Detailed explanation of foreign trade terms and analysis of cost traps

In international trade, a variety of pricing methods and price terms have been produced under the principle of “taking the seaport terminal as the benchmark point”, among which the most commonly used are FOB, CNF, and CIF.

Terminology analysis of FOB, CNF and CIF

FOB（Free on Board）

FOB refers to the freighter ship rail at the port of export as the reference point. All costs before the goods cross the ship rail are included in the FOB price. Therefore, FOB is also called “free shipside price” or “free on board price”. In this case, the seller is responsible for export commodity inspection, customs declaration and other matters until the goods safely cross the ship’s rail at the export port. After the goods are shipped, the seller should promptly notify the buyer so that the buyer can handle insurance matters.

CNF（Cost and Freight）

CNF refers to cost plus freight, which adds the freight from the shipping port to the destination port on the basis of FOB. For the buyer, this is the price to the destination port, so it is also called the “cif price”.

CIF (Cost, Insurance, Freight)

CIF is based on CNF and further adds insurance premiums. This means that the seller is not only responsible for shipping, but also for insuring the goods.

The above three terms are not only pricing methods, but also the basis for dividing responsibilities and risks between buyers and sellers. For example, if an accident occurs while lifting goods at the port of export under FOB conditions, liability depends on whether the goods have crossed the ship’s rail.

Special terms and commissions

In addition to the above basic terms, there is also DDP (Delivered Duty Paid), that is, the seller is responsible for transporting the goods to the buyer’s location and completing the process of import customs clearance and payment of duties.

There is also the concept of commission in international trade. Brokers act as intermediaries to help customers purchase goods and receive a certain percentage of commissions. If the commission is express, it will be clearly marked in the price. For example, “CNF NEW YORK C3 USD9.00/CTN” means that the price of US$9 per box includes a 3% commission.

Cost Trap

When conducting foreign trade transactions, sellers need to pay special attention to possible cost traps to avoid unnecessary economic losses.

Bank fees

When foreign customers remit money, domestic and foreign banks will charge certain handling fees, which may cause the actual amount received to be lower than expected. To avoid this, it is recommended to understand bank charges in advance and take these costs into account when quoting.

Terminal operating costs

Terminal operations involve a variety of miscellaneous costs, and the bearer of these costs is not clear in some cases. For example, under FOB terms, the importer is responsible for booking space, but in actual operation, the cost may be passed on to the exporter. Therefore, when cooperating for the first time, the exporter should confirm the cost allocation with the freight company.

In summary, the selection of foreign trade terminology and cost control are crucial to ensuring smooth transactions. Disadvantages in trade can be avoided by understanding the division of responsibilities behind different terms and being aware of potential cost traps.