Stop Using FOB and CIF for Containerized Cargo

Most freight forwarders and trade blogs will tell you to use FOB or CIF for ocean shipments. That advice is wrong for containerized cargo. FOB and CIF were designed for breakbulk, not for the intermodal reality of 2024. If you're shipping in containers, stop using them.

The problem with FOB and CIF

Under FOB, the seller delivers goods once loaded on board the vessel at the port of shipment. After that, risk and costs transfer to the buyer. Under CIF, the seller pays ocean freight and minimum insurance to the destination port, but risk still transfers to the buyer at loading. That risk-transfer point is the most commonly misunderstood aspect of CIF.

Here's the practical problem: with containerized cargo, the seller often loses control long before the container is loaded on the vessel. The container sits at a terminal, gets stuffed, and waits. If the terminal is congested, or the container gets damaged before loading, who bears the loss? Under FOB and CIF, the seller does—because risk hasn't transferred yet. That's a raw deal for the seller.

Why Incoterms 2020 gives you better options

The ICC updated Incoterms in 2020. There are seven rules for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU, and DDP. And four rules for sea and inland waterway: FAS, FOB, CFR, and CIF. The any-mode rules are built for containerized freight. FCA, in particular, was revised to address goods sold for carriage by sea: the parties may agree that the buyer will instruct the carrier to issue an on-board bill of lading to the seller once the goods have been loaded on board, and the seller then tenders that document to the buyer, often through the banks. That fix solves the documentary problem that used to force sellers into FOB.

The insurance trap in CIF

CIF requires the seller to provide only minimum insurance coverage—Institute Cargo Clauses (C)—which may not cover theft, water damage, or rough handling. That's a nasty surprise for the buyer. But Incoterms 2020 differentiates insurance levels between CIF and CIP: while CIF retains Institute Cargo Clauses (C) as the default, CIP now requires a higher level of cover, compliant with Institute Cargo Clauses (A) or similar clauses. So if you're the seller and you want to offer real insurance, CIP is the better term. If you're the buyer and you want real coverage, insist on CIP or buy your own.

The counter-argument: banks want on-board bills of lading

Some will say: "But letters of credit require an on-board bill of lading, and only FOB or CIF can give you that." That used to be true. Under UCP 600, the rules for documentary credits, banks deal in documents. An on-board bill of lading is often required. But Incoterms 2020 fixed this. Under FCA, the parties can agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller, who then tenders it to the buyer, often through the banks. So you can get the document the bank wants without using FOB. The counter-argument is outdated.

What about risk and control in practice?

Consider a seller in Chicago shipping 20 containers of machinery to Rotterdam. Under FOB, the seller bears risk until the containers are loaded on the vessel. If a container is damaged at the terminal, the seller eats the loss. Under FCA, the seller's risk ends when the goods are delivered to the carrier at a named place—often the terminal. That's earlier and cleaner. The seller can hand off the goods and be done. The buyer gets a lower price because the seller isn't padding for risk. Everybody wins.

What I'd actually do

If you're shipping containerized cargo, use FCA or CPT instead of FOB or CIF. For most transactions, FCA is your default. It matches how containers actually move—door to terminal to vessel. If you need the seller to pay freight, use CPT or CIP. CIP gives you better insurance than CIF. And if you're stuck with a letter of credit that requires an on-board bill, use the FCA mechanism in Incoterms 2020 to get that document. Don't let old habits cost you money.

Sources

• ICC (Incoterms rules) - https://iccwbo.org/business-solutions/incoterms-rules/
• US trade.gov Incoterms - https://www.trade.gov/know-your-incoterms
• ICC (Incoterms 2020) - https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/
• ICC (UCP 600) - https://iccwbo.org/news-publications/news/iccs-new-rules-on-documentary-credits-now-available/