What Are Trade Terms?
Trade terms, also known as price terms, are concise expressions used in international trade contracts to clearly define the allocation of costs, risks, and responsibilities between buyers and sellers during the delivery process. They form a crucial part of international pricing and contract terms.
These trade terms specify who is responsible for transportation, insurance, customs clearance, loading, and unloading, making them essential knowledge for export, import, and international freight operations.
Major International Conventions on Trade Terms
The main internationally recognized conventions on trade terms include:
- A. Warsaw-Oxford Rules 1932 (W.O. Rules 1932)
- B. Revised American Foreign Trade Definitions 1941
- C. Incoterms 2000 by the International Chamber of Commerce (ICC)
Among these, Incoterms (International Commercial Terms) established by the ICC (International Chamber of Commerce) are the most widely accepted and applied global standards.
China became a member of the ICC in November 1994.
Both Incoterms 1990 and Incoterms 2000 are extensively used worldwide, especially in international trade contracts and letters of credit (L/C).
Definitions and Meanings of Common Trade Terms: FOB, CFR, and CIF
(1) FOB (Free on Board)
FOB price means the seller is responsible for all costs and risks until the goods are loaded on the buyer’s designated vessel at the port of shipment. It does not include sea freight or insurance. This term is mainly used in maritime transport.
(2) CFR (Cost and Freight)
CFR price includes the FOB cost plus the sea freight to transport the goods to the destination port, but does not cover insurance.
(3) CIF (Cost, Insurance, and Freight)
CIF price includes the cost, sea freight, and insurance. The seller is responsible for transporting the goods to the destination port and insuring them during transit. This places the highest responsibility on the seller among the three terms.
Keywords included: FOB and CIF conversion, CIF price calculation method, international freight conversion formula
Conversion Formulas Between FOB, CFR, and CIF Prices
Below are the formulas for converting prices between FOB, CFR, and CIF, useful for exporters, freight forwarders, and pricing professionals.
1. Convert FOB to CFR and CIF
- CFR = FOB + Overseas Freight
- CIF = (FOB + Overseas Freight) ÷ (1 − Insurance Markup × Insurance Rate)
2. Convert CFR to FOB and CIF
- FOB = CFR − Overseas Freight
- CIF = CFR ÷ (1 − Insurance Markup × Insurance Rate)
3. Convert CIF to FOB and CFR
- FOB = CIF × (1 − Insurance Markup × Insurance Rate) − Overseas Freight
- CFR = CIF × (1 − Insurance Markup × Insurance Rate)
Note: The insurance markup is generally 10%, while the insurance rate varies depending on cargo type and risk.
Conversion of FCA, CPT, and CIP Terms (Applicable to Multimodal Transport)
(1) FCA (Free Carrier)
Seller delivers goods to the carrier nominated by the buyer and completes export customs clearance.
(2) CPT (Carriage Paid To)
Seller pays for freight to the named destination but does not cover insurance.
(3) CIP (Carriage and Insurance Paid To)
Seller pays for both freight and insurance to the named destination.
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Conversion Formulas Between FCA, CPT, and CIP Prices
1. Convert FCA to CPT and CIP
- CPT = FCA + International Freight
- CIP = (FCA + Freight) ÷ (1 − Insurance Markup × Insurance Rate)
2. Convert CPT to FCA and CIP
- FCA = CPT − Freight
- CIP = CPT ÷ (1 − Insurance Markup × Insurance Rate)
3. Convert CIP to FCA and CPT
- FCA = CIP × (1 − Insurance Markup × Insurance Rate) − Freight
- CPT = CIP × (1 − Insurance Markup × Insurance Rate)
Conclusion
This article thoroughly explains the conversion methods between FOB, CFR, and CIF prices as well as the conversion between FCA, CPT, and CIP terms. It serves as a valuable reference for exporters, customs brokers, freight forwarders, and other professionals engaged in international trade.
Mastering these international trade terms and their conversion formulas will help companies quote accurately, control costs, minimize risks, and improve professionalism and competitiveness in global business.
