FOB vs CIF when importing from China: What should you choose?

FOB vs CIF, what is the better option when importing from China? What are the advantages of the one over the other? Interestingly, how do you choose the right freight forwarder for you?

FOB vs CIF: Nightmare of a first-time importer from China

You must have heard of several first-time importing stories online. These nightmares vary from

Below are some details about these:

FOB vs CIF: Penalty of $5000 due to ISF filing delay

CIF is a common choice for many first-time importers when shipping from China. It is also the preferred terms of many Chinese sellers for many different “good” reasons. Some of which we will discuss in this article. Nevertheless, let us read the nightmare story shared by a first-time importer who chose CIF terms.

Example
Manufacturer X in China shipped a cargo via CIF. The first time importer/buyer was not aware that the ISF filing was not part of CIF. He was sent the required paperwork just two days before the shipping occurred.

This is not good news for the new importer because ISF filing has to be done 24 to 72 hours before the shipment leaves the port.

With very little time left and lack of knowledge on how to file an ISF filing, the shipment got a penalty of $5000. Little did he know that this could have been avoided if chose FOB over CIF.

Lesson learned
Be proactive and ask the full coverage of the different INCOTERMS offered to you. Include in your probing questions who will be responsible in the filing and clearing of the shipment, so you won’t be surprised upon your shipment’s arrival at the port.

Disadvantages of CIF terms when shipping goods

As mentioned above you have many options when shipping goods from China. However, the two most common terms would be CIF and FOB. The latter is the preferred choice of many experienced importers due to the following disadvantages CIF terms brings to the buyer/importer of goods

FOB vs CIF: Cargo damaged upon transit

When goods are damaged in transit, who will pay for the damages? The insurance company, you may answer.

Yes! That is right, especially if the goods didn’t reach the port of destination. But what if it has reached the port of destination and the damage to the goods were only spotted at the warehouse. How will you ask for the damages to be recovered?

In cases where cargo was damaged, the responsibility of paying for the damages is determined under CIF as stated by the Law Teacher.

In the end, you are simply in no full control of your cargo, especially in terms of the destination costs. You’ll be surprised at how much fees you need to pay just to have your cargo be released.

As for the cost of insurance? Should you get one for your shipment?

Absolutely! We highly advise you to get one. You are most free to do it on your own, or we can also handle it for you. Send us a message, today.

FOB vs CIF: Damaged goods under CIF

The loss or deterioration after the buyer has paid becomes the buyer’s responsibility. The goods are the buyer’s property and at his risk. Further, the loss or deterioration after tender of documents is also the buyer’s responsibility unless the buyer is entitled to reject the documents and throw the loss back to the seller as indicated in the contract.

LESSON
It’s better to put into writing the responsibility of the seller and buyer in terms of damaged and lost goods. As needed, the buyer may also ensure the product accordingly to guarantee it is protected while in transit.

Read more about the insignificance of cargo insurance when choosing CIF terms. Click here. <bookmark, Title: Know the cargo insurance insignificance under CIF terms>

FOB vs CIF: Increased tariff charges

Do you know that commercial invoices are used as the basis for calculating tariff charges? Under CIF terms, the ocean transportation and insurance costs are included in your seller’s commercial invoice.

What does this imply?

It implies higher tariff charges for you as shown in the calculation below:

Case scenario
If your product is subject to a 3% tariff, and your ocean freight declared in the ocean freight cost is $4000. Then you’ll need to pay $120 for your tariff expense.

 

FOB vs CIF: tariff rate calculationFOB vs CIF: tariff rate calculation

Before, suppliers show this as a cost of ocean transport so you won’t be charged for it, but Customs expects rated Ocean and Air Bills of Lading as the proof to substantiate any deductions to dutiable merchandise value.

This could be avoided if you choose FOB because you’ll be given a separate invoice for the transportation of the goods.

FOB vs CIF: Loss of control over your cargo

You may ask, how can I lose control over the cargo? Isn’t CIF the perfect way to ship my cargo without any hassles?

This is true in some instances, but it is only good if you don’t have enough time to look into the details of your shipment. However, if you want full control then FOB is the better option because FOB gives you the freedom to choose your carrier. This ensures damage to your cargo will be none, if not very minimal.

 

FOB vs CIF: Choice of vessel carrierFOB vs CIF: Choice of vessel carrier

Under CIF terms, the seller is the one who chooses the carrier. Often times, these vessel carriers are the one which offers the cheapest rate possible. You don’t want this kind of contract, right? You would want to have the best services to ensure your cargo arrives at the destination port in good condition and at the right time.

FOB vs CIF: Unexpected impact on your operation and cash flow

Since you don’t have any control on your cargo and your contracts are based on departure dates from the port of origin, it will be very hard for you to estimate the transit time between carriers.

But, the seller has provided the estimated time of arrival? That is very true, little do you know that the selected carrier maybe using a transshipment ocean service which means an estimated 24-day transit can actually become 36 days. Imagine the impact it will make on your operation and cash flow?

 

FOB vs CIF: Shipping delayedFOB vs CIF: Shipping delayed

How do you explain this to your buyers? Moreover, how do you properly plan for the warehouse and land transportation of your goods upon arrival at the port with a very long delay?

Thus, it only signals disaster.

FOB vs CIF: The dirty little secret of Terminal Handling Charges (THC)

Terminal Handling Charges (THC) are the charges collected by terminal authorities at each port against handling equipment and maintenance. This varies from port to port of each country, as the cost of handling at each port differs one to another port. It also depends upon the total cost of port terminal handling at each location.

As an importer, you would really pay for these charges but the problem with CIF terms is you are presented with substantial charges that are not fully explained to you. Often than not, this is not provided beforehand so you become totally unaware.

 

FOB vs CIF: Terminal handling chargesFOB vs CIF: Terminal handling charges

Will this not happen via FOB terms?

No! It will definitely not happen. Moreover, FOB terms allow you to readily accumulate the TOTAL cost of freight for your goods.

The below table further explains this.

 

FOB vs CIF: INCOTERMS Buyer and seller responsibilityFOB vs CIF: INCOTERMS Buyer and seller responsibility

FOB vs CIF: Non-inclusion of ISF Filing

Are you aware that goods entering the US require ISF Filing? You need to ensure this is promptly filed otherwise be prepared to pay a minimum penalty rate of $5000 to a maximum of $10,000. That will most definitely hurt, especially if you are a first-time importer.
Moreover, this does not include the customs entry, duties and inland transportation.

The role of a cargo insurance

CIF does include cargo insurance in their terms, but are you aware who is listed as the
beneficiary on the insurance? It is definitely not you and because it isn’t you, it signals a big problem in the future.

How?

Most of the time, the company who arranged the insurance also becomes the beneficiary. Thus, it also becomes the recipient of the payment in case any product is damaged. Sadly, the discovery of the damages to the goods only happens after you have received at the warehouse. However, you may most likely have already made the final payment for these goods; otherwise, how can it be released to you from the port. Right?

So if you are unsatisfied, the task of following-up and hoping that the supplier will reimburse you from the insurance is left on your shoulder. Unless of course you have specified and agreed in the contract that the final payment is to be paid only after the items have been inspected at the warehouse.

Hidden supplier profits on transportation

So why do most sellers in China prefer CIF options? Is it solely because they want your goods to be easily transported or is this more to it?

Very frequently, CIF pricing includes hidden supplier profits. This is the sad truth they will not tell you, but a little math will easily show you that this is truly the case. Unfortunately, these profits inflate your overall cost of goods unnecessarily.

Advantages of CIF over FOB when importing into China

So you’ve heard the many disadvantages CIF has over FOB. But are there any advantages to it?

There is only one advantage we can think of – convenience. But going back to our list, the only convenience it gives is you not spending too much time dealing with the movement of your goods and just waiting for it to arrive on your doorstep. However, CIF can’t even guarantee that to you.

What’s better is for you to know more about the freight shipment of your goods, especially if you wish to boost your profits.

It can be a bit daunting at first, but meeting a freight forwarder who will treat your business as their own is one of the best things to consider.

Take full control of your cargo without having to spend too much. Choose a reliable freight forwarder who can handle everything for you from the port of origin to the port of destination until it reaches your store, warehouse or even your customers.

Freight Forwarder Quote Online can happily do this for you. Get your free quote, today.