Export and Import Practices chapter seventeen Export and Import Practices McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives Explain why firms export and problem areas of exporting Identify the sources of export counseling and support Discuss the meaning of the various terms of sale

Learning Objectives Identify some sources of export financing Describe the activities of a foreign freight forwarder Understand the kinds of export documents required Identify import sources Explain the Harmonized Tariff Schedule of the United States (HTSUSA)

Why Export? The main reasons why companies decide to involve in exporting instead of staying in their home country are: Desire to either increase profit and sales Protect them from being eroded

Why Export? (detail) Reasons to export To serve markets where the firm has no or limited production facilities Many large multinational company like Du Pont supplies numerous foreign markets by exports because no firm—no matter how large—can afford to manufacture in every country where its goods are sold

Why Export? (detail) Reasons to export To satisfy a host government’s requirement that the local subsidiary have exports Developing governments often require the local affiliate to export, and some require that it earns sufficient forex to cover the cost of its import

Why Export? (detail) Reasons to export To remain price-competitive in the home market Many firms import labor-intensive components produce in their foreign affiliates or export components for assembly in a country where labor is less expensive and import the finished products

Why Export? (detail) Reasons to export To test foreign markets and foreign competition inexpensively A common strategy used by firms that want to test a product’s acceptance before investing in local production facilities. Exports also enable firm to test marketing strategies and make adjustments with less risk in a smaller market

Reasons to export? (detail) cont’d. To offset domestic market’s cyclical sales To achieve additional sales Allow firm to use its excess capacity to lower unit fixed costs To extend a product’s life cycle by exporting to less advance countries To respond strategically to foreign competitors By distracting the foreign competitor with entering theirs home market

Reasons to export? (detail) cont’d. To meet actual or prospective customers’ requests for the firm to export (accidental exporting) To achieve the success the firm’s management has seen others achieve To improve the efficiency of manufacturing equipment

Reasons not to Export (US Firms) Two major reasons Preoccupation with the vast American market Reluctance to become involved in a new, unknown and therefore risky operation Not active in international markets due to Lack of knowledge Locating foreign markets Payment and financing procedures Export procedures

Sources of Export Counseling Trade Information Center (TIC) The federal government has to set this up as a first stop for information Visit http://www.ita.doc.gov/td/tic/ International Trade Administration (ITA) Offers a wide range of export promotion activities that include Market Access and Compliance (MAC) Trade Development U.S. and Foreign Commercial Services (US&FCS)

Sources of Export Counseling Small Business Administration (SBA) The office of International Trade of the SBA works through Small Business Administration offices Score Program Small Business Development Centers Centers for International Business Education and Research (CIBERs)

Show and Sell Trade events to facilitate international trade U.S. pavilions (trade fairs) Trade missions Product literature center Reverse trade missions

Export Marketing Plan Essentially same as domestic marketing plan, it should be specific about: Markets to be developed Marketing strategy for serving them Tactics to make the strategy operational The export marketing plan will spell out what must be done and when, who should do it, and how much money will be spent

Pricing Policies: Terms of Sale INCOTERMS Universal trade terminology developed by the International Chamber of Commerce Ex-Works Risk passes at factory door US equivalent: FOB (free on board) all costs and risks from that point on are borne by the buyer

Pricing Policies: Terms of Sale, cont’d. FAS Free alongside ship, port of call The seller pays all of the transportation and delivery expense up to the ship’s side. The buyer is responsible for any loss or damage to the shipment from that point on

Pricing Policies: Terms of Sale, cont’d. CIF Cost, insurance, freight, foreign port The seller quotes a price that includes the cost of the goods, insurance, and all transportation and miscellaneous charges to the named foreign port in the country of final destination

Pricing Policies: Terms of Sale, cont’d. CFR cost and freight, foreign port Similar to CIF except the buyer purchases the insurance, either it can obtain it at a lower cost or because its government—to save forex—insists that it uses a local insurance company

Pricing Policies: Terms of Sale, cont’d. DAF Delivered at frontier This term can be used when the goods are transported by rail and road. The seller pays for transportation to the named place of delivery at the frontier. The buyer arranges for customs clearance and pays for transportation from the frontier to his factory. The passing of risk occurs at the frontier.

Payment (Financing) Procedures Payment terms offered by exporters to foreign buyers Cash in advance When credit standing of the buyer unknown or uncertain Very few buyers will accept because: Their working capital is partly tied up until the merchandise has been received and sold There is no guarantee the buyer will receive what they ordered

Payment (Financing) Procedures Open account When sale is made on open account Seller assumes payment risk Offered to reliable customers in economically stable countries Exporter’s capital is tied up until payment has been received Consignment Goods shipped to buyer; payment made when sold Payment risk assumed by seller Multinational uses this for their subsidiaries

Payment (Financing) Procedures, cont’d. Letter of credit (L/C) Document issued by buyer’s bank Promise to pay seller specified amount when bank has received documents stipulated in letter of credit

Payment (Financing) Procedures, cont’d. Letter of credit Confirmed L/C Correspondent bank in seller’s country agrees to honor issuing bank’s L/C Irrevocable L/C Once the seller has accepted L/C, buyer cannot alter or cancel it without seller’s consent

Sample Letter of Credit

Letter of Credit Transaction

Documents Air Waybill Pro Forma Invoice A bill of lading issued by an air carrier (a proof that shipment has been made) Pro Forma Invoice Exporter’s formal quotation: description of the merchandise, price, delivery time, method of shipment, ports of exit and entry, and terms of sale

Export Payment Documents Export draft Unconditional order drawn by the seller that instructs buyer to pay the draft’s amount on presentation (sight draft) or at an agreed future date (time draft) and that must be paid before buyer receives shipping documents

L/C vs. Export Draft When the political and commercial risks are not an issue, documentary draft (i.e. export draft) is more preferable Export draft is less expensive than L/C for the buyer A confirmed L/C guarantees payment to the seller if seller conforms to its requirements, but there is no such guarantee with documentary drafts

Export Financing Private Source – Commercial Banks Banker’s acceptance Time draft with maturity of less than 270 days that has been accepted by the bank on which the draft was drawn, thus becoming the accepting bank’s obligation; may be bought and sold at a discount in the financial markets like other commercial paper Factoring Discounting an account receivable without recourse

Export Financing, cont’d Forfeiting Purchasing without recourse an account receivable whose credit terms are longer than the 90 to 180 days usual in factoring; unlike factoring, political and transfer risks are borne by the forfeiter

Export Financing cont’d. Public Sources Export-Import Bank (Exim Bank) Principal government agency that aids American exporters by means of loans, guarantees, and insurance programs Overseas Private Investment Corporation (OPIC) U.S. government corporation that offers American investors in developing countries insurance against expropriation, currency inconvertibility, and damages from wars and revolutions

Other Public Incentives Foreign Trade Zone Duty-free area designed to facilitate trade by reducing the effect of customs restrictions Free Trade Zone An area designated by the government as outside its customs territory Customs drawback Rebate on customs duties

Export Procedures Foreign freight forwarders act as agents for exporters Independent business that handle export shipments for compensation Prepare documents Book space Offer advice about Markets Regulations Transportation Packing Supply cargo insurance

Official Procedures for Importing and Exporting

Shipping Documents Shipper’s Export Declaration U.S. Department of Commerce form to control export shipments and record export statistics Validated export license Document issued by the U.S. government authorizing export of strategic commodity or shipment to unfriendly country General Export License Covers export commodities for which validated license not required; no formal application required

Shipping Documents, cont’d. Export Bill of Lading Contract of carriage between shipper and carrier A receipt from the carrier for the goods shipped A certificate of ownership Straight bill of lading is nonnegotiable; endorsed “to order” bill gives holder claim on merchandise An order bill of landing is negotiable Insurance Certificate

Collection Documents Commercial invoice Consular invoice Include origin of goods, export packing marks, and clause stating goods will not be transshipped Consular invoice Purchased from the consul and prepared in local language Certificate of origin Issued by local Chamber of Commerce Inspection certificate Frequently required for grain, food, live animals

Export Shipments (cargo handling) Containers Reduce theft and handling costs LASH (lighter aboard ship) Barges for shallow inland waterways RO-RO (roll on-roll off) Can drive onto vessel Air Freight Can arrive in one day

Sea-freight vs. Air-Freight Total cost of using air-freight is often less costly than the apparently least-cost sea-freight because: Insurance rates—less chance of damage Packing—air-freight packing can go with domestic packaging instead of the heavier, more costly export packing Custom duties—when calculated in gross weights Replacement costs for damage goods—less chance of damaging shipment Inventory costs—rapid delivery with air freight often obviates the need for expensive warehouse

Sea-Air Total Cost Comparison, Shipment and Spare Parts

Benefit of Air Freight cont’d Total cost may decrease Either the firm or the product may be air-dependent—ex: seller of live animals, fresh flowers, etc—without air freight they would out of business The market may be perishable—ex producer of short-life cycle product such as high-fashion and fad items, etc. Competitive position may be strengthened

Importing Ways to identify import sources If similar imported products are already in the market, visit a retailer and examine the product label If the product is not being imported, call the nearest consul or embassy of that country Use the electronic bulletin boards of the World Trade Centers

Customhouse Broker Independent business that handles import shipments Acts as agent for importer Customhouse broker brings goods through customs May arrange transportation for goods after they leave customs Need to know when imports are subject to import quotas and how much of the quota has been filled

Importing Bonded warehouse Automated Commercial System (ACS) Area authorized by customs for storage of goods on which payment of import duties is deferred until goods are removed Automated Commercial System (ACS) Used to track, control, and process all commercial goods imported into U.S. Import Duties Importer must know how U.S. calculates import duties The Harmonized Tariff Schedule of U.S. (HTSUSA) American version of the Harmonized System used worldwide to classify imported products

Page from the HTSUSA