1.What is FOB (Free On Board)?
FOB is an Incoterm primarily used for sea and inland waterway transport. Under FOB terms, the seller is responsible for delivering the goods to the port of shipment and loading them onto the vessel nominated by the buyer. Once the goods pass the ship’s rail and are on board, the risk and responsibility transfer from seller to buyer.
Seller's Responsibilities under FOB
- Packaging and preparing goods for shipment.
- Arranging and paying for transportation from their premises to the agreed port of shipment.
- Handling export customs clearance and paying any related export duties or taxes.
- Loading the goods on board the vessel nominated by the buyer.
- Providing the buyer with necessary shipping documents, such as the bill of lading.
Buyer's Responsibilities under FOB
- Selecting the shipping vessel and paying for ocean freight.
- Arranging and paying for insurance during the sea transit.
- Handling import customs clearance, including paying import duties and taxes.
- Managing transportation from the destination port to the final delivery address.
2.What is EXW (Ex Works)?
EXW places the minimum obligation on the seller, who only needs to make the goods available at their premises or another named place (factory, warehouse, etc.). The buyer assumes responsibility for all other aspects, including loading the goods, export and import clearance, shipping, and delivery.
Seller's Responsibilities under EXW
- Making the goods available for pickup at the agreed location on the agreed date or within the agreed period.
- Providing necessary commercial documents, such as the invoice.
- Assisting the buyer with export documentation if agreed, but the seller is not obligated to clear the goods for export.
Buyer's Responsibilities under EXW
- Organizing and paying for all transport from the seller’s premises to the final destination.
- Loading the goods at the seller’s premises unless otherwise agreed.
- Handling export customs clearance and paying export duties.
- Arranging and paying for ocean or air freight.
- Managing insurance, import clearance, and delivery after arrival.
3.CMR (Road Consignment Note)
| Aspect | FOB (Free On Board) | EXW (Ex Works) |
|---|---|---|
| Point of Delivery | Goods delivered on board the vessel at the port of shipment | Goods made available at seller’s premises or agreed place |
| Risk Transfer | At loading onto the ship at port of shipment | At seller’s premises, before loading |
| Loading Responsibility | Seller loads goods on vessel | Buyer loads goods at seller’s premises |
| Export Clearance | Seller handles export customs clearance | Buyer handles export customs clearance |
| Transportation Costs | Seller pays transport to port of shipment | Buyer pays all transport costs from seller’s location |
| Insurance Responsibility | Buyer is responsible for insurance from ship onward | Buyer is responsible for insurance from pickup |
| Complexity for Buyer | Medium – buyer arranges sea freight and import logistics | High – buyer arranges entire shipment including export |
| Suitability | Buyers wanting seller to handle export formalities | Buyers with strong logistics capability and local contacts |
4.Advantages and Disadvantages of FOB vs EXW
| Aspect | FOB Advantages | FOB Disadvantages | EXW Advantages | EXW Disadvantages |
|---|---|---|---|---|
| Responsibility | Seller handles export clearance and loading, reducing buyer’s complexity | Buyer may have less control over transport from seller to port | Seller’s obligation is minimal, simplifying their role | Buyer bears all risk from seller’s door, including export formalities |
| Control | Buyer controls the main shipping leg and choice of carrier and freight | Potential delays or disputes at port if responsibilities unclear | Buyer has full control over the entire logistics chain | Buyer must arrange loading at seller’s premises, which can cause issues |
| Risk Transfer | Risk transfers at a clearly defined point – on board the ship | N/A | N/A | Not recommended if buyer lacks expertise or presence in seller’s country |
| Use Case | Suitable when buyer wants seller to handle export and manage loading | N/A | Useful when buyers have reliable local agents and carriers | N/A |
5.When to Use FOB vs EXW?
- You want the seller to handle export customs clearance.
- You want risk transfer at the port of shipment, once goods are loaded on board.
- You prefer to manage sea freight and import clearance yourself.
- The shipment is by sea or inland waterway.
- You have strong local logistics support in the seller’s country.
- You want to control the entire transport process, including export.
- You want the seller to have minimal responsibility.
- The shipment may use any transport mode and flexibility is desired.
6.Common Misunderstandings and Tips
1.Loading at Seller’s Premises:
Under EXW, buyers often assume the seller will load the goods, but legally, the buyer must do this unless agreed otherwise. This can cause practical issues if the buyer lacks resources locally.
2.Export Clearance:
EXW places export clearance on the buyer, which can be complicated for those unfamiliar with the seller’s country regulations. FOB makes the seller responsible, easing the buyer’s burden.
3.Insurance:
Neither term requires the seller to insure the goods in transit. Buyers should always consider appropriate insurance depending on the Incoterm chosen.
4.Mode of Transport:
FOB is mainly for sea and inland waterway shipping. For air, road, or multimodal transport, FCA (Free Carrier) or EXW are often more appropriate.
Conclusion
Understanding the fundamental differences between FOB vs EXW is essential for negotiating international sales contracts that protect your interests and streamline shipping processes. FOB offers a balanced approach with the seller handling export formalities and the buyer managing ocean freight. EXW shifts nearly all responsibility to the buyer, granting control but requiring logistics expertise.Before finalizing your contract, evaluate your operational capabilities, shipment nature, and preferred risk allocation. Clear communication with your trading partner and logistics providers ensures a smooth and successful shipment.
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FAQs
Q1:Can FOB be used for air freight or only sea freight?
FOB is primarily intended for sea and inland waterway transport. For air freight or multimodal shipments, other Incoterms like FCA (Free Carrier) are more suitable.
Q2:Who is responsible for insurance under FOB and EXW?
Neither FOB nor EXW requires the seller to provide insurance. The buyer should arrange insurance as per their risk tolerance.
Q3:Can the buyer load goods at the seller’s premises under EXW?
Yes, under EXW, the buyer is responsible for loading the goods at the seller’s location unless both parties agree otherwise.
Q4:What happens if export customs clearance is complicated in the seller’s country?
FOB places the export clearance responsibility on the seller, which can simplify matters for the buyer. Under EXW, the buyer must handle export clearance, which may require local expertise or agents.
Q5:Can FOB or EXW terms be modified?
Incoterms can be customized by mutual agreement. However, any changes should be clearly stated in the sales contract to avoid disputes.