Introduction
When you want to choose a shipping service from China to all over the world, it is better to know the terms used in this field. It will help you to choose the best one, and never have they confused you.
As a person who lives in the 21th century, and has an easy access to the Internet, it is expected of you to get information in the field you are dealing with!
This article aims to talk about FOB VS CFR (Incoterms). After finishing this article, you will have enough information, and you will be a professional person in this field.
Welcome to DDPCH, your reliable partner in freight forwarding. In the complex world of international trade, understanding terms like FOB (Free on Board) and CFR (Cost and Freight) is vital. At DDPCH, we demystify these complexities and provide strategic, efficient, and cost-effective solutions for your shipping needs. Join us as we explore the nuances of FOB and CFR and how they could influence your global trade operations in 2023 and beyond.
What is incoterms?
Before we talk about FOB VS CFR, it is better to be familiar with incoterms. It is the abbreviation of International Commercial Terms, and it has been designed by “International Chamber of Commerce.”
This term is used to distinguish costs and responsibilities between sellers and buyers.
This term is used to distinguish costs and responsibilities between sellers and buyers. This term also covers the matters such as following:
- Transportation of goods
- Clearance of goods
- Importing and exporting of goods
- Who is responsible for payment
- Who is responsible for the risk of moving and transferring goods at different stages
And other matters related to freight forwarding from sellers to buyers.
Then, by this definition, we can say that this term is about all international trading rules for selling and transporting of goods.
It is not important that you want to import or export, you need to refer to these rules.
What is FOB?
FOB, which stands for “Free On Board,” is an Incoterm that describes a shipping agreement in which the seller’s responsibilities include delivering the goods to a specified port, getting them loaded onto a ship, and clearing them for export. Under FOB, the seller’s responsibilities are fulfilled once the goods have passed the ship’s rail at the named port of shipment. From this point forward, the buyer assumes all responsibility, including the risk of damage or loss.
This term also signifies that the buyer is responsible for the cost of shipping and risk of loss after the goods have been loaded onto the vessel. This includes the cost of insurance, unloading costs, transport from the port of arrival, and any customs duties or taxes that may be applicable. Thus, FOB allows the buyer and seller to clearly define who is responsible for each part of the shipping process, and at what point the ownership of goods is transferred.
What is CFR?
CFR, standing for “Cost and Freight,” is an international trade term used to describe a shipping agreement where the seller is responsible for arranging sea transportation and covering the costs associated with transporting the goods to the destination port. This includes not only the direct freight costs but also the costs of loading the goods onto the ship and clearing them for export.
However, it’s important to note that while the seller is responsible for arranging the transport and covering these costs under CFR, the risk of loss or damage to the goods is transferred from the seller to the buyer as soon as the goods are loaded onto the ship. This means that if the goods were to be damaged or lost in transit, the buyer would be responsible, not the seller. Additionally, the buyer is responsible for obtaining insurance, unloading costs, and any customs duties or taxes applicable at the destination.
FOB VS CFR
For FOB VS CFR, at first, you should know these terms. FOB is the abbreviation for “Free on Board,” and CFR stands for “Cost and Freight.”
In the first term, the seller delivers goods on a specific board. All losses when goods are loading on the board are by the buyer.
And in the second term, the seller delivers goods on the board. The seller should pay all the cost of freight transportation to the port.
Now, it is time to talk about FOB VS CFR.
Key Considerations When Choosing Between FOB and CFR
Choosing between Free On Board (FOB) and Cost and Freight (CFR) largely depends on your business needs, the nature of the goods being shipped, and the specifics of the shipping agreement. Here are some key considerations to keep in mind when deciding between these two Incoterms:
- Risk Transfer Point: In both FOB and CFR, the risk transfers from the seller to the buyer once the goods have been loaded onto the ship. However, under CFR, the seller is also responsible for arranging and paying for the transport to the destination port.
- Cost Responsibility: Under FOB, the buyer is responsible for the freight and insurance costs once the goods have been loaded onto the ship. In contrast, under CFR, the seller is responsible for the cost of freight to the destination port, but not for insurance.
- Insurance: If the buyer wants to ensure that the goods are insured during transport, they might prefer FOB, which requires them to arrange for insurance. Under CFR, the seller is not required to insure the goods during transport.
- Nature of the Goods: The type of goods being shipped may also influence the choice between FOB and CFR. For goods that are particularly susceptible to damage during loading, the buyer might prefer FOB, where they assume responsibility only after the goods have been loaded onto the ship.
- Customs Clearance: Under both FOB and CFR, the seller is responsible for clearing the goods for export. However, the buyer is always responsible for import clearance and any associated duties or taxes.
- Control Over Shipping: If the buyer prefers more control over the shipping process, they might opt for FOB, which requires them to arrange the main carriage. On the other hand, if the seller prefers to maintain control over the shipping process, CFR might be more appropriate.
By weighing these factors, businesses can make an informed choice between FOB and CFR that best suits their needs and mitigates potential risks.
How Insurance Factors into FOB and CFR Shipping Terms
Insurance plays a pivotal role in mitigating risk in international shipping under both FOB (Free On Board) and CFR (Cost and Freight) terms. However, the responsibility for obtaining insurance differs. Under FOB, the buyer assumes responsibility for insuring the goods once they are loaded onto the shipping vessel. This gives the buyer the liberty to choose an insurance policy that best aligns with their risk assessment and specific needs.
Contrastingly, under CFR, the seller arranges and pays for transportation to the destination port, but the buyer assumes risk once the goods are loaded onto the ship, including the responsibility for insurance. It’s crucial for both parties to understand their insurance obligations under each term to ensure adequate coverage and effective risk management.
The difference between Tasks of Buyer in FOB VS CFR
Like the previous section, in both methods, the buyer must do some tasks , and they have some differences as the following:
- The buyer should pay the price of goods according to the contract, in both methods.
- In FOB VS CFR, in FOB, the buyer, if he or she tends, can provide all licenses at his own expense, but in CFR, the buyer has an obligation to provide all licenses.
- In FOB VS CFR, in FOB, the buyer must pay the cost of goods transportation from the designated port; however, in the second term, the buyer has no obligation to the seller to conclude the contract of carriage.
- In both methods, the buyer must deliver the goods when they are delivered.
- In both methods, the buyer must pay all losses from the time of delivery of the goods.
- In both methods, all the costs are by the buyer after receiving the goods except the Customs fee.
- In FOB VS CFR, in FOB, the buyer must provide the seller with sufficient information about the ship’s name, point of loading, and, if necessary, delivery time within the agreed timeframe; however, in the second one, the buyer, when she or he has the right to determine the time of goods transportation or deliver them at a specific destination, must give all information to the seller.
Who must do the clearance of goods in FOB and CFR?
In both methods, depending on the case, requires the seller to clear the goods for export. However, the seller has no obligation to do clearance the goods for import, pay any import duties, or perform any customs formalities for import.
Comparative Analysis of Responsibilities in FOB and CFR
Navigating Shipping in 2023: A Closer Look at FOB vs CFR
As we navigate the complex waters of shipping in 2023, a firm grasp of the shipping terms FOB and CFR is more critical than ever. Advancements in shipping technologies and the evolving global trade landscape have further underlined the significance of these terms.
FOB and CFR, standing for Free On Board and Cost and Freight respectively, form the cornerstone of international shipping contracts. These terms determine who assumes the risks, costs, and responsibilities at each stage of the shipping process. In the face of increased globalization and complex supply chain networks, understanding the nuances of FOB and CFR will play a vital role in mitigating risks, managing costs, and ensuring the smooth flow of goods across borders in 2023 and beyond.
Where is the international shipping method FOB not suitable?
The FOB is not appropriate when the goods are delivered to the carrier before being loaded on the ship, for example, goods loaded in a container, which is usually delivered at the terminal. In such cases, the term FCA should be used.
This is because the point of transfer for risk and responsibility under FOB is when the goods cross the ship’s rail. However, with containerized goods, the crucial event often occurs before the goods are loaded onto the ship. Therefore, using FOB could create confusion about when risk and responsibility transfer from the seller to the buyer. To avoid such ambiguity and potential disputes, the FCA (Free Carrier) Incoterm, which clearly designates the seller’s responsibility up until the goods are handed over to the carrier at a specified location, should be utilized instead.
Concluding remarks
Navigating the complexities of FOB and CFR is crucial in international trade, and DDPCH is here to guide you through it. As we move into 2023, understanding these terms becomes even more vital. With DDPCH as your freight forwarding partner, you can confidently handle the ever-evolving challenges of global shipping. We remain committed to providing strategic, efficient, and cost-effective solutions that align with your business needs. Explore the world of seamless, hassle-free shipping with DDPCH, and enhance your international trade operations like never before.
DDPCH
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Does CFR include customs clearance?
CFR includes import customs duty which is borne by the buyer.
The main difference between FOB and CFR is who is responsible for the goods during transport. Under FOB, the buyer takes responsibility once the goods are loaded onto the vessel. Under CFR, the seller pays for freight to the destination port, but the buyer assumes risk once the goods are loaded onto the ship.
FOB and CFR are traditionally used for sea or inland waterway transport. For multi-modal transport, terms like CPT (Carriage Paid To) or CIP (Carriage and Insurance Paid to) are typically used.
FOB stands for “Free On Board.” It is a shipping term where the seller is responsible for the goods until they are loaded onto the shipping vessel.
Yes, the terms can be modified as long as both parties agree. However, the standard definitions of FOB and CFR provide a reliable starting point for negotiations.
Under both FOB and CFR terms, the risk transfers to the buyer once the goods are loaded onto the ship. Therefore, if goods are damaged during transit, it would generally be the buyer’s responsibility, assuming they have taken out adequate insurance.
Under both FOB and CFR terms, if the goods are not loaded onto the ship within the agreed time, the seller could potentially be in breach of contract.
Incoterms, such as FOB and CFR, establish clear rules and guidelines for sellers and buyers in international trade. They help avoid misunderstandings by specifying who is responsible for costs, risks, and tasks at various stages of the shipping process.
Understanding FOB and CFR is crucial because they determine who bears the cost, risk, and responsibility at different stages of the shipping process, affecting the final cost and risk management in international trade.
Disputes under FOB and CFR terms are typically resolved according to the specific dispute resolution clause in the contract. This could involve negotiation, mediation, arbitration, or litigation, depending on the contract terms and the nature of the dispute.
Yes, under FOB terms, the buyer takes over the responsibility once the goods are loaded onto the ship. This includes arranging and paying for transport from the shipping port to the destination.
If the seller fails to deliver the goods to the agreed location, they would generally be in breach of contract. This could entitle the buyer to claim damages, or in some cases, to cancel the contract.