Exporting Importing and Countertrade Exporting Sale of products

Exporting, Importing and Countertrade

Exporting Sale of products produced in one country and sold in another country Volume of exporting in the world is increasing as exporting has become easier due to reduced trade barriers improved logistics and transportation systems global information technology

Promise of Exporting While there is a great opportunity for firms to profit and grow their business by exporting their products to international markets. . …. there are many pitfalls to avoid

Pitfalls of Exporting Small and Medium-Sized Firms Tend to be reactive and wait until Ignorant about the export opportunities Intimidated by exporting mechanics domestic market is saturated emergence of excess domestic capacity potential opportunities to come to them Typical: 30 parties, 60 original documents, 360 copies Experience problems in their initial exporting activity Concerned over time commitment and paperwork Approximately 10% of the value of the goods exported

Improving Export Performance Collect information and compare international markets Tap information sources federal and state governmental agencies commercial banks and major accounting firms trade groups suppliers and distributors Hire an export management company (EMC) Develop an exporting strategy

Utilizing Export Management Companies Export specialist who act as the export management department or international for client firms Two types of assignments: start exporting operations for a firm with the understanding that the firm will take over exporting after they are well established start-up services with continuing responsibility for selling the firm’s products internationally

Exporting Strategy Hire an EMC or someone with experience But develop your export capabilities…EMC’s won’t! Focus on one or a few markets Enter market on a fairly small scale until established Add new markets or products after initial success Recognize the time and managerial commitment Build strong and lasting relationships Hire locals to help firm establish itself Be proactive and seek export opportunities Keep the option of local production in mind Tap governmental resources Expect the unexpected!

Governmental Export Assistance US Department of Commerce International Trade Administration US Foreign and Commercial Services Export Assistance Centers S. C. O. R. E Trade Opportunities Program Best Prospects List Distributor Evaluations Trade Missions and Exhibitions National Trade Data Bank

Export and Import Financing Lack of trust is a major export issue unfamiliar customer different business system significant distance geographic language culture Overcome by use of trusted third party

Preference of the US Exporter Pay me before I send you the goods!

Preference of the French Importer Ship me the goods before I pay you!

The Use of a Third Party (Bank) Fig 15. 3

Export/Import Financing Financial Devices to Resolve Lack of Trust Letters of Credit (L/C) Drafts (Bill of Exchange) Bill of Lading

Letter of Credit Bank guarantee on behalf of importer to exporter to pay a specified sum of money to the exporter on presentation of specified documents Importer will be charge a fee between 0. 5 and 2% of the value of the letter of credit May reduce importer’s ability to borrow funds since letter of credit is a financial liability

Drafts (Bill of Exchange) Written order by an exporter (maker), telling an importer (drawee) to pay a specified amount of money at a specified time

Drafts (Bill of Exchange) Sight Drafts payable on presentation to the drawee (the bank) Time Draft negotiable instrument allowing for delay in payment in 30, 60, 90 or 120 days presented to drawee who signifies acceptance which becomes a promise to pay Bank Acceptance (by bank) Trade Acceptance (by firm) accepted time drafts are negotiable and can be discounted to a third party

Bill of Lading Issued to exporter by the common carrier transporting the merchandise

Bill of Lading Serves Three Purposes Receipt indicates the carrier has received the merchandise Contract carrier is obligated to provide transportation service in return for a certain charge Document of Title can be used to obtain payment or a written promise before the merchandise is released to the importer function as collateral against which funds may be advanced to the exporter by its local bank before or during shipment and before receiving payment

Typical International Trade Transaction Fig 15. 4

Export Financing Assistance Government-backed assistance Export-Import Bank Export Credit Insurance

Export-Import Bank Referred to as Eximbank Independent agency of US government Provides loans and loan-guarantee programs Makes commercial banks more willing to lend cash to foreign firms buying US exports Directly lends money to foreign borrowers to purchase U. S. exports

Export Credit Insurance Provided by Foreign Credit Insurance Association Consists of private commercial institutions operating under the guidance of Export-Import Bank Coverage is bought by exporter when L/C is not utilized Provides credit insurance if importer defaults on A/P insurance against political risks (expropriation, etc)

Countertrade Trade of goods and services for other goods and services when they can not be traded for money

Countertrade Denotes a whole range of barter-like agreements Primarily used when a firm exports to a country whose currency is not freely convertible Importing country may lack the foreign exchange reserves required 8 to 10% of world trade (or as low as 2%) is in the form of countertrade

Types of Countertrade Barter Counterpurchase Offset Switch Trading Compensation or Buybacks

Barter Direct exchange of goods and services between two parties without a cash transaction Possible problems if goods are not exchanged simultaneously, one party ends up financing the other for a period goods may be unwanted, unusable or have a low re -sale value Most restrictive form of countertrade for one-time deals

Counterpurchase Reciprocal buying agreement when a firm agrees to purchase a certain amount of goods back from the country to which a sale is made

Offset Exporter agrees to use certain percentage of proceeds from the sale to buy goods from any firm in the importing country Similar to counterpurchase, but more flexible by allowing exporter to choose the goods they wish to purchase

Switch Trading Use of a specialized third-party trading house to sell your counterpurchase credit (at a discount) to another firm

Compensation or Buybacks Firm builds foreign plant or supplies technology or equipment and agrees to take a percentage of the plant’s output as a partial payment

Pros of Countertrade Gives firm a way to finance an export deal when other means are unavailable Importer’s government may require it Most attractive to large, diverse multinational firms which can use it as a strategic marketing tool

Cons of Countertrade Firms prefer hard currency payments May involve defective or poor-quality goods Must develop in-house trading department Usually expensive and time consuming Not attractive to small and medium sized firms