Lecture 07 Export-Import and Counter-trade

1. Lecture 07Export-Import and Counter-trade

2. Outline • Exporting • Exports vs counter-trade • Government support for exporting • Typical export transaction • Counter-trade • Types of counter-trade

3. Exporting To ship to another country for sale or exchange.

4. Pure export: cash payment Countertrade: Alternative payment mechanisms Pure export vs. countertrade Goods Home Seller Foreign Buyer

5. Logistics: Shipping, Freight forwarding FOB CIF Final Market Distributor Retailer Firm boundary National Border International Inter-firm operations The Export Value Chain Goods flow Money flow Seller

6. Government Support for Exports www.bundesregierung.de www.meti.go.jp https://www.uktradeinvest.gov.uk/

7. US Export Support www.doc.gov www.ita.doc.gov

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. Ex-Im Bank www.exim.gov • 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. Foreign Credit Insurance Association • 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

12. Ignorance and Intimidation Poor market analysis Poor understanding of competitive conditions Poorly executed promotional campaign Failure to customize product offering Poor distribution program Problems securing financing Pitfalls of exporting

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. 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. Preference of the US Exporter 1. Importer Pays for Goods German Importer American Exporter 2. Exporter Ships Goods After Being Paid

16. Preference of the French Importer 2. Importer pays after the Goods are Received German Importer American Exporter 1. Exporter Ships the Goods

17. The Use of a Third Party 1. Importer Obtains Bank’s Promise to Pay on Importers Behalf 2. Bank Promises Exporter to Pay on Behalf of Importer German Importer Bank American Exporter 6. Importer Pays Bank 4. Bank Pays Exporter 5. Bank Gives Merchandise to Importer 3. Exporter Ships “to the Bank.” Trusting Bank’s Promise to Pay

18. Letter of credit United States Germany Bank Bank Documents Buyer (Germany) Seller (U.S.) Letter of Credit Shipping Documents Merchandise Customhouse broker Freight forwarder Merchandise Steamship line Steamship line A Typical Letter of Credit transaction

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

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. 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. Counter-trade • An umbrella term – typically appears in 5 forms • Barter • Counter-purchase • Offset • Compensation trading or Buyback • Switch trading

23. Goods Importing agency Goods Types of Counter-trade • Barter:direct exchange of goods and/or services without a cash transaction. Exporter Importer

24. Aircraft Boeing Saudi Government Trading Agency Oil Saudia (National airline) Barter:Example

25. Exporting agency F/X • Counter-purchase: reciprocal buying agreement % of total sale spent on specified products Goods Exporter Importing agency Importer

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

27. Switch trading:uses third-party trading house. Importing firm 3rd party arbitrageur Exporting agency Re-purchase credits Goods Importing agency Exporter F/X (% in re- purchase credits) Importer

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

29. Countertrade – Summary Transaction involves reciprocal commitments other than cash payments Yes No Involves the use of money Yes No Counter-purchase, buyback or offset Barter Limited to purchase of goods Yes No Goods results of initial exports? Yes No Straight sales Cash or credit Buyback Counter-purchase Offset

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. 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. 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