Exporting, Importing and Countertrade CHAPTER 13 Exporting, Importing and Countertrade

Slide 12-1 Key Issues What are the opportunities and risks associated with exporting? How can companies improve their export performance? What information programs and government resources can help exporters? What are the basic steps in financing exporting? How can countertrade facilitate exporting?

Exporting Promises and Pitfalls

Export Performance Improvement Government information sources Department of Commerce Export.gov Embassies and consulates USTR Export Management Companies (EMC) Focused export strategy

Methods of Payments 1. Cash in Advance : Most desirable method for the exporter : Importer pays cash in advance->exporter releases goods : Max risk to importer 2. Documentary Letter of Credit (sight L/C or Time L/C) 3. Drafts for Collection(sight draft or time draft) 4. Open Account : Most desirable method for the importer : Exprter ships w/o full pyment->imprter pays when get the goods : Max risk to exporter EXPORT AND IMPORT FINANCING A) Mechanisms for financing exports and imports have evolved over the centuries in response to a problem that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger. Lack of Trust B) Firms engaged in international trade face a problem - they have to trust someone who may be very difficult to track down if they default on an obligation. C) Due to the lack of trust, each party to an international transaction has a different set of preference regarding the configuration of the transaction. Figures 12.1 and 12.2 show the preferences for two firms - a US exporter and a French importer. D) The problems arising from a lack of trust between exporters and importers can be solved by using a third party who is trusted by both - normally a reputable bank. Figure 12.3 illustrates this Teaching Tip: A menu of resources available on the Internet that deal with financing exports and other international finance issues is available at {http://dylee.keel.econ.ship.edu/intntl/intfin/fin-hom.htm}. Letter of Credit E) A letter of credit, abbreviated as L/C, stands at the center of international commercial transactions. Issued by a bank at the request of an importer, the letter of credit states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. Draft F) A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce for payment. A draft is simply 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. A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment - normally 30, 60, 90, or 120 days. Bill of Lading G) The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three purposes: it is a receipt, a contract, and a document of title. A Typical International Transaction H) The entire process for conducting an export transaction is summarized in Figure 12.4.

Bill-of-Lading issued to exporter by the carrier: is a 1) receipt 2) a contract 3) a document of title issued to the exporter by the carrier *Carriers move product from A to B

3. Letter of Credit Opens and issues L/C 4 Send documents 7 Advising or Confirming Bank Wire money 8.2 Opening or Issuing Bank 5 Advise or Confirm L/C Mk Shipment 6.1 6.2 Presents doc. 8.3 Pays money 3 Apply for L/C 8.1 Pays money Turn over doc. To importer to collect goods 8.4 Request L/C 1 2 Send Pro Forma Inv.

3. Letter of Credit Opens and issues L/C 4 Send documents 7 Advising or Confirming Bank Wire money 8.2 Opening or Issuing Bank 5 Advise or Confirm L/C Mk Shipment 6.1 6.2 Presents doc.(BOL) 8.3 Pays money 3 Apply for L/C 8.1 Pays money Turn over doc. To importer to collect goods 8.4 Request L/C 1 2 Send Pro Forma Inv.

3. Letter of Credit Opens and issues L/C 4 Send documents 7 Advising or Confirming Bank Wire money 8.2 Opening or Issuing Bank 5 Advise or Confirm L/C Mk Shipment 6.1 6.2 Presents doc. 8.3 Pays money 3 Apply for L/C 8.1 Pays money Turn over doc. To importer to collect goods 8.4 Request L/C 1 2 Send Pro Forma Inv.

Note: Letter of Credit Bank Charges Bank commission: 0.5% -2% or more w/ min fee Advising bank/confirming bank charges $200-300 or more Various forms of letter of credits 1. Advised v.s. Confirmed credit (2nd bank simply notify v.s add its guarantee of payment to exporter.) 2. Irrevocable credit v.s. Revocable credit( cannot v.s. can be cancelled prior to expiration w/o the consent of the parties) 3. Sight L/C and Time L/C(exporter gets paid v.s receives promise to pay at later date against presenting documents to the bank)

Drafts for Collection: Sight and Time A bill of exchange = A demand for payment The exporter retains title to the goods until importer pays when receives document:title of goods (sight draft) or sign to pay at later date (time draft) exporter ships goods-> sends all shipping document through his bank to the importer’s bank(importer’s bank release doc. (title of goods) to importer in exch. for final payment (documents against payment) or sign to pay at later date (documents against acceptance). Adv to exporter: less expensive than L/C risks to exporter: importer might not take the goods

Terms of Payment

Terms of the Sale Incoterms Ex-works – seller places goods at the disposal of the buyer at the time specified in the contract; buyer takes delivery at the premises of the seller and bears all risks and expenses from that point on. Delivery duty paid – seller agrees to deliver the goods to the buyer at the place he or she names in the country of import with all costs, including duties, paid.

Export Process Obtain export license if required Obtain currency permit Pack goods for export Transport goods to place of departure Prepare a land bill of lading Complete necessary customs export papers Prepare customs or consular invoices Arrange for ocean freight and preparation Obtain marine insurance and certificate of the policy

Export Assistance Export-Import Bank (Eximbank) Slide 12-8 Export Assistance Export-Import Bank (Eximbank) Independent agency of US Government Provides financing for US exports, imports, and exchange of commodities Guarantees repayment of medium, long term loans to foreign borrowers for purchasing US exports Export Credit Insurance Covers the exporter who must deal with an importer who insists on no letter-of-credit Issued by the Foreign Credit Insurance Association (FCIA) Grouping of private commercial banks Under the guidance of Export-Import Bank Coverage against commercial and political risk

Freight Forwarder : Carriers->wholesaler of space, FF->Retailers : Help vessels’ owner fill up the space, Help shippers gets best rate, routing : FF are compensated in form of : brokerage (charged to vessel owners), fee (charged to shippers) : FF must be licensed by FMC (Federal Maritime Commission)

Countertrade A range of barterlike agreements Slide 12-9 Countertrade A range of barterlike agreements Trade goods/services for other goods/services Used when currencies not convertible Used when the currencies are too unstable Types of Countertrade Barter: direct exchange of goods Counterpurchase: reciprocal buying agreement Offset: similar to Counterpurchase but more than one set of exchanges can be involved Switch trading: involves the use of a specialized third party trading house in a countertrade agreement Buybacks: a firm builds a plant, supplies technology or equipment or training or other service in a country and agrees to take percentage of output as partial payment

Countertrade: Pros and Cons Slide 12-10 Countertrade: Pros and Cons Pros Can offer a way to finance exports when other forms of financing are not available Can be the preferred financing method in cases where cash deals are too risky May satisfy the need to build good will with the host government Cons May involve the exchange of poor quality goods Importing firm must find a market for goods in an unrelated industry Can involve building a marketing infrastructure to dispose of a stream of such goods More suitable to large firms