What are the international commercial term differences between FOB and CIF when applied to export/import of merchandise?

Alfonso Llanes, Master Degree in International Development

Answered just now

The short answer is it describes Cost Insurance and Freight (CIF) or Free on Board (FOB).

The United Nations Development Program www.undp.org/content/undp/en/home.html publishes a shipping guide of terms used for international shipping under the title:” UNDP-Shipping-Guide.pdf”

This guide provides the reader with ample information about the many terms in use today for conducting world trade. The guide is a complete overview of shipping arrangements, documentation and International Commerce Terms (Incoterms). In addition, it provides guidance to employees working in functions that include interaction with procurement and logistics or for the staff who would need a better understanding of shipping activities worldwide.

For example: what are the principles of effective shipping arrangements, methods and mitigation of risks that commercial transactions must endure? Also, it provides an overview of the options available for optimizing the organization’s logistical capabilities for planning, implementing and evaluating a transportation exercise suitable to the value/risk of the merchandise to be transported.

The guide also provides an introduction to the need for cargo insurance and the types of coverage.

· Explanation of different Incoterms and their appropriate use for contracting shipping services and conditions of carriage such as FOB, CIF, CF, FAS and so on.

· Packing and marking requirements for ports of entry as well as Customs procedures.

· It discusses the choice of shipping documents required such as bill of sale, certificate of origin, bill of laden and so on.

· Also, attention is paid to cost, frequency / regularity, reliability, speed and handling required for a given shipment like oversize/weight, fragile, refrigerated etc.

Transportation is the essential link between buyer and seller, and both parties are interested in completing not only the sale but safe and complete delivery of the purchased merchandise. The effort requires the intervention of third parties with corresponding staff to accomplish all the steps required to complete a successful transaction and shipment from port of departure to port of entry. The particular voyage involved, whether it is over land, sea, air or a combination of all will certainly be subject to certain costs and risks that can be mitigated by appropriate methods of dispatch, insurance coverage, suitable packaging instructions, and the proper handling and responsible action of all the parties involved in the supply chain.

The mode of transportation is of significant importance for estimating cost, risk, scheduling, handling, loading/discharge and inter-modal such as ocean, ground or air mode of transporting cargo.

Inter-modal transportation has had a tremendous impact on facilitating movement of cargo from origin to destination under a single set of documents for the whole operation where the operator is legally responsible for a satisfactory overall performance at each stage of the transport supply chain. For instance, an ocean container loaded in Hamburg, Germany delivered to the port of New Orleans and then by truck to Kansas City, MO., must go through several stages where each stage has to perform specific tasks to complete a process. The entire voyage moves under one set of documents while is being handled by different agents throughout the process which starts by picking up the cargo at the origin warehouse and then delivered to the port, loaded on a ship and delivered to the port of entry for Customs clearing and finally completing the ground delivery portion of the merchandise.

Aside from the mechanics of shipping other functions must also be completed for a successful international transaction to take place. Trade finance is one of those functions where a financial institution intervenes to make sure the buyer gets the merchandise under the conditions agreed for purchase and the seller gets paid for the merchandise sold under the contracted terms.

This is where a special set of terms such as (Incoterms) become crucial for negotiating and contracting the purchase, transportation and payment of merchandise sold in one country but delivered other destination(s). Each stage requires specialized agents in various fields: Cargo labeling and packaging, handling to/from one transportation mode to another, loading/unloading from port of origin/destination, prper documentation, Customs clearance, final transportation/delivery/distribution and payment of merchandise.