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Lecture 07 Export-Import and Counter-trade PowerPoint PPT Presentation


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Lecture 07 Export-Import and Counter-trade. Outline. Exporting Exports vs counter-trade Government support for exporting Typical export transaction Counter-trade Types of counter-trade. Exporting. To ship to another country for sale or exchange. Pure export : cash payment.

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Lecture 07 Export-Import and Counter-trade

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Lecture 07 export import and counter trade l.jpg

Lecture 07Export-Import and Counter-trade


Outline l.jpg

Outline

  • Exporting

    • Exports vs counter-trade

    • Government support for exporting

  • Typical export transaction

  • Counter-trade

    • Types of counter-trade


Exporting l.jpg

Exporting

To ship to another country for sale or exchange.


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Pure export:

cash payment

Countertrade:

Alternative payment mechanisms

Pure export vs. countertrade

Goods

Home

Seller

Foreign

Buyer


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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


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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’


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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


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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


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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


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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

1. Importer Pays for Goods

German Importer

American Exporter

2. Exporter Ships Goods After Being Paid


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Preference of the French Importer

2. Importer pays after the Goods are Received

German Importer

American Exporter

1. Exporter Ships the Goods


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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


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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


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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


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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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Goods

Importing

agency

Goods

Types of Counter-trade

  • Barter:direct exchange of goods and/or services without a cash transaction.

Exporter

Importer


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Aircraft

Boeing

Saudi Government

Trading Agency

Oil

Saudia

(National airline)

Barter:Example


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Exporting

agency

F/X

  • Counter-purchase:

    reciprocal buying agreement

% of total sale spent

on specified products

Goods

Exporter

Importing

agency

Importer


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  • 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


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  • 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


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  • 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


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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


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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.


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Countertrade Practice

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


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