How to Choose Trade Terms: FOB, CIF, EXW, FCA, and DAP Explained

Trade Terms Are Part of the Quotation

When an overseas customer writes for a quote, the most common line is "Please quote FOB Kaohsiung" or "I want a CIF price." These abbreviations come from Incoterms®, published by the International Chamber of Commerce (ICC); most contracts today cite the 2020 edition. They divide the work between buyer and seller during transport into several stages: who delivers the machine to the port, who handles export customs clearance, who pays ocean freight, who buys insurance, and at what moment the buyer bears the risk of loss or damage.

Incoterms themselves aren't law; they're only binding when written into a contract or quotation. The standard format is "rule code + named place + edition," for example "FOB Kaohsiung Incoterms® 2020." Without the place or edition, disputes later are hard to resolve. Also remember that trade terms don't cover payment methods, transfer of ownership, or liability for breach; these must be written into the contract separately.

The 11 Rules of the 2020 Edition

Incoterms 2020 has 11 rules in two groups:

• For any mode of transport: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid).
• For sea and inland waterway transport only: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight), CIF (Cost, Insurance and Freight).

For exporting complete food machines, the most used are EXW, FOB, and CIF, and in recent years FCA and DAP have become increasingly common.

How EXW, FOB, and CIF Differ

Picture an encrusting machine shipped from a factory in Tainan:

EXW (Ex Works): The seller packs the machine and makes it available at its own factory for the buyer to collect, and its responsibility ends there. Loading, inland transport, export clearance, ocean freight, and insurance all fall to the buyer. Risk passes when the machine is placed at the buyer's disposal. The problem is export clearance: the buyer is usually abroad, yet someone still has to handle Taiwan's export procedures, so in practice it often ends up back with the seller or either side's customs broker, and the division of work easily becomes confused.

FOB (Free on Board): The seller is responsible for transporting the machine to the port of export, completing export clearance, and loading it onto the vessel nominated by the buyer. Risk passes to the buyer the moment the goods are "placed on board," and ocean freight and insurance are paid by the buyer. Exports from southern Taiwan are often quoted FOB Kaohsiung (Port of Kaohsiung).

CIF (Cost, Insurance and Freight): In addition to what's done under FOB, the seller books the vessel, pays ocean freight to the destination port, and buys cargo insurance on the buyer's behalf. The common misunderstanding: under CIF, risk passes at the same point as FOB, when the goods are loaded on board at the port of export. If something happens at sea, the buyer claims under the policy the seller bought. Incoterms 2020 requires only minimum cover for CIF (Institute Cargo Clauses C), with an insured amount of at least 110% of the contract price; if more comprehensive cover is wanted, the parties must agree on additional cover in the contract.

FCA, DAP, and DDP

FCA (Free Carrier): The seller hands the goods to the carrier nominated by the buyer at the agreed place (its own factory or a container yard) and completes export clearance. Machines are mostly exported in containers, which are handed over at the container yard, not at the ship's rail, so the ICC also recommends using FCA instead of FOB for container transport. The 2020 edition also allows the parties to agree that the buyer will instruct the carrier to issue an on-board bill of lading to the seller, making letter of credit negotiation easier.

DAP (Delivered at Place): The seller delivers the goods to the named place in the buyer's country (for example, the customer's factory gate), and delivery is complete before unloading. Import clearance and duties are handled by the buyer.

DDP (Delivered Duty Paid): The seller also takes care of import clearance, duties, and import taxes. It's the easiest for the buyer and the riskiest for the seller, since the seller must know the importing country's tax system and procedures; it's mostly used only when the seller has a local partner.

How to Choose When Quoting

• The buyer has its own freight forwarder or freight contract: Use FOB or FCA and let the buyer negotiate freight itself; it's simpler for both sides.
• A small customer importing a machine for the first time, with no forwarder: Use CIF or CFR, where the seller helps book shipping and the customer feels more secure; but remind the customer that risk has already passed at the port of export.
• The customer wants a single delivered-to-factory price: Use DAP, with import duties handled by the customer; only accept DDP if you're very sure of the importing country's procedures.
• Avoid EXW where possible: Responsibility for export clearance becomes unclear, unless the buyer has an agent or customs broker in Taiwan.

Whichever you choose, the quotation should clearly state the named port or place, the Incoterms edition, the packing method (for example, an export wooden crate), and whether installation, test runs, and training are included in the price. Installation and training are outside the scope of Incoterms and must be specified separately.

For Dong-Yih Machinery's export quotation practices and usual terms, please call 06-257-4644 or reach us through our contact information page. For the complete export process, see An Overview of the Machinery Export Process.

FAQ

Q: Should we quote FOB or CIF?
A: If the buyer has its own forwarder and wants to negotiate freight, use FOB or FCA; if the buyer has no export experience and wants the seller to arrange shipping, use CIF or CFR. Both have the same risk transfer point; the difference is who arranges ocean freight and insurance.

Q: Under CIF, doesn't the seller buy the insurance? Why does the buyer have to claim when something happens at sea?
A: Under CIF, risk passes to the buyer when the goods are loaded on board at the port of export; the seller only buys the insurance on the buyer's behalf. The buyer is the beneficiary of the policy and claims against the insurer if something happens at sea.

Q: When does risk pass under FOB?
A: The moment the machine is placed on board the vessel at the port of export. Damage before that (from the factory to the dock, before loading) is the seller's responsibility.

Q: Do we have to state the Incoterms year?
A: It's strongly recommended, for example "FOB Kaohsiung Incoterms® 2020." Older editions can still be cited, and omitting the year easily leads to disputes over the content of the rules.

Q: Are installation and training costs included in CIF?
A: No. Incoterms only cover the division of delivery, transport, insurance, and customs clearance; installation, test runs, and training must be agreed separately in the contract.