© ram mudambi, temple university, 2007 1 lecture 07 export-import and counter-trade

© Ram Mudambi, Temple University, 2007

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Lecture 07Export-Import and Counter-trade


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Outline

Exporting Exports vs counter-trade Government support for exporting

Typical export transaction Counter-trade

Types of counter-trade


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Exporting

To ship to another country for sale or exchange.


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Pure export vs. countertrade

HomeSeller

ForeignBuyer

Goods

Pure export: cash payment

Countertrade: Alternative payment mechanisms


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The Export Value Chain

SellerSeller Distributor RetailerFinal

Market

NationalNationalBorderBorder

Logistics:Shipping, Freight forwarding

FOB CIF

Firmboundary

InternationalInter-firm operations

Goods flowMoney flow


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Government Support for Exports

www.bundesregierung.de

www.meti.go.jp

https://www.uktradeinvest.gov.uk/

http://www.tradepartners.gov.uk/register.shtml

http://www.meti.go.jp/english/policy/index_externaleconomicpolicy.html

http://www.meti.go.jp/english/policy/index_metipolicies.html

http://www.tradepartners.gov.uk/register.shtml


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US Export Support

www.doc.gov

www.ita.doc.gov


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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

www.exim.gov

Ex-Im Bank

Provides loans and loan-guarantee programsLends money to foreign borrowers to purchase U.S. exportsMakes commercial banks more willing to lend to foreign enterprises

http://www.meti.go.jp/english/policy/index_externaleconomicpolicy.html


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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 AssociationForeign Credit Insurance Association


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Pitfalls of exporting

Ignorance and

Intimidation

Poor marketanalysis

Poor understandingof competitive

conditions

Failure to customize product

offeringPoor distribution

program

Poorly executedpromotional

campaign

Problems securingfinancing


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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.


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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.


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Preference of the US Exporter

German Importer American Exporter

1. Importer Pays for Goods

2. Exporter Ships Goods After Being Paid


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Preference of the French Importer

German Importer

American Exporter

1. Exporter Ships the Goods

2. Importer pays after the Goods are Received


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The Use of a Third Party

German Importer American Exporter

1. Importer Obtains Bank’s Promise to Pay on Importers Behalf

5. Bank Gives Merchandise to Importer

Bank6. 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


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A Typical Letter of Credit transaction

BankBank BankBank

Buyer (Germany)Buyer (Germany) Seller (U.S.)Seller (U.S.)

Customhousebroker

Customhousebroker Freight forwarderFreight forwarder

Steamship lineSteamship line Steamship lineSteamship line

Letterof creditLetter

of credit

DocumentsDocuments

MerchandiseMerchandise

Germany United States

Letter of CreditShipping DocumentsMerchandise


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A Typical LOC Transaction

German ImporterAmerican Exporter

Bank of New York Deutsche Bank

6. Goods Shipped to France7. 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 Paris9. Deutsche Bank Returns Accepted Draft4. Deutsche Bank Sends LOC to B of NY

5. B of NY Informs Exporter of LOC


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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.


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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


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Counter-trade

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


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Types of Counter-trade Barter: direct exchange of goods and/or services

without a cash transaction.

Exporter

Importer

Importingagency

Goods

Goods


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Barter: Example

BoeingSaudi Government

Trading Agency

Aircraft

Saudia(National airline)

Oil


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Counter-purchase: reciprocal buying agreement

ExporterImporting

agency

Goods

Importer

F/X

Exportingagency

% of total sale spenton specified products


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Offset: like counter-purchase, but exporter

can buy goods from any firm in country.

ExporterImporting

agency

Goods

Importer

F/X

Exportingagency

% of total sale spenton any goods fromimporting country


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Switch trading: uses third-party trading house.

ExporterImporting

agency

Goods

Importer

F/X (% in re-purchase credits)

Exportingagency

3rd party arbitrageur

Re-purchasecredits

Importing firm


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Buybacks: foreign plant takes products as

contract payment.HOST

Importer

HOME

Exporter

Flow of capital goods

F/X payment

Re-purchasedoutput

3rd Country Re-export andlocal sale


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Countertrade – SummaryTransaction involves reciprocal commitments other

than cash payments

Yes No

Straight salesCash or credit

Involves the use of money

Yes No

Limited to purchase of goods

Counter-purchase, buyback or offset Barter

Yes No

Goods results of initial exports?

Yes NoBuyback Counter-purchase Offset

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.


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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

Offse t

S witc h T ra d in g

B a rte r

B u yb a c k

C o u n te rp u rc h a se

73

3

19 22

60

0

20

40

60

80

100

OffsetSwitch TradingBarterBuybackCounterpurchase

Percent of companies engaged in each countertrade practice


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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