1. Exporting, Importing and Countertrade
CHAPTER 13
Exporting, Importing and Countertrade

2. 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?

3. Video Case
1. People have come from all over Britain to be part of the trade delegation to Brazil. What are the advantages of participating in a trade delegation as compared to trying to expand into a new market independently?
2. Brazil and Great Britain are long-time trading partners. How has the relationship between the two countries changed over time? Why is the British Consul trying to improve the relationship between the two countries?
3. What types of problems do inexperienced exporters typically encounter? How can trade delegations help small businesses avoid these problems?
4. Small businesses are often take a reactive approach to foreign markets, and only purse foreign opportunities when they are approached. How can programs like the British Consul’s trade delegation help small companies take a more proactive approach to foreign markets?

4. Exporting Promises and Pitfalls

5. Export Performance Improvement
Government information sources
Department of Commerce
Export.gov
Embassies and consulates
USTR
Export Management Companies (EMC)
Focused export strategy
US Trade Representative:
IMPROVING EXPORT PERFORMANCE
A) There are a number of ways in which inexperienced exporters can gain information about foreign market opportunities and avoid some of the common pitfalls that tend to discourage and frustrate novice exporters.
An International Comparison
B) One big impediment to exporting is the simple lack of knowledge of the opportunities available. The way to overcome ignorance is to collect information.
Information Sources
C) Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The most comprehensive source of information is the U.S. Department of Commerce.
Utilizing Export Management Co
mpanies (EMC)
D) Export management companies are export specialists that act as the export marketing department or international department for client firms.
E) EMCs normally accept two types of export assignments. EMCs start up exporting operations for a firm with the understanding that the EMC will have continuing responsibility for selling the firm’s products.
F) In theory, the advantage of EMCs is that they are experienced specialists who can help the neophyte exporter identify opportunities and avoid common pitfalls. However, studies have revealed a large variation in the quality of EMCs. Therefore, an exporter should carefully review a number of EMCs, and check references from an EMC's past client, before deciding on a particular EMC.
Exporting Strategy
G) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it is careful about its choice of exporting strategy. First, particularly for the novice exporter, it does to help to hire an EMC, or at least an experienced export consultant, to help with the identification of opportunities and navigate through the tangled web of paperwork and regulations so often involved in exporting. Second, it often makes sense to initially focus on one, or a handful, of markets. Third, it may make sense to enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failure. Fourth, the exporter needs to recognize the time and managerial commitment involved in building export sales, and should hire additional personnel to oversee this activity least the existing management of the firm be stretched too thin. Fifth, in many countries it is important to devote a lot of attention to building strong and enduring relationships with local distributors and / or customers. Sixth, it is important to hire local personnel to help the firm establish itself in a foreign market. Finally, it is important for the exporter to keep the option of local production in mind.

6. 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 {
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.

7. 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

8. 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.

9. 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
Pro-forma invoice refers to an invoice together with a quotation provided by a supplier prior to sale or shipment of an article, informing the buyer of the kinds and quantities of goods to be sent, their value, and important specifications (weight, size, and similar characteristics). 2
Send Pro Forma Inv.

10. 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.

11. Note: Letter of Credit Bank Charges
Bank commission: 0.5% -2% or more w/ min fee
Advising bank/confirming bank charges $ 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)

12. 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

13. Terms of Payment

14. 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.
Incoterms apply to all modes of transportation P.P. 11
For ex-works, the seller places goods at the disposal of the buyer at the time
specified in the contract.
The buyer takes delivery at the premises of the seller and bears all risks and
expenses.
For delivered duty paid, the seller agrees to deliver the goods to the buyer at
a specific place the country of import, with all costs, including duties, paid.
Several Incoterms apply to sea and inland waterway transportation:
F.A.S. (free alongside ship) named port of destination: seller places goods alongside the vessel or other mode of transportation and pays all charges up to
that point.
F.O.B. (free on board): seller’s responsibility does not end until the goods have actually been placed aboard a ship.
C.I.F. (cost, insurance, freight) named port of destination: risk of loss or damage to goods is transferred to the buyer once the goods have passed the ship's rail.
C.F.R. (cost and freight): seller is not responsible at any point outside the factory.
Price escalation occurs when these costs are added to the per-unit cost.
The net effect of this add-on accumulating process is a total retail price of
$50, 210, or 166 percent of the ex-works price.
Experienced global marketers view price as a strategic variable that can achieve
marketing and business objectives.
Notes___________________________________________________________________________________________________________________________________________________________________________________________________________________

16. Free carrier name
Free alongside ship

17. 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
Terms of the Sales P.P. 10
Every commercial transaction is based on a contract of sale, and the trade terms in that
contract specify the exact point at which ownership is transferred from seller to buyer.
The following activities take place when goods cross international boundaries:
Obtain an export license if required.
Obtain a currency permit.
Pack goods for export
Transport goods to the 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
Obtaining marine insurance and certificate of the policy

18. 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
EXPORT ASSISTANCE
A) Prospective U.S. exporters can draw on two forms of government-backed assistance to help their export programs. They can get financing aid from the Export-Import Bank and export credit insurance from the Foreign Credit Insurance Association.
Export-Import bank
B) The Export-Import Bank (Eximbank) is an independent agency of the U.S. government. Its mission is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries.
Teaching Tip: The Eximbank web site is {
Export Credit Insurance
C) In The U.S., export credit insurance is provided by the Foreign Credit Insurance Association (FCIA). FCIA provides coverage against commercial risks and political risks.

19. 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)

20. 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
A) Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. Countertrade denotes a whole range of barterlike agreements; its principle is to trade goods and service for other goods and services when they cannot be traded for money. The text provides several examples of countertrade.
The Growth of Countertrade
B) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the 1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports. There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997.
Types of Countertrade
C) Countertrade can be categorized into five distinct types of trading arrangements: barter, counterpurchase, offset, switch trading, and compensation or buyback. Figure 12.5 summarizes the popularity of each type of arrangement.
Barter
D) Barter is a direct exchange of goods and/or services between two parties without a cash transaction. Barter is viewed as the most restrictive countertrade arrangement. It is used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy.
Counterpurchase
E) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.
Offset
F) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which t he sale is being made.
Switch Trading
G) Switch trading refers to the use of a specialized third-party trading house in a countretrade arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country. Switch trading occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them.
Buybacks
H) A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant’s output as a partial payment for the contract.

21. 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
The Pros and Cons of Countertrade
I) Countertrade’s main attraction is that it can give a firm a way to finance an export deal when other means are not available. If a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement.
J) A countertrade arrangement may be required by the government of a country to which a firm is exporting goods or services.
K) The drawbacks of countertrade are substantial. Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably. Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading.

22. Title: Global Trade Freezes Amid Economic Downturn (Run Time: 8:05)
1. The port of Long Beach has morphed from a busy hub of activity to a virtual ghost town in a matter of a few months. Reflect on the changes that have taken place at the port, and the speed at which they have taken place. Which industry sectors have been affected? What do the changes mean for those that depend on activity at the port for their livelihood? What does this imply about the interdependence of the world economy?
2. Toyota and Mercedes have both leased additional space from the port of Long Beach to store their unsold vehicles. What does the economic slowdown mean for these companies? In your opinion, should the automakers have been better prepared for the economic crisis?
Title: Global Trade Freezes Amid Economic Downturn
Run Time: 8:05
Discussion Questions and Answers:
1. The port of Long Beach has morphed from a busy hub of activity to a virtual ghost town in a matter of a few months. Reflect on the changes that have taken place at the port, and the speed at which they have taken place. Which industry sectors have been affected? What do the changes mean for those that depend on activity at the port for their livelihood? What does this imply about the interdependence of the world economy?
Answer: Richard Steinke, executive director of Long Beach Port, claims the reduction in the movement of goods at the port is the worst he has seen in two decades. Moreover, it seems that everything from containerized cargo to liquid bulk cargo to automobiles is affected by the slowdown. Because fewer goods are being imported from places like China, there is less demand for the scrap paper that usually accounts for a significant share of the activity at the port, and less demand for truckers, longshoremen, and other individuals involved in transporting goods. One trucker for example, used to make $2000 per week, but is now lucky to make just $200. Lower demand from the United States for products made in Asia is forcing factories to close across China, which then further exacerbates the global slowdown. Many students may suggest that it is this very interdependence between countries that contributed to the speed at which the global economy seemingly collapsed.
2. Toyota and Mercedes have both leased additional space from the port of Long Beach to store their unsold vehicles. What does the economic slowdown mean for these companies? In your opinion, should the automakers have been better prepared for the economic crisis?
Answer: Hundreds of unsold vehicles are lined up across acres of ground at the Long Beach Port. Toyota alone, has leased an additional 150 acres on which to store cars that are waiting to be shipped to dealerships. Most students will probably agree that the economic slowdown and accompanying tightening of credit has spelled disaster for the global automakers. Some students may suggest that the automakers should have prepared for such a slowdown, buy many others will probably disagree noting that the speed and magnitude of the current economic slowdown has taken most people by surprise. Some students may suggest that the automakers have taken a double hit –first with the rapid rise in gas prices, and then with the economic slowdown – both of which have battered the companies. Still other students may point out that hindsight is always 20:20, and the focus for the automakers now should be on how to recover from the shock. Many students may suggest that to ensure a recovery these firms may have to abandon traditional strategies entirely, and focus on how to develop and market their product in a time of economic uncertainty and potentially high gas prices. Students may argue that it could be a case of survival of the fittest, and that the inefficiencies and excesses that have plagued at least one U.S. automaker can no longer be a part of a viable strategy.
3. Consider the current state of the global economy from the perspective of George Rudes, CEO of Not Your Daughter’s Jeans. Can the company remain competitive? What changes should the company make to its strategy to be viable in a significantly slower economy? What advantages might the current economic slowdown offer Not Your Daughter’s Jeans?
Answer: A year ago, business was booming at Not Your Daughter’s Jeans, a company that makes jeans that promise to provide a tummy tuck. Sales, including exports were strong, helped to some degree by the weak dollar. Today, business is still good, but CEO George Rudes is worried. According to Rudes, it is difficult to predict what demand will be like in the future, making strategic planning a real challenge. Rudes is unsure of whether additional investment in his business is wise. Moreover, the company’s business and plans are being affected by the situation in China where hundreds of factories in the textile business are going out of business. Many students will probably focus on Not Your Daughter’s Jean’s unique designs and materials as the key to the company’s competitive longevity. Students taking this perspective will probably argue that as long as the company can maintain this product advantage, it will likely to see demand for its products remain strong. However, if competitors enter the market, the company may see its sales deteriorate rapidly. Other students may suggest that the current market conditions may actually offer a silver lining. Students taking this point of view may suggest that a company like Not Your Daughter’s Jeans that has a relatively strong market may have an advantage over less stable companies when it comes to bargaining with suppliers. The company may also find that it can expand into new facilities or buy new equipment at a lower cost than it could before. Some students may suggest that indeed the current economic conditions could create the opportunity for a company with relatively stable demand to actually gain a significant advantage over less stable companies.
4. U.S. exports of scrap paper to China and other parts of Asia have slowed to a trickle in recent months. Consider the implications of this slowdown along with the impact of lower demand for goods from China in general. What are the implications of the slowdown for future trade patterns and policies?
Answer: Until the recent collapse of the global economy, exports of scrap paper from the United States to China were strong. China purchased the scrap, converted it into packaging materials, and then used the materials to package goods that were exported to the United States. Today, the exports of scrap paper have nearly stopped. Demand for packaging materials has dropped off dramatically as demand for products from China has slowed. Prices on waste paper have fallen 60 to 70 percent. Many students will probably recognize the domino effect of the current situation and point out for example, that as demand for imports continues to fall, so will demand for recycled materials, which will then make it difficult for U.S. exporters of waste products to stay in business, which of course will then prompt layoffs, and even less demand for products imported from Asia. As demand for Chinese exports falls, factories will continue to close in China, making it difficult for the Chinese to buy American-made products. Many students may suggest that the U.S. government will be pressured to “do something” about the situation which could then lead to protectionist policies in the United States. Some students may worry that such policies, while beneficial in the short-run, could lead to trade wars, and in the long-run, create global inefficiencies. Indeed, some students may wonder if the strides made by the World Trade Organization and its predecessor to reduce trade barriers could be quickly undone as countries try to survive the current economic downturn.

23. 3. Consider the current state of the global economy from the perspective of George Rudes, CEO of Not Your Daughter’s Jeans. Can the company remain competitive? What changes should the company make to its strategy to be viable in a significantly slower economy? What advantages might the current economic slowdown offer Not Your Daughter’s Jeans?
4. U.S. exports of scrap paper to China and other parts of Asia have slowed to a trickle in recent months. Consider the implications of this slowdown along with the impact of lower demand for goods from China in general. What are the implications of the slowdown for future trade patterns and policies?