When it comes to importing from China, you should carefully choose the most suitable Incoterms 2020. In terms of imports from China, the most popular Incoterms are the FOB and CIF rules. Import on CIF seems to be a very convenient solution since most of the obligations are placed on the seller. As the importer, you do not have to worry about concluding the contract of carriage from China and must only wait for the goods to arrive at the port of destination. However, importers that choose the CIF terms are usually unaware of the additional costs that await once the goods reach the port of destination. It is hard to oversee the costs of unloading goods. After that, import on CIF basis does not seem so favorable anymore.
Import on the CIF Incoterms basis
All Incoterms in group C (CPT, CIP, CFR, and CIF) are called “the death of a novice trader,” as they are not so intuitive in use. Looking at what CIF stands for (Cost Insurance Freight), it can be only partly guessed how it works.
The seller undertakes the delivery of the goods to the ship. The risk passes to the buyer when the goods have been loaded onboard the vessel. The seller covers the costs of concluding the contract of carriage. In addition, they must also conclude an insurance agreement and deliver it to the buyer. If the goods are subject to export customs clearance, the related obligations and costs are also on the seller’s side.
Therefore, the import price on CIF indicates that transport and insurance costs are all included. In the CIF rule, the seller is required to obtain insurance at their expense only with minimal coverage (provided in clause “C” of the Institute Cargo Clauses, unless stated otherwise in the agreement). If there is a need for the buyer to increase the level of insurance coverage, then they should either agree in advance with the seller and indicate the exact level or conclude additional insurance contracts at their expense.
Check out the article to learn about the allocation of costs and obligations of the seller and the buyer on CIF terms.
Buying on a CIF basis – delivery risk and hidden costs
Any actions that lead to loss, damage, theft of goods, or delays in delivery are often resulting from reasons beyond the control of the seller and buyer. It is worth bearing in mind that the obligation to pay in this situation is placed on the buyer because the risk has already transferred. The only exception is when it is obvious that the damage resulted due to the seller’s actions or negligence.
To understand where the hidden costs passed to the buyer at the port of destination come from, you need to analyze the process of transporting goods from China.
- The supplier packs the goods at the factory.
- The courier or carrier collects the goods and transports to the port.
- In the case of shared containers, in a warehouse in the port, the goods are loaded into the container (manually or with a forklift). Next, the container is loaded onto the ship (by crane).
- Chinese export license must be obtained so that the goods can leave China.
- The goods must then be declared to Chinese customs (export clearance).
- To send goods, you must obtain official documents (fee charged).
- After boarding, the costs of the contract of carriage are to cover sea transport from port to port.
- Goods are unloaded from the ship (by crane) and moved to the warehouse (by truck). Then the container is unloaded (manually or with a forklift). The port and warehouse provide the services for an additional fee.
- The goods must then be declared to customs by a specialist. Finally, the carrier receives your goods and delivers them to the selected location.
Many hidden costs associated with imports on CIF are passed on to the buyer at the port of unloading. Unfortunately, the importer finds out about these costs only when the goods reach the port of destination. Novice importers, unaware of the rules and fees, end up paying twice the initial planned charge for the carriage of goods.
Import on a CIF basis – problems while importing from China
1. Buying on the CIF terms and the hidden costs
Although CIF terms are favorable at first glance, CIF pricing, unfortunately, does not include hidden costs. They do not come from a supplier who may not even be aware of their existence. Hidden costs are caused by forwarding companies that need to send cargoes to stay on the market and therefore offer suppliers their services at the cheapest possible rate. That is the transport cost that the supplier reveals to the buyer. In other words, the cost of ocean transportation to the port of destination is covered, but it does not include the Destination Handling Charge (DTHC) costs. As a result, the importer is charged with hidden costs. The costs are often inflated so that the forwarding company can make more profit.
It seems that imports on CIF involve only paying the transportation cost provided by the supplier and small fees at the port of unloading. To importer’s surprise, after the goods arrive at the port, it turns out that it is complicated to control the additional costs, and they significantly exceed the expected transport cost.
2. Fake Bill of Lading
On the CIF basis, the supplier arranges the freight. There may be discrepancies or errors in the transport documents. Every change introduced to the Bill of Lading is associated with additional costs. What is more, on the CIF terms, suppliers usually issue the original B/L. In order to receipt the goods, this document is required. A dishonest Chinese supplier may not provide us with the original document after receiving the payment. Thus, it will block us from collecting the goods and bring extra container parking costs.
3. Delays in delivery on Incoterms CIF
The CIF terms can only be used for maritime and inland waterway transport. It does not apply to combined transport that involves multiple modes of transport. Sometimes, Incoterms intended for sea transport are also used to transport goods by plane or by rail. When there are no transport complications, you do not have to worry. However when something goes wrong, things get tough For instance, the airport customs may not want to accept the CIF in air shipment (these are not the same terms of delivery) and demand the correction of the invoice on CIP in air shipment, which causes delays at customs clearance (up to several days).
4. Frauds on CIF
Unfortunately, the Incoterms CIF basis can be used by dishonest suppliers to send goods different than stated in the contract. The buyer does not control the loading of goods. Therefore there is a risk of getting the wrong ones. For example, it may turn out that fraudsters will load the container with sandbags of the corresponding weight instead of the ordered goods.
It is worth arranging quality control of goods at the time of loading. Your inspector may be present when loading the container until the truck leaves the factory or warehouse. In this way, you can also defend yourself against the loss and the risk of getting switched goods.
5. Insurance of goods on CIF terms
It is worth noting that often when the seller pays for the cargo insurance, they are the beneficiary. It means that if the goods are damaged, the seller will receive the money from the insurer. In this case, you can only count on the goodwill of the seller in terms of obtaining compensation. Besides, the insurance chosen by the supplier will cover only CIF costs that do not include the additional costs placed on the buyer related to customs clearance or transport to the destination.
Import on a CIF basis – downsides of Incoterms CIF
You should also be alert when the transaction is settled through a letter of credit (LC). It cannot be substituted for another document. The other documents must be the same as the letter of credit indicates. Otherwise, the bank can suspend the payment.
When it comes to transport under CIF, CFR, FOB and FAS terms, the Sea Waybill (SWB) is needed to meet the conditions of the letter of credit. If the seller sends the goods, for example, by plane, they will not receive a Bill of Lading (B/L) but an Air Waybill (AWB). Therefore, the bank will not pay the money because the beneficiary has not exactly met the obligations stated in the contract.
How to avoid those problems?
You should pay attention to the shipping method. If your goods are shipped via sea freight, the supplier must specify the shipping terms or negotiate the terms with you. It is a red flag when the supplier does not disclose the ocean transport conditions according to Incoterms. Low transport fees are also suspicious. Usually, in this case, the transport rates are incomplete, and you will have to cover additional costs. A good idea is to use a letter of credit that provides the security of the transaction.
When importing from China, you should carefully choose the appropriate Incoterms rule. If you decide on CIF, you must be prepared to cover costs not included in the freight charges provided by the supplier. On the FOB basis, you have the full transparency of the total costs of transport, as well as complete control over the cargo. On our site, you can read more about the difference between FOB and CIF.