Incoterms 2020: which term to choose for importing industrial equipment

Incoterms are 11 standardized terms published by the International Chamber of Commerce (ICC). In three letters, they define where the seller's responsibility ends and the buyer's begins: who arranges and pays for transport, who clears customs, who insures the goods, and at what precise moment the risk of loss or damage shifts from one party to the other. Without a clear Incoterm, you have 80 % of import-export disputes waiting to happen.

Incoterms 2020 (effective 1 January 2020) brought two major changes. First, they better reflect modern container shipping: some maritime terms (FOB, CIF) no longer fit containerized cargo and should be replaced. Second, insurance became stricter: for example, under CIP, the seller must insure at 110 % of value (not 100 %), and cover all-risk coverage, not just classical maritime perils.

EXW means the seller puts goods at your disposal at their site (factory, warehouse) and washes their hands of everything else. You take risk the moment goods are packed and ready for pickup. You pay: transport from seller's site to Shanghai port, ocean freight, insurance, customs clearance for export in China (nearly impossible for a foreign buyer without a local agent), customs clearance for import into the EU, customs duties, taxes. You also bear all transport risks: if goods are damaged en route, it is your loss.

Under EXW, the seller has no obligation to load, arrange transport, or even verify the truck will leave. This creates immense contractual risk: how do you ensure the seller has actually set aside your goods and not resold them to another buyer? In practice, EXW is negotiated only with established, trusted vendors. Avoid EXW if it is your first order or the amount exceeds a few thousand euros.

FOB means the seller pays transport until goods cross the ship's rail (on board) at the loading port. At that precise moment, risk shifts to you. You pay: ocean freight, insurance from the loading port onwards, import customs clearance, taxes. The seller pays: transport to Shanghai port, export customs clearance in China, and optionally insurance (but you should insure after the ship leaves).

The FOB pitfall: it is a 'maritime' rule in Incoterms 2020, designed for bulk carriers or conventional vessels. If you buy containerized cargo (95 % of China imports today), FOB is technically ill-suited. The moment risk transfers (crossing the ship's rail) becomes vague when goods are already sealed in a container. Unless your Chinese supplier routinely uses FOB, prefer FCA or CIP.

CIF means the seller pays ocean freight and insurance to the destination port (Hamburg, Rotterdam, etc.). This often creates the false impression the seller bears risk until the destination port. Wrong. Risk passes to you at the loading port (Shanghai), the moment goods cross the ship's rail, the same as FOB. The difference: the seller arranges and pays for insurance, so you are covered.

Under CIF, you pay: import customs clearance, customs duties, VAT taxes, transport from arrival port to your facility, container stripping fees. The seller pays: transport to port and marine insurance (responsible if insufficient). CIF advantage: you do not hunt for an insurer or negotiate insurance with the supplier. CIF disadvantage: if goods arrive damaged, you manage the insurance claim (not the seller).

DDP means the seller delivers goods to your EU address with all taxes and duties paid. The seller pays: transport, insurance, export customs clearance in China, import customs clearance in the EU, customs duties, import VAT. You pay almost nothing. You receive, unpack, done.

DDP looks ideal but is a trap for China sourcing. Two reasons. First, EU VAT (20 % or 5 %) is enormous: goods at 50,000 euros include 10,000 euros VAT. Who calculates and pays this VAT at customs? In theory, the seller. In practice, many Chinese sellers refuse it or miscalculate, which falls back on you at import clearance. Second pitfall: import customs clearance in the EU cannot be done by a Chinese factory alone. You need a licensed customs broker, a French logistics provider, and a fiscal guarantee. The cost of this chain often makes DDP more expensive than CIP plus self-handled import.

EXW: you assume 100 % of risk and 100 % of costs. No flexibility. FOB: you assume 100 % of maritime and beyond risk, 80 % of costs (seller pays transport to port). CIF: you assume 100 % of risk beyond the loading port; seller arranges insurance (roughly 10 % of price); you handle import (duties plus VAT). DDP: seller assumes risk to your address, pays all fees, but it is complex and often costlier than quoted.

Rule of thumb: the more responsibility the Incoterm places on the seller (EXW < FOB < CIF < DDP), the more protected you are from transport and customs risk, but more expensive and slower. In return, simpler to implement (CIF and DDP) than to organize yourself (EXW, FOB). For a first-time or high-value purchase, CIF is the sweet spot: you benefit from seller's insurance, you keep control of import clearance with a local agent.

Pitfall 1: forgetting Incoterms define risk and costs, not ownership. You can pay DDP (owner at delivery) or own goods as of Shanghai under EXW. If the seller goes bankrupt between order and shipment, check your contractual right, the sales contract, not the Incoterm, decides.

Pitfall 2: confusing risk and insurance. FOB and CIF shift risk, but insurance does not always follow. Example: CIF Shanghai to Rotterdam, seller insures to Rotterdam port, but who insures Rotterdam port to your factory? You do. Read the official Incoterms 2020 or get written confirmation of where seller's insurance ends.

Pitfall 3: negotiate DDP without clarifying VAT. VAT at 20 % equals 5 % of price for every 25-euro increment. If the seller quotes DDP without mentioning VAT, they have not understood it. Request an itemized quote including VAT (or accept VAT is your responsibility on top).

Pitfall 4: using FOB or CIF for containerized cargo. Incoterms 2020 class FOB and CIF as maritime rules, suited to bulk or conventional ships, not containers (99 % of China today). For containers, use FCA (seller delivers to first carrier) or CIP (seller pays insurance to destination) instead. Clearer, fewer disputes over risk transfer timing.

Pitfall 5: forgetting Incoterm affects customs value. Under EXW, customs value is the ex-works price. FOB adds transport and insurance to the loading port. CIF adds freight and insurance to the destination port. DDP is typically the price ex-VAT. This difference affects customs duties charged. Calculate the tax impact before choosing.