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GENERAL INTERNATIONAL TRADE
In any international sales process, there are always two parties: the buyer and the seller, each with their own interests. When negotiating the contract, it is common to agree at this point on the international maritime transport terms under which the transaction will be carried out, including, of course, the MODEL under which the transaction will be carried out. Let's look separately and in order of recommendation—from most recommended to least recommended—at the Incoterms we can work, depending on whether we are exporters or importers. Best MODELS if you are the exporter: CFR-CIF: Cost and Freight - Cost, Insurance, and Freight. The basic characteristic of these models is that, as the seller, you are responsible for delivering the goods to the destination. CFR and CIF are the most recommended because they are very competitive but not too risky. Let's see why: They are competitive because they allow you, as the seller, to control the costs of international maritime transport to the port of destination, which enables cost savings. When you control this fundamental cost, you can evaluate different shipping companies, get better ocean freight prices from your freight forwarder—if you're handling a certain volume—or decide which transit times are best for you. But they also don't impose as much obligation on your obligations as DDP or DAP. DDP-DAP: Delivered Duty Paid - Delivered at Place. DDP and DAP imply that you will deliver the goods to your client's warehouse in the destination country. This means that you will have to control absolutely everything that happens in the destination country. The entire burden will fall on you, so you must be very aware of the potential complications and complexities that may arise in the destination country. It may be a country where imports are not very common, has many restrictions, or is not adequately equipped to receive transport. For example, a developing country may present many complications for international transport, such as road transport, slow customs, and much more. And all of this can end up generating costs. If you decide to use the DDP or DAP terms, keep these two recommendations in mind: In a country that isn't sufficiently prepared, your freight forwarder should have a physical presence in the country to achieve greater control and expedite the process. If your freight forwarder doesn't have offices at the destination and you sell via DDP, at least make sure it's from a reliable country with extensive experience in imports, such as the United States. You've already seen that the more you control international shipping costs, the more competitive you'll be. You might think that if you fully control all costs up to your client's warehouse, as is the case with the DAP term, your competitiveness will be even greater. But you should take other aspects into account, because greater control implies greater commitment and that also exposes you to greater risks in the destination country. FOB: Freight on Board Under FOB terms, your responsibility as the seller is to deliver the goods at the port of origin. This means that you don't decide the shipping company, the costs, or the associated times. That is, you lose control over costs and therefore competitiveness. If you choose FOB, you must keep in mind that the shipping company's costs can significantly affect the final cost of your ocean freight. EXW: Ex Works. With the EXW model, as a seller, you will have the goods prepared for international transport, but in theory, your responsibility ends at the door of your warehouse or factory. Although the customer at the destination is the one who contracts the transport, the loading at origin must be done by the person in the warehouse. In other words, it will be your responsibility. Loading is, in principle, the seller's responsibility, but EXW is a bit ambiguous because of this, because it is the buyer who is obligated to do the loading, for convenience and logic. Since this responsibility is somewhat up in the air when you negotiate under EXW terms, it is very important to clarify who bears the burden of any incidents that may occur during loading. Another negative aspect is the loss of competitiveness. Selling under EXW terms is like telling the buyer, "I'll just leave it there and you'll figure it out." A message from another seller offering you an FOB price would sound more like a convenient "I'll drop it off at the port of destination and you'll have more peace of mind." The model you offer your customers can be a key factor in being more competitive than your competition. Best Models if You're the Importer If you're the buyer, basically the same thing happens, but in reverse. You'll have to choose the model that offers you the greatest control over ocean freight costs, but as the buyer. And you'll think, "Well, the other party is in the same situation as me..." And that's exactly right. Each party is interested in controlling ocean freight as much as possible, which is the largest expense in an international shipping campaign. Let's look at the most recommended models from the buyer's point of view. FOB Model: Freight on Board Let's start with the most recommended model if you're the buyer: FOB. If you're the buyer, the FOB model means your seller leaves the goods at the port of origin, handles the paperwork in the country of origin, and leaves everything ready for international transport. You contract the international transport and fully control all related costs up to your warehouse. This control, just as we explained above with the CFR but from the seller's perspective, is what gives you competitiveness and the ability to choose the shipping company, the route, the timescale, and the ability to negotiate better prices with a freight forwarder, etc. EXW: Ex Works. As we mentioned before, the EXW Incoterm is only recommended in a country you know well and is safe, or where your freight forwarder is physically located. Our advice: whenever you think it's feasible, do it. But if you have doubts and think it could be complicated, it's best not to risk it in an unknown country. In that case, it's better to have it left at the port. Your supplier will surely have an agent there, and everything will be much easier. CFR-CIF Model: Cost and Freight - Cost Insurance and Freight CFR and CIF are not recommended from the buyer's perspective. Not only do they not allow you to control costs, but there is another factor that adds complexity to these Incoterms: the Bill of Lading (BL), or bill of lading. The bill of lading is issued in the name of the person contracting the international transport. If you import under CFR or CIF Incoterms, the transport is contracted at origin, so you must wait to receive the BIL. The problem arises when at origin—this happens frequently, for example, with imports from China—that BIL is consigned to an agent at destination. Often, that agent offers you a competitive rate to the port, but then demands an exorbitant amount to deliver the BIL, which is in their name and confirms ownership of the goods. If you purchase under CFR or CIF terms and the BIL is not consigned to you directly but to an agent, you have to be very careful. You could get an unpleasant surprise when you receive the BIL. We recommend choosing FOB over CIF if you're importing from China. DAP and DDP: Delivered Duty Paid - Delivered at Place. As a buyer, you want to be competitive, save costs, and control everything. But with the DAP and DDP models, the buyer basically controls nothing. As you can see, whether you're the buyer or the seller, assuming international shipping costs allows you to control them, and that means deciding the freight forwarder, the shipping company, the route, the transit time, etc. Therefore, the key to deciding the best model for your shipment lies in the balance between the control and responsibility you assume over international maritime transport. If you assume this control and have good negotiating skills, controlling these costs can translate into greater competitiveness, efficiency, and savings in your export and/or import campaigns.
FOB
FOB (Free On Board, Named Port of Loading) What is the FOB Incoterm? Seller's Responsibilities in the FOB Incoterm Buyer's Responsibilities in the FOB Incoterm When to Use the FOB Incoterm Incoterm 2020 FOB: Obligations of the seller and the buyer FOB A1/B1: General obligations FOB A2/B2: Delivery FOB A3/B3: Transfer of risk FOB A4/B4: Transport FOB A6/B6: Delivery, transport and document FOB A7/B7: Export and import clearance FOB A8/B8: Checking, packing and marking FOB A9/B9: Cost allocation FOB A10/B10: Notifications Incoterm FOB (Free On Board): Advantages and disadvantages Alternatives to the FOB Incoterm Incoterms are internationally recognized trade terms that define the responsibilities of the buyer and the seller in a commercial transaction. One of the most used Incoterms is FOB (Free On Board). We will analyze in detail the FOB Incoterm and how it is applied in different commercial situations. What is the FOB Incoterm (Free On Board)? FOB Incoterm FOB (Free On Board) 2020 | What is it and when to use it? 17 FOB (Free on Board) is the most commonly used Incoterm. The term "Free on Board" refers to a situation in which the seller is responsible for delivering the goods on board the ship at the named port of shipment. The seller is responsible for the associated costs and risks until the goods are on board the ship. From that point on, responsibility and risks transfer to the buyer. It's worth mentioning that this trade term dates back to the days of sailing ships. However, the Incoterms 2020 rules, as well as previous versions, require the seller to place the goods on board the vessel designated by the buyer. From that point on, the risk of loss or damage to the goods transfers to the buyer. In the 2020 version of the FOB Incoterm, Free On Board (FOB), is no longer defined as placing the goods "above the deck of the ship." In fact, no similar term is defined, as everything depends on what is specified in the contract according to the nature of the goods. Furthermore, the cost of transportation is borne by the buyer. This is because the freight bill is generally indicated as "freight collect." The seller must complete all export formalities, while the buyer must complete import formalities. Free On Board (FOB) is no longer defined as placing the goods "above the deck of the ship." Furthermore, it is the buyer's responsibility to arrange for transportation. Therefore, the carrier on the freight bill must be the buyer, not the seller. The seller will most likely require at least a mate's receipt or some other form of proof of export. This could be, for example, a copy of the freight bill for VAT/GST purposes. Often, when a letter of credit is involved, the seller appears on the shipping bill as the carrier. In these cases, it is highly recommended that the seller investigate all possible additional obligations they may be assuming in relation to the terms and conditions stipulated in the shipping bill. However, according to Incoterms 2020 rules, the use of the Incoterm 2020 FOB "Free On Board" is inappropriate when it comes to the transport of goods in containers. This is because the cargo is delivered to the carrier at a location some distance from the port, such as a container yard or even the seller's premises. Let's summarize it in more detail: Seller's Responsibilities in the FOB Incoterm. The seller's responsibilities in an FOB transaction include: Preparing the goods: The seller must prepare and package the goods according to the contract specifications and ensure they are ready for transport on the agreed date. Notifying the buyer: The seller must notify the buyer when the goods are ready for shipment at the designated port. Delivery of Goods: The seller must deliver the goods to the buyer on board the vessel at the agreed port of embarkation. Export Customs Formalities: The seller is responsible for completing and paying for export customs formalities. Incoterm FOB 2020 Incoterm FOB (Free On Board) 2020 | What Is It and When to Use It? 18 Buyer Responsibilities in the FOB Incoterm The buyer's responsibilities in an FOB transaction include: Transportation: The buyer must arrange and pay for the transportation of the goods from the port of embarkation to their final destination. Customs Formalities: The buyer must complete and pay for import customs formalities, as well as any other formalities related to the transaction. Insurance: The buyer must arrange and pay for insurance for the goods during transport, if desired. When to Use the FOB Incoterm? The FOB Incoterm is especially appropriate in the following situations: Maritime transactions: FOB is exclusively applicable to transactions involving maritime or river transport; it is not used for other modes of transport. Experienced buyers: If the buyer is experienced in managing customs and transport procedures, FOB may be an attractive option, as it allows greater control over these processes. Time-sensitive products: For products that require rapid and efficient transport, the buyer may prefer to assume responsibility for transport from the port of shipment to ensure proper logistics. Incoterm 2020 FOB: Obligations of the seller and the buyer FOB A1/B1: General obligations A1 (General obligations) – Seller: In each of the eleven Incoterms, especially in the case of Incoterm 2020 FOB, the seller must provide the goods and their commercial invoice. All of this must be in accordance with the terms of sale. The seller is also required to specify any other evidence of conformity. This could be a health certificate, a certificate of origin, etc. In other words, any document that might be relevant and is specified in the contract. Not only that, each of the Incoterms 2020 rules also establishes that any document can be presented in paper or electronic format, as long as all of this has been agreed upon in the contract, or even if it is not indicated in the contract, as is commonly the case. However, it should be noted that the rules do not specify a particular type of electronic format. So this could be anything from a PDF file, a blockchain, or some digital format that has yet to be developed. B1 (General Obligations) – Buyer: In each of the international trade rules, it is the buyer who must pay the price of the goods. All of this is based on what is established in the sales contract. The problem is that these rules do not specify when this payment must be made. That is: Must payment be made before shipment? Must payment be made immediately after shipment? Can half be paid now and the other half later? Is payment due 30 days after shipment? It also doesn't clearly specify what payment method is acceptable. Payment could be made by email with a copy of the documents, a prepayment, submitting documentation to a bank under a letter of credit, etc. These are all details that shouldn't be omitted from the contract. FOB A2/B2: Delivery A2 (delivery) – Seller's Obligations: In this Incoterm, the seller delivers the goods by placing them on board the vessel named or provided by the buyer. This must be done on the stipulated date, or within the agreed period as notified by the buyer. In the absence of such notification, the seller must deliver at the end of the agreed period. There is still a belief that the ship's rail is the defining point. That is, before the theoretical vertical line above the rail, there is the seller's cost and risk, and then there is the buyer's cost and risk. What would happen if the goods were placed below deck? A court ruled that the point of delivery was when the goods were on the ship's deck. However, a couple of questions arise: Was the notional vertical line replaced by a notional horizontal line in line with the deck itself? What would happen if the goods were placed below the deck? The concept of "on board the vessel" was eliminated in the Incoterms® 2010 version. Consequently, "on board" is generally expressed when the goods are safely on deck or in the hold. In addition, sometimes the goods are required to be secured for transport. This can be done by lashing or separating the cargo with material, or it can even be distributed evenly throughout the hold if the goods are in bulk. If this is the case, the seller and buyer must agree in their contract what is required, as well as the costs and risks of doing so. B2 (Delivery) – Buyer's Obligations: The buyer is obliged to take delivery of the goods when the cargo has been delivered as described in section A2. FOB A3/B3: Transfer of Risk A3 (Transfer of Risk) – Seller: In each of the Incoterms, the seller assumes all risks of loss or damage to the goods until they have been delivered, as described above in A2. However, there is one important exception: loss or damage to the goods under the circumstances described below in B3. These circumstances also vary depending on the role of the buyer, as described in B2. B3 (Transfer of Risk) – Buyer: In this case, the buyer assumes all risks of loss or damage to the goods once the seller has delivered them, as described in A2. However, there are several aspects to consider. For example, the buyer may not inform the seller about the location and time of the ship's arrival. It may even be that the ship does not arrive on time, or that the goods are not loaded, and therefore the seller cannot deliver them. If something like this happens, then the buyer bears the risk of loss or damage to the goods, from the agreed date or the end of the stipulated period. FOB A4/B4: Transport A4 (transport) – Seller: It is not the seller's obligation to contract for transport. However, if the buyer requests it, the seller must provide any information related to security requirements for transport. All this will be done at the buyer's risk and expense. B4 (transport) – Buyer: Unless the seller contracts for transport as described in A4, it will be the buyer's responsibility to contract for transport from the port of shipment. FOB A5/B5: Insurance A5 (insurance) – Seller: For the seller, the risk does not extend beyond the point of delivery. That is, they are not required to contract insurance. The buyer, however, may request it at their own risk and expense. B5 (insurance) – Buyer: The buyer is not obliged to insure the goods with the seller. Whether they choose to insure the goods will be their own choice. FOB A6/B6: Delivery, Transport, and Document A6 (Delivery/Transport Document) – Seller: At the seller's expense, the buyer must receive the usual proof that the goods have been delivered as described in A2. The seller may assist in obtaining the transport document at the buyer's cost and risk. B6 (Delivery/Transport Document) – Buyer: The buyer must accept the delivery note provided by the seller. FOB A7/B7: Export and Import Clearance A7 (Export/Import Clearance) – Seller: Where applicable, the seller must complete the export clearance procedures required by the exporting country. This is done at the seller's own risk and expense. The seller is not required to obtain any transit or import authorization, but the buyer may request it. If so, the buyer assumes the risks and expenses involved. B7 (Export/Import Settlement) – Buyer: Where applicable, the buyer must assist the seller in obtaining any necessary documents required by the exporting country. The seller must bear the risks and costs. FOB A8/B8: Checking, packing, and marking A8 (Checking / Packing / Marking) – Seller: The seller is obliged to pay the costs of any checking required for delivery of the goods. B8 (Checking / Packing / Marking) – Buyer: The buyer is not obligated to the seller regarding packaging and marking. If the buyer provides the buyer with labels and logos, then the buyer must do the marking. FOB A9/B9: Cost allocation A9 (Cost allocation) – Seller: The seller is obliged to cover all costs until the goods are delivered as described in A2. B9 (Cost allocation) – Buyer: The buyer is obliged to the seller to cover all costs related to the goods from the moment of delivery. These costs are different from those payable by the seller. FOB A10/B10: Notifications A10 (Notices) – Seller: The seller is obliged to notify in sufficient time that the goods have been delivered. They must also inform if the ship has not loaded the goods. B10 (Notices) – Buyer: The buyer is obliged to notify in sufficient time of any security requirements related to transport and that apply after the goods are already on the ship. They must also inform the name of the ship, as well as the loading point, stipulating this in the contract. what is incoterms fob Incoterm FOB (Free On Board) 2020 | What is it and when to use it? 19 Incoterm FOB (Free On Board): Advantages and disadvantages Advantages: For the seller: FOB is beneficial for the seller, as it allows them to maintain control over the goods until they are on board the ship and limits their liability for maritime transport. For the buyer: The buyer has greater control over transportation and associated costs from the port of shipment, which can result in savings if managed efficiently. Disadvantages: For the seller: The seller may face difficulties if there are problems at the port of shipment, such as delays or additional costs. For the buyer: The buyer assumes greater responsibility and risk in transportation from the moment the goods are on board the ship, which can result in additional costs if customs and transportation formalities are not properly handled. Alternatives to the FOB Incoterm If the FOB Incoterm does not fit the specific needs of a transaction, there are other Incoterms that may be more appropriate. Some alternatives include: CFR (Cost and Freight): In this Incoterm, the seller is responsible for transportation and costs up to the port of destination, but the risk is transferred to the buyer once the goods are on board the ship at the port of shipment. CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also provides transport insurance for the goods. FCA (Free Carrier): The seller delivers the goods to the buyer's designated carrier at an agreed-upon location. The seller handles export customs formalities, but the buyer assumes responsibility from that point forward. Conclusion The FOB Incoterm is a popular choice in commercial transactions involving ocean freight due to its advantages for the seller and for experienced buyers. However, it also carries additional risks and responsibilities for the buyer, which may not be appropriate in all situations. When choosing the right Incoterm for a transaction, it is important to consider the specific needs and capabilities of both parties, as well as the characteristics of the product and the logistics involved.
CFR
The CFR Incoterm, or "Cost and Freight," is an incoterm exclusively for maritime transport. It means that the seller is responsible for delivering the goods at the port specified by the buyer, as well as booking and paying for the carriage of the goods to the port of destination. The CFR Incoterm is almost identical to the CIF Incoterm, with the only difference being that, under the CIF Incoterm, insurance must be purchased by the seller. Under the CFR Incoterm, however, insurance is optional. For this reason, the CFR Incoterm is often the preferred option in cases where the buyer has the opportunity to purchase better or less expensive insurance than the seller. CALCULATE FREIGHT Seller's Obligations Under the CFR Incoterm Delivery of the goods and necessary documents Packaging and packing Inland transport in the country of origin Customs clearance at origin Outbound charges (or origin charges) International ocean freight Buyer's Obligations Under the CFR Incoterm Payment for the goods Arrival charges (or destination charges) Payment for customs clearance at destination Inland transport in the country of destination Payment of taxes and duties Insurance Under the CFR Incoterm Although cargo insurance is not mandatory under the CFR Incoterm, it is highly recommended that all ocean freight shipments be insured. The shipment can be covered from start to finish by a single policy taken out by either the seller or the buyer. Or two separate policies can be taken out, so that the buyer and seller are responsible for their respective parts of the transport chain. In both cases, it is advisable to ensure that the insurance terms are clearly reflected in the international sales contract. The CFR Incoterm is not suitable for containerized cargo. Unlike other Incoterms, in the case of the CFR Incoterm, the transfer of risk does not occur at the same point where the costs are transferred. Under CFR terms, the risk is transferred when the goods are loaded on board the vessel at the port of origin. Therefore, this Incoterm should only be used in situations where there is direct access to the vessel, such as in bulk cargo shipments. In these cases, the goods are loaded directly onto the vessel, rather than being delivered in a container at the terminal.
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According to Incoterms 2010, the CIF Incoterm, or "Cost, Insurance, and Freight," is exclusive to maritime transport. Under the CIF Incoterm, the seller is responsible for the cost and contracting of maritime transport to the port of destination specified by the buyer. The transfer of risk under CIF terms occurs when the goods are loaded on board the vessel. Therefore, it is recommended when the seller has direct access to the vessel, as is the case with bulk cargo shipments. This makes the CIF Incoterm unsuitable for containerized cargo. CALCULATE FREIGHT Seller's obligations under the CIF Incoterm Delivery of goods and necessary documents Packaging and packing Inland transport in the country of origin Customs clearance at origin Outbound charges (or origin charges) International ocean freight Insurance Buyer's obligations under the CIF Incoterm Payment for goods Arrival charges (or destination charges) Payment for customs clearance at destination Inland transport in the country of destination Payment of taxes and duties Insurance under the CIF Incoterm Under the CIF Incoterm, the seller is required to take out transport insurance for the goods. Along with the CIP Incoterm, it is the only Incoterm that establishes mandatory insurance. In practice, the buyer may have the option of taking out insurance with better coverage. In these cases, the buyer usually prefers the CFR Incoterm, which, unlike CIF, does not require the seller to take out insurance; rather, the buyer can also purchase it. The CIF Incoterm, Not Suitable for Containerized Cargo Unlike other incoterms, the point at which risk is transferred under the CIF Incoterm does not coincide with the point at which costs are transferred. Under CIF terms, risk is only transferred when the goods have been loaded on board the vessel at origin. This makes the use of CIF problematic for container shipments, as these are typically delivered to the terminal, where they can remain for days, before being loaded on board the vessel. This creates a gray area of liability: should damage occur during this time, liability could be difficult to determine. Given the nature of this type of cargo, which travels in containers where it remains intact until it reaches its destination, it would be virtually impossible to know when the damage to the goods occurred. Therefore, if you ship containerized cargo, the recommended alternative to the CIF Incoterm would be the CIP Incoterm. If you are unsure whether the CIF Incoterm is the most suitable for your shipment, contact our expert advisors.
CIP
Definition of the CIP Incoterm The CIP incoterm, or "Carriage and Insurance Paid to," means that the seller is responsible for the delivery of the goods at destination, the cost of international transport, and insurance. Under the CIP incoterm, the transfer of risk does not coincide with the transfer of costs. Under CIP conditions, risk is transferred when the goods have been accepted by the shipping company, either at the terminal or at the port, which is why this incoterm is recommended for containerized cargo. The CIP incoterm is versatile, meaning it can be used for intermodal transport. CALCULATE FREIGHT Seller's Obligations Under the CIP Incoterm Delivery of the goods and necessary documents Packaging and packing Inland transport in the country of origin Customs clearance at origin Outbound charges (or origin charges) International ocean freight Insurance Buyer's Obligations Under the CIP Incoterm Payment for the goods Arrival charges (or destination charges) Payment for customs clearance at destination Inland transport in the country of destination Payment of taxes and duties Insurance Under the CIP Incoterm The CIP Incoterm is one of the two incoterms, along with the CIF Incoterm, in which insurance is mandatory. And in both cases, the seller is responsible for paying for and purchasing the insurance. If you purchase under CIP terms and are able to obtain better or cheaper insurance, you may consider purchasing under CPT terms. Under the CPT Incoterm, the buyer is not required to purchase insurance, so you can choose the insurance you prefer.
