978-1259929441 Chapter 16 Part 2

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Chapter 16 ‒ Exporting, Importing, and Countertrade

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5. Switch trading

Pros and Cons of Countertrade

The main attraction of counter trade is that it gives a firm a way to finance an export deal

when other means are not available.

Countertrade is unattractive because it may involve the exchange of unusable or poor-

quality goods that the firm cannot dispose of profitably.

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: A firm based in California wants to export a shipload of finished lumber

to the Philippines. The would-be importer cannot get sufficient credit from domestic

sources to pay for shipment but insists that the finished lumber can quickly be resold in

the Philippines for a profit. Outline the steps the exporter should take to effect the export

of this shipment to the Philippines.

ANSWER 1: The steps are as follows:

(1) The Philippine importer places an order with the U.S. exporter and asks the

exporter if it would be willing to ship under a letter of credit.

(2) The U.S. exporter agrees to ship under a letter of credit and specifies relevant

information such as prices and delivery terms.

credit in its favor.

(6) The U.S. exporter ships the goods to the Philippine importer on a common

carrier. An official of the carrier gives the U.S. exporter a bill of lading.

(7) The U.S. exporter presents a 90-day time draft to California Bank and Trust,

drawn on the Bank of Manila in accordance with the Bank of Manila’s letter of

(9) The Bank of Manila returns the accepted draft to California Bank and Trust.

(10) California Bank and Trust tells the U.S. exporter that they have the accepted

bank draft, which is payable in 90 days.

Chapter 16 ‒ Exporting, Importing, and Countertrade

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(12) The Bank of Manila notifies the Philippine importer of the arrival of the

documents. It agrees to pay the Bank of Manila in 90 days. The Bank of Manila

releases the documents so that the Philippine importer can take possession of the

shipment.

QUESTION 2: You are the assistant to the CEO of a small textile firm that manufactures

quality, premium-priced, stylish clothing. The CEO has decided to see what the

opportunities are for exporting and has asked you for advice as to the steps the company

should take. What advice would you give to the CEO?

ANSWER 2: This question is designed to stimulate classroom discussion and/or to

encourage your students to “think” about the export process in completing a written

answer for this question. There are a number of approaches that can be pursued in

QUESTION 3: An alternative to using a letter of credit is export credit insurance. What

are the advantages and disadvantages of using export credit insurance rather than a letter

of credit for exporting (a) a luxury yacht from California to Canada, and (b) machine

tools from New York to Ukraine?

ANSWER 3: Exporters prefer to get letters of credit from importers. However, when the

importer is in a strong bargaining position and able to play competing suppliers off

against each other, an exporter may have to forgo a letter of credit. The lack of a letter of

credit exposes the exporter to the risk that the foreign importer will default on payment.

Chapter 16 ‒ Exporting, Importing, and Countertrade

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QUESTION 4: How do you explain the use of countertrade? Under what scenarios might

its use increase still further by the year 2020? Under what scenarios might its use

decline?

ANSWER 4: Countertrade becomes popular when foreign exchange markets are limited,

or importers do not have access to the foreign exchange (low reserves) they need to fund

QUESTION 5: How might a company make strategic use of countertrade schemes as a

marketing weapon to generate export revenues? What are the risks associated with

pursuing such a strategy?

ANSWER 5: Countertrade is an alternative means of structuring an international sale

when conventional means of payment are difficult, costly, or nonexistent. The

governments of developing countries sometimes insist on a certain amount of

CLOSING CASE: Embraer and Brazilian Importing

Summary

Embraer, a Brazilian company, is the fourth-largest airplane manufacturer in the world.

To be able to produce that many aircraft and achieve a top-four position in its industry,

Embraer has to import a lot of raw materials and component parts to Brazil, and the

Brazilian government has made importing difficult. The complete list of suppliers needed

for Embraer planes is incredibly lengthy with the number of parts used at more than

300,000. This places pressure on operating an efficient and effective global supply chain

system and, most importantly, a well-structured importing operation into Brazil.

Additionally, the World Bank considers Brazil to be one of the most difficult places to

start a business, and analysts have ranked its tax system as one of the most complex

worldwide. Discussion of the case can begin with the following questions:

QUESTION 1: Do you expect a company like Embraer to be able to compete long-term

with the top aircraft manufacturers in the world today (Airbus, Boeing) by staying

heavily oriented toward producing its products in Brazil?

Chapter 16 ‒ Exporting, Importing, and Countertrade

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ANSWER 1: Most students will probably agree that Embraer is unlikely to be successful

QUESTION 2: Similar to automobile companies, aircraft manufacturers have a

staggering number of suppliers that supply a staggering number of component parts that

go into the production of an aircraft. While plane producers will likely need a large

number of parts in the future as well, do you think they should try to consolidate those

parts into a much smaller set of suppliers?

ANSWER 2: Students may be divided on this question. Some are likely to suggest that a

smaller number of suppliers would allow for an easier managerial process and a closer

QUESTION 3: Embraer imports a lot of these parts into Brazil—a country almost

notorious for being difficult to clear its customs. Should Embraer consider developing

more of its own parts, either by starting companies or subsidiaries in Brazil that can make

these parts or help develop companies that can?

ANSWER 3: Responses to this question will probably depend on responses to the

previous two questions. Many students will probably point out that Brazil does not really

Another Perspective: For more information on Embraer, go to

{https://embraer.com/global} and

{https://www.forbes.com/sites/businessaviation/2015/09/13/embraer-talks-

strategy/#48748c1572bf}.

MHE INTERNATIONAL BUSINESS VIDEO LIBRARY

Please click here to visit our International Business Video Library which provides an

ongoing stream of updated video suggestions correlated by key concept and major topic.

Chapter 16 ‒ Exporting, Importing, and Countertrade

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Every new clip posted is supported by teaching notes and discussion questions. Please

feel free to leave comments in the library that you feel might be helpful to your

colleagues.

INCORPORATING globalEDGE™ EXERCISES

Use the globalEDGE™ site {globaledge.msu.edu/} to complete the following exercises:

Exercise 1

One way that exporters analyze conditions in emerging markets is through the use of

macroeconomic indicators. The Market Potential Index (MPI) is a yearly study conducted

by the Michigan State University Center for International Business Education and

Research (MSU-CIBER) to compare the market potential of emerging markets for U.S.

exporters. Provide a description of the dimensions used in the index. Which of the

dimensions would have greater importance for a company that markets wireless devices?

What about a company that sells clothing?

Exercise 2

You work in the sales department of a company that manufactures and sells medical

implants. A Brazilian company contacted your department and expressed interest in

purchasing a large quantity of your products. The Brazilian company requested an FOB

price quote. One of your colleagues mentioned to you that FOC is part of a collection of

international shipping terms called “Incoterms,” but that was all he knew. Find the Export

Tutorials on the globalEDGE™ site, and find a more detailed explanation of Incoterms.

For an FOB quote, what line items will you need to include in your price quote, in

addition to the price your company will charge for the products?

Answers to Exercises

Exercise 1 Answer

Exercise 2 Answer

Search phrase: Export Tutorials

Chapter 16 ‒ Exporting, Importing, and Countertrade

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McGraw-Hill Education.

Resource Name: Export Tutorials

Website: http://globaledge.msu.edu/reference-desk/export-tutorials

globalEDGE™ Category: Reference Desk

Additional Info:

Export tutorials have been developed by the globalEDGE™ Team based on the most

commonly asked questions about the exporting process from small- to medium-size

enterprises. Each question is answered briefly on the page. Links to additional resources

for more detailed answers are also provided.