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Chapter 14 - Export and Import Practices
CHAPTER 14
Export and Import Practices
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
NOTE:
International business statistics, data, and facts about countries, regions, governments, and
companies can change rapidly and dramatically. We recommend that you update this information
as needed.
As an adopter of this text, McGraw-Hill Irwin offers you a complementary online resource each
month, the International Business Newsletter. The IB Newsletter gives you an array of timely
and relevant articles, videos, country profiles, teaching suggestions, and data resources to add
breadth, depth, and richness to the ever-changing topic of international business.
iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free
video service for McGraw-Hill adopters that allows you to download breaking news videos onto
your desktop to show in class or online. Updated monthly, these streaming videos are complete
with teaching notes and discussion questions. Key concepts for each video are identified to save
you time! See www.MHHE.com and contact your sales representative for access codes.
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.
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Chapter 14 - Export and Import Practices
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.
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?
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.
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Chapter 14 - Export and Import Practices
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.
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
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Chapter 14 - Export and Import Practices
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).
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Chapter 14 - Export and Import Practices
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
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Chapter 14 - Export and Import Practices
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.
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Chapter 14 - Export and Import Practices
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
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.
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