If you are in the business of export and import, you need to familiarize yourself with incoterms.
These are rules and regulations set by ICC to make the trade within countries easier.
Two common incoterms you will come across are CIP and CIF. What do they mean?
How can you differentiate the two? This and more will be discussed in the blog.
CIF means Cost Insurance and Freight (followed by a destination. CIA means Carriage and Insurance Paid (up to name destination). So, what is the difference? Read on to know mORE.
Table of Content
Chapter 1: CIP V.S. CIF: Understanding the Differences
Chapter 2: Advantages of CIF and CIP
Chapter 3: Which one is better for you between CIP and CIF?
Chapter 4: How to Decide between CIP and CIF?
Chapter 5: FAQs About CIP & CIF
Table of Contents
Chapter 1: CIP V.S. CIF: Understanding the Differences
In international shipping, incoterms confuse many exporters/importers. Two of the frequently used incoterms are CIP and CIF. Deciding between CIP vs CIF is a challenge for many.
The more experienced exporters even use these terms interchangeably which leaves others more confused.
So, what is the difference between the two? The major difference lies in where the logistics and insurance responsibility for the freight shifts from the seller to the buyer.
1. What is CIP?
CIP is the abbreviation of Carriage and Insurance Paid. It is a globally accepted trade term in which a seller pays for both the insurance and freight incurred to deliver goods.
These goods are supposed to be delivered to the point which has been decided mutually between the buyer and seller.
The risk is transferred to the buyer once the seller delivers the goods to the appointed carrier or place of destination.
For any additional cost, the buyers paid for it. CIP is a newer incoterm that was developed to handle the freight challenges of the 21st century. It can be used in sea, air, rail or road transportation.
2. What is CIF?
CIF is the abbreviation for cost, insurance and freight. It is an incoterm that is used internationally for shipping goods from one place to another.
In it, the seller covers all the insurance, freight and costs of the order for the duration that it is in transit. It is very similar to CIP.
The biggest difference is that CIF is only applicable to goods that are transported through ocean, sea or water.
The point of destination is the pre-decided location in the sales contract. All the risks and costs are incurred by the seller until the goods reach the destination port.
If there are any additional costs like custom tax and duties, those are also paid by the seller. Once the goods are delivered, all the risks and responsibilities are transferred to the buyer. These include delivery and unloading charges.
3. What are the major differences between CIP and CIF?
We have already discussed the major difference between CIP VS CIF. CIP can be used for any mode of transportation while CIF is used only for water transport.
This is not the only difference that is present between them. CIF is one of the oldest incoterms while CIP is one of the newest ones. Let’s look at the major differences between the two.
a) Transport obligations
As already mentioned, the main difference is which mode of transport either one applies to. CIP can be used with water, railway, road and air transport while CIF is solely applicable to water transport. Even the way both the incoterms are written is different.
- CIF stands for Cost, Insurance and Freight (port of destination)
- CIP stands for Cost and Insurance Paid to (place of destination)
In CIF, the port of destination needs to be mutually decided upon. This is because it is only used for water transport.
On the other hand, in CIP, the exporter and importer mutually decided destination. This can either be an airport, port or even a train station.
b) Risk
A difference between incoterms is when the risk is transferred from the seller to the buyer. The risk shifts to the seller once the goods reach the mutually decided place of shipment
In CIF, the transfer of risk is straightforward. As it is only related to sea transport, the risk is transferred from the seller to the buyer once goods reach the buyer’s port of destination.
Confusion occurs when you are using CIP. The carrier might be unclear in this case. If you are sending goods over by air freight, who is the carrier? Is the aeroplane the carrier that takes the goods from seller to buyer?
Or, is the truck that delivers the goods to the plane the carrier?
To avoid confusion, ICC specifies that the risk will transfer over to the buyer once the goods are places in the first carrier. In this case, the first carrier is the truck in which goods are transported to the airport.
c) Insurance coverage
Both the incoterms place the responsibility of purchasing the insurance on the seller. In CIF, the insurance is covered until the goods reach the port of destination.
Similarly in CIP, the insurance is also covered by the seller but there is no hard and fast rule on the amount of minimum coverage required.
4. Comparison of Responsibilities
Chapter 2: Advantages of CIF and CIP
Both CIF and CIP have a set of advantages. These advantages play a big role in helping importers and exporters decide which incoterm to go with. There are no clear advantages of CIP over CIF or CIF over CIP.
1. Pros of CIP
The seller has more responsibility in CIP. This does not mean that is bad for the seller. More responsibility means that the seller has more say in the transport of goods. This is an advantage for the seller.
Most of the costs are incurred by the seller. This means that the buyer does not have to take headaches for most things.
The buyer is only responsible for unloading the goods at the final destination and for custom tax, duties and clearances. CIP gives more control to the seller. As the insurance is paid by the seller, this makes sense.
2. Pros of CIF
CIF states that everything in the seller’s country is the responsibility of the seller. Once the goods reach the dock of the destination, the responsibility is transferred to the buyer. This is a good settlement as the buyer is more aware of the working of his country.
Loading/unloading from the port of destination is the responsibility of the buyer. The costs associated with it are also the buyer’s responsibility.
Chapter 3: Which one is better for you between CIP and CIF?
With so little difference between the two terms, CIP vs CIF, exporters and importers are left with a nagging question of which incoterm to pick. The reality is that there is no right or wrong answer.
If we look at them closely, CIP is more comprehensive. It is a newer term that incorporates many factors. Therefore, CIP is more widely used in transporting cargo from one place to another.
CIF is also widely used in shipping. The reason is that it is solely made for shipping cargo. Many sellers and buyers still prefer it. So, it is a personal choice.
Chapter 4: How to Decide between CIP and CIF?
The first thing you need to do is understand what the incoterms stand for before you go can decide which one to pick.
Whether you are a buyer or seller also affects the decision of which incoterm to go for between CIF and CIP. There is no clear-cut method of deciding.
Being a buyer or seller, you have to consider certain factors before choosing CIF or CIP.
What control you want over the transportation process can help you decide. If you are a buyer and are willing to spend money without worrying about the risks associated with transportation, go for CIF.
If you are a buyer and want to have control over the process, go for CIP.
For more security in the logistics chain, a seller will go for CIF. The seller will be responsible for selecting the cargo and transportation company.
They can go with their already established reliable partners. The best way is to sit down with your sourcing agent and decide which incoterms work well for your cargo.
Chapter 5: FAQs About CIP & CIF
1. Which is better CIP or CIF?
There is no clear answer to this. Both have their set of advantages. CIP is a newer term as compared to CIF and that is why it is more comprehensive. It covers all the aspects of the 21st century and that is why it is mostly used.
2. Can you use CIP and CIF for air freight?
No, CIF can’t be used for air freight. CIP can be used for any type of transportation means. It can be used for air, sea and land transport.
3. Are DAP and CIF the same?
No. they are not the same.
4. Does CIF include duty?
Yes. It includes all the charges and duties that the seller is responsible for paying.
Conclusion
CIP is a more comprehensive and modern trade agreement than CIF. This does not mean that CIF is anywhere less. Both have their advantages and are used for different modes of transportation.
The blog covers all the things you need to know before deciding whether to go for CIP VS CIF. It largely depends on personal choice, mutual understanding between the buyer and seller and the business model under operation.
To know more about which one to pick, message us today at Ejet Sourcing. We will sit down with you and devise a customized plan for you!
So, what are you waiting for? Let’s chat!
