© Ram Mudambi, Temple University, Lecture 07 Export-Import and Counter-trade

© Ram Mudambi, Temple University, Outline  Exporting  Exports vs counter-trade  Government support for exporting  Typical export transaction  Counter-trade  Types of counter-trade

© Ram Mudambi, Temple University, Exporting To ship to another country for sale or exchange.

© Ram Mudambi, Temple University, Pure export vs. countertrade Home Seller Foreign Buyer Goods Pure export: cash payment Countertrade: Alternative payment mechanisms

© Ram Mudambi, Temple University, The Export Value Chain Seller Distributor Retailer Final Market NationalBorder Logistics: Shipping, Freight forwarding FOBCIF Firm boundary International Inter-firm operations Goods flow Money flow

© Ram Mudambi, Temple University, Government Support for Exports

© Ram Mudambi, Temple University, US Export Support

© Ram Mudambi, Temple University, US firms and exporting  Historically, only large firms in the US have been exporters.  Risks with doing business abroad  Large domestic market  This has been changing recently  The internet and ‘accidental exporters’

© Ram Mudambi, Temple University, Ex-Im Bank Provides loans and loan-guarantee programs Lends money to foreign borrowers to purchase U.S. exports Makes commercial banks more willing to lend to foreign enterprises

© Ram Mudambi, Temple University, Provides export credit insurance in case importer defaults in payment Consists of private commercial institutions operating under the guidance of Export-Import Bank Commercial and political risks taken into account Foreign Credit Insurance Association

© Ram Mudambi, Temple University,

© Ram Mudambi, Temple University, Pitfalls of exporting Ignorance and Intimidation Poor market analysis Poor understanding of competitive conditions Failure to customize product offering Poor distribution program Poorly executed promotional campaign Problems securing financing

© Ram Mudambi, Temple University, Exporting Strategy  It helps to hire an Export Management Company or, at least, someone with experience – outsource turnkey export ops.  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.

© Ram Mudambi, Temple University, Export/Import Financing  Letters of Credit (LOC)  Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents  Drafts (Bill of Exchange)  Written order exporter, telling an importer to pay a specified amount of money at a specified time.  Bill of Lading  Issued to exporter, by carrier. Serves as receipt, contract and document of title.

© Ram Mudambi, Temple University, Preference of the US Exporter German ImporterAmerican Exporter 1. Importer Pays for Goods 2. Exporter Ships Goods After Being Paid

© Ram Mudambi, Temple University, Preference of the French Importer German ImporterAmerican Exporter 1. Exporter Ships the Goods 2. Importer pays after the Goods are Received

© Ram Mudambi, Temple University, The Use of a Third Party German ImporterAmerican Exporter 1. Importer Obtains Bank’s Promise to Pay on Importers Behalf 5. Bank Gives Merchandise to Importer Bank 6. Importer Pays Bank 3. Exporter Ships “to the Bank.” Trusting Bank’s Promise to Pay 2. Bank Promises Exporter to Pay on Behalf of Importer 4. Bank Pays Exporter

© Ram Mudambi, Temple University, A Typical Letter of Credit transaction Bank Buyer (Germany) Seller (U.S.) Customhouse broker Customhouse broker Freight forwarder Steamship line Letter of credit Letter of credit Documents Merchandise Germany United States Letter of Credit Shipping Documents Merchandise

© Ram Mudambi, Temple University, A Typical LOC Transaction German ImporterAmerican Exporter Bank of New YorkDeutsche Bank 6. Goods Shipped to France 7. Exporter Presents Draft to Bank 10 and 11 Exporter Sells Draft to Bank 14. B of NY Presents Matured Draft and Gets Payment 12. Bank Tells Importer Documents Arrive 13. Importer Pays Bank 2. Exporter Agrees to Fill Order 1. Importer Orders Goods 3. Importer Arranges for LOC 8. B of NY Presents Draft to Bank of Paris 9. Deutsche Bank Returns Accepted Draft 4. Deutsche Bank Sends LOC to B of NY 5. B of NY Informs Exporter of LOC

© Ram Mudambi, Temple University, Countertrade  Countertrade consists of transactions which have as a basic characteristic a linkage, legal or otherwise, between exports and imports of goods or services in addition to, or in place of, financial settlements.  Countertrade can be used as an effective international business tool. Countertrade plays a part in percent of world trade.

© Ram Mudambi, Temple University, Countertrade  Trade carried out wholly or partially in goods rather than money.  Primarily used when a firm exports to a country whose currency is not freely convertible  Importing country may lack the foreign exchange reserves required  Accounts for between 8 to 20% of world trade

© Ram Mudambi, Temple University, Counter-trade  An umbrella term – typically appears in 5 forms  Barter  Counter-purchase  Offset  Compensation trading or Buyback  Switch trading

© Ram Mudambi, Temple University, Types of Counter-trade  Barter: direct exchange of goods and/or services without a cash transaction. Exporter Importer Importing agency Goods

© Ram Mudambi, Temple University, Barter: Example Boeing Saudi Government Trading Agency Aircraft Saudia (National airline) Oil

© Ram Mudambi, Temple University,  Counter-purchase: reciprocal buying agreement Exporter Importing agency Goods Importer F/X Exporting agency % of total sale spent on specified products

© Ram Mudambi, Temple University,  Offset: like counter-purchase, but exporter can buy goods from any firm in country. Exporter Importing agency Goods Importer F/X Exporting agency % of total sale spent on any goods from importing country

© Ram Mudambi, Temple University,  Switch trading: uses third-party trading house. Exporter Importing agency Goods Importer F/X (% in re- purchase credits) Exporting agency 3 rd party arbitrageur Re-purchase credits Importing firm

© Ram Mudambi, Temple University,  Buybacks: foreign plant takes products as contract payment. HOST Importer HOME Exporter Flow of capital goods F/X payment Re-purchased output 3 rd Country Re-export and local sale

© Ram Mudambi, Temple University, Countertrade – Summary Transaction involves reciprocal commitments other than cash payments YesNo Straight sales Cash or credit Involves the use of money YesNo Limited to purchase of goods Counter-purchase, buyback or offsetBarter YesNo Goods results of initial exports? YesNo BuybackCounter-purchaseOffset

Why Countertrade?  Lack of sufficient foreign currency reserves.  Situations where the importing country has political reasons to protect certain domestic industries  Suitable to MNCs with wide network of contacts  However:  How do you determine value?  Difficulties in disposition of goods.  Costs of engagement.

© Ram Mudambi, Temple University, Countertrade: Pros and Cons  Pro:  Provides business a way to finance an export deal when other means are not available.  Con:  Business may receive unusable or poor quality goods that can be disposed of profitably.

Countertrade Practice Percent of companies engaged in each countertrade practice

© Ram Mudambi, Temple University, Takeaways  Exporting is one area where corporate and home country political interests are aligned.  Exporting always has support from the home government  In exporting to soft currency countries, engagement with the foreign government may be necessary  This requires creativity and leads to countertrade