Understanding FOB (Free on Board) When Importing from China
If you’re new to importing from China, it’s crucial to understand the concept of FOB (Free on Board). Many beginner entrepreneurs often face the dilemma of choosing the right Incoterms option for their imports. Should you opt for FOB or CIF? When importing goods from China, most Chinese companies will deliver the products using the shipping method specified in your order. This is where knowing the differences between Incoterms FOB and Incoterms CIF becomes essential. In our previous article on Incoterms 2010, we provided a comprehensive guide to all Incoterms types. Now, let’s focus on the key distinctions between FOB and CIF terms, specifically in the context of importing from China.
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FOB – Free On Board
FOB (Free On Board) is an Incoterm that ensures a fair sharing of costs, risks, and insurance responsibilities between the buyer and the seller. When importing from China, the process can be divided into the following key stages:
- Manufacturing and preparing goods for shipping.
- Transportation from the factory to the port.
- Loading the goods onto the vessel (to the ship’s rail).
These responsibilities fall on the seller when agreeing to sell goods on FOB terms. The Chinese company is obligated to carry out and finance these actions, as well as bear the associated risks. However, it’s important to note that some Chinese companies may attempt to request additional funds or cost-sharing for transportation or alleged customs duties. As the buyer, you are not obliged to make such payments.
On the other hand, certain stages of the importing process become the buyer’s responsibility. These include:
- Sea freight from the Chinese port of loading to the destination port (e.g., Gdynia, Gdańsk, or Hamburg) and insurance of goods.
- Unloading and warehousing of goods (THC, warehousing costs, etc.).
- The customs import procedure (customs duty, VAT, submitting import documentation).
- Transportation of goods from the port to the final destination (e.g., your warehouse or company office).
It’s important to understand the responsibilities of the buyer and seller when using FOB terms for imports from China. This helps us anticipate costs and know which stages of the process we’re responsible for.
As the buyer, it is of utmost importance to conduct a meticulous assessment of transportation expenses. It is worth noting that the price quoted by Chinese manufacturers often includes solely the product’s cost. By taking these factors into consideration, we can effectively plan and allocate our budget for a smooth import process.
CIF – Cost, Insurance, and Freight
Unlike FOB terms, CIF (Cost, Insurance, and Freight) Incoterms put the responsibility of sea freight costs on the seller, specifically the Chinese manufacturer in this case. It may seem attractive, but it’s crucial to remember that our order includes both the product and the sea freight. Additionally, there are hidden costs related to CIF shipping that are passed on to the buyer at the port of discharge.
As importers, it is our desire to have control over the entire import process and product pricing. Therefore, we recommend opting for importing with FOB Incoterms.
What is FOB?
FOB, which stands for “Free On Board,” is a widely used international trade term in shipping and freight contracts. It defines the point at which the responsibility and costs for the transported goods shift from the seller to the buyer.
FOB (Free On Board) is a term used in international trade to designate a specific location, such as FOB Shanghai or FOB Miami. This location marks the point where the seller’s responsibility ends and the buyer takes over.
Let’s look at the responsibilities and costs associated with FOB:
Seller’s Responsibility (Exporter): The seller is responsible for delivering the goods to the designated FOB location. This includes packaging, loading onto the ship or transport, handling export customs clearance, and covering related costs.
Buyer’s Responsibility (Importer): Once the goods reach the FOB location, the buyer takes on the responsibility for transporting them to the final destination. This includes shipping, insurance, import customs clearance, and any additional charges incurred during transportation.