Chapter 16 – Exporting, Importing, and Countertrade
16-1
Exporting, Importing and Countertrade
Learning objectives
• Explain the promises and risks
associated with exporting.
• Identify the steps managers can
take to improve their firm’s
export performance.
• Identify information sources
and government programs that
exist to help exporters.
• Recognize the basic steps
involved in export financing.
• Describe how countertrade can
be used to facilitate exporting.
Previous chapters have presented exporting as just one of
a range of strategic options for profiting from international
markets. This chapter looks more at the nuts and bolts of
how to export.
Exporting is not just for large enterprises; many small
firms have benefited significantly from the moneymaking
opportunities of exporting.
The volume of export activity in the world economy is
increasing as exporting has become easier. The gradual
decline in trade barriers under the umbrella of GATT and
now the WTO (see Chapter 5) along with regional
economic agreements such as the European Union and the
North American Free Trade Agreement (see Chapter 8)
have significantly increased export opportunities. At the
same time, communication and transportation technologies
have alleviated the logistical problems associated with
exporting.
Firms are increasingly using fax, the World Wide Web,
toll-free 800 numbers, and international air express
services to reduce the costs of exporting. Consequently, it
is no longer unusual to find small companies that are
thriving as exporters.
The opening case follows the experiences of Vellus
Products, a small company that sees export sales as a
primary source of growth. The closing case explores the
growth of MD International, a medical equipment export
intermediary.
16
Chapter 16 – Exporting, Importing, and Countertrade
16-2
OUTLINE OF CHAPTER 16: EXPORTING, IMPORTING AND
COUNTERTRADE
Opening Case: Vellus Products
Introduction
The Promise and Pitfalls of Exporting
Management Focus: FCX Systems
Improving Export Performance
An International Comparison
Information Sources
Utilizing Export Management Companies
Export Strategy
Management Focus: Exporting with a Little Government Help
Management Focus: Export Strategy at 3M
Management Focus: Red Spot Paint & Varnish
Export and Import Financing
Lack of Trust
Letter of Credit
Draft
Bill of Lading
A Typical International Trade Transaction
Export Assistance
Export–Import Bank
Export Credit Insurance
Countertrade
The Incidence of Countertrade
Types of Countertrade
The Pros and Cons of Countertrade
Chapter Summary
Critical Discussion Questions
Closing Case: MD International
Chapter 16 – Exporting, Importing, and Countertrade
16-3
CLASSROOM DISCUSSION POINT
Ask students if they have ever imported a product. Many students may have done so
without realizing it simply by purchasing something from a foreign buyer via eBay.
Similarly, many students may have engaged in direct exports when they have sold
something to a foreign buyer via eBay.
Ask students to formalize the process by picking a product they would like to export.
Then ask students which markets they will target and why. Next, ask students how they
could get their product to consumers in that market. What additional information will
they need to proceed with their plan?
Organize the responses from students on the board in an export plan format. Then, ask
students to visit some of the Department of Commerce web sites to fill in the gaps.
Discuss why it is important to get the various pieces of information, and which elements
are easier to obtain and why. Refer back to the export plan as the material in the chapter
is presented.
Another Perspective: Export.gov has a great web site covering the basics of exporting.
Within the site {http://www.export.gov/index.asp} you can click on various topics related
to getting ready to export, developing an export plan, finding leads and so on. The site is
well worth a visit, and could be used as the basis for an in-class export project.
OPENING CASE: Vellus Products
The opening case explores the international expansion of Vellus Products, a small
company that produces personal care products for dogs. Vellus Products initially began
exporting when a Taiwanese business placed an order for its dog shampoo. Since then
Vellus Products has expanded its export business and today, international sales account
for about half its total sales. Vellus Products now sells in 28 countries around the world.
Discussion of the case can revolve around the following questions:
1. Why did Vellus Products choose Taiwan for its first export sales? How important do
you think the assistance provided by the Department of Commerce has been for Vellus
Products’ future export sales?
2. What can other small companies learn from the experiences of Vellus Products?
Reflect on the tips of Vellus Products’ founder Sharon Doherty for beginning the export
process.
3. How is the export experience different for smaller firms? What concerns do smaller
firms that larger companies do not face?
Chapter 16 – Exporting, Importing, and Countertrade
16-4
Another Perspective: Exporters in Ohio can get assistance from the U.S. Export
Assistance Center {http://export.gov/ohio/centralohio}. The agency currently maintains
several offices in Ohio. Students can click on Our Services, and then on an array of
options like Export Financing or Trade Leads to see the types of assistance the agency
provides. To see how to put an export plan together, students can click on Trade Leads,
then on Access Trade Lead Database, then on International Sales-Marketing, and finally
on Strategy and Planning.
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view”, then on “notes”. The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slides 16-3-16-4 Why Export?
Exporting firms need to
❖ identify market opportunities
❖ deal with foreign exchange risk
❖ navigate import and export financing
❖ understand the challenges of doing business in a foreign market
Slide 16-5 The Problems and Pitfalls of Exporting
Exporting offers the opportunity to take advantage of a bigger market, and the economies
of scale that come with producing for a bigger market. However, it is also a more
complex market.
Common pitfalls include poor market analysis, poor understanding of competitive
conditions, a lack of customization for local markets, a poor distribution program, poorly
Slide 16-6 Improving Export Performance
There are various ways to gain information about foreign market opportunities and avoid
the pitfalls associated with exporting.
Another Perspective: The UK Trade and Investment office is devoted to helping
companies develop their export business. The web site is available at
{http://www.ukti.gov.uk/home.html?guid=none} Click on “Business Opportunities” to
see a sample of a trade lead, or click on “Country Report” to see the types of information
available in a typical report on a specific country.
Chapter 16 – Exporting, Importing, and Countertrade
16-5
Slide 16-7 Getting Information
A big impediment to exporting is the simple lack of knowledge of the opportunities
available. To overcome ignorance firms need to collect information.
Another Perspective: Your students may wonder how firms U.S. firms find buyers in
foreign countries. To find foreign customers, exporters often use ‘”trade leads” that are
provided by organizations dedicated towards the activity of matching “buyers” and
“sellers” in an international context. An example of a site that provides trade leads is the
Export.gov at {http://www.export.gov/index.asp}.
The U.S. Department of Commerce is the most comprehensive source of export
information for U.S. firms.
Slides 16-8-16-9 Utilizing Export Management Companies
Export management companies (EMCs) are export specialists that act as the export
marketing department or international department for client firms.
Another Perspective: The FITA Directory of Export Management Companies web site
{http://fita.org/} provides information on export management companies, and also trade leads and
international market research.
Slide 16-10 Reducing the Risk of Exporting
Firms can reduce risk by carefully choosing their export strategy, and following some
basic guidelines.
Firms should
• hire an EMC or export consultant to help identify opportunities and navigate
through the tangled web of paperwork and regulations so often involved in
exporting
• focus on one, or a few markets at first
• enter a foreign market on a fairly small scale in order to reduce the costs of any
subsequent failures
Chapter 16 – Exporting, Importing, and Countertrade
16-6
Another Perspective: A great web site to visit to determine whether a company is ready to
export is the International Trade Centre, run by UNCTAD/WTO. If you go to the site
{http://www.intracen.org/ec/welcome.htm} you can use the interactive quiz to gauge
export readiness. Click on “Export Fitness Checker”, then on “Use the Export Fitness
Checker online” to see the quiz.
Slides 16-11-16-12 Export and Import Financing
Firms engaged in international trade face a problem – they have to trust someone who
may be difficult to track down if they default on an obligation.
Including a third party in a transaction adds an element of trust to the relationship.
Slide 16-13 Letter of Credit
A letter of credit is issued by a bank at the request of an importer and states that the
bank will pay a specified sum of money to a beneficiary, normally the exporter, on
presentation of particular, specified documents.
Slides 16-14-16-15 Draft
A draft is simply an order written by an exporter instructing an importer, or an importer’s
agent, to pay a specified amount of money at a specified time.
Slide 16-16 Bill of Lading
The bill of lading is issued to the exporter by the common carrier transporting the
merchandise.
Slide 16-17 A Typical International Trade Transaction
The typical international trade transaction involves 14 steps.
Slides 16-18-16-19 Export Assistance
There are two forms of government-backed assistance available to exporters:
1. Financing aid is available from the Export-Import Bank
2. Export credit insurance is available from the Foreign Credit Insurance Association
The Export-Import Bank (Eximbank) is an independent agency of the U.S. government
that provides financing aid to facilitate exports, imports, and the exchange of
commodities between the U.S. and other countries.
Export credit insurance protects exporters against the risk that the importer will default
on payment. In the U.S., export credit insurance is provided by the Foreign Credit
Insurance Association (FICA).
Chapter 16 – Exporting, Importing, and Countertrade
16-7
Slide 16-20 Countertrade
Countertrade refers to a range of barter-like agreements that facilitate the trade of goods
and services for other goods and services when they cannot be traded for money.
Countertrade began in the 1960s primarily in the Soviet Union and Eastern bloc
countries. Its popularity increased during the 1980s when many developing countries
that were short of hard currencies used countertrade instead. More recently, its use
increased after the 1997 Asian financial crisis.
Slides 16-21-16-24 Types of Countertrade
There are five distinct versions of countertrade:
Slides 16-25-16-26 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 Washington State 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 that the exporter should take to
effect the export of this shipment to the Philippines?
ANSWER 1: The steps are as follows:
The Philippine importer places an order with the American exporter, and asks the
American if he would be willing to ship under a letter of credit.
The American exporter agrees to ship under a letter of credit, and specifies relevant
Chapter 16 – Exporting, Importing, and Countertrade
16-8
The American exporter presents a 90 day time draft to the Bank of Seattle, drawn on the
Bank of Manila in accordance with the Bank of Manila’s letter of credit and accompanied
The Bank of Seattle presents the draft and documents to the Bank of Manila. The Bank
of Manila accepts the draft, taking possession of the documents and promising to pay the
now accepted draft in 90 days.
QUESTION 2: You are the assistant to the CEO of a small textile firm that manufactures
high-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
answering this question. The first step might be to tap into some of the government
information sources that are available, free of charge, to see if international markets are
Chapter 16 – Exporting, Importing, and Countertrade
16-9
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 as opposed to a
letter of credit for (a) exporting a luxury yacht from California to Canada, and (b)
exporting 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.
The exporter can insure against this possibility by buying export credit insurance.
QUESTION 4: How do you explain the continued existence of counter trade? Under
what scenarios might its popularity increase still further by the year 2015? Under what
scenarios might its popularity 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
their purchases. Currency crises and monetary instability are two conditions that lead to
QUESTION 5: How might a company make strategic use of countertrade schemes 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
Chapter 16 – Exporting, Importing, and Countertrade
16–10
CLOSING CASE: MD International
The closing case explores the success of MD International in Latin America. MD
International is an export intermediary for U.S. medical equipment manufacturers. The
company has been able to capitalize on falling trade barriers, as well as expanding health
care programs in the Latin American region. MD International currently represents more
than 30 companies and sells to some 600 regional distributors. The following questions
can be helpful in directing the discussion.
QUESTION 1: How does an intermediary like MD International create value for the
manufacturers who use it to sell medical equipment in foreign markets? Why do they
want to use MD International rather than export directly themselves?
ANSWER 1: Companies like MD International that act as intermediaries between sellers
in one country and buyers in another provide many valuable services for their clients.
Manufacturers can expand their sales through MD International without committing the
QUESTION 2: Why did MD International focus on Latin America? What are the
benefits of this regional approach? What are the potential drawbacks?
ANSWER 2: When Al Merritt founded MD International in 1987 he chose to focus on
Latin America. Merritt was familiar with the area and he wanted to take advantage of
changing government regulations in the region. Many Latin American countries were
QUESTION 3: What would it take for MD International to start exporting to other
regions such as Asia or Europe? Given this, would you advise Al Merritt to continue his
regional focus going forward, or to add other regions?
ANSWER 3: While expanding into Asia or Europe would allow MD International to
diversify and avoid some of the problems associated with focusing on a single region, it
would also be costly. MD International is currently able to offer assistance to sellers as
Chapter 16 – Exporting, Importing, and Countertrade
16–11
QUESTION 4: How important has government assistance been to MD International? Do
you think helping firms like MD International represents good use of taxpayer money?
ANSWER 4: Many students will probably suggest that government assistance has been
quite important to MD International. The company has taken advantage of various
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: How Currency Choices “Made in China” Have Big Impact On Global
Economy
Run Time: 8:11
Abstract: This video explores the continuing pressure on China to revalue its currency
relative to the U.S. dollar and the effects of China’s currency policy on global trade
patterns.
Key Concepts: globalization, international monetary system, international trade,
currency values, global competition, balance of trade, national trade policy, political
economy, competitive advantage
Notes: The pressure on China to allow its currency to appreciate intensified recently in
conjunction with the visit of China’s president, Hu Jintao, to the United States to meet
with President Obama. China, which has maintained an artificially low renminbi for
some time, has resisted claims that its policies give Chinese exporters an unfair
competitive advantage in the global market place. While many countries have criticized
China’s policies on its currency, the United States has been particularly vocal because of
its large trade imbalance with the country.
Chapter 16 – Exporting, Importing, and Countertrade
16–12
The United States believes that China’s policy of keeping the renminbi at artificially low
levels rather than allowing it to float according to market forces make Chinese products
more attractive in foreign markets. Moreover, U.S. Secretary of State Hillary Clinton
argues that U.S. companies trying to export to China are at a disadvantage because of the
country’s policies. Clinton would like to see China open its markets to U.S.
manufactured goods, farm and ranch products, and services. According to Clinton,
changes in China’s policy toward its currency would not only benefit the United States,
but would also benefit the rest of the world by contributing to more balance and
predictability in the global economy and broader prosperity. U.S. Treasury Secretary
Timothy Geithner has gone as far as to suggest that if China does not take steps to
revalue its currency, it will in fact damage its relations with the rest of the world.
China however, claims that its policies on the renminbi are simply part of a larger effort
to discourage hot money in order to prevent its economy from overheating. By
prohibiting the open trading of its currency, China hopes to avoid increases in wages, raw
materials prices, and property prices that could make its finished products more
expensive in foreign markets. Yasheng Huang of the MIT Sloan School of Management
defends China’s policies noting that even if China did allow its currency to rise, the U.S.
Discussion Questions:
1. Why was the value of China’s currency a dominant issue at the recent U.S. – China
summit? Why is the United States pushing for a higher renminbi? Why is China
reluctant to allow its currency to appreciate?
2. Reflect on how policy decisions made in China affect the strategies of U.S. companies.
What does this imply about the interdependency of the global monetary systems and
economy in general?
3. Discuss the claims by U.S. Secretary of State Hillary Clinton that policy reforms in
China would contribute to global economic balance, predictability, and prosperity. Do
you agree with Clinton? Why or why not?
4. How would inflation in China affect the competitiveness of its goods in global
markets?
Chapter 16 – Exporting, Importing, and Countertrade
16–13
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following from
International Business DVD Volume 6:
Title: Developing World Hit By Recession, but Microfinance Grows
Learning Objectives
The purpose of this video is to help you:
❖ Recognize the difference between developing and developed countries.
❖ Understand the implications of the global economic recession on the developing
world.
❖ Explain the effects of globalization on developing countries.
❖ Discuss microfinance and why it is important to developing markets.
Key Words
❖ Levels of economic development
❖ Microfinance
❖ Exports
❖ G-7
❖ Globalization
❖ The World Bank
Synopsis
The effects of the recent global recession are still being felt across much of the developed
world. High unemployment continues to plague many countries, credit is tight, and
repossessions are rising. However, in much of the developing world, the effects of the
recession may be much worse. According to the World Bank, 53 million more people
could be trapped in poverty, earning less than $2 per day. Moreover, infant mortality is
rising with some 200,000 – 400,000 more babies dying every year. Compounding the
problems for the developing world is the decline in private sector capital flows from
developed countries. The World Bank expects inflows of capital to developing countries
to fall 50 percent from their 2007 levels, a reduction of $500 billion.
Like many developed countries, developing countries, and particularly those countries in
Southeast Asia, have experienced significant job loss. Many people in Southeast Asia
work in factories that produce clothing that is exported to developed countries. However,
lower demand has meant that many jobs have disappeared. Other developing countries
that rely on exports are experiencing similar problems. Zambia for example, relies on
copper for its livelihood. But with copper prices at just one-third of where they were just
Chapter 16 – Exporting, Importing, and Countertrade
16–14
a year ago, companies have little choice but to lay off workers. In the Democratic
Republic of Congo, about 250,000 jobs have been lost because of the collapse in the
mineral prices prompted by the global recession.
The developing countries have asked developed nations like the United States for
assistance, but so far, the response has been lukewarm at best. What may be more
promising though is the burgeoning microfinance industry. Microfinance providers make
small, low interest loans to the world’s poorest people. The industry began in the 1970s
and today is worth more than $25 billion. Now, the back to basics, relationship approach
of microfinance is being hailed as a potential model for the developed world as well. In a
tight credit market, the loans made by microfinance providers are often the only option
open to individuals.
Discussion Questions
1. How would you classify countries like Zambia and the Democratic Republic of
Congo? Explain how developing countries differ from developed countries. Do you
think developed countries have a responsibility to help poorer countries?
2. How has the recent global recession affected the developing world? What does your
response tell you about the interdependent nature of the global economy?
3. Reflect on what globalization means for developing countries. In your opinion, has it
been advantageous to lower income countries? Has the gap between the developed world
and the developing countries increased or decreased as a result of globalization?
4. Explain the significance of microfinance to the developing world. Why is it so
important to ensure that the industry continues to grow? How can multinational
companies capitalize on the microfinance trend?
INCORPORATING globalEDGE™ EXERCISES
Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following
exercises:
Chapter 16 – Exporting, Importing, and Countertrade
16–15
Exercise 1
Exporting is an important way for small and large companies to introduce products and
develop new markets. In fact, the Internet is rich with resources that offer guidance to
companies wishing to expand their markets through exporting. The trade tutorials at the
globalEDGE website provide links to these resources. Identify five sources and provide a
description of the services available for new exporters through each source.
Exercise 2
Understanding the specific terminology used in the import/export process is necessary
prior to your company’s first international venture. Utilize the globalEDGE Glossary of
International Business Terms to identify the definitions of the following terms related to
exporting and importing: ad valorem tariff, consignment, embargo, global quota, invisible
barriers to trade, letter of credit, mercantilism, and section 201.
Answers to the Exercises
Exercise 1
There are a variety of sources that provide guidance to companies that consider starting
exporting. A rich list of those resources can be found by searching the term “exporting”
at http://globaledge.msu.edu/ResourceDesk/, or by directly entering the “Trade Tutorials”
category under the Global Resources section of the Resource Desk. Each approach will
render different results. Some of the websites that provide information for U.S. exporters
Exercise 2
An alphabetic list of the terms commonly used in international business can be found
under the glossary section of the resource desk, at
Chapter 16 – Exporting, Importing, and Countertrade
16–16
The consignee sells merchandise for commissions and remits the net proceeds to the
consignor.
embargo: A type of economic sanction that totally disallows the imports of a specific
product or all products from a specific country. Embargoes are typically placed in time of
war.
global quota: An import quota set by a nation which specifies the allowed quantity of a
product from all countries.
invisible barriers to trade: Government regulations that do not directly restrict trade but
have a hindering effect on through the use of excessive and obscure requirements on
goods before they can be sold, especially imported goods. While known to local business
people, foreign investors are not aware of these conditions, making them “invisible.”
Labeling requirements or other sorts of measurement or sanitary standards would be an
example of this.
letter of credit: A letter issued by an importer’s bank guaranteeing payment upon
presentation of specified trade documents (invoice, bill of lading, inspection and
insurance certificates, etc.).