The choice of Incoterm for importing from China can significantly affect the overall cost. Strangely, most importers are rarely well-informed about shipping details.
Most importers prioritize obtaining the highest possible selling price while overlooking other details. This can be a mistake that may end up costing them a lot. To understand how import costs can increase, let’s first explain what Incoterms mean.
Price Variations Based on Incoterms
The prices of goods vary depending on whether they are imported using FOB Incoterm, CIF Incoterm, or EXW Incoterm.
Chinese suppliers often include shipping costs directly in the product price, which leads to different pricing structures under CIF Incoterms.
Be cautious when negotiating with the Chinese supplier, as some may manipulate the buyer into choosing a particular Incoterm that favors the supplier more than the importer.
International Trade Terms and Their Impact on Your Shipment
When you choose an Incoterm, it governs the shipment at all stages of the shipping process. Whoever controls the shipping will also control costs and have higher negotiating power.
If you allow the supplier to manage the shipping, you must accept the price and terms agreed upon with the freight forwarder.
Before starting, carefully consider whether these terms and prices are in your favor, or if you can ship under them. You might not like the price quote or the schedules. Here, you can negotiate with the forwarder until you reach a satisfactory outcome. Another solution to allow for a smoother supply chain is to hold the shipment until a larger quantity accumulates, giving you more leverage with freight forwarders and carriers.
In addition to cost, the chosen Incoterm can also impact other important aspects such as supply chain efficiency, transit times, and cargo conditions. These factors can lead to the disruption of the import campaign.
Importing from China with FOB Incoterm
FOB (Free On Board) Incoterm might be the preferred—if not the only—Incoterm among more experienced importers. We are talking about countless imports with various characteristics, each requiring different handling.
In my opinion, if you must choose only one Incoterm for your imports from China, FOB Incoterm is the way to go. Why?
FOB Incoterm gives you greater control over the importation of marine shipments without the associated responsibilities.
Overview of FOB Incoterm
Buyer’s Responsibilities: Paying for the goods, maritime shipping, insurance, landing fees, customs clearance at the destination, and inland transportation costs from the port to the warehouse, as well as all applicable duties and taxes.
Seller’s Responsibilities: Delivering the goods according to the terms agreed upon with the buyer, providing necessary certificates for the goods, managing inland transportation in China from the warehouse to the port chosen by the buyer, handling customs clearance, paying the applicable duties in China, and covering port expenses.
In short, under FOB Incoterm, the responsibilities for the importer include payment, hiring, and managing the shipment. The one who pays also controls the purchase and selects FOB Incoterm, allowing you as the buyer to:
- Choose the carrier, route, and transit time
- Negotiate directly with the seller
- Pressure the seller to lower prices
- Reduce costs by minimizing tax burdens on your shipment
- Control your overall costs
There are fewer responsibilities with FOB Incoterm compared to EXW Incoterm.
FOB vs. EXW for Importing from China
As previously mentioned, the biggest advantage of importing from China using FOB is that you have control over the shipment, whereas with EXW, you have fewer responsibilities.
With FOB, your responsibilities as an importer include shipping costs and delivery costs. This means any issues at the origin will be the responsibility of your supplier in China. However, with EXW, you are responsible for any unforeseen problems and fees.
Although both FOB and EXW international trade terms are considered safe options for importers, there is a significant difference in how responsibilities are distributed.
My advice: Always import from China using FOB Incoterm. In addition to being more cost-competitive, it has limited responsibilities compared to EXW.
Overview of CIF Incoterm
Buyer’s Responsibilities: Paying for the goods, landing fees, customs clearance at the destination, and inland transportation costs from the port to the warehouse, as well as applicable import taxes.
Seller’s Responsibilities: Delivering the goods according to the terms agreed upon with the buyer, obtaining necessary export documents, managing inland transportation in China, handling customs clearance and paying corresponding duties in China, and hiring and paying for maritime shipping and insurance, as well as port fees at the origin.
For novice importers, CIF Incoterm may seem appealing: there are no shipping payments or responsibilities in choosing or negotiating with a freight forwarder, and you won’t have to organize the shipment. However, goods are typically cheaper when purchased under other Incoterms.
That said, using CIF Incoterm for any import is generally not advised, as it limits your control over costs, especially arrival costs. When importing from China, it’s advisable to avoid using CIF Incoterm as it can significantly increase overall costs.
When importing under CIF Incoterm, the supplier and agent will impose additional fees outside the importer’s control. When choosing CIF Incoterm, you only pay all fees before the shipment is released.
Now, you face additional destination expenses while under pressure to clear your shipment or risk facing delay fees, both of which can significantly raise your total 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 your shipments from China.
Importing from China with EXW Incoterm
Overview of EXW Incoterm
Buyer’s Responsibilities: Paying for the goods, managing inland transportation at both the origin and destination, paying departure and arrival fees, maritime shipping, insurance, managing customs clearance at both the origin and destination, and paying applicable fees.
Seller’s Responsibilities: Delivering the goods according to the terms agreed upon with the buyer, providing all required documents and certificates.
The main advantage of importing from China under EXW Incoterm is the control over managing the shipment from start to finish. However, this can be a burden as you are subject to more responsibilities. With EXW, you are responsible for everything that happens at the origin.
Be prepared for unexpected issues that may arise during the shipping process. They may be out of your control, but they are not beyond your responsibilities.
Expected issues from the factory or pickup point for the goods being loaded onto the ship may include problems with inland transport, container loading, customs clearance, etc. In the case of customs inspection at the origin, costs for inspection and delays must be borne by the importer.
Another important aspect to consider when importing from China using EXW Incoterm is the physical distance and cultural differences; language barriers and time zone differences can create additional obstacles that may lead to extra expenses, as you may not always be available to respond to unexpected events.
What is the Best Incoterm for Importing from China?
FOB, CIF, and EXW are theoretically viable options for importing from China. Each involves a different level of risk, responsibility, cost, and security.
My advice: Opt for the most secure Incoterm that provides you with the greatest control over your shipment.
Remember: Whoever controls the shipping controls the price.
Finally, you can visit this article to learn about all shipping terms and conditions:
