Trade Incoterm is Key of an International Sourcing

POSTED ON April 8, 2021

When importing form China, the Trade Incoterm you choose can hugely affect your costs. Still, most importers focus just on getting the lowest prices and do not pay attention to choosing the right Incoterm. Remember, the price of the product will depend directly on whether you are importing with FOB, CIF or EXW Incoterm. Also, the Incoterm will also determine the control you have over the shipment through the entire shipping process.

When negotiating with a sourcing agent China base you must be fully aware of the different trade Incoterm so that you can make the right decision. This is important because if you leave the freight to your supplier, you will have to accept the price and other conditions that the supplier has agreed to with his freight forwarder. If you decide to do it on your own, you can negotiate the price and conditions. However, it may not be the best option in all cases. Based on our years’ of experience providing product sourcing services, we have realized each Incoterm has its own advantages and disadvantages. Here is a look at each Incoterm and its use cases:

FOB (Free on Board): Any sourcing agent China base would tell you that this is probably the most commonly used Incoterm when importing from China. The reason is that it gives you a lot of control over the shipment without having to bother about the responsibilities that come with it. Basically, the buy buyer pays for the cargo, freight, customs clearance at the destination port, insurance, arrival face, transportation fees at the destination port and all other taxes and tariffs. The seller has to just deliver the goods, provide necessary documents and certificates, manage customs clearance, and fees in China and port expenses. FOB allows buyers greater control over the freight forwarder, transit time and route and helps minimize overall costs.

CIF (Cost, Insurance and Freight): In this case, the buyer pays for cargo, customs clearance and destination, arrival fees, import taxes and inland transportation costs at the destination. The seller delivers the goods, provides all export-related documentation, manages transportation within China, manages customs clearance and pays customs fees in China, and pays ocean freight, insurance and port charges at the source. For someone who is probably importing for the first time, this may seem like a great option because they think that it will save them a lot of hassle. They believe that they won’t have to hire a freight forwarder and negotiate prices with them and don’t have to manage shipment. Moreover, when you import with CIF the price of goods may actually be lower, but the overall cost is an entirely different story. When you don’t have any control over your overall costs, you no longer remain competitive. You also have to hire a customs clearance agent at the destination, which can further increase your expenses. CIF is not really the best choice for importing from China unless you are working with a supplier or a sourcing agent China base that is really trustworthy and keeps your interests in mind.

EXW (Ex Works Share): Under EXW Trade Incoterm, the buyer would pay for the cargo, for both arrival and departure fees, manage inland transportation at both the origin and destination, pay the ocean freight, manage customs clearance, pay custom fees at both the origin and destination ports, pay insurance and other duties. The seller only delivers the goods and provides all necessary documents and certificates. The buyer has complete control over the entire shipment process. However, this is not entirely an advantage because the quantum of responsibilities that come with it can be really overwhelming. When you are shipping from China to any international destination, there are many variables involved and there are various things that can go wrong. This can cause additional stress, and delays and there could be costs involved, which will have to be borne by the buyer.

Also, when you are importing from China, you have to bear in mind that due to the long distance and inherent cultural differences managing the entire shipment process can be extremely difficult. Add to it the language barriers and you can find yourself in a difficult situation.

As an experienced product sourcing service provider, we can tell you that there is no single Incoterm that is the best for all situations. Each Incoterm comes with its own advantages, disadvantages, risks, responsibilities and costs. So, as a buyer, you should choose the Incoterm based on what gives you control over the shipment, minimizes your costs and leaves you reasonably stress-free.
If you are looking to source products from China, it is in your best interest to hire the service of a sourcing agent in China base. They will not only help find the best products for you, but will also ensure that it reach you in a hassle-free manner.