Summary of this article：The key to success in international business lies not only in understanding what you are trading, but also in understanding how you conduct those transactions. In the import business in particular, it is essential to have a clear understanding of the flow of goods. One of the factors that influences this flow is the “terms of trade.” In this article, we will first explain what the import business entails, and then provide a clear explanation of what basic terms of trade—such as FOB, CIF, CFR, and EXW—mean and how they are used.
Introduction: What Is the Import Business?
The import business refers to the practice of purchasing goods or services from one country and selling them in another.
This involves purchasing products from countries with low manufacturing costs and selling them in countries with high manufacturing costs to generate a profit.
While this business model generally focuses on the physical import of goods, it also applies to the import of digital products and services.
When engaging in the import business, it is necessary to understand many factors.
This includes the entire process from purchasing goods, through transportation and customs clearance, to the final sale.
Each step involves different regulations, costs, and risks, and a business owner’s ability to manage these appropriately determines whether the business will succeed.
To ensure these processes run smoothly, an understanding of "terms of trade" is essential.
Terms of trade are the standard rules that serve as a basis for agreements between buyers and sellers regarding the transfer of ownership and risk of goods, as well as the allocation of transportation and insurance costs.
Trade terms are standardized as Incoterms (International Commercial Terms) established by the International Chamber of Commerce (ICC) and are widely used in international trade.
Examples of these terms include FOB (Free On Board), CIF (Cost, Insurance, and Freight), CFR (Cost and Freight), and EXW (Ex Works).
These terms of trade clarify the conditions of the transaction, including the point at which ownership of the goods transfers, the allocation of transportation and insurance costs, and the location of risk.
Thus, to succeed in the import business, it is essential to understand the goods or services, the destination market, and the terms of trade.
By understanding and appropriately selecting these terms, you can manage business risks and conduct transactions efficiently.
Basic Terms and Conditions
1. What is FOB (Free On Board)?
FOB is a trade term under which the seller bears the cost of transporting the goods to the designated port of shipment and loading them onto the vessel.
The seller also confirms that title and risk transfer to the buyer once the goods are loaded onto the ship.
This means that if the goods fall off the ship and are lost, or are damaged during transport, the buyer is responsible.
FOB is a trade term primarily used in maritime transport and is suitable when the buyer wishes to select the shipping route and carrier.
2. What is CIF (Cost, Insurance, and Freight)?
CIF is a trade term under which the seller bears the cost of the goods, insurance, and freight charges.
Specifically, the seller pays the cost of transporting the goods to a port in their home country, the cost of shipping to the destination, and the insurance premium for the goods.
Ownership and risk transfer to the buyer when the goods are loaded onto the vessel at the port of shipment.
In other words, the seller covers the risk (loss or damage to the goods) from the time the goods are shipped from the seller’s port until they arrive at the buyer’s port with insurance.
CIF is suitable when the buyer wants to minimize risk or is unfamiliar with international shipping and insurance procedures.
3. What is CFR (Cost and Freight)?
CFR is a trade term under which the seller bears the cost of the goods and the freight charges to the destination.
Ownership and risk of the goods transfer to the buyer when the goods are loaded onto the vessel at the port of shipment.
In this case, since the seller does not bear the insurance premium, insurance is the buyer’s responsibility.
Therefore, if the goods are lost or damaged during transport, the buyer bears that risk.
CFR is primarily used for sea transport and is suitable when the buyer wishes to arrange insurance independently or wants to keep insurance costs low.
4. What is EXW (Ex Works)?
EXW is a trade term under which the seller delivers the goods to the buyer at the seller’s factory or warehouse.
This means that ownership and risk of the goods transfer to the buyer at the moment the goods are picked up at the seller’s factory or warehouse.
Under EXW, the buyer is responsible for all transportation costs, risks, and customs clearance procedures.
This term is advantageous when the buyer wants the freedom to choose the shipping route and carrier, wishes to minimize shipping costs, or has an existing contract with a specific carrier.
However, caution is required as it necessitates sufficient knowledge and experience regarding transportation and customs clearance procedures.
The Process of Importing from China
1. Selecting Products and Suppliers
First, select the products you wish to import and a reliable supplier to provide them.
This selection is based on market research, an understanding of industry trends, and competitive analysis.
When selecting a supplier, you should investigate their quality control, production capacity, past transaction history, and reviews.
By utilizing B2B marketplaces such as Alibaba, you can choose from a wide variety of suppliers.
2. Setting Transaction Terms
Once you have decided on the products and suppliers, the next step is to set the terms of the transaction.
The terms of trade referred to here define the specific details of the transaction, such as payment methods, price, delivery dates, shipping costs, insurance, and risk allocation.
Knowledge of Incoterms (International Commercial Terms) can help this step proceed smoothly.
The specific terms of trade will vary depending on the type of product, quantity, price, and mode of transport.
3. Importing the Goods
Once the terms of trade have been established and the contract signed, the product import process begins.
This process includes manufacturing and inspection of the goods, transportation, customs clearance, and final delivery.
You must prepare the necessary documents for each step and pay customs duties and VAT (Value Added Tax).
Care must also be taken to ensure that the goods do not violate import regulations, which may require various certifications and inspections.
These processes are complex, and the specific procedures vary depending on the type of goods, the terms of the transaction, and the laws of the importing country.
With the right knowledge and experience, as well as a reliable partner—such as an import agent—you can ensure that your import business from China runs smoothly.
How to Source Products on Alibaba
1. Benefits of Using Alibaba
Alibaba is one of the world’s largest B2B (business-to-business) marketplaces, where you can find a wide variety of products and suppliers.
This allows business owners and buyers to find the products that best suit their needs at the most competitive prices.
Alibaba also offers various tools and services to support transactions between users, such as transaction guarantee services and a supplier rating system.
This enhances the security and transparency of transactions and helps mitigate risks.
2. Setting Trade Terms on Alibaba: Examples of Using FOB, CIF, CFR, and EXW
Here are specific examples of trade terms to apply when sourcing products on Alibaba.
In practice, these may vary depending on the type of product, shipping method, and scale of the transaction.
Example 1: Setting FOB (Free On Board)
I purchased bicycles from a Chinese factory on Alibaba.
The chosen trade term is FOB.
Under this term, the seller is responsible for transporting the bicycles to the port of shipment in China and loading them onto the ship.
Ownership and risk transfer to the buyer once the goods are loaded onto the ship.
Example 2: CIF (Cost, Insurance, and Freight) Terms
I purchased electronic components from a Chinese supplier on Alibaba.
I chose CIF as the terms of trade.
Under this term, the seller bears the cost of the goods, insurance, and freight charges.
Ownership and risk transfer to the buyer the moment the goods are loaded onto the ship at the port of shipment.
Example 3: Setting up EXW (Ex Works)
I purchased furniture from a Chinese supplier on Alibaba.
I chose EXW as the terms of trade.
Under this term, the seller delivers the goods to the buyer at their own factory or warehouse.
Ownership and risk of the goods transfer to the buyer the moment the buyer takes possession of the goods.
In the examples above, the transfer of ownership, risk, and cost responsibility vary depending on the terms of trade.
As such, since the terms of trade on Alibaba may vary depending on the type of goods, price, shipping method, and business needs, it is important to make appropriate selections and adjustments.
Achieving Business Success Through Effective Use of Terms and Conditions
By leveraging these terms and conditions, your import business can grow further and lead to success.
Here are some specific ways to do so.
・Strengthening Risk Management
Selecting and establishing appropriate terms of trade effectively distributes and manages risks between buyers and sellers.
This reduces the risk of unexpected expenses and losses, thereby enhancing business stability.
・Improving Cost Efficiency
Transaction terms clarify responsibilities regarding the transfer of ownership, shipping costs, insurance, and other matters, thereby ensuring that the resulting costs are appropriately allocated.
This helps avoid unexpected cost increases and improves the cost efficiency of the business.
・Efficient Supply Chain Management
By clarifying the terms of trade, it becomes easier to track the movement of goods (from shipment to arrival), enabling more efficient supply chain management.
・Enhanced Trust in the Business Relationship
Terms of trade are documented as part of the transaction and clearly understood by both parties.
This is crucial for building trust between buyers and sellers and fostering long-term business relationships.
・Enhanced Competitiveness
Establishing appropriate terms of trade and the resulting improvements in efficiency and cost management enhance a business’s competitiveness and strengthen its market position.
Appendix: List of Resources and Tools for Import Businesses
・Alibaba
The world’s largest B2B trading platform, ideal for sourcing products. It brings together many suppliers, allowing you to compare and select from a wide variety of products.
・Incoterms 2020
Standard terms of trade for international transactions provided by the International Chamber of Commerce (ICC).
They help you understand and properly utilize trade terms such as FOB, CIF, CFR, and EXW.
・HS Code Search Tool
A tool for searching HS codes, which are international standard codes used to determine product classifications and tax rates.
Essential for calculating duties and classifying goods.
・Customs Broker
A business that handles customs clearance procedures on behalf of clients.
Since customs clearance procedures are complex and require specialized knowledge, it is recommended to entrust them to experts.
・Currency Conversion Tool
A tool for checking and converting exchange rates between foreign currencies and your local currency.
This is necessary for cost calculations and pricing.
・International logistics companies
Companies responsible for transporting goods.
Well-known examples include DHL, FedEx, and UPS.
You can compare and select shipping methods (sea freight, air freight, express delivery, etc.), shipping costs, and transit times.
Let’s use these resources and tools to move forward with the preparation and planning needed to make your import business a success.
Summary
What did you think?
In this article, we provided a detailed explanation of the basic knowledge and trade terms needed to start an import business from China.
Understanding the meaning of basic trade terms, as well as their characteristics and how to apply them, is crucial for conducting international business.
Understanding and applying trade terms may seem complicated at first glance, but it is a crucial step toward success in international business.
Let’s move forward steadily, one step at a time.
