PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. PRINTED BY: canoj2@montclair.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. INBS 561 Exporting, Importing and Countertrade Module 7a Exporting & Importing Exporting • Exporting is the sale of goods or services produced by a firm based in one country to customers that reside in another country • Why export? ▪ To serve foreign markets where the firm has no production facilities or the firm’s local facility does not produce the firm’s complete product mix ▪ To satisfy a host government’s requirement that a subsidiary export ▪ To meet requests for export from a customer located in a foreign country ▪ To increase market size and profits ▪ To extend a product’s life cycle ▪ Diversify activities, thereby being able to adapt to changes in the marketplace Approaches to Exporting Direct exporting: involves selling goods and/or services directly to independent representatives, distributors, or retailers outside of the exporter’s home country Indirect exporting: goods and/or services sold to a domestic intermediary, who in turn exports them • Passively filling orders from domestic buyers who then export the product • Selling to domestic buyers who represent foreign end users or customers Importing • Importing refers to the purchase of a good or service by a buyer in one country from a seller in another • Types of importers: ▪ Input optimizers: uses foreign sourcing to optimize, in terms of price or quality, the inputs fed into a supply chain. ▪ Opportunistic: looks for products around the world that it can import and profitably sell to local citizens ▪ Arbitrageurs: looks to foreign sourcing to get the highest-quality product at the lowest possible price. Why Import? • Reasons to import: ▪ Specialization of labor: enables companies to take advantage of the higher quality at lower prices that labor specialization provides across countries. ▪ Global rivalry: has forced companies to use foreign suppliers to keep the costs of inputs low and quality levels high. ▪ Local unavailability: if the product is not available locally, companies have no choice but to import. ▪ Diversification: companies import as part of a diversification strategy. ▪ Developing alternative suppliers makes a company less vulnerable to the dictates of a local supplier. Pitfalls of Exporting and Importing • Financial risks: a shortage of working capital to finance an export strategy • Customer management: because of reliance on document and arm’s-length transactions • Lack of international business experience • Marketing challenges • Top management commitment • Government regulation • Trade documentation INBS 561 Exporting, Importing and Countertrade Module 7b Exporting & Importing Resources and Assistance Exporting & Importing Resource and Assistance Export-Import Bank (Ex-Im Bank) aids with financing. It is an independent agency of the U.S. government • Provides financing aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries • Provides support through loan and loan guarantee programs Foreign Credit Insurance Association (FICA): provides export credit insurance • Provides coverage against commercial risks and political risks • Protects exporters against the risk that the importer will default on payment Exporting & Importing Resource and Assistance Trade Assistance by Source and Type Source: “International Business” by Daniels, Radebaugh and Sulivan, 14 ed Exporting & Importing Resource and Assistance • Export Management Company (EMC): acts as a manufacturer’s agent ▪ EMCs generally operate on a contractual basis, provide exclusive representation in a well-defined foreign territory, and act as the export arm of a manufacturer ▪ EMCs often specialize according to product, function, and/or market area • Export Trading Company (ETC): an independent broker whose primary purpose is to match suppliers to foreign customers for a fee ▪ ETCs based in the U.S. are exempt from antitrust provisions to allow them to better penetrate foreign markets by collaborating with other U.S. firms Exporting & Importing Resource and Assistance • Foreign Freight Forwarder: an international trade specialist who assists in the delivery of goods from producer to customer • The typical freight forwarder is the largest export intermediary in terms of the weight and value of cargo handled • Freight forwarders may specialize in the type of mode used or the geographic area served Exporting & Importing Resource and Assistance • Customs Agencies: government bureaus charged with collecting duties and ensuring that trade restrictions are enforced and procedures adhered to • The primary duties of a customs agency are as follows: • the assessment and collection of all duties, taxes, and fees on imported products • the enforcement of customs and related laws, and the administration of certain navigation laws and treaties Exporting & Importing Resource and Assistance • • Customs Broker: an independent agent who executes customs transactions on behalf of clients for a fee A customs broker can help minimize duties by: ▪ valuing products in such a way that they qualify for more favorable treatment ▪ deferring duties by using bonded warehouses and foreign trade zone ▪ limiting liability by properly marking the country of origin of an imported product ▪ qualify for duty refunds when the imported components are incorporated into goods to be exported (drawback provisions) INBS 561 Exporting, Importing and Countertrade Module 7c Basic Export Payment Methods Basic Export Payment Methods • Payment Methods: ▪ ▪ ▪ ▪ Letter of Credit Bills of Exchange [Drafts] Cash in Advance Open Accounts Basic Export Payment Methods • Letter of Credit is issued by a bank at the request of an importer: ▪ It states the bank will pay a specified sum of money to an exporter on presentation of particular, specified documents ▪ Its main advantage is that both parties are likely to trust a reputable bank even if they do not trust each other Figure 7c.1: A Letter of Credit Process (Irrevocable) Importer Orders Goods Exporter Agrees to Fill Order (3) (2) (1) (9) (10) (8) (7) (6) (4) (12) (11) (5) Source: Adapted from “Basic Guide to Exporting”, U.S. Department of Commerce Figure 7c.1: A Letter of Credit Process (Irrevocable) 1. Importer requests its foreign bank to prepare an irrevocable letter of credit 2. The importer’s bank prepares an irrevocable letter of credit, including all instructions, and sends it to the U.S. bank 3. The U.S. bank prepares a letter of confirmation and letter of credit and sends to exporter 4. Exporter reviews letter of credit, if acceptable, arranges with freight forwarder to deliver goods to designated port of entry 5. The goods are loaded and shipped 6. At the same time the forwarder completes the necessary documents and sends documents to the exporter 7. Exporter presents documents, indicating full compliance, to the U.S. bank 8. The U.S. bank reviews the documents, if they are in order, issues exporter a check for amount of sale 9. The documents are sent to the importer’s bank for review 10. If documents are in compliance, the bank pays exporter’s bank and sends the documents to importer, and importer pays 11. Importer presents documents to customs broker 12. Goods are released to importer Basic Export Payment Methods • What is a draft? ▪ A draft (also called a bill of exchange) is a written order by an exporter instructing an importer to pay a specified amount of money at a specified time ▪ Sight draft is payable on presentation to the drawee ▪ Time draft allows for a delay in payment, say 30, 60, 90 or 120 days INBS 561 Exporting, Importing and Countertrade Module 7d Countertrade Countertrade • • Countertrade: a barter-like flow of goods and/or services when they cannot be traded for money Distinct types of countertrade transactions include: ▪ Barter: a direct exchange of goods and/or services between two parties without a cash transaction ▪ Counter purchase: in a counterpurchase a firm agrees to purchase a certain amount of materials back from a country to which the firm has made a sale ▪ Buyback: a firm builds a plant or supplies technology, equipment or some other service to a country and agrees to take a certain percentage of the plant’s output as a partial payment for the contract Countertrade Switch trading: occurs when a third-party trading house buys the firm’s counter purchase credits and sells them to another firm Offset: one party agrees to buy goods and services with a specified percentage of the proceeds from the original sale. It is similar to counter purchase, but permits flexibility in the choice of firm for fulfilling the reciprocal obligation Pros and Cons of Countertrade • Pros of Countertrade: ▪ Provides a way to finance an export deal when other means are not possible ▪ Gives a firm an advantage over another firm that is unwilling to use countertrade ▪ The government of a country may require countertrade arrangement to make a purchase Pros and Cons of Countertrade • Cons of Countertrade: ▪ It may involve the exchange of poor quality goods that the firm cannot sell profitably ▪ May require a firm to establish an in-house trading department to handle such a deal ▪ May not be attractive to small enterprises without a global network of contacts INBS 561 Govt. Influence on Int’l Trade & Cross-National Cooperation Module 6a Government Influence on Int’l Trade Why Do Governments Intervene in Trade? • Political Motives ▪ To protect jobs: high rates of unemployment ousts a government from power ▪ Preserve national security: governments may ban certain defense-related goods from export ▪ Respond to unfair trade: it makes no sense to allow free trade if other countries erect trade barriers ▪ Gain influence over smaller nations • Economic Motives ▪ Protect infant industries: infant industries need protection from international competition during development phase • Cultural Motives ▪ Protection of national identity is the most common cultural objective Instruments of Trade Promotion Subsidies • financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price support Export Financing • a government may promote exports by helping finance export activities Foreign Trade Zone • a designated geographic region through which merchandise is allowed to pass with lower customs duties and/or fewer customs procedures Special Government Agencies • agencies responsible for promoting exports Govt. Influence on Int’l Trade & Cross-National Cooperation Module 6b Instruments of Trade Restriction & The WTO Instruments of Trade Restrictions & the WTO Tariffs: Quotas: a government tax levied on a product as it enters or leaves a country. There are three categories of tariffs: export tariff, transit tariff (levied on a product that is passing through on its way to its final destination), and import tariff. restriction on the amount of goods that can enter or leave a country. • an ad valorem tariff is based on the stated price of an imported product • a specific tariff is a specific fee for each unit of the imported product • a compound tariff is a combination of ad valorem and specific tariff • Voluntary Export Restraint (VER): an export quota that a country imposes on its exports • Tariff-Quotas: a lower tariff rate for a certain quantity of imports and a higher rate for quantity above the quota Instruments of Trade Restrictions & the WTO • Embargo: complete ban on trade in one or more products with a particular country • Local Content Requirements: laws stipulating that a certain portion of the end product must consist of domestically produced parts or components • Administrative Delays: regulatory controls or bureaucratic rules designed to impair the flow of imports into a country • Currency Controls: restrictions on the convertibility of a currency into other currencies Govt. Influence on Int’l Trade & Cross-National Cooperation Module 6c Cross-National Cooperation The World Trade Organization (WTO) ▪ The WTO is the international organization that regulates trade among member nations ▪ There are three main goals of the WTO o Help the free flow of trade among members o Help negotiate further opening of markets o Settle trade disputes between and among member countries ▪ The principle of nondiscrimination: a requirement that WTO members extend the same favorable terms of trade to all members that they extend to one member Regional Economic Integration • One notable trend in the global economy in recent years has been the accelerated movement toward regional economic integration or cross-national cooperation ▪ Regional economic integration refers to agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and factors of production between one other Levels of Economic Integration Political Union Economic Union Common Market Customs Union Free Trade Area Greater Integration MERCOSUR NAFTA ANDEAN COM. EU Levels of Economic Integration Free Trade Area • Removes all barriers to trade among members with each member determining its own trade policy toward nonmembers Customs Union • Adds the requirement that all members set a common trade policy against nonmembers Common Market • Adds the free movement of labor and capital to the requirements of a custom union Economic Union • Requires members to harmonize their tax, monetary, and fiscal policies, create a common currency, and concede some sovereignty to the larger organization in addition Political Union • Requires members to coordinate their economic and political policies against nonmembers, with a few exceptions The Economic Case for Integration • Stimulates economic growth in countries • Increases FDI and world production • Countries specialize in those goods and services they can efficiently produce • Additional gains from free trade beyond the international agreements such as WTO The Political Case for Integration Economic interdependence creates incentives for political cooperation • This reduces potential for violent confrontation Together, the countries have more economic clout to enhance trade with other countries or trading blocs The Case Against Regional Integration • Economists point out that the benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion ▪ Trade creation occurs when high cost domestic producers are replaced by low cost producers within the free trade area ▪ Trade diversion occurs when lower cost external suppliers are replaced by higher cost suppliers within the free trade area Implications for Managers Opportunities Threats Creation of single markets Differences in culture and competitive practices make realizing economies of scale difficult Protected markets, now open More price competition Lower costs of doing business in single market Outside firms shut out of market EU intervention in mergers and acquisitions
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