International Trade Rules, widely known as Incoterms, are updated every ten years. Incoterms define the conditions for the worldwide exchange of goods, namely the allocation of costs and obligations between the buyer and the seller. The latest Incoterms 2020 came into force on January 1, 2020. Of the eleven existing rules, two are especially widely used in import – FOB and CIF. Check what the differences between Incoterms 2020 FOB and CIF are.
Incoterms 2020 FOB and CIF
When it comes to importing from China, most often, the FOB and CIF rules are applied. FOB (Free on Board) and CIF (Cost Insurance and Freight) differ slightly in terms of the allocation of costs and responsibilities of both parties to the transaction. These rules are to be used only for sea or inland waterway transport and for both delivery on board the vessel applies.
What is the allocation of costs in Incoterms 2020 FOB and CIF?
On the FOB term, the seller undertakes costs related to damage to the goods before the goods are on board the vessel. They also pay for export clearance and the delivery of the goods to the ship. When it comes to the CIF term, the seller also undertakes the costs of issuing and sending the commercial invoice and contracting for the carriage of goods. The seller pays for insurance, packaging, and checking operations of the goods.
The buyer in the FOB rule pays the costs of import clearance and import-related issues, as well as costs related to the conclusion of a transport contract. The buyer also bears the possible costs related to damage or theft of the goods after loading the products onboard. CIF states that the buyer pays for the pre-shipment inspection of the goods, all costs not covered by the contract, or not being freight but relating to the goods during transport from the port of loading and additional charges.
As you can see, the buyer bears more costs on the CIF rule. However, on the CIF term, the obligation to pay sea freight is placed on the seller, not the buyer.
What is the allocation of obligations in Incoterms 2020 FOB and CIF?
The seller is responsible for the export clearance and related costs. Besides, he/she bears the responsibility for the delivery of the goods to the vessel in both FOB and CIF. Only on a CIF basis does he/she undertake to conclude an insurance agreement and to conclude and pay the freight contract costs.
In both cases, the buyer is responsible for import clearance and its costs. On both FOB and CIF basis, the buyer must inform the seller about the designated port, the name of the vessel, and the delivery date. The buyer is responsible for any damage to the goods and theft after the goods have been loaded onto the ship.
Other differences between Incoterms 2020 FOB and CIF
On the FOB rule, the delivery is completed when the goods have been loaded on board. According to CIF, delivery is completed when the goods pass the ship’s rail at the named port of shipment.
Infographics clearly show the allocation of costs and responsibilities on the FOB and CIF rules. It is worth remembering that there are also hidden costs.
We recommend choosing FOB instead of CIF. If you decide on CIF, you must consider the additional costs that can be avoided when importing. For example, the other party may give a transport price that is far too low. Therefore, when the ship arrives at the port, you may be forced to cover unexpected spending. Overall, it can be more expensive than when using other Incoterms.
On FOB, you choose the forwarder, which gives you more control over costs that are already defined.
We have prepared for you a complete guide to Incoterms 2020.