Chapter 16: Exporting, Importing, and Countertrade

Q1: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 the 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 this export to the Philippines.
Answer:The Philippines importer applies to her local bank for the issuance of a letter of credit. The Philippi-
nes local bank then undertakes a credit check of the importer. If the Bank of Philippines is satisfied with he-
r creditworthiness, it will issue a letter of credit. The letter states that the Bankof Philippines will pay theW
ashington State exporter for the merchandise as long as it is shippedin accordance with specified instructio
ns and conditions. The Philippines Bank sends the letter toWashington State Bank. When the Washington S
tate Bank received the letter, they send the carrier of lumber to Philippine payment would be done when
shipment reaches to Philippine then the amount would be paid to Washington firm on date mention on
letter of credit.

Q2: 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: As CEO has indicated his intention as export the production we assume that he would not be
interested in branding and selling the product in local markets and also that he is keen in exporting its
product. As I have been asked for advice, so my first step would be to know about some of the government
information sources that are available online that are free of charge, to know about good international
market for the company product. Another step would be to check on internet to know about foreign
market potential of their products. Another approach would be taking an assistance from an export
management company, and as it would be paid service so would involve cost. Expertise services can even
tell whether it is worthy or not to export, and also help in providing details on initiating an export program.
On the basis of collected information I would advise the CEO.
Q3:An alternative to using a letter of credit is export credit insurance. What are the advantages
anddisadvantages of using export credit insurancerather 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: A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's payment to a
seller will be received on time and for the correct amount. In the event that the buyer is unable to make a
payment on the purchase, the bank will be required to cover the full or remaining amount of the
purchase. Most people prefer using a letter of credit to credit insurance, sometimes an exporter who
insists on a letter of credit will lose an order to one who does not require a letter of credit. Thus, when the
importer is in a strong bargaining position and able to play competing suppliers against each other, an
exporter may have to forgo a letter of credit. Without a legal contract (a letter of credit), export credit
insurance firm will cover a major portion of the loss if the buyer defaults on the payment. Therefore, the
exporter does not have to go through a long and costly legal process to sue the importer, which adds
another heavy expense to its financial statements. However, insurance does cost much more money than
just a letter of insurance from a bank, so for small firms who wants to avoid as much expenses as possible,
such insurance would be a heavy burden to it. On other hand, “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” .However, getting a letter of credit puts the risks on the bank so it is much harder to get a
letter of credit and therefore some firms who do not get approved will only have to choose an insurance to
guarantee the transaction. In the case of the luxury yacht, should the importer fail to make payment, the
clearly defined laws of Canada would make it easier to go after the importer than would be the case with
the machine tools in the Ukraine, and that therefore a letter of credit is less important for the yacht
exporter. On the other hand, we may note that there is probably more competition in machine tools as
compared to luxury yachts and that the exporter of machine tools may lose the sale if the exporter insists
on a letter of credit.
Q4:How do you explain the use of countertrade? Under what scenarios might its use increase furtherby
2015? Under what scenarios might itsuse decline?

Answer: Countertrade can be defined as transaction of goods instead of currency. This transaction usually
happens when a company or a firm wants to expand into an international market. It benefits companies a
lot like gaining a competitive edge and many other benefits. There are a lot of benefits from countertrade
but in my opinion I think it’s decreased by 2015. There are many risks to countertrade and it’s an old way
of doing business. I think when it comes to exporting countertrade is very risky and can cost someone a lot
due to the lack of knowledge in the international market.

Q5: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: Countertrade includes a range of barterlike agreements. It is primarily used when a firm exports to
a country whose currency is not freely convertible and may lack the foreign exchange reserves required to
purchase the imports. However, because of the financial and economic limits of developing countries,
there is often a limit on the amount of countertrade thata local firm could make. Such limit then could
hinder the agreements between the local firm and the foreign firm because it might not satisfy the deal
they intend to make previously. Countertrade provides the companies with the ease of entry into a
competitive market, high efficiency and utilization of resources, and higher sales. As a result, these benefits
will translate into its financial numbers such as export revenues. However, there are risks associated with
using countertrade. Companies that generally prefer countertrade are those big multinational ones who
have solid financial background, and so small and medium-sized companies who are lack of global network
of operations will very likely to inefficiently utilize their resources and generate less profits, there is
uncertainty to the value proposition, especially in cases where the goods being exchanged have significant
price volatility.Countertrade also could come with more negotiation issues on agreements, logistics issues,
etc. All these potential risks will translate into a higher expenses on the local interested company.

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