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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