EXW: Ex Works – The Low-Price Trap With Hidden Risks
EXW (Ex Works) may appear attractive with its minimal seller responsibility – you simply prepare goods at your factory while the buyer handles all transportation, customs clearance, and insurance. Many new exporters are tempted by EXW's lower quoted prices, believing it will attract more clients. However, this term carries significant hidden liabilities.
Case Study:
A machinery company in Qingdao agreed to EXW terms with a Turkish client. The buyer's freight forwarder collected the goods without verifying the wooden crates met export standards (Turkey requires IPPC-certified fumigation for wood packaging). When customs detained the shipment in Istanbul, the buyer demanded the seller cover $5,000 in port fees and fumigation costs – despite EXW clearly placing this responsibility on the buyer.
Price Analysis:
EXW prices typically appear 5%-8% cheaper than FOB by excluding domestic transport and customs fees. For example, where FOB Shanghai might cost $1,000/40HQ container, EXW could show $920-950. But these "savings" simply shift costs to the buyer, who must pay for trucking (¥1,200-1,500 from Qingdao to Huangdao Port), customs clearance (¥300-500), and terminal handling charges (¥800-1,200).
Protection Strategies:
- Specify packaging standards and collection timelines in contracts
- Obtain written buyer confirmation of understanding import requirements
- Proactively share export documentation tips to demonstrate professionalism
FOB: Free On Board – The Most Common Term With the Most Traps
FOB (Free On Board) dominates international shipping agreements. Under FOB, sellers deliver goods to the port and load them onto the vessel (risk transfers at ship's rail), while buyers arrange shipping and insurance. Its familiarity often leads to dangerous complacency.
Pitfall 1: Buyer-Appointed Forwarder Issues
Some unscrupulous forwarders selected by buyers use slow vessels or unnecessary transshipments to cut costs, causing severe delays.
Case Study:
A Shenzhen electronics manufacturer shipped FOB from Yantian to Germany. The buyer's forwarder promised 25-day transit but used a Singapore transshipment, arriving 17 days late. The client demanded €8,000 compensation for production disruptions – though FOB terms made this the buyer's responsibility.
Pitfall 2: Hidden Domestic Charges
FOB quotes often obscure "local charges" like trucking (¥1,200-1,500), customs fees (¥300-500), THC (¥800-1,200), and documentation. Dishonest forwarders may sneak in illegitimate charges like "crane fees" (¥500) for standard containers.
Market Rates:
- US West Coast: $900-1,100/20GP, $1,500-1,800/40HQ (20-25 days)
- Europe: $1,200-1,400/20GP, $1,800-2,200/40HQ (28-35 days)
Protection Strategies:
- Work with reputable forwarders
- Itemize all domestic charges in quotes
- Monitor vessel routing and transshipments
- Document loading with photos/video
CFR: Cost and Freight – The Critical Notification Requirement
CFR (Cost and Freight) adds ocean freight to seller responsibilities (vs FOB), though risk still transfers at loading port. Many overlook the vital "timely notice" obligation.
Case Study:
A Guangzhou furniture exporter failed to promptly notify the Australian buyer of shipment details. The delayed customs arrangement caused AU$750 in port demurrage – payable by the seller under Incoterms rules for notification lapses.
Price Structure:
CFR = FOB + freight. Example: $1,200 FOB Guangzhou + $1,300 Sydney freight = $2,500 CFR. Confirm "ALL IN" rates to avoid later surcharges like BAF (10-15% of freight).
Protection Strategies:
- Immediately transmit shipping particulars post-loading
- Require all-inclusive freight quotes
- Research destination port charges for buyer awareness
CIF: Cost, Insurance and Freight – Don't Skimp on Coverage
CIF (Cost, Insurance, Freight) requires sellers to insure goods, but standard FPA (Free From Particular Average) coverage proves dangerously limited.
Insurance Gap:
FPA only covers total loss from natural disasters or partial loss from accidents – excluding water damage, theft, or shortage. High-risk goods need All Risks coverage (0.2-0.3% of value).
Case Study:
A Ningbo lighting company shipped CIF to France with FPA insurance. Container leaks caused $20,000 in water damage – uncovered by FPA. The buyer successfully claimed from the seller.
Price Reference:
CIF = CFR + insurance. Example: $2,800 CFR Hamburg + $150 FPA (for $150,000 goods) = $2,950 CIF. Transit times match CFR terms.
Protection Strategies:
- Understand different coverage levels
- Specify insurance type in contracts
- Maintain complete documentation
DAP: Delivered At Place – Mind the Last-Mile Costs
DAP (Delivered At Place) requires sellers to deliver goods to buyer's location (excluding unloading/import duties). Inland destinations often surprise with unexpected charges.
Case Study:
A Shanghai auto parts supplier quoted DAP Warsaw without accounting for €800-1,000 trucking from Gdansk port (300km) and €500 customs fees – eroding €1,500 in profits.
Price Reference:
DAP typically exceeds FOB by 20-25%. Example: $1,500 FOB Shanghai becomes $1,800 DAP Hamburg or $2,200-2,400 DAP Munich (40-45 days transit).
Protection Strategies:
- Research all destination charges
- Partner with experienced local logistics providers
- Clarify unloading arrangements upfront
DDP: Delivered Duty Paid – Calculate Every Cent
DDP (Delivered Duty Paid) imposes maximum seller responsibility – including import duties and final delivery. Precise cost calculation is essential.
Tariff Warning:
Rates vary drastically: US electronics (2.5%), EU textiles (9.7%), Turkish machinery (15%). Misclassification can be costly.
Case Study:
A Yiwu toy exporter budgeted 3% US duty, but customs reclassified the battery-operated items as "electronic toys" at 6.5% – adding $1,750 (¥12,000) to costs.
Price Reference:
DDP usually runs 30-40% above FOB. Example: $1,000 FOB Ningbo/20GP becomes $1,300-1,400 DDP Los Angeles (including $500 duty, $300 clearance). Transit: 30-35 days.
Protection Strategies:
- Verify exact tariff classifications
- Study destination country regulations
- Engage reliable customs brokers
Conclusion: Knowledge Is Power in Global Trade
These shipping terms (EXW, FOB, CFR, CIF, DAP, DDP) form the contractual "map" of trade responsibilities. Understanding them prevents forwarder deception ("hidden FOB charges"), unjustified claims ("FOB buyers demanding port fees"), and uninsured losses ("CIF with inadequate coverage").
When you can authoritatively state "This cost is the buyer's responsibility under FOB" or "Risk transferred at ship's rail," potential disputes evaporate.
Final Recommendations:
- Specify exact Incoterms and locations (e.g., "FOB Shanghai Port") in contracts
- Attach detailed cost breakdowns covering all charges
These two steps prevent 90% of disputes. Mastering trade terms isn't theoretical – it's practical armor for protecting profits in international commerce.