Today we start with a topic: Should Vietnamese businesses export under FOB or CIF terms? Wow…Sounds interesting, right? This article will be a bit long so prepare a cup of coffee… One of the many questions being asked today in our country is: why do most of our businesses export under FOB terms and import CIF, but do not prioritize exporting at CIF prices and vice versa, importing CIF? FOB export? Is such an import-export path eroding the added value in the sales process of businesses?
After reading, remember to scroll up and read this article: Should FOB and CIF conditions be eliminated in Container shipping? Why not?
Incoterms and CIF, FOB conditions
When it comes to Incoterms, surely anyone interested in foreign economics has more or less heard of this term. Incoterms (International Commercial Terms) is a set of rules of conduct in international trade. Since being published by the International Chamber of Commerce in 1936, Incoterms was then republished for the first time in 2000, called Incoterms 2000. Currently, the latest version of Incoterms to replace Incoterms 2000 is Incoterms 2010, in effect. from January 1, 2011. Incoterms 2010 can be considered a revised and supplemented set of rules based on the 2000 version, based on the epochal changes in international trade flows. In Incoterms 2010, the trade conditions were reduced (From 13 to 11 conditions), forming two new conditions, DAT and DAP, with the characteristics of inheriting and merging from the previous conditions, as well as contributing part that addresses the new demands of the times.
Should choose FOB or CIF terms
Should choose FOB or CIF terms
Incoterms has 4 groups of commercial terms: E, F, C, D. Of course, CIF belongs to group C and FOB belongs to group F. In fact, CIF and FOB are two commercial terms used by importers and exporters. use frequently. Depending on each case, group C or F conditions in the same group can be interchanged. In terms of CIF or other group C conditions such as: CFR, CPT, CIP, this is a condition that belongs to the type of shipment contract. Buying and selling goods under FOB and group F terms is similar. Only the buyer-seller’s obligations and the place of risk transfer are different.
In FOB (Free On Board) terms, the buyer has the right to request the seller to deliver the goods to the carrier designated by them at the departure location. For FOB terms, the place and time of transfer is determined after the goods are loaded on the ship at the port of loading (Port of departure). Thus, in this condition, the seller must deliver the goods to the carrier designated by the buyer, at the designated port of loading, that is, the person who hires and pays the cost of the means of transport (cargo ship). At this point, it is the buyer, and the person who buys insurance for the goods is also the buyer. Exporting under these trade conditions is a type of trade that forces buyers to act on their own and shoulder most of the obligations and risks when importing goods.
Transfer of risk in Incoterms
Transfer of risk in Incoterms
In CIF (Carriage, Insurance and Freight) terms, on the contrary, after completing the signing of the goods purchase and sale contract, the buyer only needs to carry out import customs clearance procedures, and the rest is delivery to the customer’s location. It is the responsibility of the buyer to specify and insure the goods. Who will designate the means of transport will usually depend on the agreement of the two parties. At the same time, all work and procedures during the shipping and delivery process will be undertaken by the seller. As long as their goods end up at the import port according to the route and agreement stated in the contract. The purchase of insurance is also the main responsibility of the seller. (The seller only buys insurance under minimum conditions) Of course, responsibility for the contract and goods is still the shared responsibility of both parties, so the buyer as well as the seller are required to make recommendations and negotiate. will and separately agreed during the buying and selling process.
When to buy/sell FOB price, and vice versa for CIF price
Thus, in a commercial contract under FOB terms, the buyer will have quite a high responsibility in their transactions. Under CIF terms, the seller is responsible for completing the processes and procedures associated with selling the goods to the importer. Standing at the buyer’s level, between the two terms FOB and CIF, buyers whose level of satisfaction only stops at buying goods and raw materials at reasonable prices will like Buy according to FOB. Sometimes the buyer has a strategy to buy goods in Vietnam and sell our goods along the way, so they will reserve the right to transport the goods and take responsibility for the goods as soon as they leave the loading port. Some importers own transportation contracts that bring many benefits to them (For example, discounts on freight rates, commissions from ship owners), so they will prefer to use FOB.
As for buyers, they want their suppliers to satisfy their need to buy goods at a higher level, which means they want to enjoy the absolute privileges of buyers as well as avoid unwanted risks and problems. want, they will prefer CIF. In general, buyers under CIF terms appreciate the seller’s transportation capacity and insurance contract, and they also accept higher prices than normal prices (Because it includes transportation costs and cargo insurance). This situation in reality will happen when the goods market in the importing country is in high demand and is growing, while the development of foreign trade transport in the exporting country is still at a weak level, to buy goods. receive the goods, the importer is willing to take the initiative in making or accepting payment and transportation proposals that are convenient for both parties.