export import countertrade

International Economics

Chapter 13Exporting, Importing,

and Countertrade

Why Export?

Profits

Growing markets and lower costs

Factors to Consider

• Financing• Insurance• Currency Exchange Risk

Countertrade

• Trading stuff for stuff

Case Study - 3M

• FIDO - First In defeats others• Make a little sell a little• Hire local

EMCExport Management

CompanyExport Specialist who act as the

marketing department for

client firms

Export Strategy• Hire EMC• Focus on one market• Enter on small scale• Added time & resources• Build relationships• Hire local• Seek opportunities to learn• Consider local production

TrustShip Goods

Send Payment

ImporterExporter

What happens first?Shipment or payment?

Three Instruments

Letter of Credit - L/C

Bill of Exchange - Draft

Bill of Lading

Financing

Importer

1. Importer obtains bank’s promise to pay on importer’s behalf

2. Bank promises exporter to pay on importer’s behalf

3. Exporter ships to the bank

4. Bank pays the exporter

5. Bank gives good to the importer

6. Importer pays the bank

Exporter Bank

Letter of Credit

LC0.5% to 2%

Loan to extend payment

Advantages

May not trust each other but do trust a reputable bank

Bill of Exchange Draft

An order written by an exporter instructing the importer, or importer’s

agent, to pay the specified amount of money at a

specified time.

Parties to the Draft

Maker - Exporter

Drawee - Who the draft is presented to (Bank)

Sight Draft

Payable on presentation

Time Draft

Payable at a future date30, 60, 90, or 120 days

Banker’s Acceptance

Once a draft has been accepted by a bank Trade Acceptance

Once a draft has been accepted by a business firm

Time Draft

NegotiableCan sellDiscount

9% for 120 days = 3%

Time DraftWhat would a $100,000

draft at 90 days be worth at 8%?

90 ÷ 360 = 1/4 8% ÷ 4 = 2%

$100,000 x 98% = $98,000

Bill of LadingA document issued to the exporter by the common carrier transporting the

merchandise.

It serves as a receipt, a contract, and a document of

title

Bill of Lading

NegotiableI can sell to a bank

1. Importer orders goods

Exporter

2. Exporter agrees to fill order

3. Importer arranges letter of credit

4. Saudi bank send L/C to U.S. Bank5. U.S. bank informs exporter of L/C

6. Goods shipped to Saudi

7. Exporter presents draft to bank

8. U.S. bank presents draft and bill of lading to Saudi bank

9. Saudi bank accepts draft and returns to U.S. bank

10. U.S. bank informs Exporter of acceptance

11. Exporter sells acceptance draft to bank at discount

12. Saudi bank informs importer of arrival of documents.

13. Importer agrees to pay bank in 90 days

Importer

ExporterBank

ImporterBank

14. U.S. bank collects payment from Saudi bank in 90 days

Import-Export Banks

Provides aid in financing

Manage Risk

L/CExport Credit Insurance

Countertrade

Trade goods for goodsNo cash in transaction

BarterNo foreign exchange

currency

Boeing sells ten 747s to Saudi Arabia for crude oil

Countertrade

BarterCounterpurchase

Offset Coupons or CreditsSwitch Trading - Buying

couponsBuybacks - Take percent as

payment

Countertrade - AdvantagesCreates an option

Government requiresCreative Competition

Countertrade - DisadvantagesCash is always preferred

Inferior quality goodsHave to resell the traded

goods

Countertrade

Good for large multinationals

Japan - sogo shosha