What is the meaning of Free on Board (FOB) and Cost Insurance freight (CIF) with regard to tariffs and international trade?
Free On Board (or Freight On Board, or FOB) refers to a type of shipment of goods and who is responsible for shipping, liability and other costs. Internationally, the term usually indicates that the buyer pays all shipping and transportation expenditures to the place where the shipment originates. The buyer then pays all other expenses (including insurance, transportation and unloading costs) to the place of destination. In North America, however, different rules often apply.
CIF (Cost, Insurance and Freight) is an incoterm (International Commercial terms) used worldwide in financial sales and transactions. It is virtually the same as FOB and CFR (Cost and Freight) in which the seller pays for the cost of the product to its destination point. However, unlike FOB and CFR, CIF requires that the seller must also purchase buyer's insurance (on maritime shipments only).
These terms are usually associated to the carriage of goods by sea, land or air. A clear distinction of FOB or CIF can only be made once the basic cost heads are understood in the carriage of goods.
Buyer: The person or company that wishes to purchase a product (X).
Seller: The person or company that wishes to sell a product (X).
Shipper: Is the owner or charterer of the means by which the goods are transported from buyer to seller.
Freight: Is the quantum of cost agreed to be paid to the shipper for physical transportation of goods from seller to buyer.
Insurance: Is the cost of protecting the goods from unforseeable / uncontrollable situations.
Arrival and departure costs: The incurrs costs related to the actual loading, unloading and clearing of goods.
FOB (Free on Board): The seller undertakes to deliver the goods to the carrier at his point of delivery in apparent good order and is not bound to any way further responsible towards the goods. Once carrier takes delivery of the cargo, the seller fulfills his responsibility and expects to be paid. So, when you get a quote for a product FOB, you have to factor in all the other costs associated with shipping the goods.
CIF (Cost Inclusive of freight): The seller quotes for the product inclusive of freight. This is a more flexible contractual agreement where the point of delivery, the coverage of risk and associated costs are agreed as per convenience to both the buyer and seller.
Essentially, a seller's market would see increased FOB activity. A buyers market would see more demand for CIF shipments.