BUS 122 – Principles of Exporting and Importing

CHAPTER 1
EXPORTING, IMPORTING, AND COUNTERTRADE

These Lecture notes provide some information about exporting and importing, in addition to – not
in lieu of your textbook reading, Chapter 1.

Learning Objectives

1. Understand the opportunities and risks associated with international trade (exporting and importing).

2. Become familiar with the different steps companies can take to improve their export performance.

3. Learn about the different information sources and government programs that exist to support exporters.

4. Learn how countertrade can be used to facilitate exporting.

Summary

These Lecture Notes focus on the “nuts and bolts” of exporting and importing. The promise and pitfalls of
exporting are discussed, along with a discussion of the role of export management companies in the
internationalization process. The lecture notes also provide a preliminary discussion of export financing
(more attention to this subject will be given later on). In this section, we will start discussing the financial
devices that have evolved to facilitate exporting including: the letter of credit, the draft (or bill of
exchange), and the bill of lading. The section ends by providing an example of a typical international trade
transaction. This example illustrates the complex nature of international trade transactions. Finally, the
lecture notes explore countertrade, its growth and the pros and cons of this type of transaction. (In addition,
please see the Appendix to Ch. 1 – PowerPoint slides).

INTRODUCTION

A) These lecture notes are concerned with the “nuts and bolts” of exporting (and importing). Exporting is
not just for large enterprises, many small firms have benefited significantly from the moneymaking
opportunities of exporting too.

B) The volume of export activity in the world economy is increasing as exporting has become easier. The
gradual decline in trade barriers under GATT and now the WTP along with regional economic agreements
such as the European Union and the North American Free Trade Agreement have significantly increased
export opportunities.

C) Despite the opportunities for exporting, it remains a challenge for many firms. The firm wishing to
export must identify export opportunities, avoid a host of unanticipated problems that are often associated
with doing business in a foreign market, familiarize itself with the mechanics of export and import
financing, learn where it can get financing and export credit insurance, and learn how it should deal with
foreign exchange risk.

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Learning Tip # 1: The International Business Training site http://www.i-b-t.net provides a wealth of
information for companies that are exporting. The site has an online library that contains articles such as
“Create an Export Plan.”

Learning Tip # 2:: You may wonder how firms U.S. firms find buyers in foreign countries. To find foreign
customers, exporters often use '"trade leads" that are provided by organizations dedicated towards the
activity of matching "buyers" and "sellers" in an international context. An example of a site that provides
trade leads is the National Trade Data Bank at http://www.stat-usa.gov (This service is available on a
subscription basis).

THE PROMISE AND PITFALLS OF EXPORTING

A) The potential benefits from exporting can be great. Regardless what country a firm is based in, the rest
of the world is a much larger market than the domestic market. While larger firms may be proactive in
seeking out new export opportunities, many smaller firms are reactive and only pursue international
opportunities when the customer calls or knocks on the door.

Learning Tip # 3: The Import Export Coach (http://www.importexportcoach.com/consulting.htm) is an

B) Many novice exporters have run into significant problems when first trying to do business abroad,
souring them on following up on subsequent opportunities.

Learning Tip # 4: A wonderful site for small and medium sized companies to visit as they begin their
export business is: http://www.ibrc.bschool.ukans.edu/resources/articles/articles.htm (The site contains
many articles designed to assist companies with their export strategy).

C) Common pitfalls include poor market analysis, poor understanding of competitive conditions, lack of
customization for local markets, poor distribution arrangements, bad promotional campaigns, and a general
underestimation of the differences and expertise required for foreign market penetration.

D) If basic business issues weren’t enough, the tremendous paperwork and formalities that must be dealt
with can be overwhelming to small firms.

IMPROVING EXPORT PERFORMANCE

A) There are a number of ways in which inexperienced exporters can gain information about foreign market
opportunities and avoid some of the common pitfalls that tend to discourage and frustrate novice exporters.

An International Comparison

B) One big impediment to exporting is the simple lack of knowledge of the opportunities available. The
way to overcome ignorance is to collect information.

Information Sources

C) Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The
most comprehensive source of information is the U.S. Department of Commerce.

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Utilizing Export Management Companies (EMC)

D) Export management companies are export specialists that act as the export marketing department or
international department for client firms.

E) EMCs normally accept two types of export assignments. EMCs start up exporting operations for a firm
with the understanding that the EMC will have continuing responsibility for selling the firm’s products.

F) In theory, the advantage of EMCs is that they are experienced specialists who can help the neophyte
exporter identify opportunities and avoid common pitfalls. However, studies have revealed a large variation
in the quality of EMCs. Therefore, an exporter should carefully review a number of EMCs, and check
references from an EMC's past client, before deciding on a particular EMC.

Exporting Strategy

G) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it is careful about
its choice of exporting strategy. First, particularly for the novice exporter, it does to help to hire an EMC, or
at least an experienced export consultant, to help with the identification of opportunities and navigate
through the tangled web of paperwork and regulations so often involved in exporting. Second, it often
makes sense to initially focus on one, or a handful, of markets. Third, it may make sense to enter a foreign
market on a fairly small scale in order to reduce the costs of any subsequent failure. Fourth, the exporter
needs to recognize the time and managerial commitment involved in building export sales, and should hire
additional personnel to oversee this activity least the existing management of the firm be stretched too thin.
Fifth, in many countries it is important to devote a lot of attention to building strong and enduring
relationships with local distributors and / or customers. Sixth, it is important to hire local personnel to help
the firm establish itself in a foreign market. Finally, it is important for the exporter to keep the option of
local production in mind.

A Typical International Transaction

The entire process for conducting an export transaction is summarized in Figure 12.4 (below)

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COUNTERTRADE

A) Countertrade is an alternative means of structuring an international sale when conventional means of

The Growth of Countertrade

B) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the Communist
states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the
1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange
reserves required to purchase necessary imports. There was a notable increase in the volume of
countertrade after the Asian financial crisis of 1997.

Types of Countertrade

C) Countertrade can be categorized into five distinct types of trading arrangements: barter, counterpurchase,
offset, switch trading, and compensation or buyback.

Barter

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D) Barter is a direct exchange of goods and/or services between two parties without a cash transaction.
Barter is viewed as the most restrictive countertrade arrangement. It is used primarily for one-time-only
deals in transactions with trading partners who are not creditworthy or trustworthy.

Counterpurchase

E) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain
amount of materials back from a country to which a sale is made.

Offset

F) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a
specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the
obligation with any firm in the country to which t he sale is being made.

Switch Trading

G) Switch trading refers to the use of a specialized third-party trading house in a countretrade
arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up
with what are called 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.

Buybacks

H) 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.

The Pros and Cons of Countertrade

I) Countertrade’s main attraction is that it can give a firm a way to finance an export deal when other means
are not available. If a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity
to a competitor that is willing to make a countertrade agreement.

J) A countertrade arrangement may be required by the government of a country to which a firm is exporting
goods or services.

K) The drawbacks of countertrade are substantial. Countertrade contracts may involve the exchange of
unusable or poor-quality goods that the firm cannot dispose of profitably. Countertrade is most attractive to
large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods
acquired in countertrading.

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Critical Thinking Questions

1. You are the assistant to the CEO of a small textile firm that manufactures high-quality, premium-priced,
stylish clothing. The CEO has decided to see what the opportunities are for exporting and has asked you for
advice as to the steps the company should take. What advice would you give the CEO?

2. How do you explain the popularity of countertrade? Under what scenarios might its popularity increase
still further by the year 2010? Under what scenarios might its popularity decline by the year 2010?

3. How might a company make strategic use of countertrade schemes as a marketing weapon to generate
export sales revenues? What are the risks associated with pursuing such a strategy?