CHAPTER 16: EXPORTING, IMPORTING, AND COUNTERTRADE

1) INTRODUCTIONs

- The volume of export activity in the world economy has increased as exporting has become easier

- Nevertheless, exporting remains a challenge for many firms.

o Smaller enterprises can find the process intimidating.

o Familiarize itself with the mechanics of export and import financing, learn where it can get financing
and export credit insurance, and learn how it should deal with foreign exchange risk.

o Arranging payment for exports to countries with weak currencies can be a problem. Countertrade
allows payment for exports to be made through goods and services rather than money.

2) THE PROMISE AND PITFALLS OF EXPORTING

- Promise:

o Large revenue and profit opportunities are to be found in foreign markets

o By expanding the size of the market, exporting can enable a firm to achieve economies of scale,
thereby lowering its unit costs.

- Pitfalls: while many large firms tend to be proactive about seeking opportunities for profitable exporting—
systematically scanning foreign markets to see where the opportunities lie for leveraging their technology,
products, and marketing skills in foreign countries—many medium-sized and small firms are very reactive.
(not even consider exporting until their domestic market is saturated and the emergence of excess productive
capacity at home forces them to look for growth opportunities in foreign markets).

o Many small and medium-sized firms tend to wait for the world to come to them, rather than going out
into the world to seek opportunities. Even when the world does come to them, they may not respond

o Many would-be exporters, particularly smaller firms, are often intimidated by the complexities and
mechanics of exporting to countries where business practices, language, culture, legal systems, and
currency are very different from the home market.

o poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure
to customize the product offering to the needs of foreign customers, a lack of an effective distribution
program, a poorly executed promotional campaign, and problems securing financing.

o Exporters often face voluminous paperwork, complex formalities, and many potential delays and
errors.

3) IMPROVING EXPORT PERFORMANCE

a) International Comparisons

- One impediment to exporting: lack of knowledge of the opportunities available.

- there are many markets for a firm’s product, but because they are in countries separated from the firm’s
home base by culture, language, distance, and time, the firm does not know of them.

- The way to overcome ignorance is to collect information.

o Germany: trade associations, government agencies, and commercial banks gather information,
helping small firms identify export opportunities

o Japanese: similar, by Japanese Ministry of International Trade and Industry (MITI) and sogo shosha to
proactively seek export opportunitites for affiliated companies.

1
 o US: not yet evolved an institutional structure for promoting exports similar to that of either Germany
or Japan.

b) Information Sources: to increase awareness of export opportunities.

- A number of private organizations are also beginning to provide more assistance to would-be exporters.
Commercial banks and major accounting firms are more willing to assist small firms in starting export
operations.

- Large multinationals that have been successful in the global arena are typically willing to discuss opportunities
overseas with the owners or managers of small firms.

c) Service Providers: freight forwarders, export management companies, export trading companies, export
packaging companies, customs brokers, confirming houses, export agents and merchants, piggyback
marketing, and economic processing zones.

- Freight forwarders: orchestrate transportation for companies that are shipping internationally.

o combine smaller shipments into a single large shipment to minimize the shipping cost

o other service: documentation, payment, and carrier selection

- Export Management Company (EMC): to companies that have not previously exported products.

o offer a full menu of services to handle all aspects of exporting, similar to having an internal exporting
department within your own firm (deal with export documents and operate as the firm’s agent and
distributor)

- Export trading companies: export products for companies that contract with them.

o They identify and work with companies in foreign countries that will market and sell the products.
They provide comprehensive exporting services, including export documentation, logistics, and
transportation.

- Export packaging companies: provide services to companies that are unfamiliar with exporting.

o some countries require packages to meet certain specifications, and the export packaging firm’s
knowledge of these requirements is invaluable to new exporters in particular

o advise appropriate design and materials for the packaging of their items

o assist companies in minimizing packaging to maximize the number of items to be shipped

- Customs brokers: avoid the pitfalls involved in customs regulations.

o many countries have certain laws and documentation regulations concerning imported items that are
not always obvious to the exporter. Customs brokers can offer a firm a complete package of services
that are essential when a firm is exporting to a large number of countries.

- Confirming houses: represent foreign companies that want to buy your products.

o try to get the products they want at the lowest prices and are paid a commission by their foreign
clients

- Export agents, merchants, remarketer: buy products directly from the manufacturer and package and
label the products in accordance with their own wishes and specifications.

o sell the products internationally through their own contacts under their own names and assume all
risks

 small effort to market the product but lose control over marketing, promotion and positioning of the product.

- Piggyback marketing: arrangement whereby one firm distributes another firm’s products

2
 o a firm may have a contract to provide an assortment of products to an overseas client, but it does not
have all the products requested. In such cases, another firm can piggyback its products to fill the
contract’s requirements.

o Successful piggybacking usually requires complementary products and the same target market of
customers

- Export processing zones (EPZs): include foreign trade zones (FTZs), special economic zones, bonded
warehouses, free ports, and customs zones.

o receive shipments of products that are then reshipped in smaller lots to customers throughout the
surrounding areas

d) Export Strategy

- For the novice exporter, it helps to hire an EMC or at least an experienced export consultant to identify
opportunities and navigate the paperwork and regulations so often involved in exporting.

- Initially focus on one market or a handful of markets. Learn what is required to succeed in those markets
before moving to other markets.

o The firm that enters many markets at once runs the risk of spreading its limited management
resources too thin  failure to become established in any one market.

- Enter a foreign market on a small scale to reduce the costs of any subsequent failure + provides the time
and opportunity to learn about the foreign country before making significant capital commitments to that
market.

- Recognize the time and managerial commitment involved in building export sales and should hire
additional personnel to oversee this activity.

- Devote a lot of attention to building strong and enduring relationships with local distributors and/or
customers.

- Hire local personnel to help the firm establish itself in a foreign market. Local people are likely to have a
much greater sense of how to do business in a given country than a manager.

- Proactive about seeking export opportunities.

- Retain the option of local production. Once exports reach a sufficient volume to justify cost-efficient local
production, the exporting firm should consider establishing production facilities in the foreign market. Such
localization helps foster good relations with the foreign country and can lead to greater market acceptance.

e) Globaledge Diagnostic Tools

- there are four diagnostic tools that focus on helping companies export: CORE, PARTNER, DISTRIBUTOR,
FREIGHT

- CORE (Company Readiness to Export): self-assessment of exporting proficiency

o evaluates both the firm’s and the intended product’s readiness to be taken internationally

o systematically identifies the firm’s strengths and weaknesses within the context of exporting

o a tutorial in exporting.

- PARTNER (International Partner Selection): analysis and evaluation of potential international partners.

o covers a wide variety of types of partnerships: joint ventures, licensees, franchisees, contract
manufacturers, and R&D partnerships.

o It is based on criteria that includes trust and relationship factors as well as operational criteria and
contains individually identified strengths and weaknesses of each partner.
3
 - DISTRIBUTOR (Foreign Distributor Selection): evaluate and compare foreign distributor or agent candidates

o given the type of product being sold and the market characteristics, and indicates areas that may
require ongoing training and management throughout the life of the relationship.

- FREIGHT (Freight Forwarder Selection): selecting the most appropriate international freight forwarder for their
type and volume of business based on six sets of criteria.

o evaluates each candidate, highlights the candidates’ strengths and weaknesses, and compares the
various candidates.

4) EXPORT AND IMPORT FINANCING

a) Lack of Trust

- lack of trust is exacerbated by the distance between the two parties—in space, language, and culture—and by
the problems of using an underdeveloped international legal system to enforce contractual obligations.

- Consider US firm exporting to France distributor:

o If US ships the products to France before receiving the payments, French will take delivery of products
and not pay US.

o If French importer pays before the products are shipped, US might keep the money and never ship the
products or ship defective products.

 each party has a different set of preferences.

 Solve: use an intermediary trusted by both

1. The French importer obtains the bank’s promise to pay on her behalf  Letter of credit.

2. Bank promises exporter to pay on behalf of importer.

3. Having seen the letter of credit, the U.S. exporter now ships the products to France. Title to the products is given
to the bank in the form of a document called a bill of lading.

4. In return, the U.S. exporter tells the bank to pay for the products, which the bank does. The document for
requesting this payment is referred to as a draft.

5. The bank, having paid for the products, now passes the title on to the French importer, whom the bank trusts.

6. At that time or later, depending on their agreement, the importer reimburses the bank.

4
b) Letter of Credit

- the letter of credit states that the bank will pay a specified sum of money to a beneficiary, normally the
exporter, on presentation of particular, specified documents.

o The French bank first undertakes credit check, if satisfy  issue

o French bank require cash deposit or collateral.

o French bank will charge importer a fee (0.5-2 percent value of letter of credit, depending on
creditworthiness and size of transaction).

o Frend bank sends letter of credit to US Bank. US Bank tells US exporter that it has received a letter
of credit and he can ship the merchandise.

5
 o After exporter shipped, he draws a draft against French bank in accordance with the terms of the
letter of credit, attaches the required documents, and presents the draft to US Bank for payment

o US Bank forwards the letter of credit and associated documents to French bank. French bank will
honor the draft and send payment to US Bank. US Bank receives the funds and pays the US exporter.

o French Bank collects payment from French importer. Or French Bank may allow importer some time to
resell the merchandise before requiring payment (treat as a loan to the importer and will charge an
appropriate rate of interest).

- Advantage:

o both the French importer and the U.S. exporter are likely to trust reputable banks.

o an exporter may find that having a letter of credit will facilitate obtaining pre-export financing. For
example, having seen the letter of credit, the Bank of New York might be willing to lend the exporter
funds to process and prepare the merchandise for shipping to France. This loan may not have to be
repaid until the exporter has received his payment for the merchandise.

o French importer, she does not have to pay for the merchandise until the documents have arrived and
unless all conditions stated in the letter of credit have been satisfied.

- Drawback:

o The fee importer must pay for French bank for letter of credit.

o the letter of credit is a financial liability against importer  it may reduce her ability to borrow funds
for other purposes.

c) Draft

- Draft/ Bill of Exchange: an order written by an exporter instructing an importer, or an importer’s agent, to
pay a specified amount of money at a specified time.

o The person or business initiating the draft is known as the maker (in this case, the U.S. exporter).

o The party to whom the draft is presented is known as the drawee (in this case, the Bank of Paris).

- Difference from domestic transaction: buyer can obtain possession without signing formal document about
obligation to pay.

- Two categories:

o Sigt draft: payable on presentation to the drawee

o Time draft: allows for a delay in payment—normally 30, 60, 90, or 120 days. It is presented to the
drawee, who signifies acceptance of it by writing or stamping a notice of acceptance on its face. Once
accepted, the time draft becomes a promise to pay by the accepting party

 When a time draft is drawn on and accepted by a bank, it is called a banker’s acceptance

 When it is drawn on and accepted by a business firm, it is called a trade acceptance

 Time drafts are negotiable instruments; that is, once the draft is stamped with an acceptance,
the maker can sell the draft to an investor at a discount from its face value.

Example: US exporter presents French Bank with a time draft requiring payment 120 days after presentation. French
Bank stamps the time draft with an acceptance.  the exporter can hold onto the time draft and receive $100,000 in
120 days OR sell it to investor (US Bank) for $97,700 if it needed the funds to finance merchandise in transit or to
cover cash flow shortfalls. The US Bank will then collect full $100,000 from French Bank in 120 days.

d) Bill of Ladding

6
- Bill of Ladding: issued to exporter by the common carrier transporting the merchandise.

- 3 purposes: a receipt, a contranct, a document of title.

o Receipt: indicates that the carrier has received the merchandise described on the face of the
document.

o Contract: specifies that the carrier is obligated to provide a transportation service in return for a
certain charge.

o Document of title: to obtain payment or a written promise of payment before the merchandise is
released to the importer

e) A Typical International Trade Transaction: 14 steps

- Step 1: French importer places an order with the U.S. exporter and asks the American if he would be willing to
ship under a letter of credit.

- Step 2: The U.S. exporter agrees to ship under a letter of credit and specifies relevant information such as
prices and delivery terms.

- Step 3: The French importer applies to the French Bank for a letter of credit to be issued in favor of the U.S.
exporter for the merchandise the importer wishes to buy.

- Step 4: The French Bank issues a letter of credit in the French importer’s favor and sends it to the U.S.
exporter’s bank, the US Bank.

- Step 5: The US advises the exporter of the opening of a letter of credit in his favor.

- Step 6: The U.S. exporter ships the goods to the French importer on a common carrier. An official of the
carrier gives the exporter a bill of ladding.

- Step 7: The U.S. exporter presents a 90-day time draft drawn on the French Bank in accordance with its
letter of credit and the bill of ladding to the US Bank. The exporter endorses the bill of lading so title to the
goods is transferred to the Bank of New York.

- Step 8: The US Bank sends the draft and bill of lading to the French Bank. The French Bank accepts the
draft, taking possession of the documents and promising to pay the now-accepted draft in 90 days.

- Step 9: The French Bank returns the accepted draft to the US Bank

- Step 10: The US Bank tells the U.S. exporter that it has received the accepted bank draft, which is payable in
90 days

- Step 11: The exporter sells the draft to the Bank of New York at a discount from its face value and receives
the discounted cash value of the draft in return

- Step 12: The French Bank notifies the French importer of the arrival of the documents. She agrees to pay the
Bank of Paris in 90 days. The French Bank releases the documents so the importer can take possession of the
shipment.

- Step 13: In 90 days, the French Bank receives the importer’s payment, so it has funds to pay the maturing
draft.

- Step 14: In 90 days, the holder of the matured acceptance (in this case, the Bank of New York) presents it to
the Bank of Paris for payment. The Bank of Paris pays.

7
5) EXPORT ASSISTANCE: help finance their export programs

a) Export- Import Bank

- Assist in the financing of U.S. exports of products and services to support U.S. employment and market
competitiveness.

- the Ex-Im Bank’s financing must have a “reasonable assurance of repayment” and should supplement, and
not compete with, private capital lending.

- Overall, Ex-Im Bank pursues its mission with various loan and loan-guarantee programs. The agency
guarantees repayment of medium- and long-term loans that U.S. commercial banks make to foreign
borrowers for purchasing U.S. exports.

- A direct lending operation under which it lends dollars to foreign borrowers for use in purchasing U.S. exports
The foreign borrowers use the loans to pay U.S. suppliers and repay the loan to the Ex-Im Bank with interest.

b) Export Credit Insurance

- sometimes an exporter who insists on a letter of credit will lose an order to one who does not require a letter
of credit. Thus, when the importer is in a strong bargaining position and able to play competing suppliers
against each other, an exporter may have to forgo a letter of credit.

- The lack of a letter of credit exposes the exporter to the risk that the foreign importer will default on payment
 The exporter can insure against this possibility by buying export credit insurance. If the customer defaults,
the insurance firm will cover a major portion of the loss.

6) COUNTERTRADE

- Countertrade: alternative means of structuring an international sale when conventional means of payment
are difficult, costly, or nonexistent. (trade goods and services for other goods and services when they cannot
be traded for money)

8
Example: Saudi Arabia agreed to buy ten 747 jets from Boeing with payment in crude oil, discounted at 10 percent
below posted world oil prices

a) Types of Countertrade

- Barter: direct exchange of goods and/or services between two parties without a cash transaction. Problems:

o if goods are not exchanged simultaneously, one party ends up financing the other for a period

o risk of having to accept goods they do not want, cannot use, or have difficulty reselling at a
reasonable price

 used for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy

- Counterpurchase: when a firm agrees to purchase a certain amount of materials back from a country to
which a sale is made

Example: a U.S. firm sells some products to China. China pays the U.S. firm in dollars, but in exchange, the U.S. firm
agrees to spend some of its proceeds from the sale on textiles produced from China. Thus, although China must draw
on its foreign exchange reserves to pay the U.S. firm, it knows it will receive some of those dollars back

- Offset: similar to a counterpurchase insofar as one party agrees to purchase goods and services with a
specified percentage of the proceeds from the original sale.

o The difference is that this party can fulfill the obligation with any firm in the country to which the sale
is being made. From an exporter’s perspective, this is more attractive than a straight counterpurchase
agreement because it gives the exporter greater flexibility to choose the goods that it wishes to
purchase

- Switch Trading: use of a specialized third-party trading house in a countertrade arrangement. occurs when a
third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can
better use them.

Example: a U.S. firm concludes a counterpurchase agreement with Poland for which it receives some number of
counterpurchase credits for purchasing Polish goods. The U.S. firm cannot use and does not want any Polish goods,
however, so it sells the credits to a third-party trading house at a discount. The trading house finds a firm that can
use the credits and sells them at a profit

- Compensation or Buybacks: occurs when a firm builds a plant in a country—or supplies technology,
equipment, training, or other services to the country—and agrees to take a certain percentage of the plant’s
output as partial payment for the contract.

Example: Occidental Petroleum negotiated a deal with Russia under which Occidental would build several ammonia
plants in Russia and as partial payment receive ammonia over a 20-year period

b) Pros and Cons of Countertrade

- Pros:

o it can give a firm a way to finance an export deal when other means are not available.

 Developing nations with difficulty in raising foreign exchange.

 Countries prefer countertrad > cash deals.

 unwilling to enter countertrade = lose export opportunity to competitor who is willing to make countertrade
agreement.

o Required by government of a country to which firm is exporting.

 in exchange for gaining an order from Air India, Boeing may be required to purchase certain
component parts, such as aircraft doors, from an Indian company.  Boeing can use its

9
 willingness to enter into a counterpurchase agreement as a way of winning orders in the face
of intense competition from its global rival

 countertrade can become a strategic marketing weapon.

- Cons:

o firms would normally prefer to be paid in hard currency. Countertrade contracts may involve the
exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.

o even if the goods it receives are of high quality, the firm still needs to dispose of them profitably. To
do this, countertrade requires the firm to invest in an in-house trading department dedicated to
arranging and managing countertrade deals. This can be expensive and time-consuming.

 countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of
contacts to dispose of goods acquired in countertrading.

10