Term can affect Incoterm The choice of importer from China significantly impacts the overall cost. However, surprisingly, importers are rarely sufficiently informed about the shipping details.
Most importers tend to prioritize getting the highest possible selling price while neglecting other details. This can be a mistake and cost them dearly. To understand the extent of the increase in import costs, let's start by explaining what Incoterms means.
The product price varies depending on the Incoterms code.
The prices of goods purchased vary depending on whether they were imported using FOB Incoterm, CIF Incoterm, or EXW Incoterm.
The Chinese apply the cost of sea freight directly to the price of the goods, which is why they have different prices according to CIF Incoterms rules.
Caution must be exercised when negotiating with the Chinese supplier you are dealing with. It is certain that some suppliers manipulate the buyer in choosing a specific Incoterms in a way that is more in the interest of the Chinese supplier than the importer.
International trade terms and their impact on your shipment
When you choose Incoterm, it will control the shipment at every stage of the shipping process.
Whoever controls maritime shipping will control costs and have greater bargaining power.
If you allow the supplier to handle the sea freight, you must accept the price and terms agreed upon with the freight forwarder.
Before proceeding, carefully consider whether these terms and prices are in your favor, or if you can ship under them. You might not like the quoted prices or timelines. In this case, you can negotiate with the agent until you reach a satisfactory outcome. Another solution that allows for a more efficient supply chain is to hold off on shipments until a larger quantity accumulates, giving you more leverage with freight forwarders and carriers.
Besides cost, the Incoterms you choose can also affect other important aspects such as supply chain efficiency, transit times, and the condition of the goods. These are factors that can lead to the suspension of an import campaign.
Importing from China with FOB Incoterm means delivering your goods on board the ship.
FOB Incoterm may be the preferred – and in some cases the only – Incoterm among the most experienced importers. We are talking about countless imports with different characteristics, each with its own unique features.
In my opinion, if you had to choose only one Incoterm for your imports from China, FOB Incoterm would be the way to go. Why?
FOB Incoterm gives you greater control over your sea freight import shipment without the responsibilities that come with it.
Overview of FOB Incoterm
Buyer's responsibilities: Payment for goods, sea freight, insurance, arrival fees, customs clearance at destination, inland transportation fees at destination from port to warehouse, and all corresponding tariffs and taxes.
Seller's responsibilities: Delivering the goods according to the terms agreed upon with the buyer, providing the necessary certificates for the goods, managing inland transportation in China from the warehouse to the port chosen by the buyer, managing customs clearance and paying the customs duties imposed in China, as well as port expenses.
In short, under FOB Incoterm, the importer's responsibilities are payment, recruitment, and shipment management. Whoever pays also controls the purchase and chooses FOB Incoterm, and you, as the buyer, can:
- To choose the carrier, route, and transit time
- You can negotiate directly with the seller.
- Pressuring the seller to lower prices
- Reduce costs by minimizing the tax burden on your shipment.
- There are fewer responsibilities with FOB Incoterm than EXW Incoterm.
There are fewer responsibilities with FOB Incoterm than EXW Incoterm.
FOB vs EXW for importing from China
We mentioned earlier that the biggest advantage of importing from China using FOB is that you control the shipment. Compared to EXW, you have fewer responsibilities.
With FOB, your responsibilities as the importer are limited to shipping costs and delivery fees. This means any issues arising at the source will fall under the responsibility of your supplier in China. However, with EXW, you are responsible for any unforeseen problems and charges.
Although both FOB and EXW international trade terms are considered safe options for the importer, there is a significant difference in how responsibilities are distributed.
My advice: Always import from China using FOB Incoterm. Besides being more cost-competitive, there are limited liabilities as opposed to EXW.
Overview of CIF Incoterm
Buyer's responsibilities: Payment for goods, arrival fees, customs clearance at destination, inland transportation fees at destination from port to warehouse, and corresponding import taxes.
Seller's responsibilities: Delivering the goods according to the terms agreed upon with the buyer, obtaining the necessary export documents, managing inland transportation in China, managing customs clearance and paying the corresponding customs duties in China, chartering and paying sea freight charges and insurance, as well as port charges at the origin.
For a novice importer, CIF Incoterm may look appealing: there are no shipping payments, no responsibilities in choosing or negotiating with a freight forwarder, and you won't have to arrange the shipment. Yet the goods are actually cheaper than if you were to buy them under another Incoterm.
However, using CIF Incoterms is not actually recommended for any import, as it limits your control over costs, especially shipping costs. When importing from China, it is advisable to avoid using CIF Incoterms because they can significantly increase overall costs.
When importing under CIF Incoterm, what happens from the supplier and agent to send the shipment to the importer is the imposition of additional fees outside the importer's limits. When choosing CIF Incoterm, you only have to pay the full fees before the shipment is released.
Now you face additional destination charges while under pressure to get your shipment out or incurring delay fees, both of which can effectively increase overall costs.
My advice: If you are working with a supplier you are not fully familiar with or do not trust, always choose FOB over CIF for importing your shipments from China.
Importing from China with EXW Incoterm
EXW Incoterm Overview
Buyer's responsibilities: paying for the goods, managing inland transportation at origin and destination, paying departure and arrival fees, sea freight, insurance, managing customs clearance at origin and destination, paying corresponding fees, and paying corresponding charges.
Seller's responsibilities: To deliver the goods according to the terms agreed upon with the buyer, and to provide all required documents and certificates.
The main advantage of importing from China under EXW Incoterm is control over the shipment management from start to finish. However, this can also be a burden because you assume more responsibilities. With EXW, you are responsible for everything and anything that happens at the source.
Be aware that unexpected problems may arise during the shipping process. These may be beyond your control, but they are not outside your responsibility.
Expected problems from the factory or point of receipt of goods being loaded onto the ship: problems with inland transport, container loading, customs clearance, etc. In the event of a customs inspection at the origin, the importer must bear the associated costs of inspection and delay.
Another important aspect to consider when importing from China using EXW Incoterm is physical distance and cultural differences. Language and cultural barriers and time zone differences pose additional obstacles, which can lead to extra expenses as you may not always be available to respond to unforeseen events.
What is the best Incoterm when importing from China?
FOB, CIF, and EXW are, in theory, viable options for importing from China. Each involves a different degree of risk, liability, cost, and security.
My advice: Go for the safer Incoterm, which gives you the most control over the shipment.
Remember: Whoever controls shipping controls the price.
Importing from China: FOB, CIF, EXW, Incoterm