When we were talking about INCOTERMS last week, and how responsibilities and costs are shared between the exporter and the importer, one of my students asked who actually decides the terms of trade, given that both parties would also like to make money from arranging ocean transportation. Put simply, the exporter would prefer to sell on a CIF basis and deliver the goods to the other side, while the importer would prefer to buy on an FOB basis and arrange transportation themselves. The answer is not difficult, and there are many examples: It is the one with the strongest bargaining position.
A classic example of this is trade between the United States
and China. Large American retailers such as Walmart and Home Depot often
purchase goods on a free on board (FOB) basis from Chinese ports, such as
Shanghai or Shenzhen. Their substantial buying power enables them to dictate
terms to Chinese exporters. By buying FOB, American importers control ocean
transport, negotiate directly with shipping lines, consolidate cargo volumes
and enjoy economies of scale in logistics. However, the reverse may occur in
sectors where Chinese exporters possess stronger bargaining power or
specialised know-how, for example in certain machinery or turnkey equipment
exports. In these cases, large Chinese state-owned importers such as Sinopec
and CNOOC increasingly prefer FOB purchases, as this supports the expansion of
Chinese tanker companies and maritime services.
Similarly, we observe CIF sales, particularly to smaller
overseas buyers, in the case of Germany’s high-value industrial exports, such
as capital goods, chemicals, and specialised engineering products. The
technological superiority and strong brand position of German manufacturers
gives them the leverage to organise transport themselves, often through
long-standing relationships with freight forwarders, insurers, and shipping
companies.
The oil trade perhaps offers the clearest example of how
bargaining power determines Incoterms. Historically, major oil exporters such
as Saudi Aramco and other Gulf national oil companies have preferred to sell
crude oil on a free on board (FOB) basis at the loading terminal. Under this
arrangement, the buyer -often a large
international oil company or refinery- owns or charters the tanker, arranges
insurance, and controls the maritime logistics chain. This suited both parties:
exporters could focus on production, while buyers such as ExxonMobil, Shell and
BP had enormous shipping expertise and controlled large tanker fleets or had
long-term time charters with oil producers. Conversely, during periods of weak
tanker markets, oil exporters preferred CIF sales because freight rates were
low, allowing them to bundle transport competitively into the sales price. This
was the case in the 1970s, when the cunning offer of a deluge of time
charter contracts to shipping companies led to excessive newbuilding orders and
an oversupply of tanker tonnage, resulting in low freight rates that suited oil
producers well. It took 20 years for that oversupply to be absorbed.
Thus, INCOTERMS are not merely technical trade clauses. They
often reveal the underlying balance of economic power between trading nations,
multinational firms, and supply-chain actors.
The incidence of transport costs is a related concept. Here,
the question is not who ‘pays the piper’ (i.e. the carrier), which is simply
determined by the agreed INCOTERMS (FOB or CIF), but rather who ultimately
bears the burden of transport costs. In the case of a CIF sale, for example,
the exporter is responsible for arranging transportation of the goods to the
buyer’s port or beyond. However, the CIF price that the buyer pays includes
transport costs. Thus, although the exporter pays the carrier, they are
compensated by the foreign importer, who therefore bears the actual cost of
transport. As we will see in a future post, the burden of transport costs is
shared between the two parties according to their respective price elasticity
of demand and supply. The party bearing the brunt of transport costs is the one
with the lowest elasticity: the exporter of fruit and the importer of oil, for
example.
HH, June 2026, Dalian
