international banking institutional exports & imports session 11 --hilla shahpur maneckji

International Banking


Institutional Exports & ImportsSession 11

--Hilla Shahpur Maneckji


Introduction (1)

Selling goods abroad is often more complex than selling in the home market.

Exported goods are sold to buyers who are likely to be less well known to the seller than are buyers in the seller’s own country.

In international trading there is the problem that the legal system, the language and trade customs are all different, and exporting tends to entail a greater risk of non payment than domestic sales.

Additionally, the time taken for goods to pass from seller to buyer is generally longer for exports than for goods sold at home.


Introduction (2)

This poses a problem because buyers prefer not to pay until they have inspected goods, while suppliers want payment on or before shipment.

Exporting also involves payment in a currency foreign either to the buyer or to seller, or to both; and hence entails exchange risk.

Any movements in the relative values of currencies which take place between the date a contract is signed and final payment will mean that the seller obtains less (or more) in terms of his own currency than expected; or that the buyer has to pay more (or less) than planned, and exchange control regulations may exist in both the seller’s and the buyer’s country.


EXPORTS


What are Exports?

Export goods or services are provided to foreign consumers by domestic producers.

It is a good that is sent to another country for sale.

Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import.

The advent of small trades over the internet such as through Amazon and e-Bay have largely bypassed the involvement of Customs in many countries due to the low individual values of these trades.

Nonetheless, these small exports are still subject to legal restrictions applied by the country of export.


History

The theory of international trade and commercial policy is one of the oldest branches of economic thought.

Exporting is a major component of international trade, and the macroeconomic risks and benefits of exporting are regularly discussed and disputed by economists and others.

Two views concerning international trade present different perspectives.

The first recognizes the benefits of international trade. The second concerns itself with the possibly that

certain domestic industries (or laborers, or culture) could be harmed by foreign competition.


Processes

Methods of export include a product or good or information being mailed, hand-delivered, shipped by air, shipped by boat, uploaded to an internet site, or downloaded from an internet site.

Exports also include the distribution of information that can be sent in the form of an email, an email attachment, a fax or can be shared during a telephone conversation.


To Consider While Exporting (1)

Before attempting to sell goods in any overseas market, the potential exporter should assess the following:

1. What is the demand (or potential demand) for the company’s products, bearing in mind the local tastes, traditions and even climatic conditions?

2. Who are the competitors, especially those selling under well established brand names?

3. What will be the most effective or even acceptable method of presentation, that is, design and packaging? (In some countries this is a decisive selling factor and demands a knowledge of local political, national or religious attitudes).



4. What language is to be used in brochures, packaging, sales and service literature, and in correspondence with potential buyers?

5. What is the advisability of advertising? Which media and what will be the cost?

6. What are the means and costs of distribution? 7. Are the products priced competitively in

relation to the market conditions? 8. What rating is given to the reputation and

credit worthiness of buyers and/or agents?



9. What is the degree of local political stability and competition?

10. What is the state of the national economy? 11. What is the extent of import restrictions,

tariffs and excise duties?


Methods of Selling Abroad (1)

Goods and services can be sold abroad through the following:

1. Direct Representation: It is arranged either as a joint venture or by establishing a subsidiary company. The objective of direct representation is to centralize marketing of the product and dispense with the dealings through separate traders. Subsidiary companies and joint ventures are established according to the regulations and laws in the importing as well as exporting countries. These legal requirements may pertain to limits on foreign participation, taxation, repatriation, etc.



2. Indirect Representation Indirect Representation may be in the following forms:

(a) Agents: Agents administer the sales of products over a defined area. They may be firms or individuals, constituting efficient marketing set up. These agents act as intermediary for the manufacturers and suppliers whose products are specialized or in so much demand that they cannot be dealt with satisfactorily by the exporters themselves. Great care is needed in appointing agents so that disputes do not arise about the payments for and delivery of the goods, and that the capital invested shows a satisfactory turnover and profit.



(b) Foreign Buying Houses: Certain large stores have buying houses or agencies in other countries to buy the bulk of their required goods. These agencies render the services on commission of the value of goods bought by them for their principals. This commission is mutually agreed upon at a defined rate. These buying houses do not normally act as agent of the foreign buyer but arrange for the purchase and shipment of the goods, in addition they may render other services as per requirements of the overseas principals.



(c) Export Merchant: They are actual buyers of goods on their own account and maintain stocks of commodities both at home and abroad. They enter into contract with manufacturers and promote sales of their products. Their transactions are almost the same as selling in markets to the buyers, so that the capital invested may show a satisfactory turnover and profit. Thus export merchants with overseas offices provide a satisfactory marketing medium for the products of manufacturers who are not in a position to set up overseas marketing agency to deal exclusively with their commodities.



(d) Confirming Houses: They act as buying agents for the suppliers of those goods which the importer wishes to purchase from abroad. These houses, in fact, assume the responsibility of payment of the cost of all goods sold by them on behalf of the principal. By doing so they take over the risk of bad debts and in return they charge a small extra commission for this confirmation.


IMPORTS


What are Imports? (1)

In economics, an import is any good or a commodity or service brought into one country from another country in a legitimate fashion, typically for use in trade.

It is a good that is brought in from another country for sale.

Import goods or services are provided to domestic consumers by foreign producers.

An import in the receiving country is an export to the sending country.

Imports, along with exports, form the basis of international trade.


What are Imports? (2)

Import of goods normally requires involvement of the Customs authorities in both the country of import and the country of export and are often subject to import quotas, tariffs and trade agreements.

When the imports are the set of goods and services imported, “Imports” also means the economic value of all goods and services that are imported.

The macroeconomic variable I usually stands for the value of these imports over a given period of time, usually one year.


Types of Imports (1)

There are two basic types of imports: 1. Industrial and Consumer Goods 2. Intermediate Goods and Services Companies import goods and services to

supply to the domestic market at a cheaper price and better quality than competing goods manufactured in the domestic market.

Companies import products that are not available in the local market.


Types of Imports (2)

There are three broad types of importers: 1. Looking for any product around the

world to import and sell. 2. Looking for foreign sourcing to get their

products at the cheapest price. 3. Using foreign sourcing as part of their

global supply chain.


Role of the Internet (1)

Many online auction websites such as eBay are now providing wholesalers through a wholesale list, generally, the lists that require a fee to view, may not be updated frequently, the data may be old, and the companies listed may no longer be in business.

Another form of online middleman is B2B trade companies like Global Sources.

These cater mainly to big businesses who are importing large quantities of goods from foreign countries.

They also have sister sites that serve smaller orders for small businesses, like Global Sources Direct.


Role of the Internet (2)

In addressing the concerns of listed companies legitimacy and dependability, such B2B portals may inspect suppliers at their actual premises before they list suppliers.

The “verified suppliers” system of Global Sources is one such example.

Imports is having cargo and clearance. Alternatively, these companies may also branch out of

cyberspace and organize their own Sourcing Fairs, where thousands of buyers and suppliers can meet face-to-face.

Two examples are Cantonfair and China Sourcing Fairs.


IMPORT AND EXPORT

FINANCING


Introduction

Like those whose full effort is devoted to imports and exports, financial managers of multinational firms must be aware of the financial techniques involved in selling and shipping merchandise across national boundaries.

Most multinational firms engage in importing and exporting, sometimes to affiliates and sometimes to independent customers.


Basic Needs of Import-Export Financing (1)

Importing and exporting involve certain ways of documenting transactions that have evolved over many centuries.

The basic purpose of documentation is to assure the seller receives payment and the buyer receives the merchandise.

More specifically, the system provides—1. Assurance against the risk of non-completion of

a transaction.2. Protection against foreign exchange risk.3. A manner of financing the transaction.


Basic Needs–Risk of Non-Completion (2)

Once importer and exporter agree on terms, the seller usually wants to maintain legal title to the goods until paid, or at least until assured of payment.

The buyer, however, is naturally reluctant to pay before receiving the goods, or at least before receiving title thereto.

Trust between buyer and seller complicates international trade more than domestic trade since in many cases parties to an international transaction will have limited knowledge about each other.

Longer transportation and communication lines, and the possibility of misunderstanding because of a language or culture barrier, add uncertainty.


Basic Needs–Risk of Non-Completion (3)

Much of the risk of non-completion is reduced through the use of key documents:

1. The Letter of Credit, which is a bank guarantee of payment if certain stipulated conditions are met;

2. The Draft, which is the document by which payment is effected; and

3. The Bill of Lading, which is a shipping document issued by a common carrier.

These documents are part of a carefully constructed system to determine who bears the risk of non-completion in any transaction at any given time.


Basic Needs–Protection Against Foreign Exchange Risk (4)

In international trade the basic foreign exchange risk is transaction risk.

If the transaction is invoiced in the exporter’s currency, the importer carries the transaction risk.

If the transaction is invoiced in the importer’s currency, transaction risk resides with the exporter.

Wherever different currencies and an interval of time between agreement on price and final payment exist, one or the other of the parties is exposed.

Transaction risk in international trade is usually covered by hedging.


Basic Needs–Protection Against Foreign Exchange Risk (5)

To acquire protection, however, the exposed party must know the amount and time of payment.

The three key documents mentioned specify both the amount and the time, and thus lay the groundwork for effective hedging.


Basic Needs–Financing the Trade (6)

Most international trade involves a time lag, which means that the funds are tied up during the period the merchandise is in transit.

Because the locus of risk of non-completion is clear, and because foreign exchange risk can be hedged, commercial banks are often willing to finance goods in transit or even prior to shipment.

A bank can deal with the financial aspects of trade, as evidenced by documents, without exposing itself to questions about the quality of the merchandise or other physical aspects of the shipment.


Export Credit Insurance


Export Credit Insurance (1)

The exporter who insists on cash or letter of credit payment for foreign shipments is likely to lose orders to competitors from other countries that provide more favorable credit terms.

Better credit terms are often made possible by means of export credit insurance, which provides assurance to the exporter or the exporter’s bank that, should the foreign customer default on payment, the insurance company will pay for a major portion of the loss.

Because of the availability of export credit insurance, commercial banks are willing to provide medium to long-term financing (five to seven years) for exports.



Since credit has become an increasingly competitive component of the terms of export selling, governments of at least 35 countries have established entities that insure credit risks for exports.

Details of these systems appear in the various editions of the World's Principal Export Credit Insurance Systems published by the International Export Credits Institute, New York.

Competition between nations to increase exports by lengthening the period for which credit transactions can be insured could lead to a credit war and to unsound credit decisions.



To prevent such an unhealthy development, a number of leading trading nations joined together in 1934 to create the Berne Union (officially, the Union d’Assureurs des Credits Internationaux) for the purpose of establishing a voluntary international understanding on export credit terms.

The Berne Union recommends maximum credit terms for many items including, for example, heavy capital goods (five years), light capital goods (three years), and consumer durable goods (one year).


Government Programs To

Finance Exports


Government Programs (1)

Governments of most export-oriented industrialized countries have special financial institutions that provide some form of subsidized credit to their own national exporters.

Traditionally these export finance institutions have offered terms that are better than those generally available from the competitive private sector.

At times the subsidized rate has been as low as half the rates at which treasuries were borrowing—meaning, of course, that domestic taxpayers are subsidizing lower financial costs for foreign buyers.


Government Programs (2)

This subsidizing activity has been done in the name of creating employment and maintaining a technological edge.

Particularly critical have been rates offered by French and U.S. credit programs to finance the exports of commercial aircraft, both countries believing that their position in worldwide aircraft manufacture would be lost were subsidized rates not available.

In the United States the chief government agency is the Export-Import Bank of the United States, headquartered in Washington, D.C.

Other organizations include the Overseas Private Investment Corporation (OPIC) and the Private Export Funding Corporation (PEFCO).


FORFAITING


Forfaiting (1)

Forfaiting is a technique for arranging medium-term export financing.

Forfaiting denotes the purchase of trade obligations falling due at some future date without recourse to any previous holder of the obligation.

The word comes from the French a forfait, a term that implies “to forfeit or surrender a right”.

Under a typical arrangement an exporter receives immediate cash by discounting promissory notes or trade receivables on a “without re course” basis to a specialized finance firm, called a “forfaiter”.


Forfaiting (2)

The forfaiter assesses and subsequently carries all political and commercial risk.

Forfaiting arose because the governments of Eastern Europe and certain other developing nations took an active role in seeking intermediate-term financing to pay for major items of imported capital equipment, including turn key plants constructed by Western corporations.

Such projects require up to a dozen years to complete, so financing was needed for a longer time than could be arranged by traditional bank export departments or even by the export credit guarantee programs of the various exporting countries.


Forfaiting (3)

Forfaiting firms, most of which are in Switzerland, Austria, or Germany and are affiliated with commercial banks from other European countries, developed the technique of purchasing from the exporter all rights and claims to future cash receipts from the importer without any possibility of recourse to the exporting firm.

Although the exporting firm remains responsible for the quality of delivered goods, it receives a clear and unconditional cash payment, while all political and commercial risk of non-payment by the importer is carried by the forfaiter.


Forfaiting (4)

Step 1: Importer and exporter agree between themselves on a series of imports to be paid for over an intermediate (three to seven year) period. Periodic payments are to be made against progress in delivery or completion of the project.


Forfaiting (5)

Step 2: The exporter obtains the forfaiter’s commitment to finance the transaction at a fixed discount rate, and payments are to be made when the exporter delivers to the forfaiter the appropriate promissory notes or other specified paper. The agreed upon discount rate is one of the costs to the exporting firm. An additional standby fee of about 0.1% to 0.125% per month is charged by the forfaiter from the date of its commitment to finance until receipt of the actual discount paper issued in accordance with the finance contract. In anticipation of its standby obligation, the forfaiter might borrow the needed funds on a long maturity and reinvest them in short-term maturities, thus ensuring eventual availability of the funds to the exporter.


Forfaiting (6)

Step 3: The importer obligates itself to pay for the material by issuing a series of promissory notes, usually maturing every 6 or 12 months, against progress in delivery or completion of the project. These promissory notes are first delivered to the importer’s bank, where they are endorsed (that is, guaranteed) by that bank. In Europe the guarantee is sometimes referred to as an “aval.” At this point the importer’s bank becomes the primary obligor in the eyes of all subsequent holders of the notes.


Forfaiting (7)

Step 4: The now-endorsed promissory notes are delivered to the exporter.

Step 5: The exporter endorses the notes “without recourse” and discounts them with the forfaiter, receiving immediately the agreed upon proceeds, less the amount of the discount taken out by the forfaiter. By endorsing them “without recourse”, the exporter assumes no liability for future payment on the notes and thus in effect receives the discounted proceeds free of any further payment difficulties.


Forfaiting (8)

Step 6: The forfaiting firm endorses the notes and sells them in the European money market. The notes are now two-name paper (importer’s bank and forfaiting firm); although investors can rely on either name, they are in fact attracted to the paper by the endorsement of the forfaiting firm.

In effect, the forfaiting firm functions as both a money market firm and a specialist in assessing country risk.


Forfaiting (9)

As a money market firm, the forfaiter divides the discounted notes into appropriately sized packages and resells them to various investors having different maturity preferences.

The forfaiter is supplying its own name as a guarantor of the notes.

As a country risk specialist, the forfaiter assesses and bears the risk that the notes will eventually be paid by the importer or the importer’s bank.


Forfaiting (10)

Success of the forfaiting technique resides in the belief that the external obligations of a government bank will have a higher priority for payment than will commercial debt, even when incurred by government entities.

A government bank’s default on an international agreement would destroy the country’s credibility.

In addition, the endorsing guarantee by the importer’s bank is perceived to be “off the balance sheet” in that it is a contingent rather than a direct obligation.

As an “off balance sheet” obligation, the debt is presumably not considered by other international organizations analyzing the credit risk of the importing country or its banking system.


COUNTERTRADE


Countertrade (1)

The word countertrade refers to international trade arrangements that are variations on the ancient concept of barter.

Countertrade became popular in the 1960s and 1970s as a way for the Soviet Union and Eastern European members of COMECON to finance their international trade without tapping their scarce hard currency reserves.

The technique has recently been used by non-communist less developed nations for the same reason.

Countertrade is a transaction “in which a seller provides a buyer with deliveries, and contractually agrees to purchase goods from the buyer equal to an agreed percentage of the original sales contract value”.


Countertrade (2)

In other words, an initial export sale is tied by contract to a flow of goods or services in the opposite direction.

The countertrade component may take place at the same time as the original export, in which case credit is not an issue; or the countertrade may take place later, in which case financing becomes important.

Countertrade takes several forms, depending on the type of goods and services involved and the financing arrangements.


Types of Countertrade


Classic Barter (1)

Classical barter is a direct exchange of physical goods between two parties.

It is a one time transaction carried out under a single contract that specifies both the goods to be delivered and the goods to be received.

The two parts of the transaction occur at the same time, and no money is exchanged.

Money may be used as the numeraire by which the two values are established and the quantities of each good are determined.


Classic Barter (2)

A recent example of classical barter is an arrangement whereby Pepsico exchanged Pepsi syrup for Stolichnaya vodka from the Soviet Union.

Another example is a lambs for crude-oil deal negotiated between the New Zealand Meat Board and the Government of Iran.


Counter-Purchase (1)

A counter-purchase transaction involves an initial export, but with the exporter receiving back merchandise that is unrelated to items the exporter manufactures.

One example is an agreement between McDonnell Douglas and Yugoslavia in 1966 under which McDonnell Douglas sold DC9’s to Yugoslovenski Aerotransport for $199 million cash and $26 million in Yugoslav goods.

The Yugoslav products, imported into the United States over the subsequent decades, have included Zagreb hams, wines, dehydrated vegetables, and even some power transmission towers that were retransferred to the Los Angeles Department of Water and Power.


Counter-Purchase (2)

McDonnell Douglas reportedly houses a Yugoslav trading firm at one of its aircraft plants to deal with the goods acquired in countertrade.

Other counter-purchase examples are the purchase by West Germany’s Volkswagenwerk of coal, oil, and machinery from East Germany in return for selling 10,000 automobiles to East Germany.

Rolls Royce’s sales of jet parts to Finland in return for Rolls Royce’s marketing Finnish TV sets and other consumer durables in the United Kingdom.


Compensation Arrangement or Buy-Back (1)

A third type of countertrade is called a compensation arrangement or buy back transaction.

In this instance the original seller is compensated by products that arise out of the original sale.

A typical situation involves the initial export of an industrial plant, with the exporter accepting compensation in the form of future output from that plant.

Such an arrangement has attributes that make it, in effect, an alternate form of direct investment.

The value of the buy-back usually exceeds the value of the original sale, as would be appropriate to reflect interest.


Compensation Arrangement or Buy-Back (2)

A recent example of a buy-back is the agreement by several western European countries to provide materials and equipment for a gas pipeline from the Soviet Union to Europe, with compensation from gas from that pipeline.

Another example is an agreement between Occidental Petroleum and the Soviet Union under which Occidental supplies the Soviet Union with one million tons of American super-phosphoric acid per year for 20 years and in turn receives 4 million tons of Soviet ammonia, urea, and potash.

Occidental helped construct the extra ammonia production and pipeline capacity in the Soviet Union.


Switch Trade (1)

Switch trade involves transferring use of bilateral clearing currencies from one country to another.

For example, an original export from Canada to Romania is paid for with a cash balance deposited in a clearing account in Romania.

Although the clearing account may be measured in Canadian dollars (or in any other currency), the balance can be used only to purchase goods from Romania.

The original exporter from Canada might buy unrelated goods from Romania or it might sell the clearing balance at a substantial discount to a “switch trader”, often located in Vienna, which in turn purchases goods from Romania for sale elsewhere.


Switch Trade (2)

The Canadian exporter in effect exchanges the blocked clearing balance for hard currency at a substantial discount with a specialist firm equipped to export merchandise from Romania.

The Romanian goods themselves are quite cheap, given the discount on the purchase of the blocked currency, and the switch trader resells the merchandise at a low price in world markets.

Those who oppose this practice note that it is in effect dumping below true cost, which hurts competing manufacturers in other countries; however, because the “dumping” is not done by the original country of manufacture it escapes international agreements on dumping.


Switch Trade (3)

An example of a switch trade is a Polish/Greek clearing agreement that existed before Greece joined the EEC.

Poland had sold Greece more goods than it had purchased, and so ended up with a dollar-denominated clearing balance in Greece.

A switch trader bought the right to 250,000 clearing dollars from Poland for $225,000 and then resold them for $235,000 to a European sultana merchant, who in turn used them to purchase Greek sultanas through the Greek Foreign Trade Bank. A sultana is a small white seedless grape used for both raisins and wine making.


Reasons For Growth of Countertrade


Reasons for Growth (1)

In theory, countertrade is a movement away from free trade.

It is a slow, expensive, and convoluted way of conducting trade that often forces firms (such as McDonnell Douglas) to set up operations to deal in products very remote from their expertise.

The basic problem is that the agreement to take back goods in some form of barter suggests that those goods cannot be sold in the open market for as high a price as is being locked into the countertrade agreement.

Nevertheless, several reasons are advanced for the current growth of countertrade.



First, from the perspective of either a Soviet bloc or developing country, countertrade often produces what are in effect hard currency sales that the country could not otherwise obtain.

While it seems self evident that McDonnell Douglas has little inherent expertise in selling hams, it is also probably true that the ham producing entity within Yugoslavia has even less expertise in how to sell in the United States.

McDonnell Douglas can probably acquire that marketing expertise more easily than can Yugoslavia.



Second, sales of hams or other imported goods by a U.S. corporation are probably less likely than direct import sales to run afoul of political tensions between the two countries or of domestic pressure against imports by affected domestic producers.

Third, countertrade enables a country to export merchandise of poor design or quality.

The merchandise is often sold at a major discount in world markets.

Whether or not this constitutes a discount on the original sale depends on how that original sale was priced.



Fourth, countertrade is compatible with the state planning systems of many socialist and communist countries.

In these countries, production plans are made by a central authority, and the production system does not respond well to sudden changes in export demand.

Countertrade provides an assured market for a period of time, and can be negotiated by governmental officials who set economic production quotas, rather than by the managers of individual plants who do not control the availability of resources.


The End

international banking institutional exports & imports session 11 --hilla shahpur maneckji

Documents

export goods

international trading

country of export

buyers country

trade customs

small exports

country of import

benefits of exporting