Q: I have a small question regarding FOB terms when shipping from China to the United States. A customer of mine is looking to possibly change its terms with its factory from FOB to FCA. It understands that under FOB, the factory is taking the first-mile costs in China and blending that cost into their “per unit” price on the commercial invoice.
Under FOB terms, can the factory split out the first-mile costs to origin port from the commercial invoice? This is to ensure that it is only paying tariffs on the product and not the first-mile costs.
A: It took me a couple of minutes to figure out the heart of your question. My initial feeling was that there wasn’t much point to making the change you suggest.
I gather that, under the present terms, the Chinese seller is responsible for the overland transportation required to get the goods to the ocean port of debarkation out of China, and your purchaser-customer picks up the cost from there. What you’re trying to do is shift the responsibility for the Chinese overland movement to the buyer.
Now, unless the Chinese supplier is marking up the overland freight cost, this struck me as pretty much a wash. And really, it is. The real problem you confront is the way the Chinese vendor is billing those overland transportation costs (what you’re calling the “first-mile costs”).
In the US, the usual way of passing those costs through to the buyer would be as a separate line item on the invoice, clearly distinguishing that element from the basic price of the goods. But your Chinese vendor apparently isn’t taking such a transparent approach and instead is consolidating the transportation expense invisibly into the goods’ base price.
Mostly this would fall in the “who cares” category, since it’s the same money that’s changing hands. But Chinese imports are subject to import duty (lately a good deal more than it used to be), which US Customs and Border Protection assesses based on the purchase price as represented by the Chinese vendor’s invoice.
You ask if the vendor can “split the first-mile costs to origin port from the commercial invoice.” Sure it can, if it will; as I’ve said, that’s the way it would ordinarily be done in this country. That would effectively reduce the dutiable invoice price to the actual price of the goods, which is what you’re looking for; your customer no longer would pay duties on an added transportation element.
If the vendor won’t make this change in its billing, your answer is to switch purchase terms, much as you suggest. But the change wouldn’t be from FOB to FCA, which are fairly indistinguishable. Both should be followed by place names, marking the point at which title to the goods passes from seller to buyer. You’re defining “FOB” (“free on board”) as meaning that point is the port of origin, and “FCA” (“free carrier”) as meaning it’s where the goods are handed over by the seller to the overland Chinese carrier, but either can by modified to mean the other.
Your shift in terms should be from FOB to EXW (“ex works”), meaning that title passes the moment the goods depart the origin plant where they’re produced. That’ll solve this problem, although it may give rise to another one.
Whether we use your nomenclature or the one I’ve suggested, the change you’re proposing would mean your customer, the buyer, would have ownership of the goods while they’re in the hands of the overland Chinese carrier. As long as that leg of the movement is uneventful, all is well. But what if there’s some sort of incident, resulting in loss of or damage to the goods? I have no idea what Chinese law says about carrier liability, but I doubt it’s anything as stringent as in this country, Furthermore, your customer would be in the unenviable position of trying to pursue a claim from a long distance across national borders.
All things considered, this isn’t an action that I’d recommend be taken lightly. Your customer’s best bet, I think, is to persuade its Chinese vendor to alter its billing practices, so the inland transportation cost is clearly identified as such on its invoice and doesn’t serve to inflate the base price on which import duties are assessed. That way, the vendor still will own the goods while they’re moving within China, and your customer will have what amounts to the best of both worlds.
Consultant, author, and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, SC 29455; phone, 843 559 1277; email: BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.