When a factory in China sends you a quote, the price usually comes with three letters after it: EXW, FOB, CIF or DDP. Those letters are Incoterms, and they decide two things that matter a lot to a new importer: who pays for each part of the journey, and where the risk passes from the seller to you. Two quotes for the same product can look very different simply because they use different terms. Here’s how to read them and pick the one that suits a first order to New Zealand or the Pacific.
What Incoterms are (and aren’t)
Incoterms are a set of eleven three-letter trade terms published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020, which came into force on 1 January 2020. Source: ICC
They tell you who arranges and pays for transport, loading, insurance and customs formalities, and at what point the goods become your risk. They don’t set the price, they don’t transfer ownership, and they don’t replace a proper purchase agreement. Always write the term and a named place on your order, for example “FOB Ningbo” or “EXW factory, Foshan”, plus “Incoterms 2020”.
The four terms you’ll see most from Chinese factories
EXW (Ex Works)
The factory makes the goods available at its own door. Everything after that is on you: pick-up, export clearance in China, the sea freight, insurance and the NZ side. EXW quotes often look the cheapest, but you’ll need a forwarder in China who can collect from the factory and handle export paperwork.
FOB (Free On Board)
The factory delivers the goods, cleared for export, on board the ship at the named Chinese port. From that point the risk is yours, and you (through your freight forwarder) arrange and pay the ocean freight, insurance and everything in New Zealand. FOB is the term I’d suggest most small importers start with: the factory handles the China side it knows best, and you keep control of the freight, so you can compare forwarder quotes and know exactly what you’re paying to get the goods home.
CIF (Cost, Insurance and Freight)
The factory books and pays the sea freight and minimum insurance to the NZ port. The catch: the risk still passes to you once the goods are loaded in China, even though the seller chose the ship. You also don’t control the freight, so destination charges at the NZ end can be a surprise. If you accept CIF, ask the seller for a written breakdown of the goods price, the freight and the insurance. You’ll need it for customs (more on that below).
DDP (Delivered Duty Paid)
The seller takes on everything, including import clearance and paying duty and GST in the destination country. On paper it’s hands-off. In practice, check carefully who is acting as the importer in New Zealand, whose name goes on the import entry and who can claim back the import GST. If you’re GST-registered, talk to your accountant before agreeing to DDP so you don’t lose a GST claim you’d otherwise be entitled to.
The other seven rules (FCA, CPT, CIP, DAP, DPU, FAS and CFR) are less common on factory quotes but worth knowing exist. One worth a closer look is FCA (Free Carrier). Strictly speaking, FOB, CFR and CIF are designed for goods loaded onto a ship, and the ICC’s guidance points to FCA, CPT or CIP for goods handed over in containers at a terminal. Many Chinese factories still quote FOB for container shipments, so if you want the terms to match how your goods actually move, ask your forwarder whether FCA makes more sense for your order. The ICC publishes free guidance on all eleven. Source: ICC
How your Incoterm affects NZ Customs value, duty and GST
This is where Incoterms meet New Zealand rules. NZ Customs values imported goods on a basis that includes transport and handling costs up to the point the goods leave the exporting country, while international transport and insurance after that point can be deducted if they’re shown separately from the price. Source: NZ Customs
- Bought EXW? Costs to get the goods from the factory onto the ship generally form part of the Customs value, so make sure your forwarder’s China-side charges are captured.
- Bought CIF? Customs asks for the goods value to be determined separately and the freight and insurance entered in their own fields. If you can’t get a breakdown, there are fallback options, but Customs says they shouldn’t be the default. Source: NZ Customs
- Paid in USD or CNY? The Customs value must be in NZ dollars and is converted using Customs’ published rates on the day the import entry is lodged. Source: NZ Customs
Then GST. NZ Customs calculates GST on imports at 15% on the Customs value, plus any Customs duty, plus your shipping and insurance costs. Source: NZ Customs So even when freight is left out of the Customs value, it still counts for GST. Build that into your landed cost from day one.
Which term should you choose for your first order?
- Default to FOB for sea freight from China. You get a clean factory price, the factory handles export, and you choose your forwarder.
- Use EXW only if you already have a forwarder in China who collects from factories and handles export clearance, or if you’re consolidating goods from several suppliers.
- Be careful with CIF and DDP on a first order. They can hide freight margins and make it harder to see your real costs. If you do use them, get every cost itemised in writing.
- Compare like with like. Before choosing between two suppliers, convert both quotes to the same basis (e.g. both FOB) so you’re not comparing a factory-door price with a delivered price.
Shipping to the Pacific Islands
The same Incoterms apply if your goods are going to Fiji, Tonga or the Cook Islands, but customs valuation, duty and VAT rules are set by each country, not by NZ Customs. Check with the local customs authority or a broker in the destination country before you agree on terms, especially before accepting DDP.
A quick checklist before you sign
- Incoterm, named place and “Incoterms 2020” written on the proforma invoice and purchase order
- Goods price, freight and insurance shown as separate lines
- Currency agreed and payment terms clear
- Your freight forwarder or customs broker lined up before the goods are ready
- NZ paperwork sorted: see 5 things to sort before your first shipment
New to importing? Start with my beginner’s guide to importing from China to NZ, grab the free First Import Checklist, or see the full start-to-finish service.
This article is general information, not legal, tax or customs advice. Rules change, so always check the official sources linked above or talk to a licensed customs broker or your accountant for your situation.
Not sure which quote is the better deal?
Send me the factory quotes you’ve got and I’ll help you put them on the same basis and work out the landed cost per unit before you pay. Your first chat is free, or book an Import Check (see pricing).