Which Incoterm Fits This Order, and What Does It Move?

What Does an Incoterm Actually Do — and What Does It Not Do?

Three things are settled by the term and three are not, and buyers lose money by mixing the lists. The term allocates the cost of each leg of the journey, fixes the point at which risk passes from seller to buyer, and assigns the documentary obligations on both sides — who produces the export declaration, who produces the transport document, who provides proof of delivery. It does not transfer title, it does not set a payment schedule, and it does not decide which tariff line the goods enter under.

The last row of that table is the one that causes the most friction. A buyer asks for DDP and reads it as 'the seller handles everything including my money'. A seller quotes FOB Xiamen and a buyer reads it as 'payment on delivery'. Neither reading is in the rules. Payment is agreed separately and, on this programme, runs T/T 30/70.

Read the output as a starting position rather than a verdict. The five answers sort the shipment into a term; the reasoning line below it says why, and the table says what that term costs you in visibility. Where the reasoning names a risk you did not know you were taking, that is the useful part of the exercise.

Why Is FOB Xiamen the Reference Point Here?

FOB Xiamen is the default quoted on this programme, and the reason is structural rather than habitual. Under FOB the seller's obligation ends when the goods are on board the vessel at Xiamen, and the buyer's forwarder books and controls the main carriage. That puts the largest single cost line — ocean freight — in the hands of the party who is going to pay it, and it gives that party the bill of lading, the vessel schedule and the ability to choose a carrier. A buyer who controls the freight market can see what freight is doing. A buyer who has it bundled into a unit price cannot.

• The freight market becomes visible: a buyer booking the main carriage sees rate moves and can change carrier.
• The document set arrives in the buyer's hands, which matters when the import entry has to reference a vessel and a voyage.
• Risk and cost transfer at the same point, on board at Xiamen, so there is no stretch where the buyer carries risk without control.
• The quoted unit price stays comparable between orders, because it excludes a freight component that moves weekly.
• Destination handling and duty sit with the buyer, which is where they sit under almost every term except DDP.

The trade-off is work. FOB asks the buyer to appoint a forwarder, to file the import entry, and to insure the main carriage. A buyer with none of that in place should not take FOB by reflex — which is exactly what the first question in the tool is asking.

When Is CIF Genuinely the Better Term?

CIF is better when the buyer has no forwarder, no contract with a carrier, and no wish to build one — and it is genuinely useful in exactly that case. The seller contracts and pays for carriage and insurance to the named destination port, and the buyer takes the goods from arrival. The catch is that CIF splits cost from risk: the seller pays the freight, but risk passes to the buyer when the goods are on board at origin. If a container is lost at sea the buyer's claim is against an insurance policy the seller bought, on terms the buyer did not choose.

That split is not a reason to refuse CIF. It is a reason to ask two questions before accepting it. Which insurer and which level of cover, because the minimum required under CIF is minimum cover and not all-risks. And what the freight component is, because a CIF price that does not disclose it makes every later order impossible to compare against a freight market that has moved. Ask for the freight and insurance figures to be shown separately on the proforma invoice even when the term is CIF.

When Does DDP Become a Trap for a First-Time Importer?

DDP moves everything to the seller: carriage the whole way, the import entry, duty and taxes, and delivery at the named place. For a buyer with no customs capability at destination it reads as the answer, and for a small parcel shipment it often is. For a first-time importer moving a full container of commercial goods it usually is not, for three reasons that only appear after the goods have landed.

• The buyer never builds a record. No entry is filed in the buyer's name, so there is no history, no importer number history, and no relationship with a broker when the next order needs one.
• The duty and freight margin is inside the unit price and cannot be audited. A buyer cannot tell a fair landed figure from an inflated one because nothing is itemised.
• Control of the main carriage is lost. The buyer does not know the vessel, the routing or the carrier until the goods arrive, and a delay has no one to call.
• Tax position is unclear. Where import VAT or GST is recoverable, a DDP structure can leave the buyer without the documents needed to reclaim it.
• The term is misread as covering risk after delivery. It does not. Warranty, conformity and payment are governed by the contract of sale.

The honest version of DDP is this: it is a convenience bought with visibility, and the price of that convenience is buried in the goods. A buyer who expects to import twice a year for years is better served by learning the entry once, on an FOB or DAP shipment, than by paying for the privilege of not learning it on every order.

Where Do EXW, FCA, CPT and CIP Sit in the Sequence?

EXW puts the least on the seller and is the term most often quoted without being understood: the seller makes the goods available at its premises and need not load them, and the buyer handles export formalities at origin as well as everything after. For a buyer without a legal presence and a licensed broker in the origin country, EXW is difficult to perform and can leave goods unshipped over a paperwork gap rather than a production one. FCA is the cleaner version of the same idea — the goods are handed to the carrier named by the buyer, and the seller does handle the export declaration.

CPT and CIP are the carriage-paid pair used when the handover happens before a ship's rail, which is what happens with consolidated cargo, road and rail, and air. CPT is carriage paid with no insurance obligation; CIP is carriage paid and the seller must insure at the higher level the rules require. Their sea-going equivalents are CFR and CIF. Where a shipment is consolidated, the delivery point named by FCA matches what actually happens at a warehouse, and FOB's on-board point does not — which is why the tool returns FCA when the cargo shares a container.

How Is Insurance Handled Across the Terms?

Only two of the seven terms oblige anyone to insure. Under CIF the seller must obtain cargo insurance at minimum cover for the buyer's benefit; under CIP the seller must obtain the higher level of cover the rules specify. Under every other term neither party is obliged to insure, and each insures its own exposure or takes the risk of not doing so. The word 'minimum' is where claims are lost: minimum cover is a named-perils level, not all-risks, and it excludes a great deal that happens to containers.

• Under FOB, FCA, EXW, CPT, DAP and DDP there is no insurance obligation on either side — cover is a commercial decision, and silence is a decision too.
• Under CIF the seller insures, but at the minimum level the rules set; ask for the clauses and the sum insured to be named on the proforma invoice.
• Under CIP the seller insures at the higher level the rules require, which is the closest the rules come to full cover.
• Cover is conventionally written at 110 per cent of the commercial invoice value, and a claim is settled against that figure rather than against replacement cost.
• War and strike cover is an extension, not a default. Ask for it by name on lanes where it is relevant.

The practical rule is short: whoever carries the risk should hold the policy, or should at least be named on it. Under CIF the buyer carries the risk from the loading port while the seller holds the policy, so ask for the certificate of insurance to be part of the document set rather than a favour granted after a claim.

Default term on this programme

FOB Xiamen (CIF / DDP available on request)

What the term does not settle

Title, payment schedule, or the tariff line on entry

Payment

T/T 30/70

MOQ

500 pcs per style / colourway

Sampling

6-10 working days (12-15 for complex builds)

Bulk production

35-50 days from sample approval

Inspection

AQL 2.5, ISO 2859-1, General Inspection Level II

Freight and duty figures

Quoted separately where the term bundles them; never assumed

Document set

Commercial invoice, packing list, bill of lading, certificate of insurance where applicable

Those figures sit on a quotation and a purchase order regardless of which term is chosen. The term decides who pays them, not what they are.

Why Must the Term Be Identical on Quotation, Proforma and Invoice?

Because three documents carry the same term into three different hands, and a mismatch is treated as a discrepancy rather than a typo. The quotation frames the price. The proforma invoice is what the buyer's bank, insurer and customs authority read first. The commercial invoice is what the customs authority assesses duty against. If the quotation says FOB Xiamen and the commercial invoice says CIF, the declared value now includes a freight and insurance component the entry does not account for, and the entry is wrong before anyone has checked a single carton.

• The term changes the customs value: some destinations add freight and insurance to the declared value, so a term that moves changes what duty is assessed on.
• The term changes the document set: a bill of lading, a certificate of insurance and a delivery note are expected under different terms.
• The term changes who the entry names: under DDP the seller appears as importer of record, which is a fact about the buyer's compliance record, not a formality.
• A mismatch between proforma and commercial invoice is a discrepancy a bank can refuse under a documentary credit.
• A mismatch inside one company is worse: the logistics team books on one term and finance pays against another.

So write the term once, in full, with the named place. 'FOB' alone is incomplete; 'FOB Xiamen' under the Incoterms 2020 rules is a term. Copy that exact string onto the quotation, the proforma invoice, the commercial invoice and the purchase order, and check it on the last one before the deposit moves.

What Should Be Written Into the Purchase Order?

Four lines. Name the term with its place and its rule set — FOB Xiamen, Incoterms 2020. Name the payment schedule separately, because the term does not carry it. Name the document set that must accompany the goods, including the certificate of insurance where a term requires one. And name who is the importer of record at the destination, because that party files the entry and carries the duty position.

The last of those costs nothing and prevents the most common failure on this subject. Most Incoterm disputes are not disagreements about what a term means. They are two documents on the same order naming two different terms, discovered after the goods have already sailed.

What Does the Decision Tool Return, and How Is It Read?

The panel above returns three things: the rule your five answers point at, one sentence saying which of those answers drove it, and a table of the five dimensions the rule moves — cost, the risk transfer point, who books the main carriage, who files the import entry, and who insures. It does not return a price, a transit time or a carrier, because none of those is decided by a delivery term.

Read it in that order. If the rule is the one already being quoted, the value is in the reasoning line, which names the fact that made it so — and a fact that changes on the next order changes the answer. If the rule is different from the one being quoted, the value is in the table, which shows what moves and what does not before anyone renegotiates a price.

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