Cost, Insurance, And Freight (CIF) Value in eCommerce

Introduction

Figuring out the overall costs for a shipment is crucial for the seller and the buyer. While the seller has to adjust their margin according to the additional expenses that will be incurred on the shipment, the buyer needs to see all the charges upfront. Communicating this value for an international shipment can be even more complex, given the dynamic nature of the transit process.

To standardize the process and the costing formula, the ICC (International Chamber of Commerce) developed a value calculation formula called the CIF (Cost, Insurance, and Freight). 

This value became the standard to calculate and declare the actual cost of shipments sent overseas. If you want to import goods as an ecommerce business, you will need to frequently deal with the CIF value to ensure a seamless import process.

In this blog, we will discuss the concept of Cost, Insurance, and Freight in depth so that you can negotiate with your international supplier with complete knowledge of the cost. 

The Concept of Cost, Insurance, and Freight (CIF) value

CIF or Cost, Insurance, and Freight value is the price paid or payable to the exporter for the cargo when it is unloaded from the shipper at the port when imported.

The price includes the value of goods, insurance, and freight costs required for delivering the commodities at the destination port. This value is used as a reference to display and transfer the liability of the goods in transit from the seller to the customer.

The term is often used in international trade as the logistics process can be complex. Along with defining the value of the goods, CIF also declares specific rules and regulations to declare the product's liability.

According to the rules announced by the ICC, which are considered standard practices, the seller is responsible for the goods until the product reaches the port of the buyer/destination.

Therefore, the seller will be responsible for all expenses incurred until the shipment reaches the destination port. This includes export paperwork, customs charges, inspections, or rerouting. The seller must bear all these expenses to ensure the shipment reaches the destination port.

However, once the shipment reaches the destination port, the buyer will have to assume the liability and expenses incurred for the shipment. This will typically include unloading, import duties, and transportation charges to the final destination.

In this manner, the CIF defines clear guidelines along with the value to ensure a seamless transfer of a liability in case of international shipments.

These rules also ensure that global trade is not hampered due to the different customs rules of each country, and fair-trade practices are observed.

How to calculate the CIF value for the product?

Calculating the CIF value for the products is simple. The name suggests the main three components of a CIF value – Cost, Insurance, and Freight. The CIF is typically borne by the seller and is valid for goods transported via a sea, ocean, or other water body.

Apart from the cost, insurance, and freight, the CIF value will also include any additional expenses incurred to send the products to the border/port of the importing country.

Now, to calculate the actual CIF value for your goods, the following values must be added. 

• Cost of goods (as per the sale agreement between the seller and the buyer)
• Insurance of the shipment until it reaches the destination port
• Freight incurred to send the shipment until the destination port

Apart from these, there are other charges the seller has to bear that are usually included in the CIF value.

• Loading charges for the shipment
• Customs inspection charges
• Rerouting charges, if required
• Export paperwork and export duties
• Damage to the shipment (if not covered by insurance)

All of these costs form the CIF value of a particular shipment. This value will represent the financial liability associated with the shipment to all the concerned parties, including the buyer and the insurance entities.

What are the seller’s and buyer’s liabilities regarding CIF?

To ensure hassle-free and conflict-free global trade, the International Chamber of Commerce has released some guidelines dividing the liabilities and responsibilities of the shipping process.

The seller is responsible for the following:

• Product, invoice, and paperwork
• Packaging and labeling
• Customs clearance and taxes
• Pre-loading and transport
• Loading on the vessel
• Delivery at the port
• Proof of delivery

The buyer is responsible for the following:

• Purchase of the goods
• Import taxes and paperwork
• Unloading at the dock
• Forward carriage

9 essential rules of the CIF system

There are some standard practices and rules that a seller and a buyer must follow to benefit from using the CIF value for their trade. These rules discuss guidelines and trade practices, and obligations, and they are as follows.

1. The seller must abide by all the rules set under the CIF practice and compulsorily provide a commercial or purchase invoice to the buyer. 
2. The loading of the goods on board will mark the start of the delivery process rather than the arrival of goods at the export port mentioned in the sales deed.
3. The seller is liable for the loss, damage, or theft of the goods until the goods do not reach the buyer or the destination port mentioned in the sales deed.
4. The seller is responsible for transporting the goods from their warehouse to the export port and then to the border/import port of the destination country.
5. The seller will also be responsible for insuring the goods before the transit at their own expense.
6. The seller has to send all the necessary documents, including any export, import, or customs form required to import/export the goods.
7. The packaging and marking expenses of the goods have to be borne by the seller, and the quality has to adhere to the standards mentioned in the agreement.
8. The seller has to issue a notice to the buyer notifying them of the dispatch and delivery of their goods.
9. All miscellaneous expenses incurred up to the import port must be borne by the seller, including rerouting costs, inspection costs, and export duties and paperwork.

5 Advantages of using the CIF value for the buyer

Now that we have understood the concept of CIF in-depth, let’s look at how it will help your ecommerce business while making purchases on a global scale.

1. You will not have to bear costs once the goods reach your import/destination port.
2. The buyer will not have to undertake the risks involved in the pre-carriage process. In an international process, the pre-carriage period involves many risks, including damage and loss of shipment during transit.
3. The buyer does not have to undertake the headache of having to deal with unfamiliar export rules and regulations. Under the CIF guidelines, the seller takes care of the export paperwork and fees, making it easy to deal with the buyer.
4. The buyer has better control over the shipping process on their turf. As the logistics after the goods have reached the destination port are handled by the buyer, they can handle it as per their preference. This also means they can optimize the process for costs and enable crucial features like Shipment tracking.
5. The buyer does not have to bear insurance charges as they are already taken care of by the seller. Along with this, they do not have to deal with additional charges incurred before the shipment reaches the destination port, like port congestion, vessel shortage, rerouting charges, etc.

4 Disadvantages of using CIF value for the Buyer

While the process seems seamless and hassle-free, some of the process's features can disadvantage you. Some of the disadvantages of using the CIF value in international trade include the following:

1. The goods can only be transported via a waterbody. The CIF value and guidelines are valid for shipments sent over sea, ocean, or other water bodies.
2. The buyer must go through a lot of hassle for shipping insurance claims post-delivery. Even though the seller covers the insurance cost, the buyer must go through the claims process.
3. Some countries/ports do not accept or allow CIF imports, restricting your reach.
4. The import regulations for some countries require local insurance. This makes it difficult for a seller from another country to acquire one for their shipment.

Conclusion

Every ecommerce business aims to provide the best products to their customers. This means they have to procure from the global market to maintain the quality of their products. While it may be easy to find a seller online, the products are mostly sent using freight shipping.

However, every country's differing import and export rules make it quite a hassle. That is why the International Chamber of Commerce introduced the concept of the Cost, Insurance, and Freight (CIF) value.

Using the CIF value for the trade can benefit both buyers and sellers. The guidelines have been designed in such a way that both parties will have to deal with the parts of the process that are already familiar to them. This makes the process quick and hassle-free and facilitates the growth of global trade.

FAQs

1) What is the difference between CIF and FOB?

CIF (Cost, Insurance, and Freight value) and FOB (Free On Board) are shipping agreements between the buyer and seller.

These shipping agreements are part of 12 internationally recognized norms developed and standardized by the International Chamber of Commerce for shipping operations across the globe.

The primary difference is that while the seller bears the cost of insurance and freight until the goods reach the destination port, the buyer takes full responsibility for the goods once the goods have been loaded as cargo.

2) Are CIF and CIP different?

CIF (Cost, Insurance, and freight value) and CIP (Carriage and Insurance Paid To) are similar functions. The difference is that CIF is specific to transportation via waterways, and CIP is used for all modes of transport.

And with CIP, the seller bears the responsibility of delivery, delivery costs, and insurance till the cargo reaches the first shipper nominated for further transportation.