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Incoterm FOB: Definition, challenges and alternatives

Introduction to Incoterm FOB

Incoterm FOB, or “Free On Board,” is a trade term used in international trade to determine when the ownership of goods is transferred from the seller to the buyer. It is one of 11 Incoterms, or International Commercial Terms, developed by the International Chamber of Commerce (ICC) to provide a set of standardized rules for the interpretation of commonly used trade terms. The purpose of Incoterms is to help reduce misunderstandings and disputes between buyers and sellers by clearly defining the responsibilities and obligations of each party in the delivery of goods.

 

How Incoterm FOB works

Under Incoterm FOB, the seller is responsible for delivering the goods to a specified location, such as a port, airport, or warehouse, and is also responsible for loading the goods onto a vessel, aircraft, or other mode of transport. The location where the goods are delivered and the mode of transport used will depend on the specifics of the agreement between the buyer and seller.

Once the goods have been delivered and loaded onto the transport, the ownership of the goods is transferred from the seller to the buyer. The buyer is then responsible for paying the costs of transportation from that point to the final destination, as well as any applicable customs duties and taxes.

It is important to note that Incoterm FOB does not include insurance coverage for the goods. It is up to the buyer and seller to arrange for insurance separately if it is desired.

 

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The difference between FOB and CIF

The CIF incoterm is the one most used by first-time importers. It differs from the FOB incoterm in that the seller takes charge of the maritime insurance. Thus, it has some advantages, especially for first-time buyers, as it minimises the customer’s responsibilities. However, the total cost of the transaction can be high until the goods are received.

 

Precautions to take

FOB is one of the most widely used Incoterms in international trade. However, the main pitfall of FOB is the cargo stevedoring fee. It is necessary to clearly define the person responsible for paying it when the sales contract is signed.

 

Incoterm FOB: where does the seller’s liability end?

Knowing the responsibilities of the seller and the buyer helps to prevent and resolve possible disputes.

 

What are the seller’s obligations?

In international transactions, if the parties choose to make the sales contract subject to the FOB Incoterm, the seller’s responsibility ends when the exported goods arrive on board the vessel designated by the customer for transport. Thus, the seller is responsible for:

  • Packing the goods;
  • Paying the transport costs to the port of shipment;
  • Loading the goods on board the vessel chosen by the buyer;
  • Completing customs export formalities if the goods are being shipped to a country outside the European Union or to an overseas department.

 

What are the buyer’s obligations?

In the case of transport with an FOP incoterm, the buyer is responsible for :

  • Organisation and payment of the main transport from the port of shipment to the port of discharge;
  • Unloading the goods from the main transport;
  • Taking care of customs formalities;
  • Organising the transport of the goods to their final destination.

In short, the buyer bears the risks and costs associated with the transaction as soon as the goods are loaded on board the chosen vessel at the port of shipment. Thus, he is responsible for :

  • Payment of insurance and sea freight;
  • Completing customs formalities for imports.

It should be noted that the concept of US FOB is different from the traditional FOB. In the United States, this incoterm does not refer to shipment by sea or river, but to the border. In addition, there are four types of FOB:

  • FOB/Border: the seller bears the costs up to the border without completing the customs clearance procedure;
  • FOB/Point of Departure: the customer pays all costs involved in the trade;
  • FOB/Point of Sale: the seller delivers the goods to the agreed destination and pays the customs charges;
  • FOB/Customs cleared destination: the supplier takes care of everything from the point of shipment of the goods to their final destination.

 

Advantages and disadvantages of Incoterm FOB

Incoterm FOB offers a number of advantages to both the seller and the buyer. For the seller, it allows them to shift the risk of loss or damage to the goods onto the buyer once the goods have been delivered and loaded onto the transport. This can be particularly useful when shipping goods to a remote or difficult-to-reach location, where the risk of loss or damage may be higher.

For the buyer, Incoterm FOB allows them to control the transportation of the goods, which can be important when shipping to a specific location or when working with a particular carrier. It also allows the buyer to negotiate the best price for transportation from the agreed upon location to the final destination, which can be a significant cost savings depending on the distance and mode of transport.

However, there are also some disadvantages to using Incoterm FOB. For the seller, it can be expensive to deliver the goods to the agreed upon location and load them onto the transport, and the seller may have to bear the risk of loss or damage to the goods until they are loaded onto the transport. For the buyer, there is the added expense of arranging and paying for transportation from the agreed upon location to the final destination, which can be a significant cost depending on the distance and mode of transport.

 

When to use Incoterm FOB

Incoterm FOB is often used when the seller and buyer are located in different countries, and the seller is responsible for delivering the goods to a port, airport, or warehouse in the buyer’s country. It is also often used when the buyer is responsible for arranging transportation from the agreed upon location to the final destination, or when the buyer wants to negotiate the best price for transportation with a particular carrier.

Incoterm FOB is typically used for goods that are shipped by sea or air, but it can also be used for land or multimodal transport.

 

Examples of Incoterm FOB

Here are a few examples of how Incoterm FOB might be used in a real-world scenario:

  • A Chinese manufacturer sells a shipment of furniture to a buyer in the United States. The Incoterm FOB is agreed upon, and the seller delivers the furniture to the port of Shanghai and loads it onto a container ship. The buyer is responsible for paying the costs of transportation from Shanghai to the final destination in the United States, as well as any applicable customs duties and taxes.
  • A Colombian exporter sells a shipment of coffee to a buyer in France. The Incoterm FOB is agreed upon, and the seller delivers the coffee to the airport in Bogotá and loads it onto an aircraft. The buyer is responsible for paying the costs of transportation from Bogotá to the final destination in France, as well as any applicable customs duties and taxes.
  • A Mexican supplier sells a shipment of automotive parts to a buyer in Canada. The Incoterm FOB is agreed upon, and the seller delivers the parts to a warehouse in Mexico City and loads them onto a truck. The buyer is responsible for paying the costs of transportation from Mexico City to the final destination in Canada, as well as any applicable customs duties and taxes.

 

How Does Shipping Under FOB Work in China?

It will be helpful for you to comprehend the general shipping process and what to anticipate when you start communicating with Chinese suppliers for your next production if you are new to buying FOB from China.

 

Obtaining a Product Quote

FOB Incoterms are the norm for product quotations from Chinese factories. You might get quotes in EXW Incoterms for small products that must inevitably be shipped by air or for small suppliers with little prior experience doing business with foreign clients. The majority of the quotes you will get from Chinese vendors, though, will be under FOB Incoterms. When you look at a quotation, the unit price, FOB as the Incoterm, and a Chinese city, the shipping point, are typically visible.

The unit price will include the cost of the goods as well as all Incoterm-related costs. The agreed-upon International Commercial Trade Term will be defined by the Incoterm. The port they agree to use specifically is the shipping point. You would need to coordinate with your supplier to change the unit price so that it takes into account the cost of shipping your cargo to a different port if your cargo needs to be exported from a port other than the one the seller initially estimates. The seller needs the chance to modify their offer if, for instance, the supplier quotes FOB Ningbo but you prefer to have your freight shipped from Shanghai. In this case, the unit price may be different.

 

Obtaining a Shipping Quote

The following details are required when you ask a freight forwarder or third-party logistics provider for a shipping quote:

  • Your supplier’s address would be the “ship from” address.
  • The final destination is “ship to address.”
  • When it comes to pickup and delivery services, forwarders may occasionally want to know if they will be handling every aspect of the service themselves or if a local trucking company might step in. 
  • It is usually best to let your freight forwarder handle everything so there are fewer moving parts to worry about.
  • Type of Cargo: There are two major reasons why freight forwarding companies need to know what is being shipped. First off, some goods are prohibited from being transported or call for specific paperwork or containers because they contain hazardous materials. The sooner your forwarder knows what your cargo is made up of, the better equipped you will be should any paperwork or compliance be necessary. The second reason is that they frequently manage the import’s customs brokerage component. So the sooner they are aware of the products, the sooner they can start putting together the paperwork required for import.
  • The size of the cargo – The freight forwarder needs to know the size of the cargo in order to recommend the best shipping method for your shipment.

The key pieces of information that a freight forwarding company would require are the five items listed above. It is best to confirm the carton dimensions, weight, and address where the collection with your supplier will take place before you can get an accurate quote from your logistics company. Once you have all of the aforementioned details, asking your supplier for a quote is simple, and you should be able to get your shipping costs in a few hours.

Once your supplier has provided you with all of this information, you can ask us for a quote, and we will respond with a thorough shipping proposal for your cargo.

 

Verification of the Shipment

When you are happy with the shipping estimate, the next thing to do is let your logistics provider know that you want to use them to ship your goods. They will typically send you some paperwork and ask you to sign an agreement stating that you want the forwarder to handle your shipment, depending on where the cargo is going.

Any information that is still missing will be verified, and the logistics provider will reserve space for your cargo on the chosen ship.

 

Shipping Day

Your logistics provider and the seller’s warehouse will set up a truck to pick up your cargo on the day it is scheduled to depart. Make sure to find out whether your forwarder prefers you to handle all communication with the supplier or if they can speak with them. Some forwarders limit their requests to speaking with their client. Contrarily, we understand that having a team in China allows us to better coordinate with suppliers directly and be ready to respond in the event of any delays or problems prior to the shipping day. If you are shipping a full container load (FCL), the seller will load the cargo directly into the container after the truck has delivered the container to the seller’s warehouse.

When shipping a less-than-container-load (LCL) shipment, your cargo will be loaded onto a truck and driven to a warehouse where it will be combined with the other shipments traveling in the same container.

Your cargo will start traveling to the port once it is loaded onto the forwarder’s truck. After the cargo is weighed to ensure that the initial dimensions given are correct, the exporting and loading process starts.

FOB Incoterms shipping from China is easy, simple, and the best way to guarantee your products leave China safely and arrive at your destination without a hitch.

 

Who pays for FOB transport?

In the case of FOB transport, the buyer is responsible for organising and settling the main transport from the port of shipment to the port of discharge. Unloading the goods from the main means of transport.

 

Conclusion

Incoterm FOB is a commonly used trade term in international trade that determines when the ownership of goods is transferred from the seller to the buyer. It offers a number of advantages to both the seller and the buyer, but also has some disadvantages. It is important for buyers and sellers to carefully consider the terms of their agreement and choose the Incoterm that best suits their needs and interests.

 

What is Incoterm FOB?

Incoterm FOB, or Free On Board, is a trade term used to determine when the ownership of goods is transferred from the seller to the buyer in international trade. It is one of 11 Incoterms developed by the International Chamber of Commerce (ICC) to provide a set of standardized rules for the interpretation of commonly used trade terms.

How does Incoterm FOB work?

Under Incoterm FOB, the seller is responsible for delivering the goods to a specified location and loading them onto a mode of transport. Once the goods have been delivered and loaded, the ownership of the goods is transferred to the buyer. The buyer is then responsible for paying the costs of transportation to the final destination and any applicable customs duties and taxes. It's important to note that Incoterm FOB does not include insurance coverage for the goods.

What is the difference between FOB and CIF?

CIF is similar to FOB, but the seller also takes charge of the maritime insurance. This can be beneficial for first-time buyers, as it minimizes their responsibilities. However, the total cost of the transaction can be higher until the goods are received.

What precautions should be taken with Incoterm FOB?

One potential pitfall of FOB is the cargo stevedoring fee. It is important to clearly define who is responsible for paying this fee in the sales contract.

What are the seller's and buyer's obligations under Incoterm FOB?

The seller is responsible for packing the goods, paying the transport costs to the port of shipment, loading the goods onto the vessel chosen by the buyer, and completing customs export formalities if applicable. The buyer is responsible for organizing and paying for the main transport from the port of shipment to the port of discharge, unloading the goods, taking care of customs formalities, and organizing transport to the final destination. The buyer also bears the risks and costs associated with the transaction once the goods are loaded onto the vessel at the port of shipment, including payment for insurance and sea freight and completing customs formalities for imports.

Can Incoterm FOB be used for any mode of transport?

Incoterm FOB can be used for any mode of transport, including by sea, air, or land. The specific mode of transport and delivery location will be agreed upon by the buyer and seller in their trade agreement.

Is Incoterm FOB only applicable to international trade?

Incoterm FOB can be used in both international and domestic trade. However, it is primarily used in international trade to clearly define the responsibilities and obligations of each party in the delivery of goods.

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