What are “Incoterms” and who has what responsibilities and costs?

International Commercial Terms (Incoterms) are pre-determined trade terms of ICC (the International Chamber of Commerce) to describe the mode of delivery of goods and the roles of importers and exporters in the process. Both buyers and sellers in the global trading market should acknowledge them during the transaction.

CIF vs. FOB: What’s the Difference

Sure! CIF and FOB are two common international shipping terms that define who is responsible for the costs and risks of transporting goods. Let’s break them down in simple terms.

CIF

(Cost, Insurance, and Freight)

Under CIF, the seller takes care of:

• Shipping costs: The seller pays for transporting the goods to the buyer’s destination port.
• Insurance: The seller buys insurance to cover potential damage or loss during transit.
• Freight charges: The seller arranges and pays for the shipping.

Key Points of CIF

• The seller is responsible for the goods until they reach the destination port.
• The buyer takes over once the goods arrive at the port.
• CIF is often used when the buyer wants a hassle-free shipping process.

FOB

(Free on Board)

Under FOB, the buyer takes responsibility once the goods are loaded onto the ship at the seller’s port.

Key Points of FOB

• The seller delivers the goods to the port and loads them onto the ship.
• The buyer arranges and pays for shipping, insurance, and other costs after the goods are loaded.
• FOB gives the buyer more control over the shipping process.

Differences Between CIF & FOB

		FOB (Free on Board)

Feature	CIF (Cost, Insurance, and Freight)	FOB (Free on Board)
Who pays for shipping?	Seller	Buyer
Who arranges insurance?	Seller	Buyer
Who takes responsibility for goods in transit?	Seller	Buyer
When does the buyer take ownership?	At the destination port	Once goods are loaded onto the ship
Cost for buyer	Higher (seller includes the price is shipping & insurance)	Lower (buyer arranges shipping & insurance)

Which One Should You Choose?

• CIF is better if you want the seller to handle everything until the goods arrive at your port.
• FOB is better if you want more control over shipping and costs.

All basics about Carriage and Insurance Paid To Explained

CIP incoterms are one of the shipping policies by ICC. So how do they impact the shipping between exporters and importers? Let’s explore the critical details of CIP here.

What is CIP?

“Carriage and Insurance Paid To” is the full name of CIP.

This incoterm published by ICC helps buyers receive their imported goods at their designated location from the seller. The seller prepares the goods, contracts a shipping service for delivering the cargo, and pays the insurance cost.

That means, being a seller, you will pay the price for the shipping (any acceptable shipping mode) after bearing the insurance expense.

In other incoterms, if anything happens to the sent goods, which makes them useless until the buyer takes custody, the supplier is answerable and will be asked to offer a compensation price on the entire spoiled items.

However, under CIP, the goods are backed by an insurance policy, helping exporters to get rid of such damage prices to some extent depending on the coverage.

Apart from the damage coverage by the insurance company, the seller will be responsible for paying the remaining price for the loss or damaged goods to the buyer.

Understanding CIP Incoterms with an Example

Let’s suppose “Company A” (the seller) in China is about to ship a loaded container of kids toys to “Company B” in South Africa (the buyer).

So, under CIP freight terms, the seller “Company A” will have to decide a shipping mode, arrange it, and pay the freight charges. Also, the seller “Company A” will opt for an insurance policy at the maximum value of the goods and pay for it.

Besides, the seller “Company A” will also be held responsible for export clearance and customs duty in the country of origin (where the consignment will be shipped).

On the contrary, the buyer “Company B” will appoint a person or a transit service on its behalf to collect the container sent by the seller “Company A”.

Once the delivery is made to the destination country (the buyer “Company A” asked to deliver the order), and the buyer “Company B” receives it with proper documentation, the buyer “Company B” will pay for the import duties and taxes to clear the goods from the customs office.

Once the goods are received, the buyer “Company B” will bear the losses of any damaged goods and cannot demand the seller “Company A” to pay the price.

In this example, the seller “Company A” was at risk to pay for the damaged goods. But these risks transferred to the buyer “Company B” when its appointed carrier or person officially received the container.

How Does the Shipping Process Take Place Under CIP?

In CIP shipping, both buyers and sellers have to fulfil their responsibilities as mentioned in the steps below:

Steps on Sellers‘ side

• Step 1
• Clear exports formalities and buy an insurance policy

• Step 2
• Load goods on a carrier to be taken to the export port

• Step 3
• Unload goods from the carrier at the export port

• Step 4
• Again, load goods on the cargo ship or plane as decided on the export port

• Step 5
• Makes sure the goods reach at the import port

• Step 6
• Unload the goods from the cargo vessel on the import port

• Step 7
• Load goods on the carrier arranged by the buyer at the import port

Steps on Buyers‘ side

• Step 1
• Make import clearance and pay import duties and taxes

• Step 2
• Receive goods, which are being transported by their nominated carrier (such as a truck) from the import port to their premises (factory, warehouse, and more)

• Step 3
• Unload goods at their premises

Example of a CIF Transaction

Imagine a company in Dubai wants to import high-end furniture from Italy. The Italian seller agrees to a CIF (Cost, Insurance, and Freight) contract.

How It Works:

1. The Italian seller arranges for the furniture to be shipped to Dubai.
2. The seller pays for shipping costs to transport the goods to Dubai’s port.
3. The seller buys insurance to cover any damage or loss during transit.
4. Once the furniture arrives at Dubai’s port, the buyer takes responsibility for customs clearance and further transportation.

Key Takeaway:

The seller handles all costs and risks until the goods reach the buyer’s port.

Example of an FOB Transaction

Now, imagine a U.S. electronics retailer wants to buy smartphones from a manufacturer in China. They agree to an FOB (Free on Board) contract.

How It Works:

1. The Chinese manufacturer delivers the smartphones to the port in Shanghai.
2. The manufacturer loads the goods onto the ship bound for the U.S.
3. Once the smartphones are onboard, the buyer takes responsibility for shipping, insurance, and any risks.
4. The buyer arranges transportation from the U.S. port to their warehouse.

Key Takeaway:

The seller’s responsibility ends once the goods are loaded onto the ship, and the buyer takes over from there.

Choosing Between CIF and FOB

• CIF is ideal if the buyer wants a hassle-free process with the seller handling shipping and insurance.
• FOB is better if the buyer wants more control over shipping costs and logistics.

Obligations Related to CIP Incoterms

SELLERS

Obligations Sellers Must Fulfill in CIP Incoterms

1. Get insurance on the majority of the goods

2. Necessary to transfer the goods to the export port on the date to which both parties have agreed

3. Got to pay the price associated with lost or damaged goods (if any during the shipping period) until the container is officially delivered to the import port

4. Arrange and pay for the main mode of transportation (by sea, by air, by road) to deliver the goods at the destination/import port

5. Give original transportation documents to the buyer, proving that the cargo arrived on the specified date as mentioned in the CIP agreement

6. Customs clearance in the origin country, and help the buyer for import clearance at the destination country, plus customs exams if there is.

7. Packing, checking and marking of goods to determine and confirm their weight and the number of items, which will be delivered to the buyer

8. Ensuring paying all the costs from the beginning of the export process until the deliverance of goods at the port of destination

9. Notify the buying party that the cargo has reached the destination port and is being unloaded

BUYERS

Obligations Buyers Must Fulfil in CIP Incoterms

1. Receive goods from the destination port or any particular point, such as the name of the terminal

2. Must inform the seller about the exact location where the goods shall be delivered within the agreed period, or else pay for the loss

3. Finding main transportation is not an obligation on the buyer, but they can assist sellers on mutual understanding

4. No need to buy an insurance policy when taking the goods to their premises from the export port with the help of an appointed carriage,

5. Get the delivery evidence from the seller for record-keeping

6. Must perform and pay for all the steps involved in clearing the imported items from the customs duty, as well as help the seller in the export clearance process (if needed)

7. There is no obligation to check the goods at the destination port, but it would be wise to do it

8. Bear the unloading cost from the truck to the premises

9. Inform seller about the destination port and when the goods are unloaded at the premises

Pros and Cons of CIP Incoterms

Advantages for Sellers under CIP Incoterms

• Control on choosing the main mode of transportation
• Free to negotiate with the insurance company
• No need to load the goods at the destination port on the carrier service appointed by the buyer

Advantages for Buyers under CIP Incoterms

• Saved from paying for the main transportation cost
• Enjoy minimum risks for bearing the cost of any lost or damaged items
• Just need to pick up the goods from the destination port after clearing the import duties and customs
• Not forced by agreement to buy an insurance plan

Disadvantages for Sellers under CIP Incoterms

• Bear the cost for almost everything until the goods are available at the named destination (port of destination)
• Cannot avoid buying an insurance policy
• Increased chances for paying for the damaged or lost goods

Disadvantages for Buyers under CIP Incoterms

• Might need to pay more advance amount
• Cannot claim the seller for any wasted goods after receiving them from the destination port

Insurance in CIP Incoterms – An Option or a Necessity

Being a seller, you cannot ignore the fact that you will have to contact an insurance company and obey all expenses related to obtaining an insurance policy on the value of the exported items.

It’s a requirement in CIP incoterms and must be fulfilled at any cost.

Nevertheless, as a buyer, you are not subject to an insurance policy in CIP incoterms. But the option is still available if you think the goods would be affected by any artificial or Godly incidents while taking them from the destination port to the factory or any other place.

That makes buying insurance in CIP incoterms a necessity for a seller and an option for a buyer.

Who is Responsible for the Payment in CIP Incoterms?

Both parties have to face expenses. Nevertheless, if you ask who pays the most in CIP incoterms, the answer is “Seller.”

It is not only the export duties and main transportation charges, but also they even have to pay for the insurance.

CIP Incoterms in China

CIP incoterms in China are not encouraged by the major sellers. Instead, they prefer working on FOB, CIF, and DAP incoterms.

But if you still want to try working with a party in China on CIP, you can contact them to discuss this matter.

On the other hand, you can also call, message, or visit sourcing and shipping companies in China, like Jingsourcing and let them work on your behalf.

How are CIP Incoterms Different from CPT, DAP, and CIF?

	CIP	CPT	CIF	DAP
Shipping Mode	All major modes	All major modes	Sea freight only	All major modes
Shipping Cost	Seller	Seller	Seller	Seller
Insurance Cost	Seller	No requirement	Seller	No requirement
Export Clearance	Seller	Seller	Seller	Seller
Loading (From Seller Warehouse)	Seller	Selle	Seller	Seller
Import Clearance	Buyer	Buyer	Buyer	Buyer
Unloading (At Buyer Warehouse)	Buyer	Buyer	Buyer	Buyer

CIP versus CPT

While everything is similar in CPT, the only difference is that the seller is not lawfully forced to buy an insurance policy.

CIP versus CIF

CIF incoterms make insurance an obligation for the seller, but these incoterms are applicable to ocean shipping only, unlike CIP.

CIP versus DAP

Comparing CIP vs DAP, sellers under DAP are free from unloading the goods at the import port, and also, they don’t have to go for the insurance policy to send the cargo.

All incoterms have something different about them. For instance, in CIP incoterms, the exporter is liable to make sure the goods are insured to make them eligible for shipping at the destination port. In this condition, sellers will pay the cost related to freight and insurance, whereas the buyer is free from these responsibilities.

EXW Meaning in Shipping?

EXW or Ex-Works, is a shipping term. It means that the seller only needs to deliver the goods to you at his factory or warehouse. After that, you get ownership of the goods and have to bear all the risks and costs.

Suppose you buy a batch of cups from a seller in Yiwu, China. And you will ship the cups to your warehouse in Los Angeles, USA. Then you need to：

1. Contact freight forwarder to ship your cargo from the seller’s factory to your warehouse, including picking up goods at the seller’s warehouse, shipping your goods to Los Angeles by air or sea, and then sending your goods to your warehouse.
2. Pay all related shipping costs, which also include various other handling expenses during the transit.
3. Deal with export customs declaration and pay related fees.
4. Handle import customs clearance and pay import duties & taxes.
5. Bear the risk of loss and damage of the goods in transition.

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FCA shipping

FCA shipping term means that the seller will first send your goods to an agreed delivery location, usually the warehouse of your freight forwarder or agent, and deliver the goods there. Also, the seller has to deal with exporting customs declarations.

While under EXW, the seller only needs to wait for your truck to pick up the goods at his factory. However, in practice, you can also negotiate with the seller to help you send the goods to the warehouse of your freight forwarder or your agent, and deliver the goods there. This sounds similar to FCA.

But in fact, they have one major difference. Under EXW, whether the goods are delivered at the seller’s factory or at your designated warehouse, the seller will not be responsible for export customs declaration, while under FCA, the seller has to do this.

Compared with EXW, FCA seller also pays the cost from the factory to the delivery location and the export customs declaration fee, which are finally included in the FCA quotation:

FCA price = EXW price + shipping cost to the delivery location + export declaration fees

EXW vs FOB

Compared with FCA, FOB seller will not only handle the export declaration and pay the fee, but also send your goods to Port of Ningbo (the nearest port to the seller) and deliver goods to your freight forwarder there. After that, you will be responsible for everything and costs.

So the main difference between EXW and FOB is whether the seller is responsible for export declaration, shipping the goods to a nearby port, and bearing these costs and risks during the period. The final FOB quote you get will also include these fees.

FOB price = EXW price + shipping cost from the factory to Ningbo Port + export customs declaration costs

If you are an experienced buyer and have your own freight forwarder to help you ship from a China port to a US port, you can choose FOB.

EXW vs CIF

Based on FOB, the seller also needs to help you to send the goods from Ningbo Port to the Port of Los Angeles, pay the freight, and purchase cargo insurance. The seller should be responsible for the risks and costs from the factory to the Port of Los Angeles. The buyer should bear all costs and risks after that.

So the CIF quotation you get is:

CIF price = EXW price + Export declaration costs + shipping cost from the factory to Port of Los Angeles + cargo insurance