978-0134129945 Chapter 8 Lecture Note Part 1

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CHAPTER 8

IMPORTING, EXPORTING, AND SOURCING

SUMMARY

A. A company’s first business dealings outside the home country often take the form of

exporting or importing. Companies should recognize the difference between export

marketing and export selling. By attending trade shows and participating in trade

missions, company personnel can learn a great deal about new markets.

B. Governments use a variety of programs to support exports, including tax incentives,

subsidies, and export assistance. Governments also discourage imports with a

combination of tariffs and nontariff barriers.

C. A quota is one example of a nontariff barrier. Export-related policy issues include the

status of foreign sales corporations (FSCs) in the United States, Europe’s Common

Agricultural Policy (CAP), and subsidies. Governments establish free trade zones and

special economic zones to encourage investment.

D. The Harmonized Tariff System (HTS) has been adopted by most countries that are

actively involved in export-import trade. Single-column tariffs are the simplest; two-

column tariffs include special rates such as those available to countries with normal

trade relations (NTR) status. Governments can also impose special types of duties.

These include antidumping duties imposed on products whose prices government

officials deem too low and countervailing duties to offset government subsidies.

E. Key participants in the export-import process include foreign purchasing agents, export

brokers, export merchants, export management companies, manufacturers’ export

agents, export distributors, export commission representatives, cooperative

exporters, and freight forwarders.

F. A number of export-import payment methods are available. A transaction begins with the

issue of a pro forma invoice or some other formal document. A basic payment

instrument is the letter of credit (L/C) that assures payment from the buyer’s bank. Sales

may also be made using a bill of exchange (draft), cash in advance, sales on open

account, or a consignment agreement.

G. Exporting and importing are directly related to management’s sourcing decisions.

Concern is mounting in developed countries about job losses linked to outsourcing jobs,

both skilled and unskilled, to low-wage countries. A number of factors determine whether

a company makes or buys the products it markets as well as where it makes or buys those

products.

LEARNING OBJECTIVES

1 Compare and contrast export selling and export marketing

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2 Identify the stages a company goes through, and the problems it is likely to encounter, as it

gains experience as an exporter

3 Describe the various national policies that pertain to exports and imports

4 Explain the structure of the Harmonized Tariff System

5 Describe the various organizations that participate in the export process

6 Identify home-country export organization considerations

7 Identify market-country export organization considerations

8 Discuss the various payment methods that are typically used in trade financing

9 Identify the factors that global marketers consider when making sourcing decisions

OVERVIEW

Many nations export a significant amount of their economic output; Switzerland’s exports

constitute a whopping 51 percent of GDP! U.S. exports have historically been dominated

Boeing, Caterpillar, GE, and other large Fortune 500 companies. In 2010, for example, GE

exported American-made products valued at $17 billion. In Germany, by contrast, where exports

make up 40 percent of GDP, small businesses are the export powerhouses.

In response to the ongoing economic crisis, U.S. President Barack Obama created a National

Export Initiative and established the President’s Export Council. The Council is currently headed

by Boeing CEO James McNerney.

President Obama’s goal is to double U.S. exports by 2015; doing so will require boosting exports

15 percent annually (see Exhibit 8-1). As President Obama noted, “The more American

companies export, the more they produce. And the more they produce, the more people they hire

—and that means more jobs.”

A wide range of resources is available to would be exporters, including 19 U.S. Export

Assistance Centers (USEACs) and a government-sponsored Web site

(www.export.gov).

This chapter provides an overview of import–export basics. We begin by explaining the

difference between export selling and export marketing. Next is a survey of organizational export

activities. An examination of national policies that support exports and/or discourage imports

follows. After a discussion of tariff systems, we introduce key export participants. The next

section provides an overview of organizational design issues as they pertain to exporting.

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ANNOTATED LECTURE/OUTLINE

EXPORT SELLING AND EXPORT MARKETING: A COMPARISON

(Learning Objective #1)

To better understand importing and exporting, it is important to distinguish between export

selling and export marketing.

Export selling does not involve tailoring the product, the price, or the promotional material to

suit the requirements of global markets. The only marketing mix element that differs is the

“place”; that is, the country where the product is sold.

Export marketing targets the customer in the context of the total market environment. The

export marketer does not simply take the domestic product “as is” and sell it to international

customers. To the export marketer, the product offered in the home market represents a starting

point. It is modified as needed to meet the preferences of international target markets.

Export marketing is the integrated marketing of goods and services that are destined for

customers in international markets. Export marketing requires:

1. An understanding of the target market environment

2. The use of marketing research and identification of market potential

3. Decisions concerning product design, pricing, distribution and channels, advertising,

and communications – the marketing mix.

After the research effort has zeroed in on potential markets, there is no substitute for a personal

visit to size up the market firsthand and begin the development of an actual export-marketing

program.

A market visit should do several things. First, it should confirm (or contradict) assumptions

regarding market potential. A second major purpose is to gather the additional data necessary to

reach the final go or no-go decision regarding an export-marketing program

For example, an export manager or international marketing manager may have a list of potential

distributors provided by the U.S. Department of Commerce. He or she may have corresponded

with distributors on the list and formed some tentative idea of whether they meet the company’s

international criteria. It is difficult, however, to negotiate a suitable arrangement with

international distributors without actually meeting face-to-face to allow each side to appraise the

capabilities and character of the other party. A third reason for a visit to the export market is to

develop a marketing plan in cooperation with the local agent or distributor. Agreement should be

reached on necessary product modifications, pricing, advertising and promotion expenditures,

and a distribution plan. If the plan calls for investment, agreement on the allocation of costs must

also be reached.

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One way to visit a potential market is through a trade show or a state- or federally sponsored

trade mission. Each year hundreds of trade fairs, usually organized around a product category or

industry, are held in major markets. (Exhibit 8-2)

Perhaps most important, attending a trade show enables company representatives to learn a great

deal about competitors’ technology, pricing, and depth of market penetration.

ORGANIZATIONAL EXPORT ACTIVITIES

(Learning Objective #2)

Exporting is becoming increasingly important as companies in all parts of the world step up their

efforts to supply and service markets outside their national boundaries. Research has shown that

exporting is essentially a developmental process that can be divided into the following distinct

stages:

1. The firm is unwilling to export; it will not even fill an unsolicited export order. This

may be due to perceived lack of time (“too busy to fill the order”) or to apathy or

ignorance.

2. The firm fills unsolicited export orders but does not pursue unsolicited orders. Such a

firm is an export seller.

3. The firm explores the feasibility of exporting (this stage may bypass Stage 2).

4. The firm exports to one or more markets on a trial basis.

5. The firm is an experienced exporter to one or more markets.

6. After this success, the firm pursues country- or region-focused marketing based on

certain criteria (e.g., all countries where English is spoken or all countries where it is not

necessary to transport by water).

7. The firm evaluates global market potential before screening for the “best” target

markets to include in its marketing strategy and plan. All markets—domestic and

international—are regarded as equally worthy of consideration.

However, commitment is the most important aspect of a company’s international orientation.

Before a firm can reach Stage 4, it must receive and respond to unsolicited export orders. The

quality and dynamism of management are important factors that can lead to such orders.

One study noted that export procedural expertise and sufficient corporate resources are required

for successful exporting. An interesting finding was that even the most experienced exporters

express lack of confidence in their knowledge about shipping arrangements, payment

procedures, and regulations. The study also showed that, although profitability is an important

expected benefit of exporting, other advantages include increased flexibility and resiliency and

improved ability to deal with sales fluctuations in the home market.

Although research generally supports the proposition that the probability of being an exporter

increases with firm size, it is less clear that export intensity—the ratio of export sales to total

sales—is positively correlated with firm size. Table 8-1 lists some of the export-related problems

that a company typically faces.

NATIONAL POLICIES GOVERNING EXPORTS AND IMPORTS

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(Learning Objective #3)

It is hard to overstate the impact of exporting and importing on the world’s national economies.

In 1997, for example, total imports of goods and services by the United States passed the

$1 trillion mark for the first time; in 2014, the combined total was $2.8 trillion. European Union

imports, counting both intra-EU trade and trade with non-EU partners, totaled more than $3

trillion.

Trends in both exports and imports reflect China’s pace-setting economic growth in the Asia-

Pacific region. Exports from China have grown significantly; they are growing even faster now

that China has joined the WTO. As shown in Table 8-2, Chinese apparel exports surpass those of

other countries by a wide margin.

One word can summarize national policies toward exports and imports: contradictory.

For centuries, nations have combined two opposing policy attitudes toward the movement of

goods across national boundaries. On the one hand, nations directly encourage exports; the flow

of imports, on the other hand, is generally restricted.

Government Programs that Support Exports

To see the economic boost that can come from a government-encouraged export strategy,

consider Japan, Singapore, South Korea, and the so-called greater-China or “China triangle”

market, which includes Taiwan, Hong Kong, and the People’s Republic of China. Japan totally

recovered from the destruction of World War II and became an economic superpower as a direct

result of export strategies devised by the Ministry for International Trade and Industry (MITI).

The four tigers – Singapore, South Korea, Taiwan, and Hong Kong—learned from the Japanese

experience and built strong export-based economies of their own.

Although Asia’s “economic bubble” burst in 1997 as a result of uncontrolled growth, Japan and

the tigers are moving forward in the twenty-first century at a more moderate rate.

Any government concerned with trade deficits or economic development should focus on

educating firms about the potential gains from exporting.

Governments commonly use four activities to support and encourage firms that engage in

exporting. These are tax incentives, subsidies, export assistance, and free trade zones.

Tax incentives treat earnings from export activities preferentially either by applying a lower rate

to earnings from these activities or by refunding taxes already paid on income associated with

exporting.

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From 1985 until 2000, the major tax incentive under U.S. law was the foreign sales corporation

(FSC), through which American exporters could obtain a 15 percent exclusion on earnings from

international sales.

However, in 2000, the World Trade Organization ruled that any tax break that was contingent on

exports amounted to an illegal subsidy.

Accordingly, the U.S. Congress has set about the task of overhauling the FSC system; failure to

do so would entitle the EU to impose up to $4 billion in retaliatory tariffs.

Governments also support export performance by providing outright subsidies, which are direct

or indirect financial contributions or incentives that benefit producers. Subsidies can severely

distort trade patterns when less competitive but subsidized producers displace competitive

producers in world markets.

Agricultural subsidies are particularly controversial because, although they protect the interests

of farmers in developed countries, they work to the detriment of farmers in developing areas

such as Africa and India. The EU has undertaken an overhaul of its Common Agricultural

Policy (CAP).

The third support area is governmental assistance to exporters. Companies can avail themselves

of a great deal of government information concerning the location of markets and credit risks.

Assistance may also be oriented toward export promotion. Government agencies at various

levels often take the lead in setting up trade fairs and trade missions designed to promote sales to

foreign customers.

The export/import process can entail red tape and bureaucratic delays. In an effort to facilitate

exports, countries are designating certain areas as free trade zones (FTZ) or special economic

zones (SEZ). These are geographic entities that offer manufacturers simplified customs

procedures, operational flexibility, and a general environment of relaxed regulations.

Governmental Actions to Discourage Imports and Block Market Access

Measures such as tariffs, import controls, and nontariff barriers are designed to limit the inward

flow of goods.

Tariffs can be thought of as the “three Rs” of global business: rules, rate schedules (duties), and

regulations of individual countries.

Duties on individual products or services are listed in the schedule of rates (Table 8-3).

One global trade expert defines duties are “taxes that punish individuals for making choices of

which their governments disapprove.”

Developed under the auspices of the Customs Cooperation Council (now the World Customs

Organization), the Harmonized Tariff System (HTS) went into effect in January 1989 and has

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since been adopted by the majority of trading nations. Under this system, importers and exporters

have to determine the correct classification number for a given product or service that will cross

borders.

INNOVATION, ENTREPRENEURSHIP, AND THE GLOBAL STARTUP

Oscar Farinetti, Eataly

Oscar Farinetti is an entrepreneur. He developed an innovative retail concept, Eataly, and started

a company to market it. By applying the basic tools and principles of modern global marketing,

Farinetti has achieved remarkable success.

Starting in 2007 with a single location in Turin, Italy, Farinetti now presides over a far-flung

global empire of Eataly megastores that celebrate all things Italian. Farinetti has opened more

than 25 stores in major cities such as Chicago, Dubai, and New York City.

Eataly gourmet supermarkets, and the restaurants tucked inside, are helping Italian food

producers during Italy’s ongoing recession.

Many observers note that “Made in Italy” got an additional boost from the 2015 World Expo in

Milan. The theme of the expo was “Feeding the Planet. Energy for Life.” Eataly Milan

Smeraldo opened months before the Expo itself. Farinetti is optimistic about Italy’s future. “We

need to double tourism in Italy, we can double our export of food and agriculture products, we

need to open up other industries of fashion, design, industrial manufacturing. And if we manage

this we will bring the country to another renaissance.” he says.

In spite of the progress made in simplifying tariff procedures, administering a tariff is an

enormous problem. People who work with imports and exports must familiarize themselves with

the different classifications and use them accurately. Even a tariff schedule of several thousand

items cannot clearly describe every product traded globally.

The introduction of new products and new materials used in manufacturing processes creates

new problems. Often, determining the duty rate on a particular article requires assessing how the

item is used or determining its main component material. Two or more alternative classifications

may have to be considered. A product’s classification can make a substantial difference in the

duty applied.

A nontariff barrier (NTB) is any measure other than a tariff that is a deterrent or obstacle to the

sale of products in a foreign market. Also known as hidden trade barriers, NTBs include

quotas, discriminatory procurement policies, restrictive customs procedures, arbitrary monetary

policies, and restrictive regulations.

A quota is a government-imposed limit or restriction on the number of units or the total value of

a particular product or product category that can be imported. Generally, the quotas are designed

to protect domestic producers.

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Discriminatory procurement policies can take the form of government rules, laws or

administrative regulations requiring that goods or services be purchased from domestic

companies.

Customs procedures are considered restrictive if they are administered in a way that makes

compliance difficult and expensive.

Discriminatory exchange rate policies distort trade in much the same way as selective import

duties and export subsidies.

Restrictive administrative and technical regulations may take the form of antidumping

regulations, product size regulations, and safety and health regulations.

TARIFF SYSTEMS

(Learning Objective #4)

Tariff systems provide either a single rate of duty for each item applicable to all countries or two

or more rates, applicable to different countries or groups of countries. Tariffs are usually grouped

into two classifications.

The single-column tariff is the simplest type of tariff. It is a schedule of duties in which the rate

applies to imports from all countries on the same basis.

The two-column tariff (Table 8-4), column 1 includes “general” duties plus “special” duties

indicating reduced rates determined by tariff negotiations with other countries.

Rates agreed upon by “convention” are extended to all countries that qualify for normal trade

relations (NTR; formerly most-favored nation or MFN) status within the framework of the

WTO. Column 2 shows rates for countries that do not enjoy NTR status.

EMERGING MARKETS BRIEFING BOOK

Clothing Factory Tragedies in Bangladesh

About 80 percent of Bangladesh’s export earnings come from its network of more than 5,000

garment-manufacturing operations. However, the garment industry has been roiled by a series of

tragedies that have highlighted the often dangerous conditions facing workers.

In 2010, dozens of Bangledeshis were killed in two separate fires in factories that made clothing

for Western clients such as JCPenney and the Gap. In November 2012, 112 garment workers

were killed when a fire broke out at Tarzreen Fashions, a clothing manufacturer in Dhaka,

Bangladesh. Tazreen’s clients included Walmart and other well-known global retail brands.

In April 2013, tragedy struck another factory in Dhaka (see Exhibit 8-5). More than 500 people

– most of them women – were killed. This time, however, fire was not the cause. Rather, the

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eight-story Rana Plaza building in Dhaka collapsed. The building housed garment factories that

employed 5,000 garment workers.

The Workers Rights Consortium, the International Labor Organization, the Interfaith Center for

Corporate Responsibility, and other groups that monitor labor issues are stepping up pressure on

the companies that participate in the global garment supply chain. Too often, the activists

charge, Western retailers pay lip service to concerns about factory safety; in reality, critics say,

the retailers continue to focus on low prices rather than the welfare of workers. As the head of

the Cambodian garment manufacturers association told the Financial Times, “The buyer and

consumer must be willing to pay more.”

A preferential tariff is a reduced tariff rate applied to imports from certain countries.

The United States is now a signatory to the GATT customs valuation code. GATT prohibits the

use of preferential tariffs, with three major exceptions:

1. Historical preference arrangements such as the British Commonwealth

2. Preference schemes that are part of a formal economic integration treaty, such as free

trade areas or common markets.

3. Industrial countries are permitted to grant preferential market access to companies based

in less-developed countries.

Under the code, the primary basis of customs valuation is “transaction value”. Transaction value

is defined as the actual individual transaction price paid by the buyer to the seller of the goods

being valued.

Customs Duties

Customs duties are divided into two categories. They may be calculated either as a percentage of

the value of the goods (ad valorem duty), as a specific amount per unit (specific duty), or as a

combination of both of these methods.

As noted, an ad valorem duty is expressed as a percentage of the value of the goods. In countries

adhering to GATT conventions on customs valuation, the customs value is the value of cost,

insurance, and freight (CIF) at the port of importation.

A specific duty is expressed as a specific amount of currency per unit of weight, volume, length,

or other units of measurement. Specific duties are usually expressed in the currency of the

importing country.

Other Duties and Import Charges

Dumping is the sale of merchandise in export markets at unfair prices. To offset the impact of

dumping and to penalize guilty companies, most countries have introduced legislation providing

for the imposition of antidumping duties.

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Countervailing duties (CVDs) are additional duties levied to offset subsidies granted in the

exporting country.

Several countries apply a system of variable import levies to certain categories of imported

agricultural products. If prices of imported products would undercut those of domestic products,

the effect of these levies is to raise the price of imported products to the domestic price level.

Temporary surcharges are used to provide additional protection for local industry and, in

particular, in response to balance-of-payments deficits.

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