CHAPTER 14
Export and Import Practices
1 Learning Objectives
LO14-1 identify the sources of export counseling and support
LO14-2 discuss the meaning of the various terms of sale known as Incoterms
LO14-3 identify some sources of export financing
LO14-4 describe the activities of a foreign freight forwarder
LO14-5 outline the export documents required
LO14-6 identify import sources
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2 Overview
Exporting is an important facet of international business for both large and small firms. No company can
afford to have local production facilities in every one of its overseas markets. Some markets must be
supplied by exporting from either the home plant or from a foreign subsidiary. In spite of the fact that
exporting can be profitable, only a small percentage of the U.S. GDP is exported. The major hurdles for
non-exporters to entering the export market are (1) finding markets, (2) payment and financing
procedures, and (3) export procedures.
Market screening described in Chapter 15 will enable the firm to locate foreign markets. The terms of
payment employed in the export market are (1) cash in advance, (2) open account, (3) consignment, (4)
letters of credit, and (5) documentary drafts. A number of private and public sources of financing are
available. OPIC, FSC and Foreign Trade Zones are some of the other government incentives to export.
Export procedures are considered problematic because of the documentation involved. In addition to the
usual domestic documents, goods for export require export licenses and export bills of lading. Marine
insurance is necessary because ocean going steamship companies assume no responsibility for their cargo.
The documents for collection generally include (1) commercial invoices, (2) consular invoices, (3)
certificates of origin, and (4) inspection certificates.
Innovations in materials handling such as containerization, huge freight planes, RO-RO and LASH ships,
have opened up new markets to exporters.
Importing is in one sense the reverse of exporting, but many of the concerns of importers and exporters
are similar.
Suggestions and Comments
1. This chapter covers the process of exporting in a hand-on way, describing the processes. Unlike
other topics in this text, this area is all implementation. It is an important area for international
business students because it is a growth area for entry-level jobs for college graduates.
2. We believe that all business students should be acquainted with the basics of exporting and should
know where to begin to gather information.
3 Student Involvement Exercises
1. Ask the students to interview people involved in exporting such as members of a bank’s
international department, foreign freight forwarders, export departments of a local multinational,
the foreign trade specialists in the Department of Commerce or the manager of a Foreign Trade
Zone. Report to the class what these people do.
2. Ask the students to choose a product and a country to which they wish to export it. Assume an FOB
factory selling price and prepare a quotation using one of the terms of sale in the text. Specify
export payment terms. What other documents will be required?
4 Guest Lecturers
1. If you have a foreign freight forwarder in your area, invite him or her to explain the firm’s services
to exporters. A good forwarder can help a newcomer to get started and is one person who is
knowledgeable about the entire exporting process.
2. Someone from an Export Management Company or an export merchant can provide the class with
good information.
3. The person in charge of exporting in a local company is a good source of information. Don’t think
that your city has to be a large international business center to have firms that export. Check all the
companies in your area. You may be surprised.
4. If your institution has a Small Business Development Center, ask one of the persons that counsel
newcomers on exporting to talk to your class.
5 Lecture Outline
I. Why Export?
A. No firm can produce every product in every market.
B. The host government may require it.
C. Export to remain competitive in home market.
D. Test the market first with exports.
E. Accidental exporting (firm is requested to export).
F. To offset cyclical sales of the domestic market.
G. To achieve additional sales, which allows firm to use excess capacity to lower unit fixed
costs.
H. Extend product’s life cycle.
I. Distract foreign competitors in firm’s home market by exporting to their home markets.
J. Partake in the success that other firms have in exporting.
K. Improve equipment utilization rates.
II. Why Don’t They Export?
A. Preoccupation with the vast American market
B. Reluctance to become involved in a new and unknown operation
C. What are their specific problem areas?
1. Locating foreign markets
2. Payments and financing procedures
3. Export procedures
III. Locating Foreign Markets
The screening process in Chapter 14 is a procedure that can be used by experienced market
analysts, but newcomers to exporting may wish to use any one of a number of export assistance
programs.
A. Sources of Export Information, Counseling and Support
1. Dept of Commerce, U.S. government’s trade portal, export.gov
2. International Trade Administration (ITA)
3 U.S. Commercial Service
B. Other Sources of Assistance
1. World Trade Centers Association
2. District Export Councils
3. State governments
C. Mistakes Made by New Exporters
1. Failure to get qualified counseling and develop export strategy
2. Insufficient commitment by top management to overcome initial difficulties
3. Poor choice of overseas sales representatives
4. Chasing orders rather than establishing basis for profitable and orderly growth
5. Neglecting exports when home market booms
6. Failure to treat international on equal basis with domestic customers
7. Assuming that a given marketing technique and product will work in all countries
8. Unwillingness to modify products to meet regulations or cultural preferences of other
countries
9. Failure to provide sales, service and warrantee information in local language
10. Failure to consider use of export management company
11. Failure to consider joint ventures and licensing
12. Failure to provide readily available servicing for the product.
D. Export Marketing Plan
1. The plan, like the domestic plan, must state what must be done when, who should do it,
and how much money will be spent. See the Appendix for a plan outline
2. Sales agreement
Similar to domestic agreement, but attention must be given to designation of the
responsibilities for patent and trademark registration and designation of country whose
laws will govern a contractual dispute. Incoterms used to describe terms of sale. New
terminology as of 2011. (See Fig. 14.1.)
IV. Payment and Financing Procedures
A. Export Payment Terms
These may be (1) cash in advance, (2) open account, (3) consignment, (4) letters of credit,
and (5) documentary drafts.
1. Cash in Advance
Few customers will pay cash in advance.
2. Open Account
Seller assumes all risk so these terms must be offered only to reliable customers in
economically stable countries.
3. Consignment
Seller assumes all risk.
4. Letters of Credit
Document issued by buyer’s bank which promises to pay the seller a specified amount
when the bank has received certain documents specified in the letter by a specified time.
a. Confirmed and irrevocable
Letter will usually be confirmed and irrevocable. When letter is confirmed by a bank
in the seller’s country, that bank is obligated to pay if exporter conforms to letter’s
terms.
b. A pro forma invoice (looks like an invoice but is really a quotation) frequently
requested by buyer before order is placed. Bank will use it when opening letter of
credit.
c. Letter of credit transaction
5. Documentary Drafts
a. An export draft is an unconditional order drawn by seller on buyer instructing buyer
to pay amount of draft upon presentation (sight draft) or at an agreed future date
(time draft).
b. No guarantee that buyer will accept and pay a documentary draft whereas a
confirmed letter of credit will be paid if documents are in order.
B. Export Financing
The competition forces exporters to offer credit. They must be familiar with private and
public sources of export financing.
1. Private Sources
a. Private banks
b. Factoring–discounting export accounts payable without recourse.
c. Forfeiting–purchase of obligations arising from sale of goods and services which fall
due at some date generally between 90-180 days, without recourse.
2. Export-Import Bank provides direct loans, intermediary loans, and guarantees.
3. Other Government Incentives
These are other government incentives to trade which are not strictly a part of export
financing.
a. Overseas Private Investment Corporation (OPIC)–a government corporation which
offers investors insurance against expropriation, currency inconvertibility and
damages from wars or revolutions.
b. Foreign Sales Corporations (FSCs) have replaced Domestic International Sales
Corporations (DISCs) as a means of granting tax benefits on export transaction.
c. Foreign Trade Zones (FTZ)–the American version of a free trade zone. Goods may be
brought into an FTZ and stored, inspected, repackaged or combined with American
components. No import duties need be paid while goods are in the FTZ.
V. Export Procedures
Exporters are confronted with five or six times as many documents as are domestic shippers.
However, foreign freight forwarders will handle much of this work.
A. Foreign Freight Forwarders
1. Act as agents for exporters.
2. Prepare documents, book space with carriers and will supply marine insurance if asked.
B. Export Documents
1. Shipping documents include domestic bill of lading, export packing list, export licenses,
export bill of lading, export packing list, export licenses, export bill of lading, insurance
certificates, and Shipper’s Export Declaration.
a. Export Licenses
All goods except those going to U.S. possessions or Canada require either a general
export license or a validated export license.
b. General export license requires no special authorization.
c. Validated export license requires special authorization for a specific shipment and is
needed for strategic materials and all shipments to communist countries.
d. Export bill of lading-service three purposes: 1) contract for carriage between shipper
and carrier, (2) receipt from the carrier for the goods shipped, (3) certificate of
ownership. Bills of lading for foreign shipments are called air waybills (air
shipments) and ocean bills of lading (steamships) A straight bill of lading is
non-negotiable whereas an order bill may be endorsed like a check.
e. Insurance certificate–evidence that insurance coverage has been obtained to protect
shipment from loss or damage while in transit. There are three kinds of marine
insurance: (1) basis perils, (2) broad named perils, and (3) all risks.
2. Automated Export System (AES) –Customs has introduced a single information
collection and processing center for electronic filing of the export documentation
required by the government.
C. Collection Documents
Documents that seller must provide the buyer in order to receive payment: (1) commercial
invoices, (2) consular invoices, (3) certificates of origin, and (4) inspection certificates.
VI. Export Shipments
The tremendous advance in materials handling techniques over the past two decades such as
containerization, RO-RO and LASH, provide cost savings and enables exporters to reach new
markets.
A. Containers
Containers are large boxes 8′ x 8′ in cross section by 10, 20 or 40 feet in length which seller
fills in its own warehouse. They are sealed and not opened until goods arrive at final
destination. Materials handling time is reduced and the risks of damage and theft are
minimized.
B. RO-RO (Roll On-Roll Off) ships permit anything on wheels to be driven on and off. Loaded
trailers can be driven off in ports which do not have lifting equipment to unload containers.
C. LASH (Lighter Aboard Ship) vessels carry 60-foot long barges that are unloaded in deep
water and towed to shallow river ports where they are filled with cargo. The barges are then
brought back to the anchored LASH ship and loaded aboard.
D. Air Freight
Air freight has had a profound effect on international business because shipments which
required 30 days for delivery by ocean freight are now delivered in 24 hours. Huge freight
planes can carry 200,000 pounds of cargo. Although airfreight rates are higher than ocean
rates, the total cost of shipping by air is frequently less expensive. Even when total costs for
airfreight are higher, it may still be advantageous to ship by air when production and
opportunity costs are considered. Also the firm may be air-dependent, the products may be
air-dependent and airfreight may enable the exporter to compete with overseas manufactures.
VII Importing
Many of the concerns of exporters and importers are similar. The prospective importer
identifies import sources in a number of ways:
A. If similar products are already in the market, inspect them at a retailer who sells them to see
where they are made. Imported products are required by law to have country of origin clearly
marked. Then call the country’s embassy and ask for names of manufacturers. Also call
foreign chambers of commerce that are in major American cities. Once you have names and
addresses, write for quotations.
B. If product not being imported, try the sources in point 1 and try international department of
banks as well. Try the electronic bulletin board of the World Trade Centers. You can put your
name in their data banks that are seen around the world. The Internet has many sites where
exporters from other countries are offering their products to importers.
C. When you visit foreign countries, look for articles to import.
D. Customhouse Brokers
Help importers import. They are to importers what foreign freight forwarders are to exporters.
They can provide such services as arranging transportation for the goods after they leave
Customs and advising clients as to import quotas. They can arrange to place goods in a
bonded warehouse when necessary.
E. The Automated Commercial System (ACS)
Customs has another system, ACS, that it uses to track, control, and process all U. S. imports
of commercial goods. Importers who use the ACS to file documents can also pay Customs
fees and import duties electronically in one transaction.
F. Import Duties
Every importer should know how Customs calculates import duties and the importance of
product classification.
1. The Harmonized System–is an important classification system used by all developed
nations. A firm that feels it is paying excessive import duties can take the matter to court
if it cannot reach an agreement with customs officials.
2. HTSUSA
6
Global Debate
The Ethics of Exporting: Do Home Values Apply?
This debate explores issues about the ethics of exporting. To what degree are ethics domestic
and to what degree are they universal? Another way to phrase the question is, Should exports
have ethics embedded in them? The focus is on Australian regulations on the exporting of beef
cattle.
Worldview
Head of U.S. Export-Import Bank Calls Foul on China, India and Brazil, Changes Game Rules
This Worldview feature focuses on the new head of the Ex-Im Bank and his commitment to
supporting U.S. businesses in their export efforts by addressing competitive issues with
developing countries. Ex-Im President Fed Hochberg recently pointed out that Brazil, India and
China provide export funding, particularly export credit, at levels that violate the export finance
rules that bind the G7 and OECD countries. Together, Brazil, China and India presently provide
more export funding than do the combined nations of the G7 — the United States, Japan, France,
Germany, Britain, Canada and Italy.