The following articles are very helpful for newcomers to international trade and e-commerce rookies because Incoterms has so many trade terms that it is really difficult to make a choice.

 

The content of this blog contains many details about FOB shipping and answered what is FOB? In particular, it introduces in detail many inland and local costs attributions of FOB in actual operation.

 

FOB Ho Chi Minh, FOB Ningbo, and FOB Bangkok usually appear in international trade and freight. These are the trade methods agreed with sellers when buyers import goods from Vietnam, China, and Thailand. Most of the international trade in the world is conducted on a FOB basis.

 

Because different countries, different regions, buyers, and sellers have very different cultures, and trading habits, it is very important to choose the right Incoterms that are beneficial to your business. Fob is currently the most popular and efficient incoterms in the world.

 

Especially after COVID-19, the advantages of FOB terms have become more obvious.

 

The following questions are the most frequently asked questions by buyers and sellers in B2B and B2C international trade. We have summarized them as below:

 

What does FOB exactly mean?

What is the significance of the “FOB value of goods”?

What does the term FOB mean for export?

What is FOB shipping?

What are the FOB shipping point and FOB destinations?

What is the difference between CIF and FOB?

Who is responsible if your goods are damaged during shipping under Fob Term?

How does Incoterms® 2020-ICC describe FOB terms?

What Does Free or Freight On Board (FOB) Mean?

What is Free On Board (FOB) Definition?

 

What is FOB shipping and what is the definition of Free on board (FOB)?

 

FOB Term is one of the commonly used trade terms in international trade, and it is a commonly used price clause in international trade contracts. The full text of FOB is Free On Board (…named port of shipment), that is, delivery on board (designated port of shipment), which is customarily called delivery on board at the port of shipment.

 

FOB is also called “free onboard price”. According to the FOB transaction, the buyer is responsible for dispatching to receive the goods. The seller shall load the goods on the vessel designated by the buyer at the port of shipment and within the time limit specified in the contract, and notify the buyer in time.

 

With the ship’s rail as the dividing line, the goods are in After crossing the ship’s rail during shipment, the risk assumed is transferred from the seller to the buyer.

 

Fob shipping is to uses FOB terms to determine the delivery method of logistics in international trade. Keep reading the following content will answer why FOB shipping is the best method of logistics delivery under the COVID-19 situation.

 

 

Overview of FOB term:

 

In 2011, there is no longer the concept of “ship’s side”. In other words, in the original interpretation of FOB, CFR, and CIF terms, the concept of “ship’s side” was deleted and replaced by “placed on board”. Previously, the seller assumes all risks until the goods cross the ship’s rail. Under the new terminology, it is changed to “the seller assumes all risks until the goods are loaded on the ship, and the buyer assumes all risks after the goods are shipped from the port of departure.”

 

FOB advantages:

 

1 Sea freight and air freight are very transparent. Importers can get the latest, most punctual, and timely freight even if they change every week. Compared with CIF’s shipping freight, importers cannot truly understand the real shipping cost in CIF per unit price.

 

2 All export declaration documents, permits, and certificates of origin at the port of departure are provided by the shipper

 

3 All local fees and all additional costs incurred at the port of departure are borne by the factory or the shipper.

 

4 By choosing your own FOB forwarder, buyers can understand the progress of the goods faster, the latest prices, the most favorable prices, fast communication, and efficient logistics operations. Better control of its own international logistics links, the premise is to find a reliable FOB freight forwarder. When you ship from China or another country.

 

 

What are the risks and costs of the buyer and seller under the Fob Term? What are the key factors that need to be considered?

 

The cost and risk the seller needs to bear for the FOB shipping situation:

 

Under FOB conditions, the seller has to bear the risks and expenses, obtain an export license or other official documents, and be responsible for handling export procedures. Pay all local expenses incurred at the port of departure until the goods are safely on board.

 

So under the FOB terms, what are the local fees at the port of departure?

 

Here we assume that shipping from China is an example, of course, there will be some slight differences in local charges for different Chinese departure ports.

 

Shipping by sea freight :

 

There are two common shipping methods, FCL and LCL. Then the local cost of the port of departure in FOB includes:

(1)Processing and finishing costs;

 

(2)Packing costs in the factory;

 

(3) The cost of storage of goods in the factory (storage/rental, fire insurance, etc.);

 

The above three items are usually included in the FOB unit price of the product when the factory provides the FOB price quotation.

 

Domestic transportation costs, there are usually two situations:

1)Transport from the factory to the warehouse designated by the carrier (Fob freight forwarder), which is the LTL method. Usually, the goods enter the warehouse will incur a warehouse fee.

 

2) Transportation from the factory to the dock designated by the carrier (Fob freight forwarder), that is, the truck cost of the container, usually needs to consider container pick up fee and container gate into port fee also.

 

(4)Various origin certificates, C/O, FTA, other certifications, export license fees (including commodity inspection fees, notarization fees, consular visa fees, fumigation fees, pre-shipment inspection and quarantine fees, etc.);

 

(5) Local fees, This usually refers to some regular local fees charged by the shipping company, such as THC, booking fee, document fee, S/O, EDI, telex fee, demurrage fee, storage fee, etc.

 

(6) Bank charges (discount interest, wire transfer fees, etc.);

 

(7) Export Customs clearance fees. In case of inspection, all the costs incurred are also considered as local fees, and after the inspection, they may be incurred accordingly, such as unloading fees, parking fees, container terminal short transfer fees, container storage fees, Expenses such as overdue fees.

 

(8) When multiple suppliers need to consolidate goods, warehouse costs will also be incurred. It is necessary to load goods from different suppliers in one warehouse. According to one container or multiple containers, one shipment will be shipped out under one set of B/L. This method can save a lot of logistics freight, and it is also the most effective way to save logistics freight when you ship from China or other places.

 

(9) If it is dangerous goods you are importing, then the local cost of dangerous goods will be much more expensive than general goods, especially when the inspection of dangerous goods is encountered, the extra costs incurred are more expensive, so FOB shipping is the best trade term for dangerous goods shipping, of course, as a buyer, a reliable dangerous goods forwarder must be used.

 

(10) AMS (America manifest system ) or ENS(Entry Summary Declaration) fees

In the term of FOB shipping, the seller’s risks are mainly as follows:

 

Seller’s risk :

 

In the case of COVID-19, why FOB is the best INCOTERMS for importers and buyers, because the global shipping schedule has been chaotic, and the departure date and the arrival date of the ship are not accurate. Many goods are in order to catch up with the fastest shipping schedule may require that empty containers be retrieved from the terminal in advance to obtain the container number and seal number, which are used to cut the B/L but the cargo is not even fully completed, or the terminal has not yet been fully opened for this ship for heavy container enter the port.

 

As well as additional container storage fees at the terminal due to shipping delays and container dumping

 

The above costs are not small, these risks and costs under FOB shipping are borne by the shipper and the seller.

 

In the case of CIF shipping, although the shipper is obligated to send the goods from the factory to the designated docks and warehouses abroad, usually if it encounters COVID-19, the logistics are chaotic under the epidemic. Generally speaking, the shipper will let the importer and the buyer bear it together.

 

Buyer’s risks:

 

From the moment the goods are loaded on the ship at the port of departure, the risk begins to shift from the seller to the buyer. The buyer needs to bear all costs and risks from the ship at the port of departure to the warehouse located at the destination port.

The buyer needs to bear the cost and risk in the FOB shipping situation:

 

In the term of FOB, the buyer needs to let his freight forwarder deliver the goods from the warehouse and dock at the port of destination to his designated location. The buyer needs to bear the expenses including:

 

(1) Import Customs clearance fees and various customs duties and value-added tax

(2) Destination port cost and destination port warehouse of LCL cargo, for FCL shipping there are related DTHC, documents, D/O, terminal demurrage, etc.

(3) LCL cargo’s pickup fee, FCL cargo’s truck fee

(4) As well as additional warehouse costs and other terminal costs due to inspections

 

Although it is FOB, we strongly recommend that buyers and their own freight forwarders purchase freight insurance, so as to avoid the risk of cargo loss and damage.

 

Purchasing freight insurance is only the best way to avoid risks and losses in the case of FOB shipping. Normally the insurance fee is cheap.

 

The cost and risk that the seller needs to bear FOB air freight:

 

In the case of FOB by air freight, the seller’s expenses to be borne mainly include:

 

In air transportation: then the local cost of loading airport in FOB will be borne by the seller, including:

(1) Document fee

(2) Ground handling fees of airlines

(3) Bill of lading fee

(4) Document fee

(5) Customs declaration fee

(6) Inspection fees and storage costs incurred during inspections.

 

As we all know, the cost of airport warehouses for air transportation is very expensive.

 

In the case of FOB air freight, the seller’s risks are mainly as follows:

As long as the air cargo takes off, the cargo is automatically released to the buyer. The airway bill does not have the right to control the air freight cargo. Therefore, the collection of air cargo must be carefully considered as the shipper and seller.

 

At the same time, when as operating handling agent of the designated overseas agent. you must consult and inform the consignor that air freight has no right to control the cargo. If the consignor ships the goods in a unified manner, then get the authorization for air cargo into the warehouse.

 

In the case of FOB air transport, the buyer’s expenses mainly include:

 

In the case of FOB, the buyer needs to let his freight forwarder deliver the goods from the warehouse of the destination airport to the designated location. The buyer needs to bear the expenses including:

 

(1) Customs clearance fees and various customs duties and value-added tax

(2) Ground handling fees at the destination airport

(3) Local fees such as document fees

(4) As well as additional airport warehouse costs due to inspections

(5) Delivery cost from airport warehouse to the designated warehouse

 

Although it is FOB, we strongly recommend that buyers and their own freight forwarders purchase freight insurance, so as to avoid the risk of loss and damage to the goods. Let the air cargo be shipped more safely. Purchasing freight insurance is the best way to avoid FOB air transportation risks.

 

 

Related case studies under FOB terms:

 

There are six interpretations of FOB in the 1941 Revised Definition of American Foreign Trade, of which only: (FOB Vessel, “named port of shipment”) is similar to the interpretation of FOB terms in the 2000 General Regulations. Therefore, the interpretation and application of FOB in the 1941 Revised US Foreign Trade Definition is significantly different from the general international interpretation and application.

 

This is mainly manifested in the following aspects:

  1. U.S. practice generally interprets FOB as being delivered on a certain means of transportation, and its scope of application is very wide. Therefore, when entering into contracts with merchants from the United States, Canada, and other countries under FOB, in addition to the name of the port of shipment, the name of the port of shipment must be indicated. The word “Vessel” (Vessel) must also be added after FOB. If it is only ordered as “FOB San Francisco” and the word “Vessel” is omitted, the seller is only responsible for transporting the goods to any premises in San Francisco, and is not responsible for transporting the goods to the port of San Francisco and delivering them on board.

 

  1. The risk division is based on the ship’s rail at the port of shipment, that is, the seller bears all losses and damages that occur until the goods are loaded onto the ship’s rail.

 

  1. In terms of the cost burden, the buyer is required to pay the seller’s assistance in providing export documents, as well as export taxes and other expenses incurred by exports.

 

A certain company imported a batch of goods that were traded at FOB. When the goods were unloaded at the destination port, it was found that the goods had two pieces of three machines with damaged paint. After proper procedures, the goods were loaded in the warehouse at the port of departure because the forklifts did not operate in compliance with the regulations. The surface is damaged. May I ask, in this case, can the importer make a claim against the seller?

 

Answer: Yes. Under the FOB trade mode, the division of liability and risk is the ship’s chord of the port of shipment. It is the seller’s responsibility if the outer packaging is damaged in the warehouse at the port of shipment and the goods cross the ship’s rail.

 

How to control the risks under the FOB term?

 

 Why is the seller’s risk very high under the FOB Term?

 

Because FOB is the buyer’s responsibility for seaborne booking, and the forwarder is the designated forwarder, it is best to choose T/T as the payment method of FOB, or at least get a certain amount of prepayment, so as to ensure safety.

 

In some countries, the risk is relatively high. The buyer and the designated freight forwarder often collide with each other to automatically release the goods without passing the bill of lading, or the designated freight forwarder privately releases the bill of lading to the buyer or importer. This is too risky for the seller.

 

Therefore, we must insist on making full TT prepayment, so the TT payment method and FOB trade term are a set of commonly used combinations, which can effectively control the potential risks under this trade term!

 

In the above FOB shipping situation, the risk to the seller is very large. If you are an exporter, you must receive the full payment as much as possible before it can be loaded. Of course, there are some regular customers, or customers with credit account periods, and other considerations.

 

Which countries have the more common automatic release of bills of lading?

 

For example, India, some countries in South America, Africa, Turkey, Russia, Eastern Europe, and other countries. There are parts of the Middle East, Saudi Arabia is sometimes a problem, there are some war-torn countries, unstable countries, and regions, If you send goods to these countries, you must carefully consider your collection.

 

Of course, generally speaking, the commercial reputation of importers in Europe and the United States, and Canada is generally relatively good. FOB shipping is the most common logistics method for shipping to Europe, the United States, and Canada.

 

In addition, in the case of FOB shipping, as the FOB handling agent, the freight forwarder at the port of departure, that is, the operating agent of overseas freight forwarders must ensure that the shipper at the port of departure receives the complete payment, or if the complete payment has not been received, The shipper is required to sign and release the guarantee of the bill of lading, otherwise, do not release the bill of lading easily until the shipper allows it.

 

Otherwise, it is very easy to be sued by the shipper. If the importer at the port of destination does not pay the balance to the shipper at the port of departure, SWB is very discouraged, although it can save the cost of telex.

 

Risk comparison under FOB, CIF, and CNF terms:

 

In the FOB contract for export business, some importers colluded with the designated freight forwarder, and the designated forwarder released the bill of lading without the permission of the consignor, causing the exporting company to lose the payment.

 

This is why shippers prefer to use the CIF term. Of course, the biggest problem with CIF clauses is the high sea freight and air freight, which are actively being supplemented in the logistics link.

 

According to the “International Business Daily”, the Ministry of Foreign Trade and Economic Cooperation of China encourages export companies to conduct CIF transactions. The proposed measures include:

 

  1. Try to adopt CIF or C&F to avoid foreign businessmen appointing overseas freight forwarders to arrange transportation.

 

  1. If the foreign business adheres to the FOB clause and appoints a shipping company and freight forwarder to arrange transportation, the designated shipping company can be accepted, but the qualification of the freight forwarder should be reviewed and the forwarders with bad records should be rejected.

 

  1. If the foreign business still insists on appointing an overseas freight forwarder, the exporter shall review the overseas forwarder’s bill of lading. It must entrust a freight forwarding company approved by the Ministry of Foreign Trade and Economic Cooperation to issue and control the goods. At the same time, the forwarding company that issued the bill of lading on the agent will issue a letter of guarantee and promise, After the goods arrive at the port of destination, the goods must be released on the basis of the original bill of lading issued by the bank under the letter of credit.

 

  1. Foreign trade companies should not lightly accept forwarder bills of lading, especially foreign forwarder bills of lading designated by foreign companies.

 

This issue has caused widespread controversy among export companies. Which method of delivery is safer?

 

What problems should be paid attention to under different methods?

 

 

Professor Luck Shi, head of the Department of International Trade of the University of International Business and Economics, issued the following suggestions on this issue for the reference of exporters and importers:

 

Luck Shi: As we all know, the three main trade terms used to determine delivery terms in China’s foreign trade business are FOB, CIF, and CNF. According to survey statistics conducted by the International Chamber of Commerce in more than 40 countries in the late 1990s until right now, FOB ranked first in terms of frequency of use.

 

Since the seller is not responsible for arranging transportation and insurance when the FOB condition is used for the transaction, the seller will not be responsible for arranging transportation and insurance after delivering the goods at the port of shipment. Moreover, there is a misunderstanding among many people, that is, the risks are exactly the same when using these three commonly used terms for transactions. They are all transferred based on the ship’s rail, but the responsibilities are different.

 

This misunderstanding caused some people to neglect the careful choice of trade terms when dealing with foreign transactions and eventually caused unexpected losses. In fact, the “2000 General Rules”, an international convention on trade terms, said that the risk is divided by the ship’s rail. It is only used to determine whether the consequences of damage or loss of the goods during the handover process are borne by the seller or the buyer, and not a problem.

 

Refers to all risks, especially those that do not involve foreign exchange collection.

Facts have proved that in the export business, as a seller, it is necessary to carefully choose appropriate trade terms according to the specific conditions of the transaction to prevent foreign exchange collection risks and improve economic benefits.

 

 

What should I pay attention to in FOB terms?

 

How can the buyers and sellers better protect the rights and interests of FOB shipping?

 

  1. Generally speaking, it is more advantageous to use CIF or CFR terminology for transactions in export business than to use FOB for shippers. Because, under CIF conditions, the three contracts (sales contract, transportation contract, and insurance contract) involved in the international sale of goods are all made by the seller as its party.

 

He can make overall arrangements for stocking, shipping insurance, and other matters according to the situation to ensure the operation process On the mutual convergence. In addition, it is conducive to the development of the country’s shipping industry and insurance industry and increases the income of service trade. Of course, this is not absolute. We should first consider whether it is difficult to arrange transportation and whether it is economically cost-effective and other factors based on the specific conditions of the commodities being traded.

 

  1. When the FOB term is used as an unavoidable option, the time for the buyer to send the ship to the port to load the goods should be clearly stipulated in the contract, so as to avoid the seller’s goods having been prepared and the ship being late, which may cause delays in the goods.

 

How to choose reliable and high-quality freight forwarders under FOB terms should not just look at cheap ocean freight and air freight prices.

 

For the FOB term, the buyer’s designated overseas freight forwarder should carefully consider whether to accept it. There are frequent occurrences of non-compliant FOB freight forwarders who release the bill of lading without authorization or are unwilling to release the bill of lading to the buyer unless the buyer pays additional freight.

 

This is a freight fraud. In the case of COVID-19, because of the high sea freight, many scammers and freight forwarders use this method to deceive overseas buyers. There are also some FOB freight forwarders who cannot provide space when space is tight, but buyers of promissory notes choose their logistics services and carry out FOB terms.

 

Buyers should choose a compliant FOB forwarder to reduce logistics costs and increase logistics efficiency.

 

 

How to choose to use trade terms, FOB, CFR, CIF?

 

The choice of trade terms should also be considered in conjunction with the payment method. When using commercial credit collection methods such as cash on delivery or collection, try to avoid using FOB or CFR terms. Because under these two terms, in accordance with the provisions of the contract, the seller is not obliged to apply for freight insurance, and the buyer is responsible for it in accordance with the situation. If the market conditions are unfavorable to the buyer at the time of contract performance, and the buyer refuses to accept the goods, it may not take out insurance. This may lead to a loss of money and goods once the goods are in danger on the way. If it is necessary to use these two terms to make a deal, the seller shall insure the seller’s benefit insurance locally.

 

 

Under FOB terms, what should buyers and sellers pay attention to regarding a letter of credit payment?

 

Even when using a letter of credit to pay, you should pay attention to the shipper’s regulations, especially under FOB term, some foreign buyers often require the seller to submit a bill of lading in the letter of credit to the buyer as the shipper, this approach is also the same Will bring the risk of foreign exchange collection to the seller.

 

This happened in international trade: the buyer and the seller made a deal on FOB terms, and the contract stipulated payment by letter of credit. The buyer’s letter of credit stipulates that the seller’s bill of lading must indicate that the shipper is the buyer. The seller discovered this problem during the verification.

 

But it was the buyer who concluded the contract of carriage with the carrier, and it was logical for the buyer as the shipper. In addition, modifying the letter of credit, for this reason, would increase expenses and delay the shipment, so the seller did so. The bill of lading submitted after delivery indicates that the buyer is the shipper. However, due to discrepancies in the documents, the bank refused to pay and refunded the bill.

 

While the goods are in transit, the buyer instructs the carrier to deliver the goods to his designated consignee in the name of the shipper on the bill of lading. In this way, although the seller controls the bill of lading as proof of property rights, the goods have been taken away by the consignee designated by the buyer. The seller filed a lawsuit against the carrier for delivery of the goods without B/L, which was rejected by the court on the grounds of not having the right to sue.

 

It can be seen that under the FOB contract, whether the seller or the buyer is the shipper is not trivial. According to the interpretation of the “Hamburg Rules”, there are two types of shippers, one is the person who signs the maritime transportation contract with the carrier, and the other is the person who delivers the goods to the carrier related to the transportation of goods by sea.

 

According to the above explanation, under the FOB contract, either the buyer or the seller meets the conditions of being a shipper. If the buyer’s creditworthiness is good and there is a requirement to resell the goods in transit, the buyer is the shipper. But if this is not the case, for safety reasons, it is better to use the seller as the shipper.

 

How to calculate the FOB price:

 

X

Let us give examples of Chinese factories’ quotations to overseas buyer

 

FOB={{1-[Tax rebate rate/(1+VAT rate)]} × RMB tax included price}/ Spot exchange purchase price

 

Formula analysis:

FOB=(RMB including tax price-tax refund income) / spot exchange purchase price

Among them: tax refund income = RMB tax price × [tax refund rate / (1 + value-added tax rate)]

 

So:

FOB={RMB inclusive of tax price-{RMB inclusive of tax price×[Tax refund rate/(1+VAT rate)]}}/Purchase price in cash

 

In addition: If your products have export duties, the FOB price is calculated like this.

FOB USD price=[FOB RMB price×(1+tariff rate)]/USD spot exchange purchase price

 

When calculating the export price, why is the exchange rate used the spot foreign exchange buying price?

 

Exchange rate: the exchange rate used in foreign currency wire transfer, mail transfer, or draft transfer business.

 

It is generally higher than the exchange rate of cash because foreign currency cash generally cannot circulate in the country.

 

buying price:

As long as you don’t convert U.S. dollars into RMB, the accounting will be converted into RMB based on the intermediate price.

 

The purchase price is the price that the bank is willing to pay when receiving foreign currency.

 

 

What are the variations of the terms of Breakbulk and OOG delivery under FOB terms?

 

The deformations of the following FOB terms are mostly applied to the shipment of and Breakbulk OOG goods, because these goods are usually large in volume, or the weight of a single piece of goods is huge, and at the same time, the port of departure and the ship’s crane have different capacities, and the lifting capacity is different. The cost of the machine is very expensive, and the terms must be accurate to some subtle steps to better distinguish the buyer and seller’s cost responsibilities:

 

When closing the deal on FOB terms, the seller is responsible for paying all costs before the goods are loaded on the ship. However, various countries do not have a unified interpretation of the concept of “shipment”, who bears the costs of loading, and the practices or practices of various countries are not completely consistent. If liner transportation is used, the ship’s rail is loaded and unloaded, and the loading and unloading fees are included in the liner freight, which is naturally borne by the buyer who is responsible for chartering; while voyage chartering is used, the ship generally does not bear the loading and unloading costs.

 

It is necessary to clarify who should bear the various costs of shipment. In order to explain the burden of shipping costs, both parties often add additional conditions after the FOB term, which forms a deformation of FOB. Mainly include the following:

 

  1. FOB Liner Tenns

This deformation means that the shipping cost is handled in accordance with the liner’s approach, that is, the ship or the buyer is responsible for it. Therefore, with this variant, the seller does not bear the costs related to the shipment.

 

  1. FOB Under Tackle

It means that the seller pays the cost to deliver the goods to the place where the hook of the vessel designated by the buyer can be reached, and the buyer is responsible for the lifting and loading and other expenses.

 

  1. FOB Stowed

This means that the seller is responsible for loading the cargo into the cabin and bears the shipping costs including the handling fee. The handling fee refers to the cost of resettlement and rearrangement after the cargo is held.

 

  1. FOB Trimmed

This means that the seller is responsible for loading the cargo into the cabin and bears the shipping costs including trimming fees. The trimming fee refers to the cost of leveling the bulk cargo loaded into the cabin.

 

In many standard contracts, FOBST (FOB Stowed and Trimmed) is often used in order to indicate that the seller shall bear all shipping costs, including handling fees and flat cabin fees. To put it simply, all costs before shipment are included, but there is no ocean freight. However, in this case, foreign freight forwarders are usually designated, and designated forwarders generally charge document fees, customs fees, bill of lading fees, telex fees, and other related local fees.

 

The above-mentioned deformation of FOB is only to show who bears the shipping cost, and does not change the FOB delivery location and the boundaries of risk division. The “2000 General Rules” pointed out that the “General Rules” does not provide any guidance for the addition of these terms, and it is recommended that the buyer and the seller should make it clear in the contract.

 

The following content can answer the following questions:

 

CIF vs. FOB: What’s the Difference?

Shipping terms explained: CFR, CIF, and FOB

Contract of carriage: FOB, CIF/CFR, FOT, and FCA

The Advantages of Shipping FOB vs CIF

Should I choose FOB or CIF when importing from China?

CIF vs FOB: What’s The Difference? Which Should You Choose?

What are Incoterms?

 

It also explains the differences and advantages and disadvantages of the most commonly used FOB, CIF, and CFR, the different responsibilities and obligations of each term, and the attribution of expenses.

 

Some countries encourage the use of CIF terminology for exports and FOB terminology for imports, which are insured or carried by domestic insurance companies and carriers.

 

According to the interpretation of <2000 General Rules>, FOB terms are only applicable to maritime and inland water transportation. But in fact, air transportation is also a large number of FOBs used as a trade term for air transportation, and the actual operation does not have so many restrictions.

 

 

FOB:

“Delivery on board (…designated port of shipment)” means that when the goods cross the ship’s rail at the designated port of shipment, the seller completes the delivery. This means that the buyer must bear all risks of loss or damage to the goods from that point on. The FOB term requires the seller to go through customs clearance procedures for the export of goods.

This term only applies to sea or inland water transportation. If the parties do not intend to deliver the goods across the ship’s rail, the FCA term should be used.

 

Explanation of FOB terms

FREE ON BOARD (…named port of shipment), that is, delivery on board at the port of shipment (…designated port of shipment). This term means that the seller delivers the goods to the ship designated by the buyer at the agreed port of shipment. According to the “General Rules of 2000”, this term can only be applied to maritime and inland waterways. However, if the parties to the contract do not use delivery across the ship’s rail, the FCA term is more appropriate.

 

CFR:

COST AND FREIGHT (…Named port of destination). This term means that the seller must bear the cost and freight required to transport the goods to the agreed destination port. The cost referred to here is equivalent to the FOB price, so the CFR term is based on the FOB price plus the freight from the port of departure to the port of destination.

 

The “2000 General Rules” pointed out that CFR is the only standard code for the term “cost and freight” that is widely accepted worldwide, and the traditional term C&F (or C and F, C+F) should no longer be used.

 

In the “2000 General Rules”, it is clearly stipulated that CFR terms can only be applied to maritime and inland shipping. If the parties to the contract do not use delivery across the ship’s rail, the CPT term should be used.

 

 

Precautions for CFR term:

 

  1. CFR term sellers should promptly issue shipping notices

 

When the transaction is concluded under CFR terms, the seller will arrange the transportation and the buyer will handle the freight insurance. If the seller does not issue the shipping notice in time, the buyer will not be able to apply for freight insurance in time, and there may even be a case of missing freight insurance. Therefore, the seller must promptly notify the buyer after shipment, otherwise, the seller shall bear the risks and losses of the goods in transit.

 

  1. What should I pay attention to when importing according to CFR terms?

 

In the import business, when the transaction is concluded under CFR terms since the foreign merchant arranges the shipment and the importer is responsible for the insurance, it is necessary to choose a creditworthy foreign supplier for the transaction and put forward appropriate requirements on the ship to prevent collusion between foreign merchants and the ship party. Issue false bills of lading, charter unseaworthy ships, or forge quality certificates and certificates of origin. If such a situation occurs, the importer will suffer losses.

 

CFR term’s basic obligations:

 

According to the interpretation of FOB of the International Chamber of Commerce, the basic obligations of the seller and the buyer. In summary, it can be divided as follows:

 

  1. Seller’s Obligations under CFR term

(1) Within the time or time limit specified in the contract, deliver the goods to the ship designated by the buyer in a customary manner at the port of shipment, and notify the buyer in time;

(2) Obtain an export license or other official approval documents at your own risk and expense. When customs formalities are required, go through all customs formalities required for the export of goods;

 

  • To bear all the expenses and risks of the goods until the cargo crosses the ship’s rail at the port of shipment;

 

  • Provide a bill of lading certifying that the goods have been delivered on board. If the buyer and seller agree to use electronic communication, all documents can be replaced by electronic data interchange (EDI) information with the same effect.

 

 

  1. Buyer’s Obligations under CFR term:

(1) Obtain import licenses or other officially approved documents at your own risk and expense. When customs formalities are required, go through all customs formalities for the import of goods and transit through other countries, and pay related fees and transit fees;

 

(2) Responsible for chartering or booking space, paying freight, and giving the seller sufficient notice about the name of the ship, the place of shipment, and the required delivery time;

 

(3) To bear all the expenses and risks of the goods after the cargo has passed the ship’s rail at the port of shipment;

 

  • Accept the relevant documents provided by the seller, accept the goods, and pay the goods according to the contract.

 

  1. Note on CFR terms:

(1) The buyer must bear all costs and the risk of loss or damage to the goods from the point of delivery. This means that if the goods are in distress at sea or encounter pirates, it will have nothing to do with the seller. The buyer should not refuse to pay for the goods for this reason, so The seller can advise the buyer to ensure the goods.

 

(2) FOB price includes all domestic expenses. If there are more goods or higher profits, domestic expenses can be ignored. And if the goods are relatively small, the price needs to be increased accordingly, because the unit cost has increased a lot, and the unit cost mainly includes inland freight (factory to port or container warehouse), loading and unloading fees (especially some goods that cannot be mechanically loaded and unloaded), Container fees, terminal fees, submission fees, inspection fees, etc.

 

CIF:

The Chinese translation of the CIF term is cost plus insurance plus freight. (…named port of destination) is transacted according to this term. The components of the price include the usual freight from the port of shipment to the port of the agreed destination and the agreed Therefore, in addition to the same obligations as CFR terminology, the seller also handles freight insurance for the buyer and pays insurance premiums. According to general international trade practices, the amount of insurance insured by the seller should be added to the CIF price by 10%. If the buyer and the seller do not agree on the specific insurance, the seller only needs to obtain the minimum insurance. If the buyer requires additional war insurance, the seller shall provide additional insurance if the insurance premium is borne by the buyer. If it is done, it should be insured in the contract currency.

 

It should be emphasized that, according to the CIF terminology, although the seller arranges the transportation of the goods and handles freight insurance, the seller does not undertake the obligation to guarantee the delivery of the goods to the agreed destination port, because CIF is a term for shipment and delivery, not The term for delivery at the port of destination, which means that CIF is not “CIF”.

 

CIF the “cost, insurance and freight” means that the seller completes the delivery when the goods pass the ship’s rail at the port of shipment.

 

CIF usually refers to FOB + freight + insurance.

 

CNF VS CIF:

 

C&F is different from CIF. C&F: cost and freight, refers to cost + freight, followed by the name of the destination port, that is to say, the freight must be counted to the destination port, and the responsibility also ends at the destination port.

 

C&F usually refers to FOB + freight.

The seller must pay the freight and expenses required to transport the goods to the designated port of destination, but the risk of loss or damage to the goods after delivery and any additional costs caused by various events are transferred from the seller to the buyer. However, under CIF terms, the seller must also apply for marine insurance against the risk of loss or damage to the buyer’s goods in transit.

 

Therefore, the seller concludes the insurance contract and pays the insurance premium. The buyer should note that the CIF term only requires the seller to ensure the minimum amount of insurance. If the buyer needs higher insurance coverage, it needs to reach an explicit agreement with the seller or make additional insurance arrangements on its own.

 

The CIF term requires the seller to go through customs clearance procedures for the export of goods.

 

This term only applies to sea and inland water transportation. If the parties do not intend to deliver the goods across the ship’s rail, the CIP term should be used.

 

Seller’s obligations under FOB terms:

 

A1 Provide goods in compliance with the contract

The seller must provide the goods and commercial invoices or equivalent electronic messages that comply with the provisions of the sales contract, as well as any other certificates that may be required by the contract to prove that the goods comply with the provisions of the contract.

 

A2 permits, other permits, and procedures

The seller must bear his own risks and expenses, obtain any export license or other official permits, and go through all customs procedures required for exporting goods when customs procedures are required.

 

A3 Carriage Contract and Insurance Contract

 

  1. a) Contract of carriage

The seller must pay at his own expense, enter into a contract of carriage in accordance with the usual conditions, and ship the goods to the designated port of destination by sea vessels (or vessels suitable for inland water transport according to the circumstances) that are usually available for the type of goods specified in the contract of carriage via the usual routes.

 

  1. b) Insurance contract

The seller must obtain cargo insurance at its own expense in accordance with the provisions of the contract, and provide the buyer with an insurance policy or other insurance evidence so that the buyer or any other person who has an insurable interest in the goods has the right to claim directly against the insurer. The insurance contract should be concluded with a reputable insurer or insurance company. In the absence of a clear agreement to the contrary, it should be insured in accordance with the minimum insurance risk in the “Association of Cargo Insurance Clauses” (London Association of Insurers) or other similar clauses. The insurance period shall be in accordance with B5 and B4. At the buyer’s request, and at the buyer’s expense, the seller shall add war, strike, riot, and civil commotion risks, if it can be insured. The minimum insurance amount should include the contract price plus 10% (ie 110%), and the contract currency should be used.

 

A4 delivery

The seller must deliver the goods on board at the port of shipment on the agreed date or within the time limit.

 

A5 risk transfer

Except for those specified in B5, the seller must bear all risks of loss or damage to the goods until the goods pass the ship’s rail at the port of shipment.

 

A6 fee division

Except for those specified in B6, the seller must pay all costs related to the goods until they have been delivered in accordance with A4; and the freight and all other costs incurred in accordance with A3a), including the shipping cost of the goods; and in accordance with A3b) Stipulate the insurance costs incurred; and any unloading costs at the agreed unloading port paid by the seller according to the contract of carriage; and when customs formalities are required, the customs formalities required for the export of the goods and all customs duties payable at the time of export Taxes and other expenses, as well as the cost of transiting the goods through other countries paid by the seller according to the contract of carriage.

 

A7 inform the buyer

The seller must give the buyer sufficient notice stating that the goods have been delivered in accordance with A4, as well as any other notices required, so that the buyer can take the normally necessary measures for receiving the goods.

 

A9 check, pack, mark

The seller must pay the cost of checking (such as checking the quality of the goods, measuring, weighing, and points) required for delivery in accordance with A4.

 

The seller must provide at his own expense the packaging that meets the transportation requirements of his arrangement (unless the goods described in the contract are shipped without packaging in accordance with relevant industry practices). The packaging should be appropriately marked.

 

A10 Other obligations

At the buyer’s request and at its borne risks and costs, the seller must provide the buyer with all assistance to help the buyer obtain the goods issued or transmitted by the country of shipment and/or the country of origin, which may be required by the buyer to import the goods, and when necessary, from other countries Any documents or equivalent electronic messages required for transit (except those listed in A8).

 

At the request of the buyer, the seller must provide the buyer with the information required for additional insurance.

 

Buyer’s obligations under FOB terms:

 

B1 pay for goods

The buyer must pay the purchase price in accordance with the provisions of the sales contract.

 

B2 permits, other permits and procedures

The buyer must bear its own risks and expenses, obtain any import license or other official permits, and go through all customs procedures for the import of goods and transit through other countries when customs procedures are required.

 

B3 Carriage Contract and Insurance Contract

  1. a) Contract of carriage

No obligation.

 

  1. b) Insurance contract

No obligation.

 

B4 Receive goods

The buyer must accept the goods when the seller has delivered the goods in accordance with A4, and accept the goods from the carrier at the designated port of destination.

 

B5 risk transfer

The buyer must bear all risks of loss or damage to the goods after they have passed the ship’s rail at the port of shipment.

 

If the buyer fails to give the seller notice in accordance with B7, the buyer must bear all risks of loss or damage to the goods from the agreed date of shipment or the date of expiry of the shipment period, provided that the goods have been officially placed under the contract and clearly classified or otherwise determined as the goods under the contract.

 

B6 fee division

In addition to A3a), the buyer must pay All costs from the time of delivery in accordance with A4; and all costs of the goods in transit until they arrive at the port of destination, unless these costs should be paid by the seller in accordance with the contract of carriage; and unloading charges including lighter and terminal charges, Unless these costs shall be paid by the seller in accordance with the contract of carriage; and if the buyer fails to give the seller notice in accordance with the provisions of B7, all additional costs incurred for the goods from the agreed date of shipment or the date of expiry of the shipment period, but the goods have been Formally placed under the contract, clearly delineated or otherwise determined as the goods under the contract as the limit; and when customs procedures are required, all duties, taxes and other fees payable on the import of the goods, and customs clearance The cost of the formalities, and the cost of transiting through other countries when needed, unless these costs are included in the contract of carriage.

 

B7 inform the seller

Once the buyer has the right to decide when to ship the goods and/or the port of destination, the buyer must give the seller sufficient notice.

 

A8 The seller must pay for the delivery voucher, transport document or equivalent electronic message, and provide the buyer with the usual transport document indicating that it is carried to the agreed port of destination without delay.

 

This document (such as a negotiable bill of lading, non-negotiable sea waybill or inland water transport document) must contain the contracted goods, and its date shall be within the agreed shipping period so that the buyer can pick up the goods from the carrier at the port of destination, and, unless otherwise stated the agreement shall enable the buyer to sell the goods in transit to the subsequent buyer through the transfer document (negotiable bill of lading) or by notifying the carrier.

 

If there are several originals of such transportation documents, the buyer should provide the buyer with a full set of originals.

 

If the buyer and seller agree to use electronic communication, the documents mentioned in the preceding paragraph can be replaced by electronic data exchange messages with equivalent functions.

 

B8 Proof of delivery, transport document or equivalent electronic message

The buyer must accept the transport document provided in accordance with A8, if the document complies with the contract.

 

B9 cargo inspection

The buyer must pay for any pre-shipment inspections, except for inspections mandated by the relevant authorities of the exporting country.

 

B10 Other obligations

The buyer must pay all the expenses incurred in obtaining the documents or equivalent electronic messages mentioned in A10, and reimburse the expenses incurred by the seller in providing assistance.

 

At the request of the seller, the buyer must provide him with the information needed for insurance.

 

Conversion of the trade terms:

 

 

  1. Convert FOB price to other prices:

 

CFR price = FOB price + ocean freight

 

CIF price = (FOB price + ocean freight) / (1-insurance premium × insurance rate)

 

  1. Convert CFR price to other prices:

 

FOB price = CFR price- ocean freight

 

CIF price=CFR price/(1-insurance bonus×insurance rate)

 

  1. Convert CIF price to other prices:

 

FOB price=CIF price×(1-insurance bonus×insurance rate)- the ocean freight

 

CFR price=C IF price×(1-insurance bonus×insurance rate)

 

In FOB shipping, who are the main parties involved?

 

In the case of FOB, the following parties will appear:

  1. Exporter;
  2. Importer;
  3. Freight forwarding (the destination port freight forwarding, the supplier’s freight forwarding overseas freight forwarding. In many cases, it is the operating agent of foreign freight forwarding agents in the loading port).
  4. Intermediary (trading company).

Under the terms of FOB, the operation process of the designated freight forwarder in loading port:

 

1 )Under normal circumstances, after negotiation between the exporter and the importer, the importer places an order to the exporter and agrees on the delivery date, packaging, inspection… of course, including the contact information of the designated freight forwarder.

 

2) After receiving the deposit, the exporter arranges production. According to the production progress, the exporter will contact the designated forwarder based on the designated forwarder information provided by the importer, and the designated forwarder will start booking. Note: The exporter is contacting the designated freight forwarder at the port of departure.

 

The designated freight forwarder at the port of departure may be the freight forwarder at the port of departure that the importer is looking for, or it may be the designated freight forwarder in the destination country of the importer.

 

3)After receiving the booking provided by the factory, the freight forwarder at the loading port will book the space according to the agreed shipping schedule, and provide S/O to the exporter on time and quickly. And update the latest shipping schedule to foreign importers or foreign forwarding companies.

 

4 )The supplier will obtain the bill of lading (forwarder bill of lading or ship owner’s bill of lading) after paying the FOB local fees for quasi-fashionable goods.

 

5)The supplier copies the shipping documents to the recipient so that the recipient can pay the balance of the order in time. After receiving the balance, the supplier expresses the shipping documents to the consignee for customs clearance and pickup.

 

 

Common Q&A under FOB terms:

 

1 What should I do if the designated freight forwarder releases the bill of lading without authorization? Without the permission of the shipper?

 

The issue of delivery without a bill of lading. This is very troublesome and the risks are also great. That is, the consignee requires the forwarder to release the goods without the bill of lading (original or telex bill of lading). Then the rights of exporters will be greatly threatened. In this case, the exporter must remember to write: TO THE ORDER or TO ORDER OF SHIPPER in the Consignee on the bill of lading. Write the actual consignee’s information in NOTIFY PARTY. This is also the only useful thing the exporter can do. Of course, the exporter has to endorse the actual bill of lading. In addition, after shipment, you can check the shipping schedule, the status of the goods, and follow up on the goods at any time.

 

2What if the importer does not pay the balance?

 

When the goods arrive at the port of destination, the consignee does not pay the balance of the goods (the bill of lading is not available), and the goods cannot be picked up. The rights of exporters are threatened the most. After the free period stipulated by the port is exceeded, expensive demurrage will be charged (provided that the consignee still needs the goods). If no one picks up the goods after a certain period of time, the goods will be confiscated or destroyed by the government at the port of destination. ,Or sold.

 

First: After the goods are on the ship, you must get the shipping documents in time and copy them to the consignee, and ask the other party to pay the balance in time.

 

Second: Track the shipping schedule, before arriving at the port, be sure to remind customers to pay. And notify the freight forwarder of the situation, so as not to solve the problem in time after the problem occurs.

 

Third: After arriving at the port, if the consignee still has no intention to pay the balance (the risk is imminent), a solution must be drawn up immediately.

 

Fourth: After the specified time limit, the shipper must solve the problem before the local government makes a decision, otherwise, the goods may not be confiscated by the local government.

 

Suggestions and solutions:

a: Maintain a good relationship with the designated freight forwarder;

b: If there is no one to pick up the goods, you can entrust others to pick up the goods. The goods can be received as long as there is a bill of lading. This also reflects the role of TO THE ORDER in CONSIGNEE.

c: If the shipper has no other person to help at the port of destination, then entrust the forwarder to sell the goods, so that at least a little loss can be recovered.

 

 

3 How does FOB affect buyers?

 

1)Once the goods are shipped, the buyer needs to pay the balance

2) FOB allows buyers to pay the deposit more consciously.

3) Fob shipments, because the M B/L shipper and consignee information is usually the freight forwarder at the port of shipment and the freight forwarder at the destination port, so the real Chinese supplier information cannot be accessed, which protects the rights of traders.

4) FOB ocean freight must be paid to the freight forwarder at the port of destination or the designated freight forwarder selected by the person at the port of departure.

 

 

4 Why are Chinese suppliers unwilling to quote EXW prices?

 

1)The most important factor is that through EXW terms, suppliers cannot obtain tax refunds from the Chinese government. Because the export license is provided by the freight forwarder, but this export license is only to help the export of goods and cannot be refunded by the Chinese government.

 

2) Generally, Chinese suppliers of large-volume goods will choose FOB terms

 

3) The EXW term is usually when the quantity of goods is very small, such as 0.3 cubic or 30kgs, or the supplier is a start-up processing plant with only production capacity and no export license for foreign trade.

 

 

5 What does FOB xx port mean?

 

FOB Ningbo and FOB Manila mean that the consignor needs to deliver the goods to the ship at the designated port of departure before the delivery is completed.

 

Usually, this port is the port of departure closest to the supplier or source of goods.

 

 

6 What export documents do sellers need to prepare under FOB terms:

Invoice, packing list, sales contract, bill of lading, certificate of origin, other certification documents