Incoterms 2020: EXW vs. FOB for First-Time Importers

Executive Summary: Incoterms determine three things: Who pays for shipping? Who handles the risk? When does ownership transfer? For new importers, the choice is usually between EXW (Ex Works) and FOB (Free On Board). Choosing the wrong one can lead to surprise “local charges” that double your shipping cost.

EXW (Ex Works): Maximum Responsibility

• Definition: The seller just puts the goods on their loading dock. You (the buyer) must arrange the truck to pick it up, clear Chinese export customs, and ship it.
• Pros: The unit price on the invoice looks lower.
• Cons: You have to manage Chinese customs. If the factory doesn’t have an export license (common for small shops), you have to pay an agent to “buy” the license.

FOB (Free On Board): The Balanced Standard

• Definition: The seller trucks the goods to the port (e.g., Shenzhen) and handles export customs. Risk transfers to you once the goods are “on board” the ship.
• Pros: The factory handles the messy local logistics in China. You only worry about the ocean freight.
• Cons: Slightly higher unit price (to cover their trucking costs).

The Hidden Cost of EXW

New buyers choose EXW because the price is cheaper.

• Scenario: You buy EXW. Your freight forwarder picks up the goods.
• Surprise: The forwarder bills you for “Origin Charges” (Trucking + CFS Fees + Doc Fees + Export Declaration). These often amount to $300-$500, wiping out your savings.
• Rule: Factories can truck goods cheaper than your US forwarder can arrange it. Let the factory do it (FOB).

Why FOB is Safer for Taxes

Most countries charge import duty on the FOB value (Cost of goods + cost to get to the port).

If you buy CIF (Cost Insurance Freight), the invoice total is higher, and you might accidentally pay duty on the shipping cost if your broker isn’t careful separating the line items. FOB keeps the product cost clear.

Checklist: Choosing Your Term

• LCL Shipment: Use FOB. Avoiding local “CFS” fees is worth it.
• Small Courier (FedEx): Use EXW or DAP. The courier picks it up anyway.
• Full Container (FCL): FOB is standard.

Supplier has no Export License: You must use EXW and hire an agent to export it.

FAQ

Q1: What is DDP (Delivered Duty Paid)?

A: The “Amazon FBA” favorite. The seller does everything, including paying your taxes. Easy, but you lose control and often pay a hidden premium.

Q2: Who pays for insurance?

A: Neither EXW nor FOB includes insurance. You must buy it separately. (That would be CIF).

Q3: Can I switch from EXW to FOB mid-order?

A: Yes, but the factory will ask for a price increase to cover the trucking to the port.

Key Takeaways

• Default to FOB: It is the cleanest hand-off point.
• Compare Apples to Apples: Do not compare an EXW quote to an FOB quote directly. Add local transport costs to the EXW price.

Control the Freight: Avoid CIF (where the supplier hires the ship). They will use the cheapest, slowest vessel. With FOB, you choose the forwarder.