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