Chapter 16 Exporting, Importing and Countertrade

Chapter 16: Exporting, Importing, and Countertrade in International Business

Learning Objectives

  • 16-1: Explain the promises and risks associated with exporting.

  • 16-2: Identify the steps managers can take to improve their firm’s export performance.

  • 16-3: Recognize the basic steps involved in export financing.

  • 16-4: Identify information sources and government programs that exist to help exporters.

  • 16-5: Describe how countertrade can be used to facilitate exports.

Introduction

  • The volume of export activity has seen significant increases over the past 30 years because of:   - Decline in trade barriers and growth in regional economic agreements.   - Advances in technology and communication.

  • The process of exporting can be intimidating:   - Shifting trade barriers can complicate exporting processes.   - Currency non-convertibility can create additional challenges.

The Promise and Pitfalls of Exporting

Revenue and Profit Opportunities

  • Exporting presents large revenue and profit opportunities in foreign markets for most firms.

  • Economies of scale are achieved through exporting.

  • Larger firms tend to be proactive in exporting, while medium and small firms often exhibit reactive behaviors due to:   - Intimidation or unfamiliarity with foreign market opportunities.   - Initial efforts can lead to negative experiences that discourage future attempts.

Challenges to Exporting

  • Exporting involves:   - Extensive paperwork and complex formalities.   - Potential delays and errors can contribute to high time and costs, especially for inexperienced exporters.   - Key aspects include:     - Documentary compliance: adherence to document requirements for customs.     - Border compliance: meeting regulations when crossing borders.

Improving Export Performance

International Comparisons

  • A major barrier to effective exporting is the lack of knowledge regarding foreign market opportunities.   - Firms need to gather information on how different countries operate and their experiences in trade.   - The United States lacks a dedicated institutional structure to promote exports similar to those in Germany or Japan.

Information Sources

  • U.S. Department of Commerce:   - U.S. Export Assistance Centers and the International Trade Administration provide critical support.   - District Export Councils assist in regional export initiatives.

  • Small Business Administration (SBA) provides:   - Small Business Development Centers (SBDC)   - Service Corps of Retired Executives (SCORE)   - Export Legal Assistance Network (ELAN)   - Centers for International Business Education and Research (CIBERs)   - Various state, regional, and city trade commissions.

Service Providers

  • Freight Forwarders:   - Consolidate smaller shipments into larger ones to optimize shipping costs and manage documentation.

  • Export Management Companies:
      - Act as an export marketing department for client firms to streamline the exporting process.

  • Export Trading Companies:   - Provide comprehensive services covering export documentation, logistics, and transportation.

  • Export Packaging Companies:   - Advise on packaging designs and materials, ensuring efficient use of space for shipping.

  • Customs Brokers:   - Offer services that help navigate complex customs requirements, preventing potential exporting pitfalls.

  • Confirming Houses (Buying Agents):   - Act on behalf of foreign companies looking to purchase products.

  • Export Agents, Merchants, and Remarketers:   - Engage in buying directly from manufacturers. They repackage and relabel products for sale.

  • Piggyback Marketing:   - This involves one firm distributing another’s products, typically involving complementary products targeting the same customer base.

  • Export Processing Zones:   - Include Foreign Trade Zones (FTZs), Special Economic Zones, Bonded Warehouses, Free Ports, and Customs Zones.

Export Strategy

  1. Consider hiring an Export Management Company or an experienced export consultant to navigate regulatory requirements.

  2. Focus initially on one or a few markets to mitigate risks.

  3. Enter a foreign market on a small scale to minimize risk of failure.

  4. Recognize and allocate the necessary time and managerial commitment for building export sales; hire staff as needed.

  5. Cultivate strong, long-lasting relationships with local distributors/customers.

  6. Employ local personnel to gain insights and navigate the local business culture.

  7. Actively seek export opportunities.

  8. Keep options open for local production in foreign markets to reduce logistical issues and costs.

GLOBALEDGE™ Exporting Tool

  • Company Readiness to Export (CORE) Tool:   - Evaluates a firm's and its product’s readiness to export.   - Identifies strengths and weaknesses in the exporting context.   - Assists firms with self-assessment in exporting proficiency.

Graphical Representation of Company Readiness to Export

  • Factors Affecting Readiness:   - Product readiness plus company readiness equals overall readiness to export.   - Company readiness assessment involves:     - Competitive capabilities in domestic markets     - Motivation for international expansion     - Commitment from ownership and management     - Experience and training of staff     - Available skills, knowledge, and resources.

Export and Import Financing

Lack of Trust in International Trade

  • Firms involved in international trade must place trust in various parties:   - Often unfamiliar and located in different countries with differing legal systems,   - Language barriers complicate communication.   - Risk of default on obligations without established trust and relationships.

Tools and Mechanisms for Payment

  1. **Letter of Credit: **    - A bank document assuring payment to the exporter upon presentation of specific documents.    - Issued at the request of the importer, enhancing trust as exporters often prefer reputable banking institutions.    - Importers pay a fee for this service.

  2. Draft (Bill of Exchange):    - Used in international transactions to ensure payment occurs at a specified time.    - Funds are required before goods are released in international trade; hence, payment or formal agreement of payment is a prerequisite to the taking of merchandise.    - Types include:      - Sight Draft: Payable on demand.      - Time Draft: Indicates a future payment promise.        - Banker’s Acceptance: Time drafts accepted by banks.        - Trade Acceptance: Time drafts accepted by business firms.

  3. Bill of Lading:    - Serves three roles:      - Receipt of the shipment of goods.      - Contract for transportation.      - Document of title.    - Can also serve as collateral for banks to provide funds before shipping or before final payment receipt.

Typical International Trade Transaction Steps

  1. Importer places order for goods.

  2. Exporter agrees to fill the order.

  3. Importer arranges a letter of credit through their bank.

  4. The exporter’s bank gets notified and informs the exporter.

  5. Goods are shipped to the destination country.

  6. Exporter presents draft to the bank for payment.

  7. The bank settles payment upon confirmation of documents, facilitating the completion of the transaction.

Export Assistance

The Export-Import Bank

  • Provides financing support for U.S. export activities:    - Offers loan and loan guarantee programs to enhance market competitiveness.    - Guarantees repayment for loans made to foreign buyers purchasing U.S. products.    - Provides loans directly to foreign buyers to finance purchases.

Export Credit Insurance

  • Addresses the risks associated with lacking a letter of credit:   - Protects exporters from defaults by foreign importers.   - This insurance is typically provided by the Foreign Credit Insurance Association (FCIA).

Countertrade

Definition

  • Countertrade:   - Exchange of goods/services for other goods/services rather than cash payments: a barter-like arrangement used in international trade.

Popularity of Countertrade

  • Especially utilized by developing nations lacking foreign exchange reserves necessary for conventional imports.

  • Countertrade agreements have grown from covering 2-10% of world trade a decade ago to approximately 20-25% today.

Types of Countertrade

  1. Barter:    - Direct exchange of goods/services without any cash involved.

  2. Counterpurchase:    - Reciprocal buying agreements where seller agrees to buy back a certain amount of goods from the importing country.

  3. Offset:    - Agreement where a firm must purchase goods or services with a part of the proceeds from the original sale in the importing country.

  4. Switch Trading:    - Involves a specialized third party in the countertrade arrangement to facilitate transactions.

  5. Compensation or Buybacks:    - Agreement to accept a portion of a plant’s output as partial payment for a contract to build a plant.

Pros and Cons of Countertrade

Pros:

  • Enables financing of export deals when other options are unavailable.

  • May be required by the importing country's government, serving as a unique market entry strategy.

  • Can be used strategically to enhance marketing positions.

Cons:

  • Businesses typically prefer solid currency payment methods over countertrade.

  • Risk of acquiring unusable or low-quality products that cannot be profitably sold; more suitable for large, diverse multinational enterprises capable of broad contact utilization for disposal of goods.

360° View: Impact of the Macro Environment

  • Changes in Trade Barriers:   - Adapt export strategies to evolving global trade landscapes, weighing the cost of producing locally vs exporting.

  • Constantly observe currency exchange rates affecting pricing and profitability.

  • Assess long-term economic forecasts of potential target countries before committing resources to establish export viability.