In international trade, there are many available trade terms for the seller and the buyer.
However, each of them has its specific definition, the responsibilities, obligations and risks for the seller and the buyer would vary from different terms.
So, how should we choose among FOB, CFR and CIF?
Namely Free On Board, usually followed by the name of the port of shipment, is one of the most widely used trade terms. Under FOB shipping terms, the buyer should arrange the vessel for shipment, while the seller should load the goods on the designated vessel at the port of shipment and within the time period as stipulated in the contract and, after that, inform the buyer of the shipment without delay.
At the point when the goods have been loaded on the designated vessel at the port of shipment, risks would shift from the seller to the buyer. FOB is used in most export transactions when it comes to sea transport.
Under the FOB term, once the goods have passed the ship's rail at the port of shipment, the seller is considered to have delivered the goods.This means that from this point, the buyer should be responsible for any risks involved.
However, in practice, most of the time, the buyer will entrust the seller(the exporter) to do his job for him, therefore, the seller will face greater commercial and legal risks.
An abbreviation for Cost and Freight, is usually followed by the name of the port of destination. Under this term, the seller should be responsible for all the costs involved until the goods have arrived at the named port of destination; the goods are delivered on board; risk transfers to the buyer when the goods have been loaded on board the ship. CFR should only be used for non-containerized sea freight inland waterway transport.
In the case of CFR, the seller is responsible for the carriage of goods, while the buyer is responsible for cargo insurance. If the seller doesn't send the Advice of Shipment to the buyer in time, then the buyer can't apply for cargo insurance at the right time or will even fail to cover cargo insurance.
Therefore, the seller must send the Advice of Shipment to the buyer right after loading the goods, without any delay, or else, the seller should be responsible for any costs and risks involved in the onward shipment.
Cost, Insurance and Freight，is usually followed by the name of the port of destination. Under this term, the price will also include the freight costs for carriage from the port of shipment to the port of destination and the premium as decided by the two sides.
That is to say, besides the same obligations as required by CFR, the seller should also apply for the cargo insurance and pay the premium. In international trade, the insurance amount here is usually 110% of the CIF price.
Under CIF term, the seller should pay the freight costs for carriage from the port of shipment to the port of destination and the premium; risk transfers to the buyer after the goods have been loaded on board. Besides, the seller should try to support the buyer, for example, to help the buyer acquire needed documents or information.
Ports in different countries have different conditions, loading & unloading expenses and freight rates. And there are some ports even have some specific rules, about which we often can not get to know.
When we import goods, if the port abroad has poor conditions and requires higher expenses, then we should try to use CIF, CFR, FOB Stowed or FOB Trimmed; when we export goods, if the port of destination has poor conditions and requires higher expenses, then we should try to use FOB, and if we have to use CIF or CFR, we'd better choose variations such as CIF Ex ship's hold or CFR Ex ship's hold.
Besides, when choosing these trade terms, we should also consider factors such as risks on the sea, whether it facilitates capital turnover, whether it's safe to receive foreign exchange or goods.
Anyway, we should choose the most appropriate trade term according to each specific situation. Hope these tips are helpful to you!
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