Chapter 15: Exporting, Importing, and Countertrade
If you’ve ever bought something over eBay from a foreign seller, you’ve been directly involved in an export transaction. Many of the products you use everyday are imported from other countries. In fact, thanks to the decline in trade barriers promoted by the WTO and regional agreements like NAFTA and the EU, exporting and importing have become easier than ever. Because it’s easier, we’ve seen the volume of exporting increasing in recent years. Today, firms of all sizes engage in exporting, and face the challenges of identifying export opportunities, dealing with the problems of doing business in foreign markets, working through the process of export financing and getting insurance, and learning how to protect themselves against foreign exchange risk. We’ve touched on some of these areas in earlier chapters, but in this chapter, we’ll look at the process of exporting and importing in more depth. Why is exporting attractive? Well, by exporting, firms can quickly increase the size of their market. Rather than simply relying on the domestic market for their revenues, by exporting, firms can increase their profits by viewing the world as their market. As you’ll see in the Management Focus in your text, FCX Systems was able to substantially increase its market by exporting. Similarly, recall from the Opening Case that MD International successfully built a business exporting medical equipment to Latin America. Despite the opportunities however, we know that while many large firms are proactive about exporting, smaller firms often wait for export opportunities to come to them. We say they take a reactive approach to the process. Sometimes, this lack of initiative by smaller companies occurs because the firms don’t really know just how great the opportunities are, nor how to pursue them. In some cases, a bad export experience in the past, can keep a firm from pursuing new export opportunities. In addition, novice exporters sometimes fail to realize just what’s involved in the exporting process, and then react negatively when something goes wrong.
What are the disadvantages of exporting? Firms can run into numerous pitfalls when they begin exporting including doing a poor market analysis, having a poor understanding of competitive conditions, using a marketing effort that fails to recognize both the need to customize a product or to make appropriate distribution arrangements and promotional campaigns, and simply having a general lack of understanding of the skills required to enter a foreign market. Some firms are also surprised at the amount of paperwork involved in exporting.
How can firms improve their export performance? One way to improve the chance for success is to take advantage of export assistance programs that are offered by governments, or hire an export management company. What type of assistance is available? The type of assistance offered varies by country. Germany and Japan for example, have developed extensive institutional structures for promoting exports. You may have heard of Japan’s Ministry of International Trade and Industry or MITI for instance. Japanese firms can also take advantage of the knowledge and contacts of the sogo shosha, the country’s great trading houses that have offices and contacts all over the world. In Germany, trade associations, government agencies, and commercial banks all provide export assistance to firms.
Some companies prefer to hire another company to handle their exporting. Export management companies, or EMCs, are export specialists that act as the export marketing department or international department for their clients. EMCs usually work in two different ways. One way involves setting up the exporting operations for a firm with the understanding that the client will take over once things are established. The other way involves setting up the exporting process for the client, and then continuing to manage it for the firm. It’s important to recognize that while the advantage of hiring an EMC is that the EMC is a specialist that should be able to avoid many of the pitfalls of exporting, in reality, the quality level of EMCs varies, so firms need to be careful with their selection process.
Firms can also reduce the risks associated with exporting by choosing their export strategy carefully. It can be helpful to hire an EMC or other experienced export consultant to help identify the best opportunities and navigate the paperwork and regulations involved in the process. Firms can also minimize risk by entering the market on a small scale initially, and then expanding once the market is a proven thing. 3M follows this type of strategy. It initially enters a market on a small scale, and then adds in additional products once the market has proven to be successful. 3M also hires locals to promote its products. You can learn more about 3M’s strategy in the Management Focus in your text. Firms also need to recognize that developing a successful export business takes time and commitment, and that additional personnel may be necessary. Building strong relationships within the importing country can also help a company avoid the pitfalls of exporting. As you can see in the Management Focus in your text, Red Spot Paint and Varnish found that developing personal relationships with client firms in the importing country was important to its export success. Finally, keep in mind that exporting might not be the best option in some cases. Local production may make more sense in certain situations. Sometimes exporting turns out to be a good way to test a market before making a bigger commitment.
Firms involved with exporting must also deal with collecting payments for their exports. Remember, when you sell your product to someone in another country, you take on the risk of whether you’ll get paid on time, and whether the currency that you’ll be paid in will be worth what you think it’ll be worth. But because the buyer is in another country, the typical methods you use to get a delinquent account to pay up, might not work! From the firm’s perspective, the best way to be paid would probably be cash in advance, in the exporter’s currency! However, since requiring these terms is likely to put the exporter at a competitive disadvantage, the firm has to be more flexible. To deal with these issues, various mechanisms have evolved to handle export financing, and the issues of trust that are associated with it. Let’s begin with the issue of trust. Exporters have to trust that the importer will actually be true to his word, that he’ll pay according to the agreed upon terms in a timely manner. Remember, that it can be very difficult to track down an importer who has defaulted on an agreement, especially since the importer lives in a different country, speaks a different language, abides by a different system of law, and so on. The importer, of course has similar concerns. If he sends payment in advance to the exporter, what guaranty does he have that he’ll get what he bought, on time, and in good condition? He would probably prefer that the goods be shipped to him prior to sending payment. So, because of the different needs of the importer and the exporter, a system using a third party - a reputable bank - has evolved.
As you can see in this process for conducting an export transaction, the third party bank plays a major role. Let’s talk about what’s going on in this transaction.
Rather than dealing directly with each other, the importer and exporter deal with the trustworthy third party, the bank, using a letter of credit. A letter of credit is issued by a bank at the request of an importer. The letter states that the bank will pay a specified sum of money to the exporter upon the presentation of specified documents. It’s sort of a promise to pay. Once the exporter sees the letter, and knows that he’ll get paid, he ships the goods, and requests payment from the bank. The bank makes payment.
How is payment made? A draft, which is sometimes called a bill of exchange, is the instrument that’s usually used for payment. It’s simply an order written by the exporter instructing the importer or importer’s agent to pay a specified amount of money at a specified time. There are two types of drafts. A sight draft is payable immediately, while a time draft allows for a delay in payment.
Another document, called a bill of lading, is also included in the process. The bill of lading is issued to the exporter by the carrier that’s transporting the goods. It acts as a receipt, a contract, and as a document of title.
What does a typical international trade transaction look like? Here you can see the fourteen steps in a typical international trade transaction.
Suppose there’s great potential for your product in a certain market, but that you’ve been having trouble exporting because the government of that country restricts the convertibility of its currency. Do you walk away? You might, but you also might see whether another form of payment is an option. Countertrade refers to a range of barter like agreements that facilitate the exchange of goods and services for other goods and services when they can’t be traded for money. Boeing sold jets to Saudi Arabia and got paid in oil using a countertrade arrangement. Similarly, Venezuela traded iron ore for Caterpillar’s earth moving equipment. How did countertrade evolve? Countertrade began in the 1960s primarily as a way for the U.S. to trade with the Soviet Union and its neighbors. Recall from our discussion of the international monetary system in Chapter 10 that at that time, these countries had currencies that were nonconvertible, and so couldn’t be used for trade. The countries turned to countertrade instead. During the 1980s, many developing countries turned to countertrade to purchase imports when they didn’t have sufficient foreign exchange reserves. The incidence of countertrade increased again after the 1997 Asian financial crisis. Many Asian countries had only limited hard currency at the time, and had to find alternative methods of payment.
What are the different types of countertrade arrangements? Countertrade agreements can be structured in five basic ways barter, counterpurchase, offset, compensation or buyback, and switch trading. Let’s look at each type. Barter, which is the most restrictive form of countertrade, involves a direct exchange of goods and/or services between two parties without a cash transaction. While barter is a relatively simple process, it’s not very common because one party ends up with goods it doesn’t really want, and may even have to wait for the goods. Usually, barter is only used for one-time deals with trading partners that aren’t creditworthy or trustworthy. Counterpurchase is a reciprocal buying arrangement where a firm agrees to purchase a certain amount of materials back from the country to which the sale is made. So, when Rolls-Royce sold jet parts to Finland, it agreed to use some of the proceeds of the sale to buy Finnish TVs. An offset agreement is similar to counterpurchase because one party agrees to purchase goods and services with some percentage of the proceeds of the original sale, but it’s different in that the party can fulfill the obligation with any firm in the country to which the sale is being made. So, it has a little more flexibility than a counterpurchase agreement.
A buyback involves building a plant in a foreign country, or supplying technology, equipment, training, or other services, and then agreeing to take a percentage of the plant’s output as a partial payment for the contract. Occidental Petroleum used this type of arrangement in Russia where it built several ammonia plants, and then received ammonia as a partial payment. In a switch trading arrangement, a third party trading house is involved. The third party buys, at a discount, the counterpurchase credits that a firm has received in a counterpurchase or offset agreement. The third party then sells them, for a profit, to another firm that can use them more efficiently.
Why is countertrade attractive? Well, the main advantage of countertrade is, as we discussed earlier, that it gives firms a chance to complete an export deal that might not have otherwise happened because of financing difficulties. Firms that are unwilling to make countertrade agreements run the risk of losing export opportunities to those firms that are willing to make the deals. In some cases, countertrade agreements are required by governments.
Keep in mind however, that a firm that gets into a countertrade agreement may end up with unusable or poor quality goods that are difficult to dispose of at a profit. For this reason, countertrade is usually more attractive to large, diverse MNEs that have a network of contacts around the world to unload the goods that are acquired in countertrade deals. Japan’s sogo shosha, for example, use their networks to sell countertrade goods. Similarly, 3M’s willingness to enter countertrade arrangements gives it a profit advantage over competitors. 3M has even established its own trading company to manage its countertrade deals.
1. Exporting, Importing, and
2. Why Export?
• Exporting is a way to increase market size and profits
• increasing thanks to lower trade barriers under the WTO and
regional economic agreements such as the EU and NAFTA
• Large firms often proactively seek new export
opportunities, but many smaller firms export reactively
• often intimidated by the complexities of exporting
• Exporting firms need to
• identify market opportunities
• deal with foreign exchange risk
• navigate import and export financing
• understand the challenges of doing business in a foreign market
3. What Are The
Pitfalls Of Exporting?
• Common pitfalls include
• poor market analysis
• poor understanding of competitive conditions
• a lack of customization for local markets
• a poor distribution program
• poorly executed promotional campaigns
• problems securing financing
• a general underestimation of the differences and
expertise required for foreign market penetration
• an underestimation of the amount of paperwork and
formalities involved 15-3
4. How Can Firms Improve
• Many firms are unaware of export opportunities
• Firms need to collect information
• Firms can get direct assistance from some
countries and/or use an export management
• both Germany and Japan have developed extensive
institutional structures for promoting exports
• Japanese exporters can use knowledge and contacts of
sogo shosha - great trading houses
• U.S. firms have far fewer resources available 15-4
5. What Are Export
• Export management companies (EMCs) are export
specialists that act as the export marketing department
or international department for client firms
• EMCs normally accept two types of assignments
1. They start export operations with the understanding
that the firm will take over after they are established
• not all EMCs are equal—some do a better job than others
1. They start services with the understanding that the
EMC will have continuing responsibility for selling the
• but, firms that use EMCs may not develop their own export
6. How Can Firms Reduce
The Risks Of Exporting?
• To reduce the risks of exporting, firms should
• hire an EMC or export consultant to identify
opportunities and navigate paperwork and regulations
• focus on one, or a few, markets at first
• enter a foreign market on a small scale in order to
reduce the costs of any subsequent failures
• recognize the time and managerial commitment
• develop a good relationship with local distributors and
• hire locals to help establish a presence in the market
• be proactive
• consider local production 15-6
7. How Can Firms Overcome The Lack
Of Trust in Export Financing?
• Because trade implies parties from different
countries exchanging goods and payment the
issue of trust is important
• Exporters prefer to receive payment prior to
shipping goods, but importers prefer to receive
goods prior to making payments
• To get around this difference of preference,
many international transactions are facilitated
by a third party - normally a reputable bank
• By including the third party, an element of trust
is added to the relationship
8. How Can Firms Overcome The Lack
Of Trust in Export Financing?
The Use Of A Third Party
9. What Is A Letter Of Credit?
• A letter of credit is issued by a bank at the request of an
importer and states the bank will pay a specified sum of
money to a beneficiary, normally the exporter, on
presentation of particular, specified documents
• main advantage is that both parties are likely to trust a reputable
bank even if they do not trust each other
10. What Is A Draft?
• A draft (also called a bill of exchange) is an order
written by an exporter instructing an importer,
or an importer's agent, to pay a specified
amount of money at a specified time
• the instrument normally used in international
commerce for payment
• A sight draft is payable on presentation to the
drawee while a time draft allows for a delay in
payment - normally 30, 60, 90, or 120 days
11. What Is A Bill Of Lading?
• The bill of lading is issued to the exporter by
the common carrier transporting the
• It serves three purposes
1. It is a receipt - merchandise described on document
has been received by carrier
2. It is a contract - carrier is obligated to provide
transportation service in return for a certain charge
3. It is a document of title - can be used to obtain
payment or a written promise before the
merchandise is released to the importer
12. How Does An International
Trade Transaction Work?A Typical International Trade Transaction
13. What Is Countertrade?
• Countertrade refers to a range of barter-like
agreements that facilitate the trade of goods
and services for other goods and services when
they cannot be traded for money
• emerged as a means purchasing imports during
the1960s when the Soviet Union and the Communist
states of Eastern Europe had nonconvertible
• grew in popularity in the 1980s among many
developing nations that lacked the foreign exchange
reserves required to purchase necessary imports
• notable increase after the 1997 Asian financial crisis 15-13
14. What Are The Forms
• There are five distinct versions of countertrade
1. Barter - a direct exchange of goods and/or services
between two parties without a cash transaction
• the most restrictive countertrade arrangement
• used primarily for one-time-only deals in transactions with
trading partners who are not creditworthy or trustworthy
1. Counterpurchase - a reciprocal buying agreement
• occurs when a firm agrees to purchase a certain amount of
materials back from a country to which a sale is made
1. Offset - similar to counterpurchase insofar as one party
agrees to purchase goods and services with a specified
percentage of the proceeds from the original sale
• difference is that this party can fulfill the obligation with any firm in
the country to which the sale is being made
15. What Are The Forms
4. A buyback occurs when a firm builds a plant in a
country—or supplies technology, equipment, training,
or other services to the country—and agrees to take a
certain percentage of the plant’s output as a partial
payment for the contract
5. Switch trading - the use of a specialized third-party
trading house in a countertrade arrangement
• when a firm enters a counterpurchase or offset agreement
with a country, it often ends up with counterpurchase credits
which can be used to purchase goods from that country
• switch trading occurs when a third-party trading house buys
the firm’s counterpurchase credits and sells them to another
firm that can better use them
16. What Are The
Pros Of Countertrade?
• Countertrade is attractive because
• it gives a firm a way to finance an export deal when other means
are not available
• it give a firm acompetitve edge over a firm that is unwilling to
enter a countertrade agreement
• In some cases, a countertrade arrangement may be required
by the government of a country to which a firm is exporting
goods or services
17. What Are The
Cons Of Countertrade?
• Countertrade is unattractive because
• it may involve the exchange of unusable or poor-
quality goods that the firm cannot dispose of
• it requires the firm to establish an in-house trading
department to handle countertrade deals
• Countertrade is most attractive to large, diverse
multinational enterprises that can use their
worldwide network of contacts to dispose of
goods acquired in countertrade deals 15-17