Incoterms Explained: Who Pays for What in International Shipping?

If you’ve ever arranged an international shipment, you’ve probably come across terms like FOB, CIF, EXW, or DAP. It can certainly be overwhelming when faced with these terms. But these internationally recognised trade rules, when you understanjd the, are actually very useful, because they define who is responsible for what during the shipping process. They clarify who pays for transport, who arranges insurance, when the risk transfers from seller to buyer, and who’s responsible for customs clearance.

Choosing the wrong Incoterm can lead to unexpected costs, delays at customs, disputes with suppliers, or even goods sitting at a port while everyone argues over who’s supposed to pay the bill. For businesses across the South West of England, where manufacturers, wholesalers and importers rely on efficient international supply chains, understanding these rules can save both time and money.

In this guide, we’ll explain the most common Incoterms, show you who pays for what, and help you decide which terms might work best for your business. Whether you’re importing products from China, exporting machinery to Europe, or arranging regular freight movements around the world, understanding Incoterms is one of the smartest investments you can make.

What Are Incoterms?

Incoterms, is a short abbreviation for International Commercial Terms, and it refers to a standard set of rules created by the International Chamber of Commerce (ICC).

The ICC themselves were set up to introduce rules to make international trade simpler, given the potential difficulties that might otherwise be faced by buyers and sellers, given internationally.

You can imagine disagreements over who pays the shipping costs, who should pay for the insurance of the goods, or who needs to collect the goods for a warehouse. Incoterms help to clarify these considerations, and it does make freight forwarding significantly easier.

It can still be confusing, though, given the different types of Incoterms, but for a freight forwarder such as RSJ, where we use these terms daily, it makes the process a lot easier and more transparent.

For example, if a supplier quotes FOB Shanghai, both parties immediately know exactly where the seller’s responsibility ends and where the buyer’s begins.

Incoterms cover several important areas, including:

• Who arranges transport
• Who pays shipping costs
• Who is responsible for export customs clearance
• Who handles import customs procedures
• When the risk transfers from the seller to the buyer
• Whether insurance is included

What they don’t cover is equally important and worth understanding.

Incoterms do not decide who owns the goods, how payment should be made, or what happens if the products are faulty. They’re purely about the movement of goods and the responsibilities attached to that journey.

For UK businesses importing products from overseas or exporting goods around the world, choosing the correct Incoterm helps prevent misunderstandings and keeps shipments moving smoothly through the supply chain.

Why Incoterms Matter More Than You Might Think

It’s easy to overlook Incoterms, especially if you are not familiar with using them, but there are some easy mistakes you can make when it comes ot understanding the overall costs of freight forwarding.

Imagine, for example, that you are importing a container of products from Finland. Your supplier quotes what at first seems an attractive price using EXW (Ex Works). It looks like a bargain in that it is much cheaper than from other suppliers.

You then realise that you are responsible for collecting the goods from the supplier’s factory, you must arrange transport to the port, complete export customs procedures, pay ocean freight, organise insurance, handle UK customs clearance, pay duties and VAT, and arrange delivery to your warehouse.

You now realise that the cheap quote was cheap because of all the exclusions, i.e., the things you must pay for, and the quote no longer looks so attractive.

On the other hand, another supplier might quote DDP (Delivered Duty Paid). The initial price appears higher, but it includes virtually everything, meaning there are far fewer surprises along the way.

In trying to understand the best options when it comes to Incoterms, this is why it can sometimes be much easier to use a freight forwarder such as RSJ International.

RSJ International has decades of experience in Incoterms and regularly helps businesses across Bristol, Gloucestershire, and the wider South West understand exactly what they’re agreeing to before shipments leave the supplier’s premises. A quick conversation before booking freight can often prevent expensive misunderstandings later.

The Most Common Incoterms Explained

There are 11 official Incoterms, but the good news is that most UK businesses regularly come across just a handful of them.

Understanding these five main incoterms will put you in a good position when negotiating with overseas suppliers or arranging international shipments.

EXW (Ex Works)

Best for: Experienced importers who want complete control.

With Ex Works (EXW), the seller’s responsibility is minimal. The goods are available at their premises, whether that’s a factory, warehouse, or distribution centre.

From that point onwards, almost everything becomes the buyer’s responsibility.

This includes:

• Collecting the goods
• Inland transport to the port
• Export customs clearance
• International freight
• Insurance
• UK customs clearance
• Import duties and VAT
• Final delivery

While EXW often comes with a lower purchase price, it can quickly become expensive if you don’t have experience managing international logistics. It’s generally better suited to businesses with established freight arrangements rather than first-time importers.

FOB (Free On Board)

Best for: Most sea freight imports.

FOB is one of the most popular Incoterms for businesses importing goods into the UK by sea.

With Free On Board (FOB), the seller is responsible for getting the goods to the departure port, clearing them for export, and loading them safely onto the cargo ship.

Once the cargo is on board the ship, responsibility transfers to the buyer.

The buyer then pays for:

• Ocean freight
• Marine insurance (if required)
• UK customs clearance
• Import duty and VAT
• Delivery to the final destination

Many freight forwarders often recommend FOB because it gives buyers more control over shipping costs and allows them to choose their own trusted logistics partner.

CIF (Cost, Insurance and Freight)

Best for: Businesses wanting a simpler shipping arrangement.

With Cost, Insurance and Freight (CIF), the seller pays for transporting the goods to the destination port and provides basic marine insurance.

Do note, though, that although the seller pays for the freight, the risk transfers to the buyer once the goods have been loaded onto the ship at the port of origin.

That means if something happens during the voyage, responsibility can still rest with the buyer, even though the seller arranged the transport.

It’s one of the reasons why you should always read the shipping terms carefully rather than assuming the seller carries all the risk.

DAP (Delivered at Place)

Best for: Businesses wanting door-to-door delivery without customs included.

Under Delivered at Place (DAP), the seller arranges transport all the way to the agreed delivery address.

This could be your warehouse in Bristol, a manufacturing site in Gloucestershire, or anywhere else in the UK.

However, the buyer remains responsible for:

• Import customs clearance
• Import duties
• VAT
• Any customs inspections or related charges

DAP is popular because it removes much of the complexity of arranging international transport while still giving buyers control over their UK customs procedures.

DDP (Delivered Duty Paid)

Best for: Buyers looking for maximum convenience.

With Delivered Duty Paid (DDP), almost everything is handled by the seller.

They arrange:

• Collection
• Export customs
• International transport
• Import customs
• Duties and taxes
• Final delivery

The buyer simply receives the goods at the agreed destination.

While DDP sounds like the easiest option, it’s worth checking exactly what’s included in the price. Some overseas suppliers build significant margins into DDP shipments or may not fully understand UK customs requirements, potentially leading to unexpected delays.

For many UK businesses, especially those importing regularly, working with a freight forwarder and using FOB or DAP often provides greater transparency and better control over costs.

Knowing which Incoterm applies before you place an order can prevent costly misunderstandings later.

If you’re ever unsure, it’s always worth discussing the shipping terms with your freight forwarder before committing to a purchase.

A quick conversation at the start can save a lot of time, money, and frustration further down the line.

Which Incoterm Is Best for Your Business?

There isn’t a one-size-fits-all answer when it comes to choosing an Incoterm. The right option depends on your experience, the type of goods you’re shipping, where they’re coming from, and how much control you want over the logistics process.

If you’re new to importing, it can be tempting to choose whichever quote looks cheapest. However, the lowest product price doesn’t always mean the lowest overall cost. Some Incoterms place much more responsibility on the buyer, which can lead to unexpected transport charges, customs fees, or administrative headaches if you’re not prepared.

Here’s a simple way to think about it:

Choose EXW if…

• You have an experienced freight forwarder.
• You want complete control over the shipment.
• You regularly import goods and understand customs procedures.

Choose FOB if…

• You’re importing goods by sea.
• You’d like your supplier to handle export procedures.
• You want to choose your own freight forwarder and control shipping costs.

FOB is often the preferred option for UK businesses because it offers a good balance between convenience and cost control.

Choose CIF if…

• You’d like the supplier to arrange the sea freight.
• You’re comfortable with the level of insurance provided.
• You understand when responsibility transfers during the journey.

Choose DAP if…

• You want your supplier to organise most of the transport.
• You’re happy to deal with UK customs and import taxes yourself.
• You’d like goods delivered directly to your premises.

Choose DDP if…

• You want the simplest possible purchasing process.
• You’d rather receive a single all-inclusive price.
• You’re confident your supplier understands UK customs regulations.

Many businesses in Bristol, Exeter, Plymouth and across the South West find that FOB or DAP offer the best combination of flexibility and value, particularly when working with an experienced freight forwarder who can manage customs clearance and delivery within the UK.

The most important thing is understanding exactly what you’re agreeing to before placing an order. Spending a few minutes discussing Incoterms with your supplier can prevent costly surprises once your goods are on the move.

Common Incoterm Mistakes UK Businesses Make

• Assuming shipping insurance is always included.
• Not understanding when risk transfers.
• Accepting the supplier’s preferred Incoterm without questioning it.
• Confusing costs with responsibility.
• Not involving a freight forwarder until the goods have already shipped.