CIF vs. FOB: What's the difference and how to choose?
Incoterms are essential for international trade. They influence the quote you receive from the seller, the shipment of the goods, and the responsibilities of sellers and buyers.
Some new buyers lack a clear understanding of trade terms. They see that others often use FOB, so they also ask their sellers for the FOB price. However, in reality, they need a CIF price that's more suitable for them. The seller will provide an FOB quote based on the buyer's incorrect requirements and descriptions. This creates a communication gap between the two parties.
In most cases, you'll use CIF or FOB, as these are two of the most common shipping terms. To help you avoid problems like the ones above and use them correctly, we'll analyze FOB vs. CIF in this article from the following perspectives:
What is CIF and who bears the shipping risk?
What is FOB and who bears the shipping risk?
What are the differences between CIF and FOB prices?
Why do buyers prefer FOB/CIF and when to use them?
What is CIF and who bears the shipping risk?
CIF is short for Cost, Insurance, and Freight. It contains three types of rates: cost of goods, freight to your country's port, and insurance. When using CIF shipping terms, you must add a designated port in your country, such as CIF New York or CIF Los Angeles.
Let's take CIF New York as an example. This means the seller will pay the ocean freight and insurance fees and ship the goods to the port of New York. You will receive the delivery there, handle import customs clearance, pay import duties, and transfer the goods from the port to your warehouse.
As for who should bear the risk of damage and loss, since the seller arranges for shipping, they will be responsible for it until the goods arrive in New York. If the goods are damaged during shipping, the seller will help you communicate with the carriers and resolve the issues. Additionally, the seller will help you arrange cargo insurance and offer insurance policies, so if the goods are lost, you can claim from the insurance company.
When negotiating a CIF shipping agreement with the seller, you should clearly clarify the port where you will pick up the goods, the shipping methods and costs, and the type and amount of insurance purchased to avoid unnecessary disputes in the future.
What is FOB and who bears the shipping risk?
FOB, or Free On Board, means that the seller must deliver the goods to the designated seaport in your country, while you have your own forwarder complete everything afterward, including arranging shipment to your destination, paying ocean freight, purchasing insurance, and processing import customs clearance.
When using FOB shipping terms, you must add a designated seaport, such as FOB Ningbo or FOB Shanghai. FOB Ningbo means the seller will transport the goods from the factory to the port of Ningbo. You take delivery of the goods there and ship them to your destination in your country.
Regarding risk, before the goods arrive at the port of Ningbo, the seller will be responsible for damage and loss. Once the goods are on the ship, you assume the risk, which is different from CIF. If your goods are damaged or lost during shipment, you must contact your freight forwarder or insurance company at your own expense.
For example, the seller transfers the goods to the ship using a lift. If the cargo accidentally falls into the sea before being loaded onto the ship, the seller will still be liable for the damage, as delivery of the goods has not been completed.
Typically, the seller will ship the goods to their nearest port on FOB terms. If you don't know, you can ask the seller and let them quote you the price based on that. For example, a seller in Dongguan will ship the goods to the port of Shenzhen, while a seller in Suzhou will ship the goods to the port of Shanghai.
CIF price vs. FOB price
When using CIF or FOB, the most important things to consider are: what are the responsibilities of buyers and sellers, who is responsible for damage or loss to the goods during shipment, and what quote do you get from the seller?
These are the main differences between these two terms. We've already mentioned the first two above. Now let's look at CIF vs. FOB prices, which involve different costs.
For example, you purchase a batch of goods from Yiwu, China, and ship them to Los Angeles, USA. Yiwu products are typically exported from the port of Ningbo. Therefore, costs include:
Product price: $10,000
Cost from factory to Ningbo port: $500
Export customs clearance fees: $300
Ocean freight from Ningbo port to Los Angeles: $2,500
Insurance cost: $250
FOB Price
With FOB shipping, the seller must arrange trucks to ship the goods to the port of Ningbo and handle export customs clearance. They will add these fees to the price you pay. Therefore, the FOB price calculation is:
FOB Ningbo Price = Product Price + Cost from Factory to Ningbo Port + Export Customs Clearance Fees.
That is, FOB Ningbo price = $10,000 + $500 + $300 = $10,800.
CIF price
Under CIF shipping terms, in addition to shipping the goods to the port of Ningbo and handling customs clearance, the seller must pay insurance and ocean freight to Los Angeles. These fees are also included in the price you must pay. Therefore, the CIF price calculation can be:
CIF Los Angeles price = FOB Ningbo price + freight to Los Angeles + insurance
That is, CIF price Los Angeles = $10,800 + $2500 + $250 = $13,800
Freight and insurance CIF
Regarding freight, it is real-time and updated weekly during the pandemic. When calculating freight, it is best to check with the seller or carrier for the most recent freight rate.
Furthermore, if your goods are shipped via LCL under CIF delivery terms, you may encounter a situation like this: the Chinese carrier initially charges you a very low ocean freight rate. You think that's all there is to it and that you won't need to pay more later. But when you pick up the goods at the port, the carrier charges you again.
In this case, you'll feel deceived because it's different from what you think. But, in fact, it's not a scam, simply because these carriers calculate LCL shipping costs differently.
For example, you're transporting three CBM goods. You ask three carriers, and they give you different prices. In reality, they only charge you a portion of the total shipping costs at first—perhaps 30%, 10%, or even free, which varies depending on the carrier. They'll charge you the remaining costs again when you pick up the goods at your country's port. All of these fees are the fees you'll owe the carriers—that is, the total shipping cost.
Therefore, the low price you get from some carriers doesn't necessarily mean it's cheap, because you'll then have to pay the other fees to offset the total cost.
Regarding insurance, the seller is required to purchase the minimum insurance for the goods, which will be (1 + 10%) of the CIF price. Therefore, Insurance paid = CIF price × 110% × insurance rate. If you require higher insurance coverage, you must reach an agreement with the seller or purchase additional insurance on your own.
Why do buyers prefer FOB/CIF prices and when should they use them?
When purchasing from China, whether by sea or air, goods must first be shipped from the factory to a Chinese port by truck, and then shipped to your country. However, this is not an easy task. China is a large country with hundreds of ports, and suppliers are located in different regions. If you are unfamiliar with China and lack import experience, shipping goods from the factory to the port will be very problematic.
Many buyers don't want to bother with this and will choose CIF or FOB. With FOB, the Chinese seller can help you ship the goods to the port in China. You just need to know when the goods will arrive at the port and send your ship there to pick them up on time.
And with CIF, the seller will ship the goods directly to your country's port, and you only need to receive them there. Both options can save you a lot of trouble.
But be aware that FOB or CIF aren't suitable for everyone. If you want to use FOB, it's best to have your own regular freight forwarder ship the goods from the port in China to your destination. Otherwise, ask your seller for the CIF price and arrange the shipment for you.
Additionally, if you need to collect goods from different sellers at the same port in China and then ship them together via LCL or FCL, FOB is a good option. All your sellers can ship the goods to the same designated seaport, where your carrier can pick them up and load them into the container.
