Chapter 16: Exporting, importing and coutertrade

Why the volume of export activity has grown
the effort of international organism such as GATT and WTO, and because technology has made communication easier.
Promise of exporting
the *increase of revenues and profits*, because it allows a company to expand beyond their local market. By *expanding the size of the market*, exporting can enable a firm to *achieve economies of scale, thereby lowering its unit costs.*
What means being reactive in exporting?
This means that *instead of seeking actively* for new market opportunities abroad these companies *only consider exporting when their home market is saturated*. Also, 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.
Why firms are reactive in exporting?
– they are *unfamiliar with foreign market opportunities*; they simply do not know how big the opportunities actually are or where they might lie.
– many would-be exporters, particularly smaller firms, are often *intimidated by the complexities and mechanics of exporting*
Common problems in exporting…
– *Poor market analysis and understanding of competitive conditions*
– *Ineffective customization* of the product, distribution program or marketing campaign.
– *Underestimating the time and expertise* needed to cultivate business in foreign countries
– *Voluminous paperwork, complex formalities*, and many potential delays and errors
The bigger source of information…
the U.S. Department of Commerce and within it there are two institutions: the U.S. Commercial Service and the International Trade Administration.
Services offered by these agencies
– Providing a “best prospects” list with the names and addresses of potential distributors in foreign markets
– “Comparison shopping service” for 14 countries that are major markets for U.S. exports (provided by the Department of Commerce)
– Customized market research survey about a specific product of a firm with information about: marketability, competition, competitive prices and distribution channels.
– Organizing trade events to help potential exporters to make foreign contacts and explore export opportunities.
– Exhibitions in international trade fairs.
– Matchmaker program to accompany business people to meet distributors and clients abroad.
Export management companies (EMCs)
Export management companies (EMCs) are *export specialists* that act as the *export marketing department or international department* for their client firms. There are two types of assignments for EMCs:
Types of assigments for EMCs
1. They start exporting operations for a firm with the understanding that later, when operations are established, the firm will take care of the operations itself.
2. They start exporting operations with the understanding that they will continue to have the responsibility to sell the firm’s products.
Advantage of EMCs
they can *help new exporters to identify opportunities and avoid common pitfalls*, because they have experience and resources in other markets.
Disadvantage of EMCs
the company would not develop exporting capabilities. Besides, quality of EMCs varies, so it is important to be careful when choosing one.
Strategic steps to good exporting
1. To *hire and EMC or an expert consultant* to help identify opportunities and navigate all the paperwork required to export.
2. *Initially to focus on one market* (or a handful of them) and learn what it is necessary to success before moving to more markets.
3. To enter a foreign market in a *small scale* to learn about the country before making big capital investments.
4. *Hire additional staff* to oversee exporting activities.
5. *Devote time to building strong relationships* with local distributors and/or customers.
6. *Hire local people* because they know the market better.
7. *To be proactive* in seeking new market opportunities.
8. Once exports reach a big volume, it is important to *consider establishing local production facilities.*
Problem of lack of trust
It is difficult for firms engaged in international trade to trust someone that they do not know very well and that is located in a different country, speaks a different language and it is ruled by a different legal system.
Solution to the lack of trust
using a third party that can be trusted by both parts, such as a commercial bank.
Letter of credit – L/C
Issued by a bank at the request of an importer, it *states that the bank will pay a specified sum of money to a beneficiary*, normally the exporter, on presentation of particular, specified documents.
Advantages and drawbacks of the L/C
The advantage of this system is that *both parts (exporter and importer) will trust in a bank*. Besides, for the exporter there is the advantage that *he will obtain credit easier* because he can prove future incomes (with the letter of credit). The *drawback for the importer* is that *it has to pay* a fee for the letter of credit.
Draft – bill of exchange
It is the instrument normally *used in international commerce to effect payment.* A draft is simply an *order written by an exporter instructing an importer to pay a specified amount of money* at a specified time. The person initiating the draft is the maker and the party to whom the draft is presented is the drawee.
Types of draft
Sight
Time
Sight draft
It has to be *paid when it is presented* to the drawee.
Time draft
*Allows a delay in payment.* When it is accepted by bank, it is called banker’s acceptance, and when it is accepted by a business firm, it is called trade acceptance. *It is a negotiable instrument*; this means that when it is accepted, the maker can sell it at a discount price.
Bill of lading
issued to the exporter by the common carrier transporting the merchandise.
Purposes of bill of lading
Receipt
Contract
Document of title
Receipt
It indicates that the carrier has *received* the merchandise.
Contract
It specifies that the *carrier is obligated to provide transportation services* in exchange for a certain charge.
Document of title
It is used to *obtain payment or a written promise of payment.*
Steps of a typical trade transaction (1-7)
1. The French importer places an order and asks the US exporter if he would accept a letter of credit.
2. The US exporter accepts and specifies information about prices and delivery terms
3. The importer applies to the Bank of Paris for a letter of credit in favor of the US exporter.
4. The Bank of Paris issues a letter of credit in favor of the French importer and sends it to the exporter’s bank, Bank of New York.
5. The Bank of New York advises the exporter of the opening of a letter of credit in his favor.
6. The exporter ships the goods to the importer. An official of the carrier gives the exporter a bill of lading.
7. The U.S. exporter presents a 90-day time draft drawn on the Bank of Paris in accordance with its letter of credit and the bill of lading to the Bank of New York. The exporter endorses the bill of lading so title to the goods is transferred to the Bank of New York.
Steps of a typical trade transaction (8-14)
8. The Bank of New York sends the draft and bill of lading to the Bank of Paris which accepts the draft and promises to pay in 90 days.
9. The Bank of Paris returns the accepted draft to the Bank of New York.
10. The Bank of New York tells the exporter that it has received the accepted draft.
11. The exporter sells the draft to the Bank of New York at a discount and receives the cash on return.
12. The Bank of Paris notifies the French importer of the arrival of the documents. He agrees to pay the Bank of Paris in 90 days. The Bank of Paris releases the documents so the importer can take possession of the shipment.
13. After 90 days, the Bank of Paris receives the importer’s payment.
14. After 90 days, the Bank of Paris pays to the holder of the acceptance (Bank of New York).
Forms to finance export programs
Sometimes the exporter could lose a sale if he asks for a letter of credit; this is because the importer has more power in the negotiation. The lack of letter of credit will expose the exporter to the risk that the importer will default. To solve this the exporter can buy an export credit insurance, so if the importer defaults, the insurance firm will cover a major portion of the loss.
Export-import bank
It is an independent agency whose mission is to *provide financing aid that will facilitate exports, imports, and the exchange of commodities* between the United States and other countries. It *gives loans to foreign borrowers* for use in purchasing US exports.
Export credit insurance
Sometimes the exporter could lose a sale if he asks for a letter of credit; this is because the importer has more power in the negotiation. The lack of letter of credit will expose the exporter to the risk that the importer will default. To solve this the exporter can buy an export credit insurance, so if the importer defaults, *the insurance firm will cover a major portion of the loss.*
Countrade
to trade goods and services for other goods and services *when they cannot be traded for money.* It is an alternative of structuring a sale when *conventional ways of payment are difficult, costly, or nonexistent.*
Types of countertrade
Barter
Counterpruchase
Offset
Switch trading
Compensation
Barter
*Direct exchange of goods and/or services* between two parties without a cash transaction. *It is no common* because it is viewed as the most restrictive countertrade agreement.
Problems of barter
– If goods are not exchanged simultaneously, *one party ends up financing the other.*
– Firms run the *risk of having to accept goods that they don’t want, cannot use or are difficult to sell.*
Counterpurchase
It is a *reciprocal buying agreement.* It occurs when a firm agrees to *purchase a certain amount of materials back* from a country to which a sale is made.
Offset
It is similar to countertrade in which one party agrees to purchase goods with a specified percentage of the proceeds from the original sale. *The difference is that this party can meet the obligation with any firm in that country*; because of this it is *more attractive for the exporter than a countertrade.*
Switch trading
use of a specialized third-party trading house in a countertrade arrangement. It occurs when a *third-party trading house buys the firm’s counterpurchase credits and sells them to another firm* that can better use them.
Compensation or buybacks
It 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.*
Advantages of countertrade
– It *gives firms a way to finance an export deal* when there aren’t other means available.
– Also, *it can become a strategic weapon* to enter countries that are no able to pay in cash.
Drawbacks of countertrade
the main drawback of countertrade is that it may require the exchange of *poor quality goods that are not desirable and profitable to a firm.* Also, even if the goods are of high quality, the *firms would need to invest resources to manage these goods* in order to get a profit.