Chapter 17

Pricing Strategies:

Countertrade and Terms of Sales/Payment

Chapter Outline

Countertrade

- Types of Countertrade

- Problems and Opportunities Price Quotation Terms of Sale

- Trade Terms

- Quotation Guidelines

Chapter Outline

Methods of Financing and Means of payment

- Consignment

- Open Account

- Cash in Advance

- Bill of Exchange (Draft)

- Bankers' Acceptance

- Letter of Credit

Countertrade

goods for goods trade (vs. monetary trade) government mandate to pay for goods and

services with something else other than cash

Countertrade

Advantages serving as trade financing buyer getting rid of surplus of own products no concern for fluctuation of exchange rates

Countertrade

Disadvantages cumbersome and time-consuming costly inferior form of exchange

- requiring "double coincidence of wants"

Types of Countertrade

Barter

- single transaction of direct exchange of products of equal value

Counterpurchase (Parallel Barter)

- two transactions of cash sales agreements (of unrelated products)

Compensation Trade (Buyback)

- products sold and later bought by a party are related

Types of Countertrade

Offset

- for the rights to sell its product in a foreign market, the seller must manufacture the product locally (in the host country)

Clearing Agreement

- line or credit established in central banks of two countries

- use "clearing account units" for exchange of products

Trade Terms

EXW (Ex Works)

- price of product only; nothing else being included FAS (Free Alongside Ship)

- EXW + local transportation in seller's country FOB (Free on Board)

- FAS + loading onto the vessel CFR (Cost & Freight)

- FOB + international transportation

Trade Terms

CIF (Cost, Insurance, and Freight)

- CFR + insurance DEQ (Delivered Ex Quay)

- CIF + unloading DDP (Delivered Duty Paid)

- DEQ + local transportation in buyer's country

Methods of Financing & Means of Payment

Consignment Open Account Cash in Advance Bill of Exchange (Draft)

- Sight Draft

- Time Draft

Methods of Financing & Means of Payment

Bankers' Acceptance Letter of Credit (L/C)

- Revocable vs. Irrevocable

- Unconfirmed vs. Confirmed

- Standby

- Back-to-Back

- Transferable

Export Payment Terms and Risk Level

Open account (highest risk for exporter) Sight draft Time draft Irrevocable L/C Confirmed irrevocable L/C Cash in advance (least risk)

Export Payment Terms and Cost

Open account (least cost for importer) Sight draft Time draft Irrevocable L/C Confirmed irrevocable L/C Cash in advance (highest cost)

L/C: Advantages/Disadvantages

Advantages– Security (for both parties)– Seller receiving early payment by discounting L/C

Disadvantages– Lacking flexibility– Complex and potentially costly