Chapter 14 Exporting, Importing, and Countertrade

Chapter 14

Exporting, Importing, and Countertrade

True / False Questions

1. Only large companies have benefited significantly from the moneymaking opportunities of exporting. True False

2. Firms that actively export often lose out on significant opportunities for growth and

cost reduction. True False

3. While small firms tend to be proactive about seeking opportunities for profitable

exporting, large firms are very reactive. True False

4. Reactive firms do not consider exporting until their domestic market is saturated.

True False

5. Low growth prospects makes firms reactive about seeking opportunities for

exporting. True False

6. Novice exporters easily realize the amount of management resources that have to be

dedicated to cultivate business in foreign countries. True False

7. Exporters often face voluminous paperwork, complex formalities, and many potential

delays and errors. True False

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8. Unlike their German and Japanese competitors, many U.S. firms do not have adequate information when they seek export opportunities. True False

9. German and Japanese firms are relatively more information disadvantaged than U.S.

firms. True False

10. For U.S. firms, the most comprehensive source of information on export opportunities

is the U.S. Department of Commerce. True False

11. Export Legal Assistance Network (ELAN), an organization within the U.S. Department

of Commerce, is dedicated to providing businesses with assistance for attacking foreign markets. True False

12. Commercial banks and major accounting firms are less willing to assist small firms in

starting export operations due to higher default risks. True False

13. Export management companies (EMCs) start exporting operations for a firm with the

understanding that the firm will take over operations after they are well established. True False

14. The advantage of export management companies is that they are experienced

specialists that can help the neophyte exporter identify opportunities and avoid common pitfalls. True False

15. The advantage of export management companies is that they are experienced

specialists that can help the neophyte exporter identify opportunities and avoid common pitfalls. True False

16. A firm that enters many markets at once runs the risk of spreading its limited

management resources too thin. True False



17. It often makes sense for a firm to enter a foreign market on a large scale to reduce the costs of any subsequent failure. True False

18. Exporting is often not an end in itself, but merely a step on the road toward

establishment of foreign production. True False

19. Lack of trust in international trade is exacerbated by the distance between the two

parties in space, language, and culture. True False

20. Issued by a bank at the request of an importer, a bill of lading states that the bank

will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. True False

21. Banks charge exporters a fee for issuing a letter of credit.

True False

22. A letter of credit may reduce an importer's ability to borrow funds for other purposes.

True False

23. A draft, an instrument normally used in international commerce to effect payment, is

also known as a letter of credit. True False

24. In international commerce, a person or business initiating a draft is known as the

drafter and the party to whom the draft is presented is known as the draftee. True False

25. In domestic trade transactions, a buyer can often obtain possession of merchandise

without signing a formal document acknowledging his or her obligation to pay. True False

26. In international commerce, a sight draft allows for a delay in payment.

True False



27. In international commerce, time drafts are negotiable instruments. True False

28. A bill of lading can function as collateral against which funds are advanced to the

exporter by its local bank before final payment by the importer. True False

29. The Export-Import Bank provides financing aid to prospective U.S. exporters.

True False

30. The mission of the Foreign Credit Insurance Association is to provide financing aid

that will facilitate exports, imports, and the exchange of commodities between the United States and other countries. True False

31. Export credit insurance protects an exporter against the possibility of a foreign

importer's default on payment when there is a lack of a letter of credit. True False

32. The principle of countertrade is to trade goods and services for money.

True False

33. Barter is primarily used with trading partners who are not creditworthy or

trustworthy. True False

34. Offset refers to the use of a specialized third-party trading house in a countertrade

arrangement. True False

35. Countertrade's main attraction is that it can give a firm a way to finance an export

deal when other means are not available. True False

Multiple Choice Questions



36. Which of the following is an advantage of exporting?

A. It helps in easy currency conversion.

B. It provides large revenue and profit opportunities.

C. It reduces the administrative costs incurred by a company.

D. It helps companies increase their unit costs.

E. It reduces paperwork and complex formalities.

37. Exporting is nearly always a way to increase the revenue and profit base of a

company because:

A. there is little competition in the international market.

B. foreign governments encourage imports from other countries.

C. international markets are less complex than their domestic counterparts.

D. the international market is much larger than the domestic market.

E. it does not involve wasting resources on paperwork.

38. Firms that do not export often:

A. face problems of currency conversion.

B. lose out on significant opportunities for cost reduction.

C. are able to reduce their unit costs.

D. are not intimidated by the business practices of foreign countries.

E. explore foreign markets to see where they can leverage their technology.



39. Large firms generally tend to be _____ about seeking opportunities for profitable exporting.

A. passive

B. risk averse

C. wary

D. proactive

E. neutral

40. Which of the following is true of medium-sized and small firms?

A. They are proactive about seeking opportunities for profitable exporting.

B. They consider exporting only after their domestic market is saturated.

C. They are not intimidated by the complexities of foreign legalsystems.

D. They have a high degree of familiarity with foreign market opportunities.

E. They explore foreign markets to see where the opportunities lie for leveraging theirtechnology.

41. Many medium-sized and small firms are not proactive in seeking export opportunities

because:

A. they are familiar with the foreign market and do not find it challenging enough.

B. the export market is similar to the home market in terms of legal and business practices.

C. they are intimidated by the complexities and mechanics of exporting to foreign countries.

D. domestic regulations limit their ability to export profitably.

E. they overestimate the time and expertise needed to cultivate business in foreign countries.



42. Which of the following is a reason why firms are not proactive about seeking export opportunities?

A. They are unfamiliar with foreign market opportunities.

B. domestic regulations limit their ability to export profitably.

C. they overestimate the time and expertise needed to cultivate business in foreign countries.

D. they do not find the foreign market challenging enough.

E. the export market is similar to the home market in terms of legal and business practices.

43. Which of the following is a common pitfall that novice exporters come across?

A. Poor understanding of the opportunities in the domestic market

B. Low unit costs

C. Increased economies of scale

D. Problems securing financing

E. Familiar distribution systems

44. Which of the following is true of exporting?

A. Many foreign customers require face-to-face negotiations on their home turf.

B. Large firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities.

C. Exporters have the advantage of reduced paperwork and fewer formalities.

D. Medium-sized and small firms are proactive about seeking opportunities for profitable exporting.

E. Firms that focus only on exporting often lose out on significant opportunities for growth and cost reduction.




A. It takes a very short time before all foreigners are comfortable enough to purchase in significant quantities.

B. Novice exporters tend to overestimate the time required to cultivate business in foreign countries.

C. Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors.

D. Large firms are usually unfamiliar with foreign market opportunities.

E. Large firms do not consider exporting until their domestic market issaturated.

46. Due to the complexity and diversity of foreign markets, firms sometimes hesitate to

seek export opportunities. These firms can best overcome ignorance by:

A. shortening production runs.

B. creating revenue.

C. outsourcing decisions.

D. collecting information.

E. lowering unit costs.

47. Japan's great trading houses are referred to as _____.

A. kaizen

B. sogo shosha

C. zaibatsu

D. guanxi

E. kanban



48. The sogo shosha of Japan:

A. proactively and continuously seek export opportunities for their affiliated companies.

B. exclusively serve the largest and most prestigious companies in Japan.

C. have offices concentrated in the business district of Tokyo.

D. have monopolized the export market in the country.

E. consider export only when there is excess production at home.

49. Which of the following is true of the export performance of the United States,

Germany, and Japan?

A. Historically, the United States has made its living as a trading nation.

B. Germany has been a relatively self-contained continental economy in which international trade played a minor role.

C. Unlike Japan, U.S. firms have a strong information advantage when they seek export opportunities.

D. The United States has not yet evolved an institutional structure for promoting exports similar to that of Germany.

E. The Ministry of International Trade and Industry (MITI) in the United States is always on the lookout for export opportunities.

50. The most comprehensive source of information on export opportunities for U.S.

firms is the _____.

A. Small Business Administration

B. Department of Commerce

C. Federal Trade Commission

D. Bureau of Competition

E. Bank of New York



35. Countertrade's main attraction is that it can give a firm a way to finance an export deal when other means are not available. TRUE

Countertrade's main attraction is that it can give a firm a way to finance an export deal when other means are not available. Given the problems that many developing nations have in raising the foreign exchange necessary to pay for imports, countertrade may be the only option available when doing business in these countries.

AACSB: Analytic

Blooms: RememberDifficulty: 1 Easy

Learning Objective: 14-05 Describe how countertrade can be used to facilitate exporting.Topic: Countertrade

Multiple Choice Questions

36. Which of the following is an advantage of exporting?

A. It helps in easy currency conversion.

B. It provides large revenue and profit opportunities.

C. It reduces the administrative costs incurred by a company.

D. It helps companies increase their unit costs.

E. It reduces paperwork and complex formalities.

The great promise of exporting is that large revenue and profit opportunities are tobe found in foreign markets for most firms in most industries. The international market is normally so much larger than the firm’s domestic market that exporting is nearly always a way to increase the revenue and profit base of a company.

AACSB: Analytic

Blooms: UnderstandDifficulty: 2 Medium

Learning Objective: 14-01 Explain the promises and risks associated with exporting.Topic: The Promise and Pitfalls of Exporting



37. Exporting is nearly always a way to increase the revenue and profit base of a company because:

A. there is little competition in the international market.

B. foreign governments encourage imports from other countries.

C. international markets are less complex than their domestic counterparts.

D. the international market is much larger than the domestic market.

E. it does not involve wasting resources on paperwork.

The great promise of exporting is that large revenue and profit opportunities are tobe found in foreign markets for most firms in most industries. The international market is normally so much larger than the firm's domestic market that exporting is nearly always a way to increase the company's revenue and profit base.

AACSB: Analytic



38. Firms that do not export often:

A. face problems of currency conversion.

B. lose out on significant opportunities for cost reduction.

C. are able to reduce their unit costs.

D. are not intimidated by the business practices of foreign countries.

E. explore foreign markets to see where they can leverage their technology.

By expanding the size of the market, exporting can enable a firm to achieve economies of scale, thereby lowering its unit costs. Firms that do not export often lose out on significant opportunities for growth and cost reduction.

AACSB: Analytic





39. Large firms generally tend to be _____ about seeking opportunities for profitable exporting.

A. passive

B. risk averse

C. wary

D. proactive

E. neutral

Studies have shown that while many large firms tend to be proactive about seeking opportunities for profitable exporting—systematically scanning foreign markets to find ways to leverage their technology, products, and marketing skills in foreign countries—many medium-sized and small firms are very reactive.

AACSB: Analytic



40. Which of the following is true of medium-sized and small firms?

A. They are proactive about seeking opportunities for profitable exporting.

B. They consider exporting only after their domestic market is saturated.

C. They are not intimidated by the complexities of foreign legalsystems.

D. They have a high degree of familiarity with foreign market opportunities.

E. They explore foreign markets to see where the opportunities lie for leveraging their technology.

Many medium-sized and small firms tend to be reactive in seeking opportunities for profitable exporting. Typically, reactive firms do not even consider exporting until their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets.

AACSB: Analytic





41. Many medium-sized and small firms are not proactive in seeking export opportunities because:

A. they are familiar with the foreign market and do not find it challenging enough.

B. the export market is similar to the home market in terms of legal and business practices.

C. they are intimidated by the complexities and mechanics of exporting to foreign countries.

D. domestic regulations limit their ability to export profitably.

E. they overestimate the time and expertise needed to cultivate business in foreign countries.

One reason more firms are not proactive is that many would-be exporters, particularly smaller firms, are often intimidated by the complexities and mechanicsof exporting to countries where business practices, language, culture, legal systems, and currency are very different from the home market.

AACSB: Analytic





42. Which of the following is a reason why firms are not proactive about seeking export opportunities?

A. They are unfamiliar with foreign market opportunities.

B. domestic regulations limit their ability to export profitably.

C. they overestimate the time and expertise needed to cultivate business in foreign countries.

D. they do not find the foreign market challenging enough.

E. the export market is similar to the home market in terms of legal and business practices.

One reason more firms are not proactive is that they are unfamiliar with foreign market opportunities; they simply do not know how big the opportunities actually are or where they might lie. Simple ignorance of the potential opportunities is a huge barrier to exporting.

AACSB: Analytic



43. Which of the following is a common pitfall that novice exporters come across?

A. Poor understanding of the opportunities in the domestic market

B. Low unit costs

C. Increased economies of scale

D. Problems securing financing

E. Familiar distribution systems

Many neophyte exporters run into significant problems when first trying to do business abroad, and this sours them on future exporting ventures. Common pitfalls include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, lack of an effective distribution program, a poorly executed promotional campaign, and problems securing financing.

AACSB: Analytic






A. Many foreign customers require face-to-face negotiations on their home turf.

B. Large firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities.

C. Exporters have the advantage of reduced paperwork and fewer formalities.

D. Medium-sized and small firms are proactive about seeking opportunities for profitable exporting.

E. Firms that focus only on exporting often lose out on significant opportunities forgrowth and cost reduction.

Novice exporters tend to underestimate the time and expertise needed to cultivatebusiness in foreign countries. Few realize the amount of management resources that have to be dedicated to this activity. Many foreign customers require face-to-face negotiations on their home turf.

AACSB: Analytic






A. It takes a very short time before all foreigners are comfortable enough to purchase in significant quantities.

B. Novice exporters tend to overestimate the time required to cultivate business inforeign countries.

C. Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors.

D. Large firms are usually unfamiliar with foreign market opportunities.

E. Large firms do not consider exporting until their domestic market issaturated.

Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors. According to a UN report on trade and development, a typical international trade transaction may involve 30 parties, 60 original documents, and 360 document copies, all of which have to be checked, transmitted, reentered into various information systems, processed, and filed. The United Nations has calculated that the time involved in preparing documentation, along with the costs of common errors in paperwork, often amounts to 10 percent of the final value of goods exported.

AACSB: Analytic





46. Due to the complexity and diversity of foreign markets, firms sometimes hesitate to seek export opportunities. These firms can best overcome ignorance by:

A. shortening production runs.

B. creating revenue.

C. outsourcing decisions.

D. collecting information.

E. lowering unit costs.

One big impediment to exporting is the simple lack of knowledge of the opportunities available. Faced with complexity and diversity, firms sometimes hesitate to seek export opportunities. The way to overcome ignorance is to collect information.

AACSB: Analytic


Learning Objective: 14-02 Identify the steps managers can take to improve their firm’s export performance.Topic: Improving Export Performance

47. Japan's great trading houses are referred to as _____.

A. kaizen

B. sogo shosha

C. zaibatsu

D. guanxi

E. kanban

Many Japanese firms are affiliated in some way with the sogo shosha, Japan's greattrading houses. The sogo shosha have offices all over the world, and they proactively, continuously seek export opportunities for their affiliated companies large and small.

AACSB: Analytic


Learning Objective: 14-02 Identify the steps managers can take to improve their firm’s export performance.



Topic: Improving Export Performance

48. The sogo shosha of Japan:

A. proactively and continuously seek export opportunities for their affiliated companies.

B. exclusively serve the largest and most prestigious companies in Japan.

C. have offices concentrated in the business district of Tokyo.

D. have monopolized the export market in the country.

E. consider export only when there is excess production at home.

Many Japanese firms are affiliated in some way with the sogo shosha, Japan's greattrading houses. The sogo shosha have offices all over the world, and they proactively, continuously seek export opportunities for their affiliated companies large and small.

AACSB: Analytic


Learning Objective: 14-02 Identify the steps managers can take to improve their firm’s export performance.Topic: Improving Export Performance

49. Which of the following is true of the export performance of the United States, Germany, and Japan?

A. Historically, the United States has made its living as a trading nation.

B. Germany has been a relatively self-contained continental economy in which international trade played a minor role.

C. Unlike Japan, U.S. firms have a strong information advantage when they seek export opportunities.

D. The United States has not yet evolved an institutional structure for promoting exports similar to that of Germany.

E. The Ministry of International Trade and Industry (MITI) in the United States is always on the lookout for export opportunities.

Both Germany and Japan have long made their living as trading nations, whereas until recently the United States has been a relatively self-contained continental economy in which international trade played a minor role. The United States has not yet evolved an institutional structure for promoting exports similar to that of either Germany or Japan.

AACSB: Analytic



136. Why do many neophyte exporters have problems when trying to do business abroad for the first time? What are the common pitfalls experienced by such exporters?

Neophyte exporters tend to underestimate the time and expertise needed to cultivate business in foreign countries. Few realize the amount of management resources that have to be dedicated to this activity. This sours them on future exporting ventures. Common pitfalls include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, lack of an effective distribution program, a poorly executed promotional campaign in the foreign market, and problems securing financing.

AACSB: Analytic



137. What does the term sogo shosha mean? How do they help Japanese exporters and what role do they play in countertrade?

Sogo shosha are Japan's great trading houses. Many Japanese firms are affiliated insome way with the sogo shosha. The sogo shosha have offices all over the world, and they proactively, continuously seek export opportunities for their affiliated companies large and small. They are masters of countertrade. They use their vast networks of affiliated companies to profitably dispose of goods acquired through countertrade agreements. Firms affiliated with one of Japan's sogo shosha often have a competitive advantage in countries where countertrade agreements are preferred.

AACSB: Analytic


Learning Objective: 14-02 Identify the steps managers can take to improve their firm’s export performance.Learning Objective: 14-05 Describe how countertrade can be used to facilitate exporting.

Topic: CountertradeTopic: Improving Export Performance



138. Describe the role of the U.S. Department of Commerce in helping U.S. firms increase their knowledge of export opportunities.

Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The most comprehensive source of information is the U.S. Department of Commerce and its district offices all over the country. Within that department are two organizations dedicated to providing businesses with intelligence and assistance for attacking foreign markets: the International Trade Administration and the U.S. Commercial Service. These agencies provide the potential exporter with a "best prospects" list, which gives the names and addresses of potential distributors in foreign markets along with businesses they are in, the products they handle, and their contact person. The Department of Commerce has assembled a "comparison shopping service" for14 countries that are major markets for U.S. exports. For a small fee, firms can receive customized market research survey on products. This survey provides information on marketability, the competition, comparative prices, distribution channels, and names of potential sales representatives. The Department of Commerce organizes trade events that help potential exporters make foreign contacts and explore export opportunities. It organizes exhibitions at international trade fairs, which are held in major cities worldwide. It also has a matchmaker program, in which department representatives accompany groups of U.S. businesspeople abroad to meet with qualified agents, distributors, and customers.

AACSB: Analytic


Learning Objective: 14-03 Identify information sources and government programs that exist to help exporters.Topic: Improving Export Performance

139. How does the Small Business Administration (SBA) help potential exporters?

The Small Business Administration (SBA) is a government organization that helps potential exporters. The SBA employs 76 district international trade officers and 10regional international trade officers throughout the United States as well as a 10-person international trade staff in Washington, DC. Through its Service Corps of Retired Executives (SCORE) program, the SBA oversees some 11,500 volunteers with international trade experience to provide one-on-one counseling to active andnew-to-export businesses. The SBA also coordinates the Export Legal Assistance Network (ELAN), a nationwide group of international trade attorneys who provide free initial consultations to small businesses on export-related matters.

AACSB: Analytic

Blooms: Understand



Difficulty: 2 MediumLearning Objective: 14-03 Identify information sources and government programs that exist to help exporters.

Topic: Improving Export Performance

140. What are export management companies? What are their advantages and and disadvantages?

Export management companies (EMCs) are export specialists that act as the export marketing department or international department for their client firms. EMCs normally accept two types of export assignments. They start exporting operations for a firm with the understanding that the firm will take over operations after they are well established. In another type, start-up services are performed with the understanding that the EMC will have continuing responsibility for selling the firm’s products. Many EMCs specialize in serving firms in particular industries and in particular areas of the world. The advantage of EMCs is that they are experienced specialists that can help the neophyte exporter identify opportunities and avoid common pitfalls. A good EMC will have a network of contacts in potential markets, have multilingual employees, have a good knowledge of different business mores, and be fully conversant with the ins and outs of the exporting process and with local business regulations. One drawback of relying on EMCs is that the company can fail to develop its own exporting capabilities.

AACSB: Analytic


Learning Objective: 14-02 Identify the steps managers can take to improve their firm’s export performance.Topic: Utilizing Export Management Companies



141. Briefly describe the strategic steps that novice exporters can take to increase the probability of exporting successfully.

The probability of exporting successfully can be increased dramatically by taking ahandful of simple strategic steps. First, particularly for the novice exporter, it helpsto hire an export management company or at least an experienced export consultant to help identify opportunities and navigate the paperwork and regulations so often involved in exporting. Second, it often makes sense to initially focus on one market or a handful of markets. Third, it often makes sense to enter aforeign market on a small scale to reduce the costs of any subsequent failure. Fourth, the exporter needs to recognize the time and managerial commitment involved in building export sales and should hire additional personnel to oversee this activity. Fifth, in many countries, it is important to devote a lot of attention to building strong and enduring relationships with local distributors and/or customers.Sixth, it is important to hire local personnel to help the firm establish itself in a foreign market. Seventh, several studies have suggested the firm needs to be proactive about seeking export opportunities. Finally, it is important for the exporter to retain the option of local production. Once exports reach a sufficient volume to justify cost-efficient local production, the exporting firm should consider establishing production facilities in the foreign market.

AACSB: Analytic


Learning Objective: 14-02 Identify the steps managers can take to improve their firm’s export performance.Topic: Utilizing Export Management Companies

142. How does a lack of trust affect firms engaged in international trade? How can the problem be solved?

Firms engaged in international trade have to trust someone they may have never seen, who lives in a different country, who speaks a different language, who abidesby a different legal system, and who could be very difficult to track down if he or she defaults on an obligation. Due to lack of trust between the two parties, each has his or her own preferences as to how the transaction should be configured. The problem is solved by using a third party trusted by both—normally a reputablebank—to act as an intermediary.

AACSB: Analytic


Learning Objective: 14-04 Recognize the basic steps involved in export financing.Topic: Export and Import Financing



143. Briefly describe the various financial devices that help exporters solve the problemof a lack of trust in international trade.

The financial devices that have evolved to cope with the problem of lack of trust inthe context of international trade are: the letter of credit, the draft (or bill of exchange), and the bill of lading. A letter of credit is issued by a bank at the request of an importer. It states that the bank will pay a specified sum of money to a beneficiary, normally the exporter,on presentation of particular, specified documents. A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce for payment. 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. A bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three purposes: it is a receipt, a contract, and a document of title. As a receipt, the bill of lading indicates that the carrier has received the merchandise described on the face of the document. As a contract, it specifies thatthe carrier is obligated to provide a transportation service in return for a certain charge. As a document of title, it can be used to obtain payment or a written promise of payment before the merchandise is released to the importer. The bill of lading can also function as collateral against which funds may be advanced to the exporter by its local bank before or during shipment and before final payment by the importer.

AACSB: Analytic


Learning Objective: 14-04 Recognize the basic steps involved in export financing.Topic: Export and Import Financing

144. What is the difference between a sight draft and a time draft?

A sight draft is payable on presentation to the drawee. A time draft allows for a delay in payment—normally 30, 60, 90, or 120 days. It is presented to the drawee, who signifies acceptance of it by writing or stamping a notice of acceptance on its face. Once accepted, the time draft becomes a promise to pay by the accepting party. Time drafts are negotiable instruments; that is, once the draft is stamped with an acceptance, the maker can sell the draft to an investor at a discount from its face value.

AACSB: Analytic


Learning Objective: 14-04 Recognize the basic steps involved in export financing.



Topic: Export and Import Financing

145. Briefly describe the different forms of government-backed assistance that help potential U.S. exporters finance their export programs.

Prospective U.S. exporters can draw on two forms of government-backed assistance to help finance their export programs. They can get financing aid from the Export-Import Bank and export credit insurance from the Foreign Credit Insurance Association. The Export–Import Bank , often referred to as Ex-Im Bank, is an independent agency of the U.S. government. Its mission is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the United States and other countries. In the United States, export credit insurance is provided by the Foreign Credit Insurance Association (FCIA), an association of private commercial institutions operating under the guidance of the Export–Import Bank. The FCIA provides coverage against commercial risks and political risks.

AACSB: Analytic


Learning Objective: 14-03 Identify information sources and government programs that exist to help exporters.Topic: Export Assistance

146. What is an Ex-Im Bank? What is its mission and how does it pursue it?

The Export–Import Bank, often referred to as Ex-Im Bank, is an independent agency of the U.S. government. Its mission is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the United States and other countries. It pursues its mission with various loan and loan-guarantee programs. The agency guarantees repayment of medium- and long-term loans U.S. commercial banks make to foreign borrowers for purchasing U.S. exports. The Ex-Im Bank guarantee makes the commercial banks more willing to lend cash to foreign enterprises. Ex-Im Bank also has a direct lending operation under which it lends dollars to foreign borrowers for use in purchasing U.S. exports. It grants loans that commercial banks would not if it sees a potential benefit to the United States in doing so. The foreign borrowers use the loans to pay U.S. suppliers and repay the loan to Ex-Im Bank with interest.

AACSB: Analytic





147. Describe the Foreign Credit Insurance Association (FCIA). What types of risks does it cover?

In the United States, export credit insurance is provided by the Foreign Credit Insurance Association (FCIA), an association of private commercial institutions operating under the guidance of the Export–Import Bank. The FCIA provides coverage against commercial risks and political risks. Losses due to commercial risk result from the buyer's insolvency or payment default. Political losses arise from actions of governments that are beyond the control of either buyer or seller.

AACSB: Analytic



148. What is countertrade? When can it be used?

Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. A government may restrict the convertibility of its currency to preserve its foreign exchange reserves so they can be used to service international debt commitments and purchase crucial imports. This is problematic for exporters. Nonconvertibility implies that the exporter may not be paid in his or her home currency, and few exporters would desire payment in a currency that is not convertible. Countertradeis a common solution. Countertrade denotes a whole range of barterlike agreements; its principle is to trade goods and services for other goods and services when they cannot be traded for money.

AACSB: Analytic





149. Briefly describe the different types of countertrade arrangements.

The five distinct types of countertrade arrangements are: barter, counterpurchase,offset, switch trading, and compensation or buyback. Barter is the direct exchange of goods and/or services between two parties without a cash transaction. Barter is viewed as the most restrictive countertrade arrangement because if goods are not exchanged simultaneously, one party ends up financing the other for a period. The firms engaged in barter run the risk of having to accept goods they do not want, cannot use, or have difficulty reselling ata reasonable price. Barter is primarily used with trading partners who are not creditworthy or trustworthy. Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. An offset is similar to a counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made. This is more attractive than a straight counterpurchase agreement. Switch trading refers to the use of a specialized third-party trading house in a countertrade arrangement. Switch trading occurs when a third-party trading housebuys the firm's counterpurchase credits and sells them to another firm that can better use them. A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant's output as partial payment for the contract.

AACSB: Analytic





150. Describe the pros and cons of countertrade.

Countertrade's main attraction is that it can give a firm a way to finance an export deal when other means are not available. Given the problems that many developing nations have in raising the foreign exchange necessary to pay for imports, countertrade may be the only option available when doing business in these countries. Even when countertrade is not the only option for structuring an export transaction, many countries prefer countertrade to cash deals. Thus, if a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement. In addition, a countertrade agreement may be required by the government of a country to which a firm is exporting goods or services. In such an event, countertrade can become a strategic marketing weapon. However, the drawbacks of countertrade agreements are substantial. Other thingsbeing equal, firms would normally prefer to be paid in hard currency. Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably. In addition, even if the goods it receives are of high quality, the firm still needs to dispose of them profitably. To do this, countertrade requires the firm to invest in an in-house trading department dedicated to arranging and managing countertrade deals. This can be expensive and time-consuming.

AACSB: Analytic





Documents

Chapter 14 Exporting, Importing, and Countertrade