1. © Ram Mudambi, Temple University, 2007 1 Lecture 07 Export-Import and Counter-trade

2. © Ram Mudambi, Temple University, 2007 2 Outline  Exporting  Exports vs counter-trade  Government support for exporting  Typical export transaction  Counter-trade  Types of counter-trade

3. © Ram Mudambi, Temple University, 2007 3 Exporting To ship to another country for sale or exchange.

4. © Ram Mudambi, Temple University, 2007 4 Pure export vs. countertrade Home Seller Foreign Buyer Goods Pure export: cash payment Countertrade: Alternative payment mechanisms

5. © Ram Mudambi, Temple University, 2007 5 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

6. © Ram Mudambi, Temple University, 2007 6 Government Support for Exports www.bundesregierung.de www.meti.go.jp https://www.uktradeinvest.gov.uk/

7. © Ram Mudambi, Temple University, 2007 7 US Export Support www.doc.gov www.ita.doc.gov

8. © Ram Mudambi, Temple University, 2007 8 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’

9. © Ram Mudambi, Temple University, 2007 9 www.exim.gov 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

10. © Ram Mudambi, Temple University, 2007 10 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

11. © Ram Mudambi, Temple University, 2007 11

12. © Ram Mudambi, Temple University, 2007 12 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

13. © Ram Mudambi, Temple University, 2007 13 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.

14. © Ram Mudambi, Temple University, 2007 14 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.

15. © Ram Mudambi, Temple University, 2007 15 Preference of the US Exporter German ImporterAmerican Exporter 1. Importer Pays for Goods 2. Exporter Ships Goods After Being Paid

16. © Ram Mudambi, Temple University, 2007 16 Preference of the French Importer German ImporterAmerican Exporter 1. Exporter Ships the Goods 2. Importer pays after the Goods are Received

17. © Ram Mudambi, Temple University, 2007 17 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

18. © Ram Mudambi, Temple University, 2007 18 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

19. © Ram Mudambi, Temple University, 2007 19 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

20. © Ram Mudambi, Temple University, 2007 20 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 20-25 percent of world trade.

21. © Ram Mudambi, Temple University, 2007 21 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

22. © Ram Mudambi, Temple University, 2007 22 Counter-trade  An umbrella term – typically appears in 5 forms  Barter  Counter-purchase  Offset  Compensation trading or Buyback  Switch trading

23. © Ram Mudambi, Temple University, 2007 23 Types of Counter-trade  Barter: direct exchange of goods and/or services without a cash transaction. Exporter Importer Importing agency Goods

24. © Ram Mudambi, Temple University, 2007 24 Barter: Example Boeing Saudi Government Trading Agency Aircraft Saudia (National airline) Oil

25. © Ram Mudambi, Temple University, 2007 25  Counter-purchase: reciprocal buying agreement Exporter Importing agency Goods Importer F/X Exporting agency % of total sale spent on specified products

26. © Ram Mudambi, Temple University, 2007 26  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

27. © Ram Mudambi, Temple University, 2007 27  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

28. © Ram Mudambi, Temple University, 2007 28  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

29. © Ram Mudambi, Temple University, 2007 29 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

30. 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.

31. © Ram Mudambi, Temple University, 2007 31 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.

32. Countertrade Practice Percent of companies engaged in each countertrade practice

33. © Ram Mudambi, Temple University, 2007 33 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