Full definition
Free On Board (FOB) is a crucial Incoterms rule established by the International Chamber of Commerce (ICC) in the 2020 edition. This term defines the responsibilities of sellers and buyers in a maritime shipping context. Under FOB, the seller is obligated to deliver the goods aboard the vessel at the designated port of origin. Once the goods are loaded, the risk shifts from the seller to the buyer. This means that the seller must handle all costs and responsibilities involved in preparing the goods for shipment until they are successfully loaded onto the vessel. Such obligations include securing the goods, proper packaging, managing inland transportation to the port, ensuring export customs clearance, and loading the goods onto the vessel itself.
On the other hand, the buyer takes on significant responsibilities under FOB conditions. Once the goods are on board, the buyer is responsible for ocean freight charges, marine insurance, destination port charges, import customs clearance, and any duties and taxes that arise during importation. The buyer also manages the inland delivery after the goods reach the destination port. This structure allows buyers to have greater control over freight costs, as they can select carriers, negotiate shipping rates, and even consolidate shipments for better pricing.
FOB is particularly prevalent in the trade of industrial rubber and power transmission belts, especially in the context of imports from Asian countries like China, India, Thailand, and Japan to Mexico and Latin America. The FOB pricing structure is also instrumental in customs valuation, where import duties and taxes are typically calculated based on the FOB value plus any additional freight and insurance costs, often referred to as the Cost, Insurance, and Freight (CIF) value. It is important to note that FOB applies solely to sea and inland waterway transport. For other modes of transport, the term Free Carrier (FCA) should be used. To prevent any misunderstandings, it is always recommended to specify the exact port name following the FOB designation, such as FOB Shanghai or FOB Mumbai.