Analysis of Risks and Drawbacks in FOB Terms for Foreign Trade

Disadvantages and Risks of FOB Terms in Foreign Trade

In international trade, FOB Free On Board is a commonly used trade term, meaning delivery on board the ship. It is usually applied to sea or inland waterway transportation. Although the FOB clause holds an important position in international goods trading, it also hides many disadvantages and potential risks behind.

From a definitional perspective, the FOB clause stipulates that the seller must transport the goods to the designated loading port and be responsible for all costs and risks before the goods cross the ship's rail. The buyer, on the other hand, bears all costs and risks after the goods cross the ship's rail. This arrangement seems clear at first glance, but it may bring about a series of problems in actual operation.

Firstly, the FOB clause may lead to unclear responsibility division. For example, in a certain trade case, a Chinese enterprise signed a contract based on the FOB clause with an American company. According to the contract agreement, the Chinese seller was responsible for transporting the goods to the Shanghai Port and loading them onto the ship, after which the risk would be transferred to the buyer. However, when the goods were being loaded at the Shanghai Port, part of the goods were damaged due to improper handling by the dockworkers. Although the loss occurred before the goods crossed the ship's rail, both parties disputed over the responsibility attribution. Ultimately, the issue could only be resolved through arbitration. This shows that under the FOB conditions, if the details of the loading process are not clearly defined, it is easy to cause disputes over responsibility.

Secondly, the FOB clause makes cost control difficult. For importers, they often want to minimize procurement costs, so they tend to choose low-cost suppliers. However, some unregulated small exporters may ignore product quality or packaging standards in order to secure orders. As a result, when the goods arrive at the destination port, serious quality issues or non-compliant packaging are discovered. At this point, the importer not only has to bear additional repair costs but may also face customer complaints or compensation claims. Since freight costs are borne by the buyer under the FOB terms, if market prices fluctuate significantly, the buyer will also have to bear higher transportation costs.

Thirdly, the FOB clause presents challenges in logistics management. Especially in bulk goods transactions, selecting suitable carriers, booking cargo space, and coordinating bill of lading issuance require a lot of time and effort. If the seller fails to timely notify the buyer of the loading time and vessel information, it may cause the buyer to miss the pick-up time, thereby delaying subsequent processes. Additionally, if an accident occurs during transportation, such as a ship sinking or encountering adverse weather, the buyer may have to face huge losses alone.

It should be noted that the 2025 edition of the Incoterms by the International Chamber of Commerce revised and improved the FOB clause in order to reduce misunderstandings and disputes. For instance, the new version emphasizes that the seller should provide sufficient information support, including shipping notifications and hazardous material declarations, to enable the buyer to make adequate preparations. Meanwhile, it also adds provisions regarding electronic data interchange, encouraging the use of modern means to improve efficiency.

In summary, although the FOB clause has advantages in simplifying transaction procedures, its inherent defects cannot be ignored. Both sellers and buyers should fully assess their own situations and take corresponding measures to avoid risks when signing contracts. For example, insurance can be purchased to transfer some financial risks; communication with partners should be strengthened to ensure seamless connections between all links; and a quality management system should be established to avoid losing sight of the bigger picture. Only in this way can the advantages of the FOB clause be maximized, achieving the goal of mutual benefit and win-win results.