When a buyer and seller agree on a price for international goods, they are also agreeing on something most people underestimate: who is responsible for the shipment at every stage, who pays for freight and insurance, and exactly where the risk passes from one party to the other.
That agreement is captured in a single term written on your commercial invoice. FOB Mumbai. CIF Hamburg. EXW Pune. Three letters followed by a named location, and everything that matters in a trade transaction is encoded in that phrase.
These are Incoterms, International Commercial Terms published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020, which came into effect on January 1, 2020, and it is the standard against which all current international trade contracts should be written. The Incoterms 2020 set includes 11 rules in total, each one defining a precise allocation of costs, risks, and responsibilities between buyer and seller.
Most exporters work with three of them more than any others. FOB, CIF, and EXW. This guide explains exactly what each one means, what it costs you in practice, which documents it affects, and when you should and should not use it.
Why Incoterms Matter More Than Most First-Time Exporters Realise
The term you choose affects four things that directly determine your shipment costs and your exposure:
Who arranges and pays for the main freight.
Who arranges and pays for cargo insurance.
At what point the risk of loss or damage transfers from seller to buyer.
Who handles export and import customs clearance.
Choose the wrong term and you can end up responsible for costs you did not budget for, liable for damage that happens during transit you thought the buyer was covering, or unable to present the correct documents to your bank under a Letter of Credit.
Incoterms clarify who pays for freight, insurance, customs, and where risk transfers. Choosing the right Incoterm is essential to avoid hidden costs, budget accurately, and negotiate fair international contracts.
Getting this right is not optional. Incoterms must appear on all commercial documents. The term you agree on needs to be written consistently on your proforma invoice, your commercial invoice, and your Letter of Credit. If you are still building your understanding of the documents these terms appear on, our complete guide to documents required for international export covers the full checklist for first-time exporters.
The Three Incoterms Every Exporter Needs to Understand
FOB: Free On Board
Full name: Free On Board (insert named port of loading)
Mode of transport: Sea and inland waterway only.
Under the Incoterms 2020 rules, FOB means the seller has fulfilled their obligation when the goods are loaded on the vessel nominated by the buyer at the named port of shipment. With FOB, the seller is responsible for loading the goods on the transport, while the buyer is responsible for everything else necessary to get the goods to the final destination. The risk or liability for the goods transfers from the seller to the buyer when the goods are on board the vessel, and the buyer bears costs from that point forward.
In plain terms: the seller packs the goods, arranges inland transport to the port, handles export clearance, and loads the goods onto the vessel. The moment the goods are on board, everything that happens next, freight costs, insurance, and the risk of damage or loss, belongs to the buyer.
What the seller pays for under FOB: Inland transport to the port of loading. Export customs clearance and any export duties. Port handling and loading charges at the origin port.
What the buyer pays for under FOB: The main ocean freight from the port of loading to destination. Cargo insurance (if the buyer chooses to arrange it). Import duties, taxes, and customs clearance at destination. Unloading and inland delivery from the destination port.
What FOB means for your documents: Because risk transfers at the point of loading, the Bill of Lading is the critical document confirming that handover has taken place. It must be presented correctly for any Letter of Credit transaction. The seller's commercial invoice must state the FOB price, which includes the cost of goods plus all charges up to and including loading.
When FOB works well: FOB is widely used in Indian export trade, particularly for commodities and bulk goods where the seller has direct access to the vessel for loading. It works cleanly when the buyer has an established freight relationship and wants to control their own shipping costs.
When FOB creates complications: Because goods are more often delivered to container terminals, not to a point where they can be directly loaded, another Incoterm like Free Carrier (FCA) may be more appropriate for containerized shipments. Under FOB, risk technically transfers when goods are on board the vessel, but containers are handed over to the terminal operator before loading. This gap creates a period where neither party clearly holds the risk, which is exactly why the ICC recommends FCA for container shipments.
A note on FOB in the US domestic context: In the US, FOB is often used in domestic transactions to indicate whether the seller or buyer is responsible for freight costs and risk at a certain location, commonly labelled FOB Origin or FOB Destination. However, the Incoterm FOB in international trade is specifically for sea or inland waterway transport. US companies new to exporting sometimes confuse these terms, so it is essential to specify that you are using Incoterms 2020 for international transactions to avoid misunderstandings.
CIF: Cost, Insurance and Freight
Full name: Cost, Insurance and Freight (insert named port of destination)
Mode of transport: Sea and inland waterway only.
Cost, Insurance and Freight means the seller is responsible for loading the properly packaged goods on board the vessel they have nominated. The seller also bears the cost of freight and insurance to the named port of destination and is required to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses.
In plain terms: the seller arranges and pays for everything up to and including the cost of getting the goods to the destination port, plus the minimum required insurance cover. However, despite paying for freight and insurance to the destination, the risk of loss or damage transfers to the buyer at the port of loading, not the destination port.
This is the part that catches many first-time exporters off guard. Under CIF, the seller pays for freight and insurance to Hamburg, but if the goods are damaged after they leave Mumbai, the financial loss falls on the buyer, not the seller. The seller's insurance covers the buyer's risk during transit, but the buyer holds that risk.
What the seller pays for under CIF: Inland transport to the port of loading. Export customs clearance and export duties. Port handling and loading at the origin port. Main ocean freight to the named destination port. Minimum cargo insurance to the destination port (Institute Cargo Clauses C).
What the buyer pays for under CIF: Import duties, taxes, and customs clearance at destination. Unloading at the destination port. Inland delivery from destination port to final location. Any additional insurance above the minimum the seller is required to arrange.
What CIF means for your documents: The seller must provide the buyer with the insurance certificate or policy document alongside the Bill of Lading and commercial invoice. Under a Letter of Credit, CIF works well because the seller controls the shipping arrangement and can provide the required transport documents to the bank directly.
The Incoterms 2020 rules provide for different levels of insurance coverage. The CIF rule, which is reserved for use in maritime trade and often used in commodity trading, requires the Institute Cargo Clauses (C) as the default level of coverage, giving parties the option to agree to a higher level of insurance cover.
When CIF works well: CIF is common in commodity trading and transactions where the buyer prefers a single landed price at their destination port, making budgeting and import planning straightforward. Many buyers in emerging markets prefer CIF because it removes the complexity of arranging international freight from their end.
When CIF creates complications: Like FOB, CIF is best used in situations where sellers have direct access to the vessel for loading, meaning bulk cargo or non-containerized goods. For most exports involving containers, Carriage Paid To (CPT) might be a better choice. The minimum insurance level under CIF (Institute Cargo Clauses C) only covers a limited range of risks. Buyers receiving goods under CIF should understand exactly what that coverage includes and whether they need additional cover for their specific cargo.
EXW: Ex Works
Full name: Ex Works (insert named place of delivery)
Mode of transport: Any mode, but with significant practical limitations for international use.
Under EXW, the seller makes the goods available at a specified location. This location may be the seller's premises or another designated site such as an off-site manufacturing facility or a logistics warehouse. The goods are considered delivered when the seller makes them available and notifies the buyer. At this point, the buyer assumes both the cost and the risk.
In plain terms: EXW places the maximum responsibility on the buyer and the minimum on the seller. The seller's only obligation is to have the goods ready and available at their premises. The buyer arranges everything else, pickup, inland transport, export clearance, loading, freight, insurance, and import clearance at the other end.
What the seller is responsible for under EXW: Making the goods available at the named location. Packaging the goods appropriately. Notifying the buyer that the goods are ready.
What the buyer is responsible for under EXW: Everything else. Loading at the seller's premises, inland transport to the port, export customs clearance and export duties, loading onto the vessel, ocean freight, cargo insurance, import duties, and final delivery.
What EXW means for your documents: Because the seller has no export clearance obligation under EXW, the export documentation responsibility sits almost entirely with the buyer. The commercial invoice shows an EXW price, which is essentially the price of the goods alone with no logistics costs included.
When EXW is used: EXW is commonly used as the basis for an initial price quotation, because it allows a seller to quote the cost of goods without building in any freight or logistics variables they cannot control. It is also used for domestic transactions where the buyer and seller are in the same country and the buyer is simply collecting from the seller's premises.
The important limitation for international use: The International Chamber of Commerce recommends using EXW only for domestic shipments, as the seller has no obligation to handle customs clearance for export. This creates a practical problem for international trade: the seller, who is physically present in the country of export, has no obligation to assist with export clearance, while the foreign buyer, who may have no legal standing or registered entity in the origin country, is the one required to complete it. In practice, using EXW as described in Incoterms 2020 is almost impossible for international shipments. Most international buyers using EXW instruct a local freight forwarder in the seller's country to handle export clearance on their behalf.
FOB vs CIF: The Practical Difference
This comparison matters because exporters and buyers frequently negotiate between FOB and CIF, and the choice affects both pricing and risk exposure significantly.
Under FOB, the buyer controls the freight arrangement. They choose the shipping line, negotiate their own freight rate, and decide on their own insurance cover. The seller quotes a lower price because their obligation ends at the port of loading.
Under CIF, the seller controls the freight arrangement. They choose the carrier and arrange the minimum required insurance. The buyer pays a higher invoice price because freight and insurance are included, but they have less control over how their goods are shipped.
From a risk perspective, both terms transfer risk to the buyer at the same point: when the goods are loaded on board the vessel at the port of loading. The difference is only in who pays for what happens after that point.
The main difference lies in who pays for freight and insurance. Under FOB, the buyer pays for the main transport and assumes all risk once goods are on board. Under CIF, the seller pays freight and minimum insurance to the port of destination, but the risk still transfers to the buyer at the port of export.
How Incoterms Appear on Your Export Documents
Every Incoterm must be written with the named location immediately after the three-letter code, and the version year should be specified. The correct formats are:
FOB Mumbai, Incoterms 2020. CIF Hamburg, Incoterms 2020. EXW Pune, Incoterms 2020.
Incoterms must always include the named place or port after the three-letter abbreviation. Writing "FOB" without a named port is incomplete and creates ambiguity that can become a dispute if something goes wrong during transit.
The Incoterm must appear consistently on the proforma invoice, the commercial invoice, and in the Letter of Credit if payment is being made on that basis. A mismatch between the term stated in the sales contract and the term on the commercial invoice is one of the most common causes of Letter of Credit discrepancies on first presentation.
For a full breakdown of which documents your shipment needs and how the Incoterm you choose affects each one, see our complete guide to documents required for international export.
A Note on FOB and CIF for Container Shipments
The ICC's own guidance consistently recommends FCA (Free Carrier) over FOB for containerized goods, and CIP (Carriage and Insurance Paid To) over CIF for the same reason. Despite this, FOB and CIF remain the most commonly used terms in Indian export trade and across many Asian markets, particularly where buyers and sellers are accustomed to them and where Letters of Credit are the primary payment method.
If you are exporting containerized goods and your buyer insists on FOB terms, you are not in an unusual position. Practically speaking, many exporters and freight forwarders have worked out how to manage the gap between when the container is handed to the terminal operator and when it is officially "on board." The important thing is that both parties understand where the practical risk handover happens, regardless of what the term technically states.
Frequently Asked Questions
What does FOB mean in international trade?
FOB stands for Free On Board. Under Incoterms 2020, it means the seller's obligation is fulfilled when the goods are loaded onto the vessel at the named port of shipment. From that point, the buyer is responsible for freight costs, insurance, and the risk of loss or damage during transit. FOB is used only for sea and inland waterway transport.
What is the difference between FOB and CIF?
Both FOB and CIF are used for sea transport, and both transfer risk to the buyer when goods are loaded on board the vessel at the port of export. The difference is in who pays for freight and insurance to the destination. Under FOB, the buyer arranges and pays for both. Under CIF, the seller pays for freight and minimum insurance to the named destination port, but the risk still transfers to the buyer at the origin port.
What does EXW mean?
EXW stands for Ex Works. It places the minimum obligation on the seller. The seller makes the goods available at their premises and the buyer is responsible for everything from that point, including loading, export clearance, freight, and import clearance. The ICC recommends EXW only for domestic transactions because it creates practical difficulties for international export, as the foreign buyer has no legal standing to complete export customs in the seller's country.
Which Incoterm is best for an Indian exporter?
There is no single best term. FOB is the most commonly used in Indian export trade and works well for bulk or break-bulk cargo where the seller has direct vessel access. For containerized goods, FCA is technically more appropriate. CIF is common when buyers want a landed price at their destination port. The right term depends on your product, your buyer's preference, and how the transaction is being financed.
Do Incoterms determine who pays import duties?
Yes, indirectly. Most Incoterms place import duties, taxes, and customs clearance on the buyer, as the buyer is the importer of record at the destination. The exception is DDP (Delivered Duty Paid), where the seller takes responsibility for all costs including import duties and delivery to the buyer's premises.
Which Incoterms can be used for air freight?
FOB, CIF, CFR, and FAS are for sea and inland waterway transport only. For air freight, you should use FCA, CPT, CIP, DAP, DPU, or DDP, all of which apply to any mode of transport including air.
Where do Incoterms appear on export documents?
Incoterms must be stated on the commercial invoice and should be included in the proforma invoice, the sales contract, and the Letter of Credit where applicable. The format is always the three-letter code followed by the named location and the version year: FOB Mumbai, Incoterms 2020.
Ready to generate export documents with the correct Incoterm pre-filled across every field? Start your free trial at freightnaut.com