How to avoid the risks in international trade（2） choose the right trade terms

The Inadequacy of FOB and CIF Trade Terms in Modern Logistics

Chinese companies commonly use two trade terms, FOB and CIF. However, these terms may not be the most suitable choices for contract parties due to the advancements in logistics. The inadequacy lies in the rules of risk transfer specified in these terms, which state that the seller transfers the risk of loss, contamination, or damage of goods to the buyer once the cargo crosses the ship's rail. As these terms only apply to non-container shipping, they are not applicable to the more prevalent container transportation.

The Limitations of FOB and CIF in Container Transportation

In container transportation, the delivery of goods typically occurs at the container yard, where the carrier takes over supervision. During the transportation of the cargo from the container yard to the ship's rail, the shipper no longer has control over the risk of cargo loss. In cases where goods are transported by air or road, where no ship's rail is involved, the boundary of risk transfer becomes uncertain if FOB or CIF terms are still applied. Consequently, this poses disadvantages for both the seller and the buyer.

A Better Alternative: FCA and CIP Trade Terms

Fortunately, there are two other trade terms, FCA and CIP, which are more suitable for international trade. The content stipulated in these terms is similar to FOB and CIF, with the key difference being that the risk transfer begins when the goods are delivered to the carrier. This rule allows FCA and CIP terms to be applicable to all modes of transportation, including shipping.