The International Chamber of Commerce (ICC) has made global trade more streamlined, and less ambiguous. How? By introducing the INCOTERM to delegate the transportation responsibilities between the buyer and seller. Global trade requires a concerted effort by multiple transport service providers, so a clear guideline is important to indicate to those service providers how the transport is arranged. There are 11 INCOTERMs for buyers and sellers to refer to. However, there are some more commonly used INCOTERMs than others. In this article, we will tell you which INCOTERM is most common as compared to others to inform you in your decision-making process.
Most Common INCOTERM in Sea Freight
The two most commonly used INCOTERMs are CNF and FOB, particularly in sea freight arrangements.
According to the World Bank, the total twenty-footer equivalent container (TEU) throughout 2019 is 796 million TEUs. That translates to approximately 1.6 Billion tons of cargo traversing the seas throughout 2019.
CNF INCOTERM indicates a Cost and Freight shipping. the cargo supplier is responsible for shipping the cargo from its manufacturing site up to the buyer’s destination port of choice. Whereas the buyer is responsible to arrange transportation from the destination port to the buyer’s door.
FOB INCOTERM indicates Free on Board shipping. FOB shipping means that suppliers ship cargo from its manufacturing site to the vessel at the port of origin. The buyer then takes over the risk and cost of transportation for the second leg of transport.
CNF and FOB INCOTERMs are most common due to several factors.
Factor 1 – Fairness in Risk Allocation
Both CNF and FOB represent the midway point of transportation.
We can pinpoint the difference between CNF and FOB shipment by determining the point where the risk of transportation of goods is transferred from the buyer to the seller.
For CNF the risk is transferred when the cargo vessel arrives at the port of destination. Whereas in FOB the risk is transferred when the cargo container is loaded onboard the vessel at the port of origin.
With this in mind, the inland transportation responsibilities and customs clearance responsibilities are equally shared among the buyer and the seller. This is why both CNF and FOB are the most common INCOTERM used.
The seller does not have to take excessive risks by transporting the cargo up to the buyer’s door. Similarly, the buyer does not need to extend its risks and responsibilities by arranging transportation from the seller’s manufacturing site.
Risk management is key in this decision-making process, we opine that the freight cost factor is less of a concern. Because the sea freight cost is generally factored into the cost of the cargo shipped.
This means that regardless of whether the transport is a CNF shipment or a FOB shipment, the buyer generally bears the sea freight cost one way or another.
What about CIF?
Logically, for FOB shipment the risk of cargo damage and loss is for the buyer to bear, whereas in CNF shipping the same risk is for the seller to bear.
But wait, didn’t we mention that CNF and FOB represent the midpoint for risk and cost transfer from the seller to buyer?
How does one determine the midway point to transfer risk during shipping? The coordinates of the Pacific Ocean?
The sensible way is the determine the midpoint to be either the port of origin or the port of destination; Port of origin (FOB), port of destination (CNF).
So that leaves us with the transportation risk of damage during the sea voyage.
Vessel operators, NVOCCs, and Freight Forwarders have to exercise due diligence in their cargo handling. Nevertheless, these operators have limited liability towards the contracted party in the event of cargo loss or damage.
But Exporters and Importers can arrange for their cargo insurance if they wish to add more assurance to their shipment’s safety.
The CIF INCOTERM is also commonly used in sea shipping. A CIF INCOTERM requires the seller to purchase marine cargo insurance or any insurance coverage that the buyer desires. The cost is then transferred, one way or another, to the buyer.
Factor 2 – Competency Consideration
The second factor that made CNF/CIF and FOB shipment the most common INCOTERM is competency.
The consensus is that the seller is far more competent than the buyer in matters about: –
1. Export Permit
2. Cargo Container Loading
3. Customs Requirement
4. Port Knowledge
Source: US Department of Agriculture
Sellers should know their products best, especially when they are engaging in international business. The seller has to be well aware of any governing agency required to facilitate its sales overseas.
The sellers also know what’s the most effective way to load the cargo onto the container. Exporters are well versed with customs requirements too and can choose the most cost-effective port to export.
As an example, let’s look at the export of timber from the US to overseas.
Here is the list of responsibilities that the seller undertakes before exporting: –
1. Apply for an Export Permit with the Department of Commerce
2. Issue a Destination Control Statement
3. Prepare a Shipper’s Export Declaration
4. Acquire a phytosanitary certificate
We gather that the most competent person to perform those roles is the exporter.
This is a similar case with the destination requirements, the importer is more competent as compared to the exporter.
In juxtaposition. In an Ex-Works shipment, there is no obligation on the seller to organize export clearance. That responsibility lies solely on the buyer.
There are of course exceptions to the rule. We recommend that you should always defer the risk and cost of transportation to the most competent party. Whether the competent person is either the buyer or the seller and their represents.
Factor 3 – Bill of Lading Arrangement
A Bill of Lading is is a contract of carriage and a receipt of goods. But more importantly, a bill of lading performs the most important role of a document of title.
A document of title facilitates the ownership transfer of goods from the seller to the buyer.
The reason why a document of title is important is that the appointed transporter ALWAYS holds possession of the goods.
Hence, if the seller wants a level of control when the transfer of ownership occurs, they can do so with a Bill of Lading.
One reason why sellers want control over ownership transfer of goods is due to the payment arrangement.
In other words, No Money = No Cargo.
Both CNF and CIF allow the exporter to dictate what type of bill of lading is issued. These INCOTERM also allows when the exporter can instruct the transporter to release the goods.
Conclusion on Most Common INCOTERM
Do not be bogged down by what INCOTERM is most common. By default, each shipment is different and it is best that the seller and buyer both negotiate the transportation arrangement.
In addition, it is always recommended to consult your transport service provider to offer you advice on which INCOTERM suits your shipment best.