are still responsible if the goods are damaged on the truck before reaching the port.

CIF (Cost, Insurance, and Freight)

Also only used for sea transport. The seller pays for the cost of the goods, marine insurance, and the ocean freight to bring the goods to the named port of destination (e.g., CIF New York). Risk transfer: Interestingly, the risk transfers to the buyer as soon as the goods are loaded onto the vessel at the origin port, even though the seller pays for the freight to the destination.

• Pros for Seller: Highly attractive to buyers who want a "landed" price without the hassle of booking freight. You can also occasionally earn a small margin on the freight and insurance markup.
• Cons for Seller: Requires more capital upfront to pay the shipping line, and managing marine insurance claims can be complex if issues arise.

DDP (Delivered Duty Paid)

The exact opposite of EXW. The seller assumes all responsibilities and costs, including international freight, destination port charges, and importantly, the import duties and taxes in the buyer's country, delivering the goods right to the buyer's doorstep. Risk transfer: At the buyer's premises.

• Pros for Seller: A massive selling point for small e-commerce buyers or companies who have no import licenses.
• Cons for Seller: Extremely high risk. You must navigate foreign customs laws and pay foreign taxes, which can be unpredictable.

Which Incoterm Should You Choose?

For your first few shipments, we highly recommend quoting FOB (Free On Board). It allows you to maintain control over the critical Indian customs clearance process (ensuring you get your BRC/EDPMS sorted and claim RoDTEP), while leaving the complex international freight and destination risks to the buyer. If you need help calculating prices for these different terms, join our Export Trade School where we provide automated pricing calculators.

Frequently Asked Questions (FAQ)

Does FOB apply to air freight?

Technically, no. Under official ICC rules, FOB is strictly for sea freight. For air freight, the correct equivalent term is FCA (Free Carrier). However, in informal practice, many traders still loosely use "FOB" for air shipments.

If I sell CIF, who files the insurance claim if the ship sinks?

Because the risk transfers to the buyer once the goods are loaded onto the ship in India, the buyer is responsible for filing the claim against the insurance policy that you purchased on their behalf.

Can I claim export incentives if I sell EXW?

It is very difficult. To claim incentives like RoDTEP or GST refunds, your name must be on the Shipping Bill as the exporter. Under EXW, the buyer's agent handles customs and they may not list you correctly, leading to lost incentives.