Exports, Imports, Countertrade

Exports, Imports, CountertradeOpportunities and risks of exportingSteps to improve export performanceInformation sources/programs on exportingFinancing exportingCountertrade as an export facilitator

Exporting Opportunities and RisksPerception: ExportsOffer huge revenue / profit opportunities overseas Are there for the pickingsLarge firms are more successfulProactive about exporting to realize promiseSystematic effort backed by knowledge of overseas marketsSmaller firms are reactive Overseas markets are an afterthoughtAd-hoc effort on an opportunistic and often nave basisExports require volumes of specialized paperwork

US Export Supportwww.doc.govwww.ita.doc.gov

Export Performance Improvement FactorsGovernment information sourcesUS: various parts of the Dept. of CommerceOther countries: similar entityEmbassies and consulates: commercial sectionsExport management companiesAct as the export department of firmsExperienced specialistsNot exclusiveFocused export strategy

Some Successful Export StrategiesEnter on a small scale to reduce risksAdd product lines after export operations begin to be successfulHire locals to promote the firms products

Exporting StrategyIt helps to hire an EMC or, at least, someone with experience.Focus on one or a few markets.Enter markets on a fairly small scale until you learn the ropes. Add new lines after initial success.Need to recognize the time and managerial commitment.Build strong and lasting relationships.Hire locals to help firm establish itself.Keep the option of local production in mind. McGraw Hill Companies, Inc., 2000

Export ProcessEvaluate export potential

financial resourcesmanagement capability/experiencecompetitive advantages abroad

Steps in the Export ProcessEvaluate export potential

Do country analysis (more later)country receptiveness to imports and investmenttrade barriers/requirementsinfrastructure

Steps in the Export ProcessEvaluate export potential

Do market analysismarket size/product potentialdistribution channelsneeds for re-engineering etc. = localization

Steps in the Export ProcessDetermine entry method

goal of entryselect distribution partner determine channel length assess risks determine costs

Steps in the Export ProcessDetermine entry method

determine trade terms (INCOTERMS: ex works, FOB, CIF, etc.)determine tasks to be performed in the foreign market

Export/Import FinancingAssures:Exporter of payment Importer of productBanks offer financing intermediary serviceLetters of credit: bank guarantee of payment to exporter bought by the corresponding importerDraft or bill of exchange: instructions to bank to pay at a certain time based on certain documentationCarriers provide to the exporterBill of lading: receipt, contract and document of title

Sources of Exporter Financing Financing exporter credit to the importer:

- Bankers acceptance (of the draft)- Factoring- Forfaiting- EXIM loans

Export/Import FinancingLetters of Credit (LOC)Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documentsDrafts (Bill of Exchange)Written order by exporter, telling an importer to pay a specified amount of money at a specified time.Bill of LadingIssued to exporter, by carrier. Serves as receipt, contract and document of title. McGraw Hill Companies, Inc., 2000

Exporters Problems with Letters of Credit (L/C) Shipment date or method required in L/C cannot be met.Documents required by L/C cannot be obtained.Importer deliberately fills out L/C application incorrectly (to stall or force a discount).Product description too detailed (exporter compliance difficult).

Preference of the US ExporterFrench ImporterAmerican Exporter1. Importer Pays for Goods2. Exporter Ships Goods After Being Paid

Preference of the French ImporterFrench ImporterAmerican Exporter1. Exporter Ships the Goods2. Importer pays after the Goods are Received

The Use of a Third PartyFrench ImporterAmerican Exporter1. Importer Obtains Banks Promise to Pay on Importers Behalf5. Bank Gives Merchandise to ImporterBank6. Importer Pays Bank3. Exporter Ships to the Bank. Trusting Banks Promise to Pay2. Bank Promises Exporter to Pay on Behalf of Importer4. Bank Pays Exporter

A Typical International TransactionFrench ImporterAmerican ExporterBank of New YorkBank of Paris6. Goods Shipped to France7. Exporter Presents Draft to Bank10 and 11 Exporter Sells Draft to Bank14. B of NY Presents Matured Draft and Gets Payment12. Bank Tells Importer Documents Arrive13. Importer Pays Bank2. Exporter Agrees to Fill Order1. Importer Orders Goods3. Importer Arranges for LOC8. B of NY Presents Draft to Bank of Paris9. Bank of Paris Returns Accepted Draft4. Bank of Paris Sends LOC to B of NY5. B of NY Informs Exporter of LOC

CountertradeStructures an international sale when means of payment are difficult, costly, or non-existentNo currency convertibilityWeak reserves prohibit access to hard currencyBarter-like agreementsTrade goods and services for other goods and services8-10% or world trade by value is in the form of countertrade (up from 2% in 1975)

CountertradeMain attraction: way to finance an export deal meet requirement of local government to support exportsMain drawback: risk of disposal / sale of goods at less than full value disposal of imports may require resources other than those that the firm possesses

Types of CountertradeBarterCounterpurchaseOffsetSwitch TradingCompensation or Buyback

BarterInternational Reciprocal Trade Association (IRTA) the industry trade organization - almost a half a million small businesses use commercial barter exchanges every year. Almost $10 billion in sales is transacted each year by the commercial barter industry. Trades where no intermediary is used and the global barter market may be 10 times that amount.

BarterInternational Reciprocal Trade Association estimates that in 1998 over 470,000 companies actively participated in barter in the US for a total of over $16 billion in annual sales. Over 65% of the corporations listed in the New York Stock Exchange are presently using barter to reduce surplus inventory, bolster sales, and ensure that production facilities run at capacity. U.S. Department of Commerce estimates that 20 to 25% of world trade is now barter, and corporate barter is now a $20 billion industry.

BarterConserve cash -- preserve cash-flow Strengthen cash reserves -- use barter for the goods & services most needed Increase buying power -- access to goods & services for growthIncrease customer base may add new clientsMove surplus inventory Finance -- new businesses can build credit through barter Employee Incentives -- travel, entertainment, gifts, perks & bonuses

CompensationBarter with a combination of goods and convertible currencyLess risk than in straight barter

Counterpurchase Parallel BarterParties pay cash of goodsSeller agrees to buy products/services unrelated to its businessSeller then sells products to third parties

Offset PurchaseUsually large projects, often involving expenditure of buying governments moneyA % of the selling price is required to be purchased or sourced from the buying country

BuybackThe seller agrees to buy a negotiated quantity of the output from the buyers output

Clearing AgreementA third party brokers transactions between parties, maintaining accounts for all participantsTypically are legal documents which specify the details of the arrangements:Electrical power companiesStock brokers, on-line traders

Switch TradingBuyer pays hard currency for unwanted goods/services from sellerBroker buys unwanted goods Broker sells goods to third parties

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