- Incoterms Explained
- Unpacking DDP
- Advantages of DDP
- Disadvantages of DDP
- What Does CIF Mean?
- Advantages of CIF
- Disadvantages of CIF
- DDP Vs CIF
- The case for DDP
- What about CIF?
In the international trade industry, experienced shippers will tell you that using the correct sales contract can significantly impact your shipment and business.
In this post, we will unpack two commonly used incoterms, DDP and CIF. By understanding the benefits and drawbacks of each of these terms, you can make a more informed decision about how to ship your goods.
First, let's look at incoterms and why they are essential to know in the international shipping space.
The International Chamber of Commerce (ICC), established in the early 1900s, set out to understand the undocumented rules and agreements governing international trade.
At the time, buyers and sellers agreed on sales terms amongst themselves, which proved tricky when it came to interpreting these terms.
Problems also arose when the laws, cultural norms, and common sales agreements differed from country to country, calling for a need to unify international sales agreements.
To this end, the ICC founded incoterms short for international commerce terms.
The creation of incoterms came at the end of World War I when the global economy sought to increase trade and commerce between countries.
Today, 11 main incoterms are widely used in the shipping industry. They are continuously updated and refined to indicate the responsibilities of both the buyer and the seller, which helps to foster a unified international trade community.
One of the most popular incoterms used in shipping today is delivered duty paid or DDP.
Under DDP, the seller has maximum responsibility. This means that the seller is responsible for arranging and paying for the transportation of goods to an agreed-upon location, wherever that may be.
On top of taking financial responsibility, the seller also carries the risks associated with the items reaching the destination port. This includes import duties, customs clearance, and any additional taxes that must be paid.
All the buyer needs to do is wait for their goods to arrive at the arranged location. They do not need to pay shipping costs and are not responsible for anything that goes wrong in transit.
Advantages of DDP
The benefits of DDP depend on which side of the sales agreement you find yourself in.
As a buyer, DDP offers a hassle-free shipping experience. You do not need expertise to handle customs clearance and the related import processes.
For a seller, especially if you're experienced in international trade, DDP can make your service more appealing to customers who do not wish to handle the regulations and shipping procedures.
Sellers using DDP also have a competitive edge over those not. Buyers want their goods as soon as possible, with the least amount of admin from their side. We see this trend more and more with the rise of online shopping.
With DDP, sellers assume all administrative duties related to the shipping, so buyers have to sit back and wait for their purchases to be delivered to the destination port.
Disadvantages of DDP
For the buyer, the convenience of having the entire shipping process handled by the seller comes at a price.
Initial DDP costs are often higher than other sales agreements. So, while the buyer saves time and effort, they pay upfront fees for it.
The buyer also has less control over the shipping process, which means they have little leeway to make adjustments in the event of a shipping delay.
DDP can disadvantage the seller if they are not well-versed in international trade. As the seller is responsible for paying import taxes and duties in the buyer's country, a miscalculation of this amount could result in additional costs not initially in the budget.
This, coupled with the administrative burden of arranging shipping, could be a stumbling block for sellers unfamiliar with the processes.
If, as a seller, you would still like to use DDP but have no idea where to start, enlisting the services of an experienced freight carrier is recommended.
The added benefit of having someone in your team who knows what they're doing in the international trade arena will ensure your goods arrive at the destination country much easier.
What Does CIF Mean?
CIF is a shipping term for cost, insurance, and freight. Like DDP above, it is an incoterm used to dictate the contract between a buyer and a seller.
Like the cost and freight (CFR) incoterm, CIF has the added insurance benefit.
With a CIF agreement, the seller is responsible for arranging and paying for the shipment to the destination port. This includes transportation costs and insurance coverage for the goods while they are on their way.
Unlike DDP, that coverage ends as soon as the cargo arrives at the destination port. From there, the buyer takes over the financial responsibilities, such as transport costs, import duties, customs fees, and other related charges.
To safeguard the shipment, the buyer should seek out the services of a freight forwarder specializing in door-to-door shipping. This will help take the burden off of inexperienced buyers who do not have the know-how to navigate international trade requirements.
Advantages of CIF
The most significant upside to using CIF lies in its cost savings. As charges and admin responsibilities are divided, the seller has more control to choose their own service providers and freight forwarders.
In this way, buyers can negotiate better transport rates, leading to savings in the long run.
If a buyer has extensive knowledge of the shipping industry, they could handle the import procedures themselves, eliminating the need to hire a third party.
It's obvious then that the division of costs also benefits the seller. Less admin for the seller also gives them more time to focus on other business aspects that need their attention.
Disadvantages of CIF
A significant drawback of CIF is that the goods will only be insured for half of the journey. Once the cargo reaches the destination port, the buyer is responsible for insuring the goods until they reach their destination.
Failure to do so could result in loss and damage, which could occur during the land transportation phase.
If the buyer is an experienced shipper, they may want to use their preferred shipping and logistics company. However, they can only do so once the shipment is in their domain. This could be a disadvantage for those who wish to have more control over the entire shipping process.
DDP Vs. CIF
As we've seen, both DDP and CIF offer notable upsides to buyers and sellers alike. However, they also have significant drawbacks, which must be considered before deciding which sales contract to use.
The choice between the two depends on a number of factors. These include:
- The nature of the shipment
- The buyer and seller's level of experience and knowledge in international trade
- The unique requirements of the transaction.
Let's look at two scenarios as examples.
The case for DDP
Let's look at this simple example: A buyer wants to purchase an item of furniture from an overseas seller for the first time. They have no experience in international shipping or a workable knowledge of import duties, shipping costs, and customs clearance.
The seller sends goods to this specific buyer's country quite often, so they know everything required to ensure a successful shipment.
In this case, DDP would be advantageous for both the buyer, who has experience in international trade and the seller, who doesn't know much about the shipping industry.
What about CIF?
A seller is seeking to send medical supplies to the buyer's destination. This type of cargo needs special handling instructions and insurance as medical goods.
The buyer, experienced in international shipping, knows this and will pay for the insurance and related costs once the goods arrive at the destination port.
CIF would be a good decision for this scenario.
The decision between DDP and CIF needs to be reviewed in detail so that you can avoid any unforeseen expenses and possible losses.
When choosing a seller or a buyer, consider what the shipment entails, where it is going, and how you would like it transported. At the same time, think about how much money and effort you are willing to spend on the cargo.
Whether you use CIF or DDP, we recommend A1 Auto Transport for your shipping needs. With credible advice and industry expertise, our shipping specialists are ready to help you get your goods quickly and safely. Contact us today for a free quote.