FOB and CIF are two most popular Incoterms in international trade industry. However, many new importers do not know which Incoterms to choose when importing goods from China, FOB, or CIF? It is important to know the difference between FOB and CIF.
FOB – Free On Board
FOB ensure that all obligations relating to costs, risk and insurance of the goods are split between the buyer and the seller in a fair way.
The entire process of importing from China is divided into the most important stages.
1. Manufacturing and preparing goods for shipping.
2. Transportation from the factory to the port.
3. Loading the goods onto the vessel.
All the above obligations are the seller’s responsibility: by agreeing to sell goods on FOB terms, the Chinese company is obligated to carry out and pay for all these actions as well as bear the associated risks.
These stages of importing from China are the responsibility of the seller. The buyer must organize, finance and bear the risk associated with the following stages, i.e.:
A. Sea fright from the Chinese port of loading to the port of destination and insurance of goods.
B. Unloading and warehousing of goods (THC, warehousing costs, etc.)
C. Customs import procedure (customs duty, VAT, submitting import documentation).
D. Transportation of the goods from the port to the point of destination (e.g. our warehouse or the company’s office).
Due to this division of responsibilities between the buyer and the seller, we know what additional costs to expect and which stages of the process are our responsibility when we opt for importing on FOB terms. When planning to import from China, we need to calculate the costs of transportation very carefully, because the price provided by a Chinese manufacturer includes only the product itself.
CIF – Cost, Insurance and Freight
In contrast to FOB terms, CIF shifts the obligation to cover the costs of sea fright to the seller, i.e. in our example – to the Chinese manufacturer
This solution may seem very tempting. However, we need to remember that we do not order only the product; we place an order for the product and sea fright. What is more, many hidden costs relating to CIF shipping are shifted to the buyer in the port of discharge.
As importers, we want to have control over the entire importing process as well as the price of the product. This is why we recommend importing with FOB, and find a forwarder in your country to quote you the shipping and handling cost for the products from vessel to your premises.