I. The Core Logic of Trade Terms and the Division of Shipping Liability
Trade terms (Incoterms) are internationally recognized rules governing the rights and responsibilities of buyers and sellers regarding the transportation of goods, the transfer of risk, and the bearing of costs. In maritime transport, FOB, CIF, and CFR are the three most commonly used terms. Their core differences lie in the point of risk transfer, transportation responsibility and cost bearing, and insurance liability. All three terms are defined as “cargo passing the ship’s rail” or “cargo loading onto the vessel” (although the 2020 version of Incoterms states “cargo loading onto the vessel at the port of shipment,” in practice, the understanding of “ship’s rail” remains the same).
- FOB: Free on Board
FOB is a typical term for “buyer-directed shipping.” The seller is solely responsible for delivering the goods to the vessel at the port of shipment, while the buyer bears all subsequent shipping responsibilities and risks. This is commonly known as “free on board.”
- Seller’s Responsibilities and Obligations
Delivery of Goods: The seller must load the goods onto the buyer’s designated vessel on time at the contractually agreed port of shipment, completing the “goods on board” delivery (subject to notification of loading details to the buyer). The seller is solely responsible for all costs associated with transporting the goods to the port of shipment and prior to loading onto the vessel (such as inland transportation fees, terminal handling charges (THC) at the port of departure, customs clearance fees, commodity inspection fees, etc.).
Risk Transfer: The risk transfers to the buyer the moment the goods pass the ship’s rail at the port of shipment (or are loaded onto the vessel). The seller bears any risk of damage or loss to the goods prior to loading (such as damage during inland transportation or exposure to rain during storage at the port).
Documentation and Compliance: Responsible for handling export customs clearance procedures and providing compliance documents such as commercial invoices, packing lists, and export licenses. Buyer is not responsible for arranging ocean transportation or purchasing insurance.
- Buyer’s Responsibilities and Obligations
Transportation Arrangements: The buyer will designate the ocean carrier (shipping company) and be responsible for booking and paying ocean freight. The buyer will provide the seller with information such as the vessel name and loading time, ensuring the vessel arrives at the port on time to pick up the goods.
Cost Assurance: The buyer will bear all costs after the goods are loaded onto the vessel (such as mainline ocean freight, destination terminal handling charges (DTHC), destination customs clearance fees, inland delivery fees, etc.). If the goods are detained at the loading port due to the buyer’s failure to dispatch a vessel on time, the buyer will be responsible for additional charges such as demurrage and storage fees.
Risks and Insurance: Once the goods are loaded onto the vessel, the buyer bears all transportation risks (such as damage, loss, and delays during shipping). The buyer must purchase marine insurance (if not, the risk is entirely theirs).
- Core Features
The buyer controls the shipping (and can choose a familiar shipping company and freight forwarder), but bears all risks and costs associated with transportation.
The seller’s liability is minimal, and costs are manageable, making it suitable for exporters who lack shipping resources or wish to offload shipping risks.
III. CFR: Cost and Freight
CFR stands for “seller arranges transportation, buyer assumes insurance.” The seller is responsible for transporting the goods to the port of destination but does not bear insurance liability. This is commonly known as “CIF (excluding insurance).”
- Seller’s Responsibilities and Obligations
Delivery and Transportation: Similar to FOB, the seller must load the goods onto the vessel at the port of shipment and bear all pre-loading costs. The seller is also responsible for arranging the entire ocean transportation (selecting a shipping company and booking a container space) and paying the mainline ocean freight to the port of destination (including fuel surcharges, peak season surcharges, etc.).
Risk Transfer: The risk transfer point is identical to FOB—the risk transfers to the buyer once the goods have passed the ship’s rail at the port of shipment (or are loaded onto the vessel). The risk of damage or delay during ocean transport remains with the buyer.
Documents and Notices: Handle export customs clearance and provide documents such as commercial invoices and bills of lading. The key obligation is the “Shipping Notice”—the buyer must be promptly informed of the details of the goods being shipped (vessel name, voyage number, and loading time) so that the buyer can purchase insurance. (Failure to notify the buyer results in the buyer missing insurance coverage, and the seller bears the corresponding risk.)
- Buyer’s Responsibilities and Obligations
Cost Assurance: The buyer bears all subsequent costs, in addition to the mainline ocean freight, including terminal handling fees at the destination port, customs clearance fees, and inland delivery fees. Ocean freight from the port of shipment to the destination port is not covered.
Risks and Insurance: After the goods are loaded, the buyer bears the risk. The buyer must purchase marine insurance to cover risks during the ocean transport (such as storm damage, ship grounding, etc.). If insurance is not purchased, the buyer bears the risk.
Transportation Coordination: No ocean freight arrangements are required (the seller is responsible for this), but the seller must confirm shipping details and receive the shipping notice from the seller.
- Core Features
The seller leads the ocean freight arrangements (controls the ship date and selects the carrier), but only covers the freight and does not assume insurance liability.
The buyer must pay close attention to the shipping notice to avoid missing insurance coverage due to delayed notification from the seller, which is a key risk for buyers in CFR terms.
IV. CIF: Cost, Insurance, and Freight
CIF stands for “seller arranges transportation and insurance.” The seller is not only responsible for transporting the goods to the port of destination but also for purchasing basic marine insurance, commonly known as “CIF (insurance included).”
- Seller’s Responsibilities and Obligations
Goods Delivery, Transportation, and Insurance: These include all CFR responsibilities—pre-shipment costs, ocean transportation arrangements, and freight. The seller is also responsible for purchasing marine insurance: FPA (Free Peace Insurance) or other basic insurance policies agreed upon in the contract are required. The insurance amount is typically 110% of the invoice value (including expected profit), and coverage covers the entire journey from the port of shipment to the port of destination.
Risk Transfer: The risk transfer point is identical to FOB and CFR—risk transfers to the buyer once the goods pass the ship’s rail at the port of shipment (or are loaded onto the vessel). Even if the seller purchases insurance, the risk of cargo damage during sea transportation remains with the buyer (the buyer must present the insurance policy to the insurance company for claims. The seller is only responsible for obtaining insurance and does not bear the liability for claims).
Document Delivery: In addition to the commercial invoice and bill of lading, the seller must provide the buyer with an insurance policy or certificate as the basis for any claims.
- Buyer’s Responsibilities and Obligations
Cost Assumption: Similar to CFR, the buyer bears the cost of subsequent post-shipment expenses, including terminal handling fees at the destination port, customs clearance fees, and inland delivery fees. Ocean freight and insurance premiums are not covered.
Risk and Claims: The buyer bears the risk after the goods are loaded. In the event of damage, the buyer must file a claim directly with the insurance company based on the insurance policy provided by the seller. (The seller does not participate in the claims process and only assists in providing relevant documents.)
Supplemental Insurance: If the buyer believes that the seller’s basic insurance (such as FPA) is insufficient (if all-risk insurance is required), the buyer may purchase additional insurance. The additional premium is the buyer’s responsibility.
- Core Features
The seller’s responsibilities are the most comprehensive (arranging transportation, paying freight, and purchasing insurance), but the risk transfer point remains unchanged, providing only “basic insurance coverage” to the buyer.
The buyer does not need to worry about transportation and insurance arrangements, but must ensure that the insurance coverage meets their needs. Claims must be settled directly with the insurance company.
V. Core Differences between FOB, CFR, and CIF and Recommended Selection
- Comparison of Key Responsibilities and Rights of the Three Terms
Risk Transfer: All three are identical—the point of departure is “the goods pass the ship’s rail at the port of shipment (or are loaded onto the vessel).” Risk accrues to the seller before loading and to the buyer after loading.
Transportation Responsibility and Freight: With FOB, the buyer arranges transportation and pays freight; with CFR and CIF, the seller arranges transportation and pays freight.
Insurance Responsibility and Premium: With FOB and CFR, the buyer purchases insurance and pays premiums; with CIF, the seller purchases basic insurance and pays premiums.
Control: With FOB, the buyer controls ocean transportation (selecting the vessel and negotiating the price); with CFR and CIF, the seller controls ocean transportation.
- Core Principles of Terminology Selection
Choosing FOB: The buyer has stable shipping company/freight forwarder relationships and wants to control ocean transportation costs and timeliness; or the exporter (seller) is small and lacks ocean transportation experience and wants to simplify responsibilities.
Choose CFR: The seller has advantageous shipping resources (can secure low freight rates) but does not want to assume insurance liability. The seller must promptly issue a “shipping notice” to prevent the buyer from missing insurance.
CIF: The buyer lacks experience with shipping and insurance and prefers the seller to arrange transportation and basic insurance. This is suitable for small and medium-sized buyers who require hassle-free transportation, but the insurance coverage must be clearly agreed upon (avoiding only basic insurance).
- Common Misconceptions
Misconception 1: CIF means “the seller bears all risks” – Wrong! With CIF, only the seller purchases insurance, and the risk transfers to the buyer after loading. The buyer must claim for damages.
Misconception 2: With FOB, the seller does not have to worry about loading – Wrong! The seller is required to “load the goods onto the vessel designated by the buyer,” but the seller still bears the responsibility for terminal operations, customs declaration, and other pre-loading procedures.
Myth 3: The seller is responsible for the port of destination charges in both CFR and CIF arrangements. Wrong! In both cases, the seller only bears the “mainline ocean freight,” while the buyer is responsible for the DTHC and customs clearance fees at the port of destination.
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