chapter seventeen
Export and Import Practices
McGraw-Hill/Irwin
International Business, 11/e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives

Explain why firms export and problem areas of
exporting

Identify the sources of export counseling and support

Discuss the meaning of the various terms of sale
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Learning Objectives

Identify some sources of export financing

Describe the activities of a foreign freight forwarder

Understand the kinds of export documents required

Identify import sources

Explain the Harmonized Tariff Schedule of the United
States (HTSUSA)
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Why Export?
The main reasons why companies decide
to involve in exporting instead of staying in
their home country are:
• Desire to either increase profit and sales
• Protect them from being eroded
17-5
Why Export? (detail)
• Reasons to export
– To serve markets where the firm has no or
limited production facilities
Many large multinational company like Du
Pont supplies numerous foreign markets by
exports because no firm—no matter how
large—can afford to manufacture in every
country where its goods are sold
17-6
Why Export? (detail)
• Reasons to export
– To satisfy a host government’s requirement
that the local subsidiary have exports
Developing governments often require the
local affiliate to export, and some require
that it earns sufficient forex to cover the cost
of its import
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Why Export? (detail)
• Reasons to export
– To remain price-competitive in the home
market
Many firms import labor-intensive
components produce in their foreign
affiliates or export components for assembly
in a country where labor is less expensive
and import the finished products
17-8
Why Export? (detail)
• Reasons to export
– To test foreign markets and foreign
competition inexpensively
A common strategy used by firms that want
to test a product’s acceptance before
investing in local production facilities.
Exports also enable firm to test marketing
strategies and make adjustments with less
risk in a smaller market
17-9
Reasons to export? (detail) cont’d.
– To offset domestic market’s cyclical sales
– To achieve additional sales
Allow firm to use its excess capacity to
lower unit fixed costs
– To extend a product’s life cycle
by exporting to less advance countries
– To respond strategically to foreign
competitors
By distracting the foreign competitor with
entering theirs home market
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Reasons to export? (detail) cont’d.
– To meet actual or prospective customers’
requests for the firm to export (accidental
exporting)
– To achieve the success the firm’s
management has seen others achieve
– To improve the efficiency of manufacturing
equipment
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Reasons not to Export (US Firms)
• Two major reasons
– Preoccupation with the vast American
market
– Reluctance to become involved in a new,
unknown and therefore risky operation
• Not active in international markets due to
– Lack of knowledge
• Locating foreign markets
• Payment and financing procedures
• Export procedures
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Sources of Export Counseling
• Trade Information Center (TIC)
– The federal government has to set this up as a first
stop for information
– Visit http://www.ita.doc.gov/td/tic/
• International Trade Administration (ITA)
– Offers a wide range of export promotion activities
that include
• Market Access and Compliance (MAC)
• Trade Development
• U.S. and Foreign Commercial Services
(US&FCS)
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Sources of Export Counseling
• Small Business Administration (SBA)
– The office of International Trade of the SBA
works through
• Small Business Administration offices
• Score Program
• Small Business Development Centers
• Centers for International Business
Education and Research (CIBERs)
17-14
Show and Sell
• Trade events to facilitate international
trade
– U.S. pavilions (trade fairs)
– Trade missions
– Product literature center
– Reverse trade missions
17-15
Export Marketing Plan
• Essentially same as domestic marketing plan,
it should be specific about:
– Markets to be developed
– Marketing strategy for serving them
– Tactics to make the strategy operational
• The export marketing plan will spell out what
must be done and when, who should do it, and
how much money will be spent
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Pricing Policies: Terms of Sale
• INCOTERMS
Universal trade terminology developed by the
International Chamber of Commerce
– Ex-Works
• Risk passes at factory door
• US equivalent: FOB (free on board)
• all costs and risks from that point on are
borne by the buyer
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Pricing Policies: Terms of Sale, cont’d.
– FAS
• Free alongside ship, port of call
• The seller pays all of the transportation
and delivery expense up to the ship’s
side.
• The buyer is responsible for any loss or
damage to the shipment from that point
on
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Pricing Policies: Terms of Sale, cont’d.
– CIF
• Cost, insurance, freight, foreign port
• The seller quotes a price that includes the
cost of the goods, insurance, and all
transportation and miscellaneous charges
to the named foreign port in the country
of final destination
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Pricing Policies: Terms of Sale, cont’d.
– CFR
• cost and freight, foreign port
• Similar to CIF except the buyer
purchases the insurance, either it can
obtain it at a lower cost or because its
government—to save forex—insists that it
uses a local insurance company
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Pricing Policies: Terms of Sale, cont’d.
– DAF
• Delivered at frontier
• This term can be used when the goods
are transported by rail and road. The
seller pays for transportation to the
named place of delivery at the frontier.
The buyer arranges for customs
clearance and pays for transportation
from the frontier to his factory. The
passing of risk occurs at the frontier.
17-21
Payment (Financing) Procedures
• Payment terms offered by exporters to
foreign buyers
– Cash in advance
• When credit standing of the buyer unknown or
uncertain
• Very few buyers will accept because:
1) Their working capital is partly tied up until the
merchandise has been received and sold
2) There is no guarantee the buyer will receive
what they ordered
17-22
Payment (Financing) Procedures
– Open account
• When sale is made on open account
– Seller assumes payment risk
– Offered to reliable customers in economically
stable countries
– Exporter’s capital is tied up until payment has
been received
– Consignment
• Goods shipped to buyer; payment made when
sold
• Payment risk assumed by seller
• Multinational uses this for their subsidiaries 17-23
Payment (Financing) Procedures, cont’d.
– Letter of credit (L/C)
• Document issued by buyer’s bank
–Promise to pay seller specified amount
when bank has received documents
stipulated in letter of credit
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Payment (Financing) Procedures, cont’d.
• Letter of credit
• Confirmed L/C
–Correspondent bank in seller’s country
agrees to honor issuing bank’s L/C
• Irrevocable L/C
–Once the seller has accepted L/C,
buyer cannot alter or cancel it without
seller’s consent
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Sample Letter of Credit
17-26
Letter of Credit Transaction
17-27
Documents
• Air Waybill
– A bill of lading issued by an air carrier (a
proof that shipment has been made)
• Pro Forma Invoice
– Exporter’s formal quotation: description of
the merchandise, price, delivery time,
method of shipment, ports of exit and entry,
and terms of sale
17-28
Export Payment Documents
• Export draft
– Unconditional order drawn by the seller that
instructs buyer to pay the draft’s amount on
presentation (sight draft) or at an agreed future
date (time draft) and that must be paid before
buyer receives shipping documents
17-29
L/C vs. Export Draft
• When the political and commercial risks are
not an issue, documentary draft (i.e. export
draft) is more preferable
• Export draft is less expensive than L/C for the
buyer
• A confirmed L/C guarantees payment to the
seller if seller conforms to its requirements, but
there is no such guarantee with documentary
drafts
17-30
Export Financing
• Private Source – Commercial Banks
– Banker’s acceptance
• Time draft with maturity of less than 270 days
that has been accepted by the bank on which
the draft was drawn, thus becoming the
accepting bank’s obligation; may be bought and
sold at a discount in the financial markets like
other commercial paper
– Factoring
• Discounting an account receivable without
recourse
17-31
Export Financing, cont’d
– Forfeiting
• Purchasing without recourse an account
receivable whose credit terms are longer than
the 90 to 180 days usual in factoring; unlike
factoring, political and transfer risks are borne by
the forfeiter
17-32
Export Financing cont’d.
• Public Sources
– Export-Import Bank (Exim Bank)
• Principal government agency that aids American
exporters by means of loans, guarantees, and
insurance programs
– Overseas Private Investment Corporation
(OPIC)
• U.S. government corporation that offers
American investors in developing countries
insurance against expropriation, currency
inconvertibility, and damages from wars and
revolutions
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Other Public Incentives
• Foreign Trade Zone
– Duty-free area designed to facilitate trade
by reducing the effect of customs
restrictions
• Free Trade Zone
– An area designated by the government as
outside its customs territory
• Customs drawback
– Rebate on customs duties
17-34
Export Procedures
• Foreign freight forwarders act as agents for exporters
– Independent business that handle export shipments
for compensation
– Prepare documents
– Book space
– Offer advice about
• Markets
• Regulations
• Transportation
• Packing
– Supply cargo insurance
17-35
Official Procedures for Importing and
Exporting
17-36
Shipping Documents
• Shipper’s Export Declaration
– U.S. Department of Commerce form to control
export shipments and record export statistics
• Validated export license
– Document issued by the U.S. government
authorizing export of strategic commodity or
shipment to unfriendly country
• General Export License
– Covers export commodities for which validated
license not required; no formal application
required
17-37
Shipping Documents, cont’d.
• Export Bill of Lading
1) Contract of carriage between shipper and carrier
2) A receipt from the carrier for the goods shipped
3) A certificate of ownership
– Straight bill of lading is nonnegotiable; endorsed “to
order” bill gives holder claim on merchandise
– An order bill of landing is negotiable
• Insurance Certificate
17-38
Collection Documents
• Commercial invoice
• Include origin of goods, export packing marks,
and clause stating goods will not be
transshipped
– Consular invoice
• Purchased from the consul and prepared in local
language
– Certificate of origin
• Issued by local Chamber of Commerce
– Inspection certificate
• Frequently required for grain, food, live animals
17-39
Export Shipments (cargo handling)
 Containers
 Reduce theft and handling costs
 LASH (lighter aboard ship)
 Barges for shallow inland waterways
 RO-RO (roll on-roll off)
 Can drive onto vessel
 Air Freight
 Can arrive in one day
17-40
Sea-freight vs. Air-Freight
• Total cost of using air-freight is often less costly than
the apparently least-cost sea-freight because:
 Insurance rates—less chance of damage
 Packing—air-freight packing can go with domestic
packaging instead of the heavier, more costly export
packing
 Custom duties—when calculated in gross weights
 Replacement costs for damage goods—less
chance of damaging shipment
 Inventory costs—rapid delivery with air freight
often obviates the need for expensive warehouse
17-41
Sea-Air Total Cost Comparison,
Shipment and Spare Parts
17-42
Benefit of Air Freight cont’d
• Total cost may decrease
• Either the firm or the product may be airdependent—ex: seller of live animals,
fresh flowers, etc—without air freight
they would out of business
• The market may be perishable—ex
producer of short-life cycle product such
as high-fashion and fad items, etc.
• Competitive position may be
strengthened
17-43
Importing
• Ways to identify import sources
– If similar imported products are already in the
market, visit a retailer and examine the product
label
– If the product is not being imported, call the
nearest consul or embassy of that country
– Use the electronic bulletin boards of the World
Trade Centers
17-44
Customhouse Broker
• Independent business that handles import
shipments
• Acts as agent for importer
– Customhouse broker brings goods through
customs
– May arrange transportation for goods after they
leave customs
– Need to know when imports are subject to import
quotas and how much of the quota has been
filled
17-45
Importing
• Bonded warehouse
– Area authorized by customs for storage of goods on which
payment of import duties is deferred until goods are removed
• Automated Commercial System (ACS)
– Used to track, control, and process all commercial goods
imported into U.S.
• Import Duties
– Importer must know how U.S. calculates import duties
• The Harmonized Tariff Schedule of U.S.
(HTSUSA)
– American version of the Harmonized System used worldwide to
classify imported products
17-46
Page from the HTSUSA
17-47