Always get quotes from suppliers with FOB, and don’t worry about incoterms until you’re actually placing an order. Once it’s time to place the order, here’s what you should do…
FOB = Your go-to incoterm. Supplier pays for and handles the product up until the specified port, where your freight forwarder then takes over. Your supplier can transport goods locally and clear local customs cheaper & quicker than you can (so use FOB, not EXW)
CIF = Your go-to incoterm for high-trust suppliers. Supplier pays for everything up until it’s delivered to my local port, where my freight forwarder takes over. You can hire a local company to
get the product & drop it off at your desired address cheaper & quicker than a foreign supplier could
(so use CIF, not DDP).
Always start with FOB, and only switch over to CIF with a supplier you really trust and order from often.
There is no guarantee you’re not being massively overcharged with CIF, so it’s important you trust your supplier (and compare quotes from time to time).
EXW (Exworks) – Consignee/buyer is responsible for all shipping costs.
FOB (Free on board) – Consignor/supplier is responsible for all origin costs while consignee/buyer is responsible for the shipping costs starting with the main leg.
Now for a bit more detail:
If you elect for EXW shipping terms (i.e pickup from a door), your chosen freight forwarder will pick up the shipment from supplier/factory door, clear customs at the origin and destination ports, and deliver the goods to your chosen destination.
You may want to check with your factory provides you with an export license or you may face a fee when trying to get the goods out of the country of export.
If you choose FOB, the supplier needs to arrange to deliver the goods to the forwarder’s warehouse at origin port and pay for all origin costs (i.e pick up and delivery to origin port, warehousing, export customs clearance).
The forwarder will then handle the main freight leg, clear import customs, and deliver the goods to your chosen destination.
The advantage of EXW is that there is only one party responsible for arranging for your cargo’s departure, whereas in FOB the supplier and forwarder both share in the responsibility. EXW is, therefore, less prone to misalignment and coordination issues.
FOB and EXW are the most common incoterms and so Freightos instant quotes are either FOB or EXW.
If you and your supplier decide on a hybrid, such as FCA, then either we will help you book a custom quote or you can book a regular instant quote and we will help you adjust post-booking.
Of all the incoterms for importing from China, I would recommend FOB in the vast majority of cases.
FOB, or ”Free on Board”, shipping offers the best of both worlds: control of your product and relatively low shipping costs.
What this basically means is that you will be responsible for the shipment once it is on the ship.
The supplier in China will be responsible for the logistics of getting your product packaged and put onto the ship, at which point you will assume responsibility.
You’ll often get better freight rates through this system, and you’ll save yourself a lot of logistical hassles.
Delivered Duty Paid (DDP)
Speaking strictly from the perspective of minimizing risk and responsibilities for an import from China (or any other country), using the Incoterms 2010 term Delivered Duty Paid (DDP) places full responsibility on the exporter and little on the importer.
According to the International Chamber of Commerce, DDP means & “the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport, ready for unloading at the named place of destination.
The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.”
Of course, there may be other considerations than just minimizing risk and responsibilities, so importers should be aware of all 11 trade terms under Incoterms 2010.
I recommend that you always buy according to FCA or FOB terms from the supplier, which ensures that the factory takes care of export clearance paperwork.
But, book a DAP shipment via an established freight forwarder, to ensure that you keep track of all costs, can book insurance and oversee the shipment process.
Factories are not shipping companies.
From my experience, I prefer using FOB.
The in-land trucking of China is very efficient, and when purchasing from my Chinese suppliers, they often give FOB price already to nearby ports.
This allows the supplier to work in their own time, and the supplier contacts my forwarder directly when the goods are going to arrive at the port or at my forwarder’s office.
This takes away a lot of thought and effort compared to other terms.
This may not always be the cheapest option, but it saves me time and a headache.
When importing from China, if you are a small business, and do not have long relationships with your suppliers, we actually recommend shipping on EXW terms but letting the supplier pay for the transportation to the CFS, port or airport.
Traditional FOB terms are a good choice, but the challenge as importer can be that the supplier will not agree to pay the local charges of the selected forwarder’s agent at the origin, claiming that they are above market level.
If going for plain vanilla EXW-terms, the shipping cost of in particular the trucking from factory to port will become very high, resulting in higher landed costs.
The reason is simply that the supplier can achieve economy of scale in the export haulage, which the importer cannot.
As incoterms decide the amount of control a seller has on his shipments, it is important for him to choose the most appropriate one.
For importing from China, the best Incoterm according to us is FOB (Free On Board).
Besides being more cost-effective, FOB comes with limited responsibilities and a good amount of benefits.
In FOB, the buyer pays for the cargo, ocean freight, insurance, arrival fees and customs clearance at the destination along with all corresponding tariffs and taxes.
This makes it a decent choice as the buyer has control and doesn’t have to bother about technical responsibilities like certificates, transportation etc.
To choose, a seller can select from the FOB, CIF or EXW based on the amount of control they get on the freight.
It is imperative to get maximum control on freight as that determines the price.
Thus, one should choose wisely.
Each Incoterm out of the three has a different cost, security, risk and responsibility involved.
My background includes writing legal contracts, so I generally peruse the source International Chamber of Commerce for original definitions of shipping Incoterms.
I also use key supplementary resources depending on where suppliers are located.
To stay current with requirements for importing from China, I set a Google alert on “Incoterms” and “China” which brings pertinent developments to my email inbox daily.
For instance, that’s how I uncovered the upcoming Incoterms 2020 changes as described by the Global Negotiator Blog.
For the unique complexities of importing goods from the world’s most powerful exporter China, I recommend BanSar’s Incoterms 2010 definitive guide 2020
BanSar offers the most practical presentation of shipping terminology when Chinese suppliers are involved.
BanSar’s Incoterms are well-organized, indexed, highly readable and quickly understood thanks to well-designed infographics.
Importing anything from China can quickly become an overwhelming process.
This is why we always suggest using an incoterm like FOB, or even DAP, which takes your cargo as far as possible.
You do not want to be using an EXW for example, as you become responsible for moving the goods while they are still at the supplier’s location!
However be careful how much responsibility you do place on the supplier, as most will not want to accept the terms of a DDP incoterm because that would make them responsible for the duties at the destination.
To sum it up, unless you want to deal with numerous shippers in China you’re best off using the FOB and DAP incoterms.
In an ideal world, EXW is the best incoterm because you have full control over the entire shipping process.
This way you have the flexibility to use your own freight forwarder, customs agent etc… to get the lowest price.
However, if you do not need full control, FOB is the next best option.
The best shipping incoterms when importing from China depend on what you’re looking for as a company, which can also depend on the size of the company.
When we import products for our Million Dollar Case Study, we use FOB (free on board). FOB is used when you’re shipping by the ocean.
Basically, when using FOB, the manufacturer will be responsible for transportation and costs to the port, then the buyer is responsible for all transportation and costs following that.
The reason we like FOB is because it typically is cheaper to have the manufacturer deliver the product to port.
INCOTERMS is the International Commercial Terms, three letters code, which determines the contractual clause trade clauses between the buyers & sellers, INCOTERMS are a Global Standard terminology used in the international trade, pre-defined by the International Chamber of Commerce (ICC).
The most commonly used INCOTERMS are FOB and CIF, most of the first timer importers from China prefers CIF, as they see CIF as less complication and less risk, in this post we will explain why new traders with China should choose FOB instead of CIF.
Following chart defined the obligations and risks between the two trading party’s buyer and seller
Experts always recommend choosing the INCOTERM which provides more control over ocean freight, that gives more control on transit time and freight cost, so importers can reduce the chances of delays, and can select the Ocean carrier and routing.
So FOB is better in term of controlling the Ocean freight, freight cost, shipping routing and transit time.
- Besides that, in CIF term the seller is the one who is responsible for insurance, although it may seem like an advantage, while in fact, it is not, because buyer is in the hands of the insurance company that was selected by the shipper, based on the seller criteria of selecting his insurance provider, and buyer will be absorbing the greater risk in case of any inconvenience.
FOB is the recommended INCOTERM for importers from China that provide the buyer with more control on the freight, insurance, routing & Transit time.
There is not one best INCOTERM…it is just what works best for you.
If you are a small importer with no experience, DDP is the least hassle.
If you are a manufacturer, EXW would give you the most control. Importers need to be familiar with what each INCOTERM means because each is different in terms of risk and who pays the freight. Pick what suits your situation.
See attached for a chart that would be most helpful for shippers and consignees.
At Trade Finance Global, we help freight forwarders and importers trade overseas.
FOB (Free on Board) is a term we see mis-used the most.
Using FOB for containerized cargo is one of the most common mistakes we see today.
Traditionally, FOB was an incoterm used for bulk cargo when passed over the rail by hand.
FOB today is typically used for air shipments or for the delivery of cargo at a warehouse.
As a solution for containerized cargo, we’d recommend looking at the FCA incoterm when dealing with Full Containerised Loads (FCL), or Ex Works (EXW) if customs can be arranged by the buyer, or, for Less than Container Loads (LCL) using the FCA incoterm at the facility of the forwarder.
FOB – Free on Board (named port of shipment)
Definition: Free Onboard Vessel is sort of a hybrid, where the seller is obligated to bring the goods all the way to the port, clear the goods for export, AND see that they are loaded onto the ship nominated by the buyer.
Once the goods clear the railing of the vessel the buyer assumes the risk. FOB is often followed by the named loading port thus: FOB Long Beach, meaning the seller delivers the goods, pays the port fees and sees the goods loaded onto the ship docked (in this case) at the port of Long Beach.
- Note: This Incoterm is used exclusively for maritime and inland waterway transport but not for container shipping.
- As a forwarder, what are our favorites?
- FOB is our favorite because it allows each party to handle only what they know best
- The seller knows their country’s requirements and processes
- Can frequently secure more competitive pricing at the origin
- The buyer (Or their agent/forwarder) knows what is required in the US
- And Has access to a vast network of vendors
- Overall there are fewer chances for error
- FOB is our favorite because it allows each party to handle only what they know best
- Specifically when talking about US Imports, if FOB isn’t an option, EXW is the next best choice.
- The issues that arise during US import shipments are generally caused by issues with customs.
- This is because US Customs has very strict rules when it comes to what documents are required when certain filings need to be done, and what processes need to be followed. If the seller/supplier or his agent is not aware of this or experienced with US Imports, there is a good chance that they will either miss something or handle something improperly.
- The importer (buyer) is the one held responsible for charges imposed by customs and border patrol this, not the seller/shipper or his agent.
- While it is preferable that the seller arranges the origin pickup, delivery to the port, and export documentation, it is not required. Many freight forwarders have very strong relationships with other forwarders overseas that act as their agents to arrange local freight and handle origin processes.
- As long as your US forwarder is well versed in customs processes (which they should be), they will be able to have their agents arrange everything perfectly.
- Specifically when talking about US Imports, if FOB isn’t an option, EXW is the next best choice.
- Our Least Favorites
- I want to start this out by saying that there are companies that successfully ship under CIF terms on a regular basis. These companies have established relationships with their overseas partner and have been doing business this way for years (if not decades).
- For a first-time importer or novice shipper, CIF is probably not for you.
- The issues we discussed earlier US Customs processes not being followed and issues with filing documentation on time are of the utmost concern when shipping under CIF terms.
- The specific issues we see very often are issues with ISF filing, documentation prepared properly, and inaccurate pricing.
- ISF must be on file and accurate 48 to 72 hrs before the ship departs the origin port. If this is not on file or has been filed incorrectly, the US importer will be subject to a MINIMUM $5000 fine for noncompliance. The fines can even reach upwards of $10,000, depending on the circumstances.
- The packing list and invoice must be prepared properly and formatted correctly. When importers allow the supplier to take complete control and don’t have a US forwarder or customs broker to verify the accuracy of the documents ahead of time, they are taking a sizeable risk.
- Usually, forwarders aren’t contacted for CIF shipments until the container is about to arrive. Unfortunately, this very regularly results in delays and extra costs.
Learn more from here.
When importing sea freight from China, it’s always best to buy on FOB IncoTerms.
Chinese exporters are very familiar with dealing with FOB IncoTerms.
Free On Board clearly states when the costs and risk is transferred onto the buyer – when the goods are actually “loaded on board” the vessel at the port of loading.
The exporter will cover all costs and processes to get the container packed, delivered to the port and loaded on board the vessel.
The importer is then liable to cover the costs of international sea freight (USD) and all other associated costs to deliver the goods through to their door.
An importer must always understand the costs of International sea freight, customs clearance, import duties/taxes, and local handling charges before they proceed with an import.
Contact your freight forwarder to get quotes before proceeding with imports.
I highly recommend CIF for Australian importers to minimize risks and simplify the procedures importers need to take in regard to logistics and insurance.
CIF is especially recommended to businesses which do not have much experience in importing from China.
The major shipping carriers from China to Australia are COSCO and China Shipping.
Both are Chinese shipping companies with their own sales offices and broad coverage through their appointed freight forwarder networks.
While it is easy for Chinese exporters to coordinate and work with these sales offices and freight forwarder networks in China, it is not as easy for Australian importers to communicate, coordinate with these Chinese logistic service providers.
It is also challenging for Australian importers, especially ad hoc importers to fully understand the complex international shipping insurance to cover all potential risks associated with shipping from China.
When importing from China to the UK we at Shippo commonly recommend choosing FOB shipping terms.
This allows you to best control your costs.
On FOB terms your supplier pays all of the Chinese costs and you pay the rest.
This means you don’t have to know what export documentation they do or don’t have in place as that’s their responsibility.
You’ll receive a cost from your supplier to sell you the goods on FOB terms and a cost from a shipping company and that should be all you need to know to establish your full purchase and import costs.
FOB terms are slightly more favorably to Exworks terms but these would be our next choice.
As the importer, you’ll be responsible for more costs and risk, but you’ll know exactly what you’re paying for.
We’d suggest avoiding CIF or CFR terms as you can end up with hidden costs when the goods land in the UK.
We recommend our clients negotiate the Incoterm that gives them maximum control while limiting their liabilities to foreign governments.
Importers should consider FCA (Free Carrier) terms. Under FCA the exporter is responsible for delivering goods to the custody of the carrier named by the importer at an agreed delivery point, e.g. the shipper’s factory or the port of loading. That way our importing clients don’t have to deal with (and aren’t liable for) export formalities of the country from which the goods originate. The risk, responsibility for regulatory compliance, and expense are handled by the exporter.
That’s especially important when importing from China, where an export license is required. Many importers have ended up accruing additional expenses and even have had cargo seized by China customs authorities when suspected of moving goods without the appropriate permissions or documentation. Many smaller factories do not have necessary permits and licenses to export, so it’s key to clarify this before finalizing purchase.
Most importantly, no one should rely on Incoterms alone. We recommend all our clients spell out expectations in a purchase order to eliminate any ambiguity and know exactly where risk and expense transfer from exporter to importer.