Stop Letting Freight Drive Your Duties: The FOB vs. CIF Trade-Off You Can’t Ignore

Hey there,

If you’ve ever felt the sting of a huge customs bill, you’re not alone. I’ve been in the trenches of landed-cost calculations for years, and the single biggest “aha” moment my clients and I discover is this: tariffs only bite on your dutiable value, and you get to choose how big—or small—that base is.

In plain English: quoting FOB (Free-On-Board) can keep your tariff bill laser-focused on your factory price, while CIF (Cost-Insurance-Freight) means you’re paying duty on every dollar of freight and insurance, too. Over thousands (or even millions) of units, that difference adds up fast—and it’s often the low-hanging fruit you’ve overlooked.

1. Why Tariffs Only “See” Your FOB Price

Under U.S. Customs’ transaction-value rule (19 C.F.R. § 152.103), when you sell FOB, the “price paid or payable” does not include ocean freight or insurance. Duty is calculated on your factory/unit price (plus any pre‐shipment inland costs you cover), and that’s it.

Example:

• FOB unit cost: $10.00
  

• Tariff rate: 10%
  

• Duty: $10.00 × 10% = $1.00 per unit

Use CIF, though, and you’re effectively saying, “Here’s $10 for the shirt, $2 for freight, and $0.50 for insurance—please charge duty on all of it.”

CIF example:

• CIF price: $12.50
  

• Duty: $12.50 × 10% = $1.25 per unit

That extra $0.25 per unit might not sound like much—until you multiply it by 100,000 units (that’s $25,000 in extra duty!).

2. The “Catch” with FOB: Why Not Everyone Chooses It

A. Logistics Complexity

FOB shifts every part of the freight puzzle onto the buyer: ocean contracts, insurance policies, inland pickup, customs clearance. If your buyer has zero shipping muscle—no negotiated rates, no freight-forwarder network—it can be a headache (and surprisingly expensive).

B. Volume Discounts & Cash Flow

Large importers often quote CIF because they bundle massive shipment volumes into rock-bottom freight contracts you simply can’t get on your own. They’re willing to eat a bit more duty in exchange for single-invoice payment and simplified cash-flow management.

C. Simplicity vs. Savings

For many, stacking one CIF invoice beats juggling multiple freight invoices, insurance certificates, and Customs entries—even when it ticks up their dutiable base. It’s like choosing the convenience of airline baggage overhauling your own cargo.

3. When FOB Is a No-Brainer

1. You’ve Got Freight Power: Your buyers or 3PL partners can negotiate top-tier shipping rates.
   

2. Duty Minimization Is Critical: Even small duty reductions move the needle when margins are razor-thin.
   

3. Administrative Muscle: You (or your buyer) have the resources to manage carriers, insurance, and customs brokers separately.

Tip: Run the numbers on your top SKUs. If you’re saving more on duty than you spend on extra freight costs, FOB wins hands down.

4. When CIF Still Reigns

1. Smaller Volume / Less Shipping Experience: Your buyer treats freight as a black box and values “all-in” simplicity.
   

2. Negligible Duty Impact: When your tariff rate is low (say, under 3%) and freight is already bundled into killer bulk rates, the extra duty might be immaterial.
   

3. Marketing & Sales Simplicity: One price, one invoice—no surprises on the landed-cost report for your sales team.

5. Next Steps: Choose Your Incoterm Like a Pro

1. Audit Your Top 5 SKUs: Compare landed-cost scenarios under FOB vs. CIF.
   

2. Talk to Your Freight-Forwarder: Get ballpark FOB and CIF quotes side by side.
   

3. Model the Savings: Pop the numbers into your landed-cost calculator—see exactly what duty you shave off.
   

4. Negotiate: Use the data to negotiate better shipping terms or push your buyer to handle freight under FOB.
   

5. Document & Learn: Record your actual landed costs and refine future sourcing decisions.

Let’s Slash Those Duties Together

Ready to see how much you could be saving? Hit reply, and let’s dive into your numbers. Or if you’d prefer, book a free 30-minute tariff audit here: Schedule Your Audit

Until next time, keep chasing smarter margins!
Lara

“Your margins deserve a fighting chance.”

P.S. If you found this useful, forward it to a colleague who’s drowning in landed-cost spreadsheets. They’ll thank you later!