The use of a specialized third-party trading house in a countertrade arrangement refers to:

International Business 8e

By Charles W.L. Hill

Chapter 15

Exporting, Importing, and Countertrade

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

15-3

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

15-4

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

15-5

How Can Firms Improve Export Performance?

Many firms are unaware of export opportunities available

Firms need to collect information

Firms can get direct assistance from some countries and/or use an export management companies 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

15-6

Where Can U.S. Firms Get Export Information?

The U.S. Department of Commerce - the most comprehensive source of export information for U.S. firms

The International Trade Administration and the United States and Foreign Commercial Service Agency - “best prospects” lists for firms

The Department of Commerce - organizes various trade events to help firms make foreign contacts and explore export opportunities

The Small Business Administration Local and state governments

15-7

What Are Export Management Companies?

 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

2. They start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products  but, firms that use EMCs may not develop their own export

capabilities

15-8

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

involved develop a good relationship with local distributors and

customers hire locals to help establish a presence in the market be proactive consider local production

15-9

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

15-10

How Can Firms Overcome The Lack Of Trust in Export Financing?

The Use Of A Third Party

15-11

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

15-12

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

15-13

What Is A Bill Of Lading?

 The bill of lading is issued to the exporter by the common carrier transporting the merchandise

 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

15-14

How Does An International Trade Transaction Work?

A Typical International Trade Transaction

15-15

Where Can U.S. Firms Get Export Assistance?

1. Financing aid is available from the Export-Import Bank (Eximbank) - 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  achieves its goals though loan and loan guarantee programs

2. Export credit insurance is available from the Foreign Credit Insurance Association (FICA) - provides coverage against commercial risks and political risks  protects exporters against the risk that the importer will default

on payment

15-16

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 currencies,

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

15-17

What Are The Forms Of Countertrade?

 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

2. 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

3. 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

15-18

What Are The Forms Of Countertrade?

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

15-19

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

15-20

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 profitably

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

15-21

Review Question

Which of the following is not a common pitfall

of exporting?

a) a product offering that is customized to the local market

b) a poor understanding of competitive conditions in he foreign market

c) poor market analysis

d) problems securing financing

15-22

Review Question

A _______ is an order written by an exporter

instructing an importer to pay a specified

amount of money at a specified time.

a) letter of credit

b) draft

c) bill of lading

d) confirmed letter of credit

15-23

Review Question

Which type of countertrade arrangement

involves the use of a specialized third-party

trading house?

a) a buyback

b) an offset

c) a counterpurchase

d) switch trading

15-24

Review Question

Which of the following is not a purpose of the

bill of lading?

a) It is a contract

b) It is a document of title

c) It is a form of payment

d) It is a receipt

15-25

Review Question

________ is the most restrictive countertrade

arrangement.

a) counterpurchase

b) switch trading

c) barter

d) offset

15-26

Review Question

Countertrade is attractive for all of the following reasons except a) It may involve the exchange of unusable or poor-

quality goods that the firm cannot dispose of profitably

b) It can give a firm a way to finance an export deal when other means are not available

c) It can be a strategic marketing weapon d) It can give a firm an advantage over firms that are

unwilling to engage in countertrade arrangements

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