FOB is one of the eleven Incoterms 2020 rules, and it is a sea and inland waterway rule, which means it only applies where the goods travel by water. The seller delivers the goods on board the vessel nominated by the buyer, clears them for export, and the risk and the cost pass to the buyer at that point. Everything after the rail is the buyer's: the main carriage, the insurance, the import clearance, the duty, and the delivery to the warehouse.
The FOB price is the price of the goods at the port of loading, and nothing else. It is the number the supplier quotes because it is the number the supplier controls, and it is the number that makes the supplier look cheapest in a comparison of quotes that are not comparable.
The buyer who compares an FOB quote with a DDP quote is comparing a partial price with a total price, and the partial price always wins. The comparison that matters is the landed cost of each, and the landed cost of the FOB shipment is the FOB price plus the freight, plus the insurance, plus the duty, plus the clearance, plus the delivery.
The freight is the first, and it is the largest. The main carriage from the port of loading to the port of discharge is the buyer's cost under FOB, and it moves with the market. A rate that was $2,000 a container last quarter can be $4,000 this quarter, and the FOB quote does not move with it.
The duty is the second, and it is the one that surprises buyers most, because the duty is calculated on the transaction value and the rate is set by the classification, not by the quote. A product with a 25 percent Section 301 duty pays 25 percent on the value whether the quote was FOB or DDP, and the buyer who priced on the FOB number discovers the duty only when the entry is filed.
The clearance is the third. Under FOB, the buyer is the importer of record, and the buyer arranges the broker, files the entry, and stands behind the classification. Under DDP, the seller does. A buyer who has never filed an entry discovers the broker fee, the filing cost, and the classification work at the same time, and all three are costs the DDP quote already included.
Build the landed cost for each quote, on the same basis, with the same units. The FOB landed cost is the FOB price plus freight plus insurance plus duty plus clearance plus delivery. The DDP landed cost is the DDP price plus delivery from the named destination, if the delivery is not included. The lower landed cost is the cheaper quote, and it is often the DDP one, because the seller who ships at volume buys freight and clearance cheaper than the buyer who ships once a quarter.
And check the VAT position before you choose. Under DDP, the seller is the importer of record and frequently cannot reclaim import VAT, so the irrecoverable VAT is priced into the goods. Under FOB, the buyer is the importer of record and can reclaim it. A buyer who can reclaim VAT and a seller who cannot will find the FOB total lower than the DDP total, even when the DDP quote looks higher, because the VAT recovery is worth more than the freight saving.
The rule is the same as for any Incoterm: the term decides who pays, who clears, and who is the importer of record, and the quote that does not say which term it is has not quoted a price at all. A freight forwarder earns the fee by knowing the total before the shipment moves, and the forwarder's first question is always which term the quote is on.
Free on Board is an Incoterms 2020 rule for sea and inland waterway transport. The seller delivers the goods on board the vessel, and the risk and cost pass to the buyer at that point. The buyer pays the freight, insurance, import clearance, and duty.
Because the FOB price covers only the goods at the port of loading, while the DDP price includes the freight, import clearance, duty, and taxes. The comparison that matters is the landed cost of each, not the quote.
The buyer. Under FOB the buyer arranges the broker, files the entry, and stands behind the classification. Under DDP the seller is the importer of record.
When the buyer can reclaim import VAT and the seller cannot, or when the buyer ships at volume and buys freight cheaper than the seller does. The landed cost decides, and the VAT position often decides it.