The selection of trade terms
Trade terms refer to the division of responsibilities between parties to a contact, by using abbreviation of English letters, between a buyer and a seller in a sale1. To coin a phrase, the use of trade terms saves both parties the bother of making a deal, which saves time and cost in transaction negotiation. Therefore, the applications of trade terms serve as the catalyst for the seller and the buyer’s cooperation. There is a mass of trade terms, such as FXW, FCA and FAS, not least the dominance of FOB, CFR and CIF. The employ of trade terms is different from the exporter to the importer.
Every term has its functions. FOB refers to Free on Board, which means that the seller completes delivery when the goods pass the ship's rail at the named port of shipment and the buyer has to bear costs and risks of loss of or damage to the goods from the point of delivery1. CFR is “cost and freight”, which means that the seller must pay the expenses and freight required to transport the goods to the named port of destination, but after the goods are delivered to the deck of the ship, the risk of the goods, loss or damage and additional expenses caused by the accident, after the goods cross the ship rail of the named port, the seller will turn to the buyer to bear. The seller is also required to clear the goods for export. CIF means that the seller's obligation is the same as the term "CFR", and shall also handle the Marine insurance for the loss or damage of the goods and pay the insurance premium.
If I am the exporter running high-end products and fragile goods, I will choose FOB. On the contrary, if I am the importer, I will choose CFR. From the graph3, it illustrates that sellers’ obligation, cost and insurance are increasing. At the opposite extreme, buyers’ cost is declining. As a result, sellers have to bear cost: FOB=CFR=CIF, and bear obligation and cost: CIF＞CFR＞FOB. Compared with FOB trade terms, I needs to pay more expenses when choosing CIF, including the freight to the destination port and relevant insurance costs. In addition, the risk that I needs to bear in this is also very big and in whole carriage process all belongs to the exporter. It is better for the exporter to know the relevant content of each trade term and choose the appropriate terms according to the working conditions, so as to ensure the smooth progress of each work and save some costs and expenses in the transportation of goods as far as possible.
The following is a case in point. A certain export company in mainland China transacts a batch of steel products with FOB Shanghai and W company in Hong Kong, and the Hong Kong merchant sells the steel products to H company in Korea by CFR Busan. The Hong Kong merchant opens the letter of credit on the condition of FOB Shanghai, requiring the shipment of Busan and indicating "Freight Prepaid" on the bill of lading2. The above hints that freight under FOB and CFR terms, and that Hong Kong businessmen in order to simplify the delivery procedures to South Korea, or attempt to pass the freight to the exporter, if the freight to Busan by the Hong Kong businessmen bear is acceptable.