Tutorial FOB vs CIF vs CFR: Key Differences, Definitions, and How to Choose the Right Incoterm

[SSF-Logistics]

Introduce

In international trade, buyers and sellers must clarify responsibilities, cost allocations, and risk transfer points for goods delivery. FOB, CIF, and CFR (formerly CNF) are three widely used trade terms defined by the International Chamber of Commerce (ICC) under Incoterms. This article explains their definitions, key differences, and practical applications to help businesses mitigate risks and optimize cross-border transactions.

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1. Definitions of FOB, CIF, and CFR​

• FOB (Free On Board; Port of Shipment)
  • Responsibility: The seller delivers goods onto the buyer nominated vessel at the agreed port, handles export clearance, and transfers risk once goods are loaded.
  • Risk Transfer: Risk shifts from seller to buyer when goods are placed on board (per Incoterms 2020).
  • Costs: Seller covers pre-shipment costs (inland transport, loading); buyer handles ocean freight, insurance, and destination charges.
• CIF (Cost, Insurance, and Freight; Port of Destination)
  • Responsibility: The seller pays for freight and basic insurance, delivers goods to the destination port, and manages export formalities.
  • Risk Transfer: Risk transfers at the origin port (same as FOB), even though the seller arranges transport.
  • Costs: Seller covers freight and minimum insurance (e.g., 110% cargo value under Institute Cargo Clauses C); buyer handles destination fees and additional risks.
• CFR (Cost and Freight; Port of Destination)
  • Note: CFR replaced the outdated term;CNF; to align with Incoterms; standards.
  • Responsibility: Seller pays freight to the destination port but does not procure insurance; the buyer must insure the goods.
  • Risk Transfer: Risk transfers at origin port (same as FOB and CIF).

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2. Key Differences Between FOB, CIF, and CFR​

Compare these terms using the table below:

Aspect	FOB	CIF	CFR
Freight Payer	Buyer	Seller	Seller
Insurance	Buyer's liability	Seller (basic cover)	Buyer's liability
Risk Transfer	At origin port	At origin port	At origin port
Transport Mode	Sea or inland waterway	Sea or inland waterway	Sea or inland waterway
Seller Obligations	Export clearance, loading	Freight, insurance, export clearance	Freight, export clearance

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3. How to Choose the Right Trade Term?​

1. When to Use FOB
   • Buyer prefers control over shipping (e.g., negotiated carrier rates).
   • Buyer seeks customized insurance (e.g., high-value goods requiring additional coverage).
2. When to Use CIF
   • Seller aims to offer competitive pricing (bundled freight and insurance).
   • Buyer lacks expertise in destination port logistics.
3. When to Use CFR
   • Seller provides cost-effective freight but avoids insurance costs.
   • Buyer can arrange insurance independently to reduce expenses.

Critical Notes:

• Under CIF, sellers only procure minimum insurance; buyers may need supplemental coverage.
• In FOB, delays in vessel nomination by the buyer can lead to demurrage disputes.

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4. Frequently Asked Questions (FAQ)​

Q1: Are CFR and CNF the same?

Yes. CNF is an outdated term; Incoterms now uses CFR exclusively.

Q2: Who bears the risk if goods are damaged under CIF?

The buyer assumes risk after loading. Even though the seller buys insurance, the buyer must file claims with supporting documents.

Q3: Can FOB be used for air freight?

No. FOB applies only to sea transport. For air shipments, use FCA (Free Carrier).

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5. Conclusion​

The core distinctions among FOB, CIF, and CFR lie in freight and insurance responsibilities, while risk transfer occurs at the origin port in all cases. Businesses should select terms based on financial capacity, logistics control, and risk appetite, ensuring contracts specify the Incoterms version (e.g., 2020) to avoid disputes.

By understanding these trade terms, companies can negotiate contracts confidently, streamline operations, and safeguard profitability in global trade.

 

[Graybeard]

The tariff is factored into all landed costs in the United States, which means it applies to the total of the product cost, transportation, and insurance. I’m not entirely sure how other countries calculate this, but that’s how it works in the U.S.


I doubt many people here are directly involved in import-export. Still, it’s worth discussing how freight consolidation into shipping containers bound for the U.S. works. With the recent Trump tariffs and rising shipping costs, the price of goods from China can effectively double by the time they arrive. After paying tariffs, there are also rail or truck drayage costs once the goods clear customs. By the time the product reaches its final destination, it often loses its initial pricing advantage.


On top of that, there are many goods that simply aren’t made in the United States. If we tried to produce them domestically, they would be prohibitively expensive, or we wouldn’t have the labor force available to make them. That’s the core problem with imposing tariffs on products we don’t --and realistically can’t --manufacture here. In such cases, the tariff serves no real domestic industry protection; it simply acts like a hidden consumption tax, similar to how a value-added tax (VAT) works.

 

[affwebsite]

good information thanks for sharing

 

[azgold]

I’m not entirely sure how other countries calculate this, but that’s how it works in the U.S.

I would think this happens everywhere, I know it does here in Canada. Companies are unlikely to take the hit out of their profits, it gets passed on. Last I heard, Trump's tariffs are being applied pretty much globally.

the price of goods from China

China has put a 100% tariff on the canola from Saskatchewan. That's devastating for that province and its farmers.

the tariff serves no real domestic industry protection; it simply acts like a hidden consumption tax,

Agreed! I don't quite understand why many people can't see it.

 

[T J Tutor]

Kittens HATE TARIFFS!

It's just another sales tax!

 

[SSF-Logistics]

The tariff is factored into all landed costs in the United States, which means it applies to the total of the product cost, transportation, and insurance. I’m not entirely sure how other countries calculate this, but that’s how it works in the U.S.


I doubt many people here are directly involved in import-export. Still, it’s worth discussing how freight consolidation into shipping containers bound for the U.S. works. With the recent Trump tariffs and rising shipping costs, the price of goods from China can effectively double by the time they arrive. After paying tariffs, there are also rail or truck drayage costs once the goods clear customs. By the time the product reaches its final destination, it often loses its initial pricing advantage.


On top of that, there are many goods that simply aren’t made in the United States. If we tried to produce them domestically, they would be prohibitively expensive, or we wouldn’t have the labor force available to make them. That’s the core problem with imposing tariffs on products we don’t --and realistically can’t --manufacture here. In such cases, the tariff serves no real domestic industry protection; it simply acts like a hidden consumption tax, similar to how a value-added tax (VAT) works.

Yes, increased tariffs will make it more expensive to deliver goods.

 

[SSF-Logistics]

good information thanks for sharing

Thank you for your recognition