Lesson 4: Exporting, Importing, and the Balance of This is one example of countertrade, specifically counter

Trade purchase. By establishing this requirement, the Indian

government was able to help a local agricultural
4.1 Brief History of Importing and Exporting
industry, thereby mitigating criticism of letting a foreign
Brief history of importing and exporting beverage company into the country.

For centuries, importing and exporting has often Why do companies engage in countertrade?
involved intermediaries, due in part to the long
1. Satisfy a foreign government mandate/policy.
distances traveled and different native languages
2. To hedge against price and currency
spoken.
fluctuations.
The spice trade of the 1400s was no exception. 3. To repatriate profits from countries that limit
the amount of currency that can be taken out of
Spices were very much in demand because Europeans the country.
had no refrigeration, which meant they had to preserve
meat using large amounts of salt or risk eating half- One reason that companies engage in this practice is
rotten flesh. that some governments mandate countertrade on very
large-scale (over $1 million) deals or if the deal is in a
Spices disguised the otherwise poor flavor of the meat. certain industry.
Europeans also used spices as medicines.
For example, South Korea mandates countertrade for
The European demand for spices gave rise to the spice government telecommunications procurement over $1
trade. million.
The trouble was that spices were difficult to obtain When governments impose counter purchase
because they grew in jungles half a world away from obligations, firms have no choice but to engage in
Europe. countertrade if they wish to sell goods into that
The overland journey to the spice-rich lands was country.
laborious and involved many middlemen along the way. Countertrade also can mitigate the risk of price
Each middleman charged a fee and thus raised the price movements or currency-exchange- rate fluctuations.
of the spice at each point. Because both sides of a countertrade deal in real goods,
By the end of the journey, the price of the spice was not financial instruments, countertrade can solve the
inflated 1,000 percent. inflation risk involved in foreign currency procurement.

Thus, giving birth to the formal concepts of exporting In effect, countertrade can be a better mechanism than
and importing. financial instruments as a way to hedge against inflation
or currency fluctuations.
Exporting – is defined as the sale of products and
services in foreign countries that are sourced or made in Finally, countertrade offers a way for companies to
the home country. repatriate profits.

Importing – is the flipside of exporting. Importing refers Since some governments restrict how much currency
to buying goods and services from foreign sources and can flow out of their country.
bringing them back into the home country. Governments do this to preserve foreign exchange
4.2 Countertrade reserves.

Countertrade Countertrade offers a way for companies to get profits

back to the home country via goods rather than money.
Some countries limit the profits a company can take out
of a country. 4.3 Global sourcing

As a result, many companies resort to countertrade, Global sourcing

where companies trade goods and services for other  refers to buying the raw materials, components,
goods and services; actual moneys are involved only to or services from companies outside the home
a lesser degree, if at all. country.
All kinds of companies, from food and beverage  raw materials are sourced from wherever they
company (e.g., PepsiCo) to power and automation can be obtained for the cheapest price
technologies giant (e.g., ABB Group), engage in (including transportation costs) and the highest
countertrade. comparable quality.

When PepsiCo wanted to enter the Indian market, for Recall the events of the spice trade. Europeans sourced
example, the government stipulated that part of spices from China and India.
PepsiCo’s local profits had to be used to purchase The long overland trade routes required many
tomatoes. payments to intermediaries and local rulers, raising
This requirement worked for PepsiCo, which also owned prices of spices 1,000 percent by the end of the journey.
Pizza Hut and could export the tomatoes for overseas
consumption.
Such a markup has naturally spurred Europeans to look In addition to quality standards, ISO also developed ISO
for other trade routes and sources of spices. 14000 standards, which focus on the environment.
Specifically, ISO 14000 certification shows that the
The desire for spices and gold is what ultimately led
company works to minimize any harmful effects it may
Christopher Columbus to secure funding for his voyage
have on the environment.
across the Atlantic Ocean.
2. Trends in Sourcing: Considering Carbon Costs
Even before that, Portuguese ships were sailing down
the coast of Africa. In the 1480s, Portuguese ships were One of the rising concerns about global sourcing is that
returning to Europe laden with African melegueta of the carbon footprint of goods traveling long
pepper. distances.

This pepper was inferior to the Far Eastern varieties, but A carbon footprint is a measure of the impact that
it was much cheaper. activities like transportation and manufacturing have on
the environment, especially on climate change.
By 1500, pepper prices dropped by 25 percent due to
the new sources of supply. The “footprint” is the impact, and “carbon” is shorthand
for all the different greenhouse gases (GHGs) that
Today, the pattern of global sourcing continues as a way
contribute to global warming.
to obtain commodities and raw materials.
Everyone’s daily activities, such as using electricity or
But sourcing now is much more expanded; it includes
driving, have a carbon footprint because of the
the sourcing of components, of complete manufactured
greenhouse gases produced by burning fossil fuels for
products, and of services as well.
electricity, heating, transportation, and so on.
There are many companies that export to a country
The higher the carbon footprint, the worse the activity
while sourcing from that same country.
is for the environment.
For example, Apple sells iPods and iPads to China, and it
Outsourcing
also manufactures and sources components in China.
In outsourcing, the company delegates an entire
Best Practices in Global Sourcing
process to an outsource vendor.
1. Judging Quality through ISO 9000 Certification
The vendor takes control of the operation and runs the
How can companies know that the products or services operation as it sees fit.
they’re sourcing from a foreign country are of good
The company pays the outsource vendor for the end
quality?
result; how the vendor achieves those end results is up
The mark of good quality around the world is ISO 9000 to the vendor.
Certification.
For example, imagine a company that has an idea for a
In 1987, the International Organization for new medical device, but lacks market research into the
Standardization (ISO) developed uniform standards for opportunity.
quality guidelines.
The company could outsource its market research to a
Prior to December 2000, three ISO standards were firm.
used:
For a relatively small fee, the outsourced firm could,
1. ISO 9001 within a time frame, can provide an independent
2. ISO 9002 market-research report.
3. ISO9003
Companies outsource for numerous reasons:
These standards were collectively referred to as ISO
1. Reducing costs by moving labor to a lower-cost
9000.
country
In 2000, the standards were merged into a revised ISO 2. Speeding up the pace of innovation by hiring
9001 standard named ISO 9001:2000. engineers in a developing market at much lower
cost.
In 2008, a new revision was issued, ISO 9001:2008. 3. Funding development projects that would
The standards are voluntary, but companies can otherwise be unaffordable.
demonstrate their compliance with the standard by 4. Liberating expensive home-country-based
passing certification. engineers and salespeople from routines tasks,
so they can focus on higher value-added work
The certification is a mark that the company’s products or interacting with customers.
and services have met quality standards and that the 5. Putting a standard business practice out to bid,
company has quality management processes in place. in order to lower costs and let the company
Companies of any size can get certified. To ensure high- respond with flexibility.
quality products, some companies require that their If a new method of performing the function becomes
suppliers be certified before they will source products advantageous, the company can change vendors to take
or services from them. ISO 9001:2008 certification is a advantage of the new development, without incurring
“seal of quality” that is trusted around the world.
the delays of hiring and training new employees on the The importer is the person or entity buying or
process. transporting goods from another country into the
importer’s home country.
The Hidden Costs and Risks of Outsourcing
The carrier is the entity handling the physical
Although outsourcing’s costs savings, such as labor
transportation of the goods. Well- known carriers across
costs, are easy to see, some of the hidden costs aren’t
the world are United Parcel Service (UPS), FedEx, and
as visible which includes the following:
DHL.
 product obsolescence, deterioration, spoilage
Customs administration offices in both the home
 taxes
country and the country to which the item is being
 loss due to damage or theft
exported are involved in the transaction.
 increased administrative and business travel
costs Their mandate is not simply to move goods through
 threats of terrorism, religious strife customs quickly and efficiently to facilitate international
 changing governments and failing economies trade; it also ensures that the items coming into the
country are validated and safe as well.
If a company outsources a service, how does it
guarantee the quality of that service? Role of Intermediaries

One way is through service-level agreements. Intermediaries can get involved at the discretion of the
importer or exporter.
Service-level agreements (SLAs) contractually specify
the service levels that the outsourcer must meet when Entrepreneurs and small and midsize businesses, in
performing the service. particular, make use of these intermediaries, rather
than spending their resources to build these capabilities
SLAs are one way that companies ensure quality and
in- house.
performance when outsourcing services.
A freight forwarder typically prepares the
SLAs typically include the following components:
documentation, suggests shipping methods, navigates
 Scope of services (Frequency of service, Quality trade regulations, and assists with details like packing
expected, Timing required) and labeling.
 Cost of service
At the foreign port, the freight forwarder arranges to
 Communications
have the exported goods clear customs and be shipped
 Dispute-resolution procedures
to the buyer.
 Reporting and governance
 Key contacts The process ends with the freight forwarder sending the
 Performance-improvement objectives documentation to the seller, buyer, or intermediary,
such as a bank.
4.4 Managing Export and Import
An Export Management Company (EMC) is an
Who are the main actors in exporting and importing?
independent company that performs the duties a firm’s
The size of exports in the world grew from less than export department would execute.
$100 million after World War II to well over $11trillion
The EMC handles the necessary documentation, finds
today.
buyers for the export, and takes title of the goods for
Export and import is big business, but it isn’t just for big direct export. In return, the EMC charges a fee or a
businesses. commission for its services.

Most of the participants are small and midsize Banks perform the vital role of finance transactions.
businesses, making this an exciting opportunity for
What’s Needed for Import and Export Transactions?
entrepreneurs.
Various forms of documentation are required for import
Importing and exporting require much documentation
and export transactions.
(i.e., filing official forms) to satisfy the regulations of
countries. 1. Bill of lading - is the contract between the exporter
and the carrier (e.g., UPS or FedEx), authorizing the
The value of the documentation is that it enables trade
carrier to transport the goods to the buyer’s
between entities who don’t know each other.
destination.
The parties are able to trust each other because the
The bill of lading acts as proof that the shipment was
documentation provides a common framework and
made and that the goods have been received.
process to ensure that each party will do what they say
in the import/export transaction. 2. Commercial or customs invoice - is the bill for the
goods shipped from the exporter to the importer or
The main parties involved in export and import
buyer.
transactions are the following:
Exporters send invoices to receive payment, and
The exporter is the person or entity sending or
governments use these invoices to determine the value
transporting the goods out of the country.
of the goods for customs valuation purposes.
3. Export declaration - is given to customs and port 5. Governmental or other organizational financing.
authorities. The declaration provides the contact
Some companies have mechanisms for providing credit
information for both the exporter and the importer (i.e.,
to their business customers.
buyer) as well as a description of the items being
shipped, which the Customs uses to verify and control For example, package delivery company United Parcel
the export. Service (UPS) also owns warehouses to which its
customers can ship their products. Because UPS can see
The government also uses the information to compile
and track the inventory that its business customers
statistics about exports from the country.
send using this service, it can lend those companies
4. Certificate of origin - as its name implies, declares the money based on their warehouse inventory and goods-
country from which the product originates. in-transit.

These certificates are required for import duties. These Simply put, UPS information systems know that a
import duties are lower for countries that are company’s goods are on their way or in the warehouse,
designated as a “most favored nation”. so UPS can lend money based on that knowledge.

5. Insurance certificates – (not required, optional) show The Role of Organizations in Providing Financing
the amount of coverage on the goods and identify the
Countries often have government-supported
merchandise. Some contracts or invoices may require
organizations that help businesses with import and
proof of insurance in order to receive payment.
export activities to and from their country.
6. License - some governments require the purchase of
These services are, for the most part, free and include
a license (i.e., permission to export) for goods due to
providing information, contacts, and even financing
national security or product scarcity.
options.
Interestingly, licenses for import and export date back
1. Japan External Trade Organization (JETRO) -
to the1500s at least, when Japan required a system of
originally established in the 1950s to help the war-torn
licenses to combat the smuggling of goods taking place.
Japanese economy by promoting export of Japanese
7. Letter of credit - is a legal document issued by a bank products to other countries.
at the importer’s (or buyer’s) request.
By 1980s, Japan had massive export surpluses and
The importer promises to pay a specified amount of began to feel the need to promote imports.
money when the bank receives documents about the
So JETRO’s mission reversed; its focus became to assist
shipment.
foreign companies to export their products into Japan.
The letter of credit is like a loan against collateral (in this
JETRO now offers such free services as:
case, the goods being shipped) in which the funds are
placed in an escrow account held by the bank.  market-entry information, business partner
matching
Letters of credit are trusted forms of payment in
 expert business consulting (through bilingual
international trade because the bank promises to make
business consultants who’re experts in various
the payment on behalf of the importer (i.e., buyer) and
industries), and
the bank is a trusted entity.
 access to a global network of executives and
Given that the letter of credit is like a loan, getting one advisors.
issued from the bank requires proof of the importer’s
On the financing side, JETRO offers subsidies to
(buyer’s) ability to pay the amount of the loan.
potential companies, free offices for up to four months
4.5 Options for Export and Import Financing while the foreign firm researches the Japanese market,
and exhibition space when the company is ready to
Basics of Export Financing
display their products to prospective Japanese
Financing against collateral is called secured financing, importers.
and it’s the most common method of raising new
2. Overseas Private Investment Corporation (OPIC) -
money. Banks will advance funds against payment
established as an agency of the US government in 1971.
obligations, shipment documents, or storage
documents. OPIC helps US businesses invest overseas, particularly in
developing countries. As its website
There are several common sources of financing:
([Link] states, “OPIC Financing
1. A loan from a commercial bank. provides medium- to long-term funding through direct
loans and loan guaranties to eligible investment
2. A loan from an intermediary, such as an export projects in developing countries.”
management company that provides short-term
financing The most useful tool of OPIC is that it can provide
financing in countries where conventional financial
3. A loan from a supplier, for which the buyer can make institutions often are reluctant or unable to lend on
a down payment and ask to make further payments such a basis.
incrementally

4. A loan from the corporate parent.

3. Export-Import Bank of the United States (Ex-Im Let's say that a country's exports of goods in a given
Bank) - helps exporters who have found a buyer, yet the year are worth $100 million, and its imports of goods
buyer is unable to get financing for the purchase in their are worth $80 million. To calculate the balance of trade,
own country. you would subtract the value of the imports from the
value of the exports:
Ex-Im Bank can provide credit support (i.e., loans,
guarantees, and insurance for small businesses) that Balance of Trade = Exports - Imports
covers up to 85 percent of the transaction’s export
= $100 million - $80 million
value.
= $20 million
4. Private Export Funding Corporation (PEFCO) - a
private-sector organization. PEFCO was formed in 1970 In the example, the balance of trade is $20 million,
“to assist in financing U.S. exports by supplementing the which means that the country has a trade surplus of +
financing available from commercial banks and other $20 million.
lenders.
It's important to note that the balance of trade is
4.6 Balance of Trade typically measured in the currency of the country whose
trade balance is being calculated.
Balance of Trade
For example, if the country in the example is the United
Balance of trade (BOT) is the difference between the
States, the balance of trade would be measured in US
value of a country's exports and the value of a country's
dollars. If the country is Japan, it would be measured in
imports for a given period.
Japanese yen, and so on.
Balance of trade is the largest component of a country’s
What is a favorable Balance of Trade?
Balance of Payments (BOP).
A favorable balance of trade occurs when a country's
Sometimes, the balance of trade between a country's
exports exceed the value of its imports.
goods and the balance of trade between its services are
distinguished as two separate figures. This indicates a positive inflow of money to stimulate
local economic activity.
The balance of trade is also referred to as the trade
balance, the international trade balance, the
commercial balance, or the net exports.

Economists use the BOT to measure the relative

strength of a country's economy.

A country that imports more goods and services than it

exports in terms of value has a “trade deficit” or a
negative trade balance.

Conversely, a country that exports more goods and

services than it imports has a “trade surplus” or a
positive trade balance.

A positive balance of trade indicates that a country's

producers have an active foreign market.

After producing enough goods to satisfy local demand,

there is enough demand from customers abroad to
keep local producers busy.

A negative balance of trade means that currency flows

outwards to pay for exports, indicating that the country
may be overly reliant on foreign goods.

Calculating the Balance of Trade

A country's balance of trade is calculated by the

following formula:

BOT = Exports – Imports

Where:

Exports represents the currency value of all goods sold

to foreign countries.

Imports represents the dollar value of all foreign goods

imported from abroad.

Here's an example of how to calculate the balance of

trade: