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 What shipping terms such as CIF and FOB mean? - Explained

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pjworldwide



Posts : 5
Join date : 2014-01-30
Location : London

PostSubject: What shipping terms such as CIF and FOB mean? - Explained   Thu 30 Jan 2014, 8:15 pm

There are a total of 11 shipping terms (Incoterms) which define the various responsibilities, costs and risks that are borne by the buyer and seller when goods are traded internationally. I am not going to go through all 11 but I will give a brief overview of the most common:

EXW = Ex-Works: This is where the seller of the goods has no involvement at all with the transportation costs or risks (i.e. damage in transit). They simply make the goods available to the buyer for collection at their site. It is then the buyer's responsibility to collect the goods from the seller and get them back to the UK, the buyer also bears all of the risks from the moment the goods are collected so insurance is advisable. This is quite a common sales term for intra European movements by trailer, but is best avoided for and sea or air freight movements.

FOB = Free On Board: This is where the seller is responsible for the costs and risks of getting the goods on board the ship. Once the goods are loaded on the ship, the costs and risks then transfer to the buyer. So this means the buyer will pay the ocean freight from the port of origin, plus all of the other transport charges, customs clearance cost etc to get the goods back to their site in the UK. Again as the risks pass to the buyer once the goods are on the vessel, insurance is always advisable.

CFR = Cost and Freight: The seller is responsible for the costs (but not the risks) up until the goods arrive in the UK port. The buyer then has to pay all of the costs to get the goods from the port to their premises.

CIF = Cost, Insurance and Freight: This is like CFR but the seller also bears the risks up until the goods arrive in the UK port. Therefore they insure the goods whilst they are on the ship.

DAP = Delivered at Place (formerly Delivered Duties Unpaid): The seller is responsible for getting the goods all of they way from their factory to a named place at destination (usually the buyers premises) but are not responsible for customs clearance or payment of import duty / vat. The seller also bears all of the risks.

DDP = Delivered Duties Paid: This is like DAP but the seller is also responsible for the customs clearance at destination, and payment of duties / taxes. Some small courier shipments will travel this way.

This is just a very brief overview, as to go into real detail and all of the various nuances would take all day. Wikipedia have a good page on Incoterms and some additional resources, however as I am unable to post links you will need to search for it yourselves.

The reason why freight forwarders always bang on about FOB for import shipments all of the time is twofold. Firstly the UK freight forwarder will the one making the money on the freight rather than the Chinese / overseas forwarder, but in addition it is very often much cheaper overall for the importer. This is because many suppliers in China are getting free or even negative ocean freight charges up to the UK. The UK agent of the Chinese forwarder will then make their money back by charging the UK importer extortionate handover / ancillary fees, which can come as a real shock. Therefore if you buy FOB you will at least know your final overall costs and have better control of the shipment.

However I will also say that it is not always the case that FOB will be cheaper, particularly if you are importing from countries other than China. It is sometimes the case that the supplier will just have more buying power and can get better rates. Therefore if you want to be sure of paying the lowest overall costs, ask for both FOB and CIF prices. Then ask a UK forwarder to get you 2 prices, 1 based on the goods being shipped FOB and 1 based on the goods being shipped CIF (you will need to find out from your supplier which service they will use so the forwarder can contact the agent in the UK and find out how much they will charge in handover / ancillary fees). Then add the respective prices together and is should become clear which is best.
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