Exports, Imports, Countertrade

Exports, Imports, Countertrade

Opportunities

and risks of exporting Steps to improve export performance Information sources/programs on exporting Financing exporting Countertrade as an export facilitator

Exporting Opportunities and Risks

Perception: Exports
Offer huge revenue / profit opportunities overseas

Are there for the pickings

Large firms are more successful

Proactive about exporting to realize promise Systematic effort backed by knowledge of overseas markets

Smaller firms are reactive

Overseas markets are an afterthought Ad-hoc effort on an opportunistic and often nave basis

Exports require volumes of specialized paperwork

US Export Support

www.doc.gov

www.ita.doc.gov

Export Performance Improvement Factors

Government information sources US: various parts of the Dept. of Commerce Other countries: similar entity Embassies and consulates: commercial sections Export management companies Act as the export department of firms Experienced specialists Not exclusive Focused export strategy

Some Successful Export Strategies

Enter

on a small scale to reduce risks

Add

product lines after export

locals to promote the firms

operations begin to be successful

Hire

products

Exporting Strategy

It helps to hire an EMC or, at least, someone with experience. 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.
McGraw Hill Companies, Inc., 2000

Export Process
Evaluate export potential

financial resources management capability/experience competitive advantages abroad

Steps in the Export Process

Evaluate export potential
Do country analysis (more later) country receptiveness to imports and investment trade barriers/requirements infrastructure

Steps in the Export Process

Evaluate export potential
Do market analysis market size/product potential distribution channels needs for re-engineering etc. = localization

Steps in the Export Process

Determine entry method

goal of entry select distribution partner determine channel length assess risks determine costs

Steps in the Export Process

Determine entry method

determine trade terms (INCOTERMS: ex works, FOB, CIF, etc.) determine tasks to be performed in the foreign market

Export/Import Financing
Assures:

Exporter of payment

Importer of product
Banks

offer financing intermediary service

Letters of credit: bank guarantee of payment to

exporter bought by the corresponding importer

Draft or bill of exchange: instructions to bank to pay

at a certain time based on certain documentation

Carriers

provide to the exporter

Bill of lading: receipt, contract and document of title

Sources of Exporter Financing

Financing exporter credit to the importer:
Bankers acceptance (of the draft) Factoring Forfaiting EXIM loans

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 by 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.

McGraw Hill Companies, Inc., 2000

Exporters Problems with Letters of Credit (L/C)

Shipment date or method required in L/C cannot be met.

Documents required by L/C cannot be obtained. Importer deliberately fills out L/C application incorrectly (to stall or force a discount).

Product description too detailed (exporter compliance difficult).

Preference of the US Exporter

1. Importer Pays for Goods

French Importer

American Exporter

2. Exporter Ships Goods After Being Paid

Preference of the French Importer 1. Exporter Ships the Goods

French Importer American Exporter

2. Importer pays after the Goods are Received

The Use of a Third Party

1. Importer Obtains Banks Promise to Pay on Importers Behalf 2. Bank Promises Exporter to Pay on Behalf of Importer

French Importer
6. Importer Pays Bank

Bank

American Exporter
4. Bank Pays Exporter

5. Bank Gives Merchandise to Importer

3. Exporter Ships to the Bank. Trusting Banks Promise to Pay

A Typical International Transaction

1. Importer Orders Goods 2. Exporter Agrees to Fill Order

3. Importer Arranges for LOC

American Exporter
10 and 11 Exporter Sells Draft to Bank 7. Exporter Presents Draft to Bank

French Importer
6. Goods Shipped to France 13. Importer Pays Bank

Bank of New York

5. B of NY Informs Exporter of LOC

12. Bank Tells Importer Documents 14. B of NY Presents Matured Arrive Draft and Gets Payment

Bank of Paris

8. B of NY Presents Draft to Bank of Paris

9. Bank of Paris Returns Accepted Draft 4. Bank of Paris Sends LOC to B of NY

Countertrade

Structures an international sale when means of payment are difficult, costly, or nonexistent
No currency convertibility Weak reserves prohibit access to hard

currency

Barter-like agreements
Trade goods and services for other goods

and services 8-10% or world trade by value is in the form of countertrade (up from 2% in 1975)

Countertrade
Main attraction: way to finance an export deal meet requirement of local government

to support exports
Main drawback: risk of disposal / sale of goods at less

than full value disposal of imports may require resources other than those that the firm possesses

Types of Countertrade
Barter
Counterpurchase

Offset
Switch

Trading

Compensation

or Buyback

Barter

International Reciprocal Trade Association (IRTA) the industry trade organization - almost a half a million small businesses use commercial barter exchanges every year. Almost $10 billion in sales is transacted each year by the commercial barter industry. Trades where no intermediary is used and the global barter market may be 10 times that amount.

Barter

International Reciprocal Trade Association estimates that in 1998 over 470,000 companies actively participated in barter in the US for a total of over $16 billion in annual sales. Over 65% of the corporations listed in the New York Stock Exchange are presently using barter to reduce surplus inventory, bolster sales, and ensure that production facilities run at capacity. U.S. Department of Commerce estimates that 20 to 25% of world trade is now barter, and corporate barter is now a $20 billion industry.

Barter

Conserve cash -- preserve cash-flow Strengthen cash reserves -- use barter for the goods & services most needed Increase buying power -- access to goods & services for growth Increase customer base may add new clients Move surplus inventory Finance -- new businesses can build credit through barter Employee Incentives -- travel, entertainment, gifts, perks & bonuses

Compensation
Barter

with a combination of goods and convertible currency Less risk than in straight barter

Counterpurchase Parallel Barter

Parties

pay cash of goods Seller agrees to buy products/services unrelated to its business Seller then sells products to third parties

Offset Purchase
Usually

large projects, often involving expenditure of buying governments money A % of the selling price is required to be purchased or sourced from the buying country

Buyback
The

seller agrees to buy a negotiated quantity of the output from the buyers output

Clearing Agreement
A

third party brokers transactions between parties, maintaining accounts for all participants Typically are legal documents which specify the details of the arrangements:
Electrical power companies Stock brokers, on-line traders

Switch Trading
Buyer

pays hard currency for unwanted goods/services from seller Broker buys unwanted goods Broker sells goods to third parties