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Critical review of cif fob international trade terms

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  • 1. Critical Review of CIF-FOB Comparison  CIF-­‐FOB  Shipping  Terms  This   study   is   conducted   especially   for   Indian   importers   who   face   challenges   while  importing,   wherein   cost   of   importing   goods   into   India   are   much   costlier   for   them  in   comparison   with   other   importers.   The   main   motto   of   this   study   is   also   to  spread  awareness  in  trade  that  how  they  can  control  the  legal  matter  keeping  full  control   on   import   expenditure   &   processes.   The   study   also   supports   importers  to  understand  the  basics  and  minute  differences  of  International  trade  using  specific  trade   terms.   The   importers   who   majorly   transact   on   LC   terms   with   CIF   buyings  face   challenges   on   movement   of   shipments;   thereby   end   up   paying   more   than  the  estimated  cost.  During  this  case  study  we  had  also  observed  that  in  practical  how   an   importer   has   lost   almost   75%   of   the   total   cost   adding   more   to   their   basic  cost  where  they  were  using  CIF  trade  term.  (As  they  were  literly  being  forced  to  pay   detention   /   demmurages   and   additional   shipping   line   charges   due   to   legal  identities   were   exposed   to   those   who   were   not   directly   in   control   of   buyer   &   are  unaware  of  specific  customer’s  process)    As   a   major   advantage   FOB   shipping   term   supports   importers   to   restrict   foreign  exchange   outflow   from   the   country.   Basically   in   case   of   CIF,   importers   are   forced  to  pay  the  entire  amount  in  foreign  currency  which  will  also  have  a  cap  of  money  transfer   charges   charged   by   the   bank   who   charge   it   to   remit   the   funds   to   foreign  supplier’s;  at  the  same  time  bank  also  freezes  the  money  from  importers  account  immediately  on  issuance  of  Letter  of  credit  (LC),  the  same  can  be  sighted  as  the  very  moment  LC  is  being  issued  or  submitted  to  bank  the  cost  and  other  charges  related  to  shipment  will  be  freezed  from  importers  account.  Wherein,  in  the  case  of   buying   FOB,   term   supports   them   to   pay   all   such   charges   other   than   cost   of  goods   locally   on   arrival   of   shipment   at   final   port   of   entry.   It   further   allows  importer  directly  to  deal  with  local  forwarders  working  in  their  best  interest,  the  complete  serivce  cost  is  payable  in  Indian  Rupee  with  a  little  &  nominal  amount  of   such   as   charges   collect   fee   (CC   Fee)   and   currency   adjustment   factor   (CAF).  Another  good  part  of  buying  FOB  is  service  tax  payable  to  government  of  India;  In  case   of   CIF,   majority   of   services   are   being   billed   overseas   and   doesn’t   attract   any  Indian   tax   policies,   whereas   in   India   the   services   billed   attract   tax   on   service  charges  which  are  payable  to  government  of  india  by  the  executer…  adds  more  to  the  growth  of  country.  Recommendation  to  Trade  by  writer:  Buy  CIF  only  when  it  is  required  to  be  or  mandatory…  start  using  more  FOB  trade  in  international  logistics  to  gain  more  out   of   lesser   volumes.   START   SMART   BUYING   TO   GAIN   WIN-­‐WIN   FOR   YOU   AND  NATION  BOTH…  
  • 2. Critical Review of CIF-FOB1 Cost,  Insurance  and  Freight  (CIF)  -­‐    1.1 An   international   trade   term   of   sale   in   which,   for   the   quoted   price,   the  seller/exporter/manufacturer  clears  the  goods  past  the  ship’s  rail  at  the  port  of  shipment  (not  destination).  The  seller  is  also  responsible  for  paying  for  the  costs  associated  with  transport  of  the  goods  to  the  named  port  at  destination.  However,  once  the  goods  pass  the   ship’s   rail   at   the   port   of   shipment,   the   buyer   assumes   responsibility   for   risk   of   loss   or  damage   as   well   as   any   additional   transport   costs.   The   seller   is   also   responsible   for  procuring   and   paying   for   marine   insurance   in   the   buyer’s   name   for   the   shipment.   The  Cost  and  Freight  term  is  used  only  for  ocean  or  inland  waterway  transport.  1.1.1 Why  CIF  is  being  used?  1.1.2 Generally   speaking,   importers   prefer   CIF   terms   when   either   they’re   new   to  international   trade   or   they   have   relatively   very   little   freight   volume.   These   importers  often   find   CIF   simpler   in   that   their   suppliers   are   responsible   for   arranging   freight   and  insurance   details.   Under   these   terms   the   importer   relinquishes   control   of   choosing  freight  carriers,  routing  and  other  shipping  specifics.  For  these  companies,  convenience  outweighs   the   need   for   enhanced   shipment   control   and   associated   freight   savings.  Shipping  CIF  grows  increasingly  difficult  as  companies  increase  their  number  of  overseas  suppliers   and   overall   freight   volume.   The   greater   the   number   of   CIF   shipments,   the  more   problems   can   occur   with   obtaining   accurate   shipment   information.   Overseas  suppliers  are  not  well  positioned  to  handle  service  issues  that  develop  in-­‐transit.  What’s  more,   they   are   not   required   to   arrange   anything   past   the   port   of   destination,   so   final  delivery  concerns,  monitoring  of  penalty  situations  such  as  demurrages,  etc.  are  all  the  responsibility  of  the  importer.  Regular  importers  quickly  adopped  &  tired  of  the  hassle  of  relying  on  suppliers  and  their  freight  agents  for  shipment  information.                    
  • 3. Critical Review of CIF-FOB2 Free  On  Board  (FOB)  -­‐    2.1 An   international   trade   term   of   sale   in   which,   for   the   quoted   price,   the  seller/exporter/manufacturer   clears   the   goods   for   export   and   is   responsible   for   the   costs  and  risks  of  delivering  the  goods  past  the  ship’s  rail  at  the  named  port  of  shipment.  The  Free  On  Board  term  is  used  only  for  ocean  or  inland  waterway  transport.  2.1.1 Why  ship  FOB?  2.1.1.1 Buying  Free  on  Board  has  two  major  benefits  over  CIF  ·∙  More  competitive  freight  rates  ·∙  Enhanced  shipment  control.  When  shipping  CIF,  companies  must  be  careful  that  their  shipping  rates  are  competitive  since  overseas  suppliers  are  always  inclined  to  mark  up   their   freight   cost   for   the   extra   service   provided   in   arranging   shipments.   Smart  importers   quickly   learned   that   they   can   obtain   very   competitive   shipping   rates   even  with  small  to  medium  freight  volumes.  While  cost  is  always  important,  there  are  other  major   reasons   for   buying   FOB.   Increased   supply   chain   visibility   and   control   is   a   critical  FOB  benefit.  By  taking  title  to  the  goods  as  they  cross  the  ship’s  rail  at  the  overseas  port  of   shipment,   importers   are   better   able   to   obtain   accurate   and   timely   shipment  information  by  working  with  the  third  party  logistics  provider  of  their  choice.  In  this  way,  they  are  assured  their  freight  partner  is  working  in  their  best  interest,  and  not  for  their  supplier’s.  More  on  to  this,  consignee  can  have  more  savings  in  terms  of  fund  planning’s  as   in   case   of   CIF   consignee   need   to   pay   freight   &   other   charges   alongwith   cost   of   goods  to   go   forward,   wherein   they   loose   interest   till   the   time   shipment   arrives   at   the   final  destination   port   but   in   case   of   FOB   terms   they   need   to   pay   freight   &   other   components  of   freight   only   after   arrival   of   goods   at   final   destination   port.   This   is   the   major   factor  which   benefits   consignee   to   gain   an   edge   on   competition   for   cost   controlled  movements.   Adding   more   to   controls   for   the   cargo   movements,   majority   for   those  importers  who  avail  any  duty  or  other  related  benefits,  in  such  case  using  own  freight  forwarder  for  movements  can  control  the  shipment  schedule  according  to  preparation  such  as  site  /  relevant  licenses  /  exemption  certificates  /  regulatory  etc.  Importer  saves  on  part  of  un-­‐necessary  demurrages  &  detentions  using  FOB  controlled  movements  as  they  by  pass  all  such  hinderance;  which  concerns  to  the  cost  of  product.   To  know  more  please  contact  @  vikas@irclindia.com    Study  By:    Vikas  Maini  –  Trade  Regulatory  Consultant  &  Director  –  Custom  Regulatory  @  IRC  Supply  Chain  Solutions  Limited  Awaded  by  Amity  University  twice  in  a  year  for  best  definition  of  international  trade  practices  and  processes  supporting  logistics  trade  (2009)  Panal  member  for  critical  review  on  forgien  trade  policies  –  IILM  (2009)