University
of Washington
Geography
349 (Professor
Harrington)
Trade Logistics
Contents:
OVERVIEW
Exporting
and
importing raise a host of marketing,
logistical, and financial issues
that differ in degree (and to some extent,
in kind) from domestic sales and
purchasing.
A
potential exporter/importer must begin
the process with a clear idea of the
role of international trade in the
company's operations:
incidental? long-term growth?
central? This will influence
decisions all along the line, decisions in
which the optimal choice depends on the
amount of trade planned and the level of
corporate resources that the
exporter/importer is willing and able to
commit to the effort.
A company (that would become) engaged in
international business needs to decide (and
modify, if needed) the optimal form
of international business:
- indirect exporting/importing (title of the
product changes hands in that company's
country);
- direct exporting/importing;
- licensing the rights to produce in a foreign
country;
- franchising;
- directly-owned operations in a foreign
country.
ACADEMIC
STUDY OF EXPORTING
Large companies are more likely to engage in
exporting (as well as other forms of
international business) than are small
companies. This makes sense because
of
- the fixed costs involved in exporting
(though note the ways in which intermediaries
can reduce these fixed costs while increasing
the per-unit costs or reducing the overall
profitability) and
- the locally-oriented sectors (retailing,
local professional services) in which most
small firms concentrate.
However, large exporters are not, overall,
more export-intensive (proportion of revenues
from foreign sales) than small exporters.
This
makes
sense because a small company that puts
substantial of its limited efforts into exporting
must receive substantial proportions of its
revenues from exporting.
What is it about firms that leads to a
likelihood of international-business
attempts and success?
There are behavioral, organizational, and
economic answers to this question, and there are
many studies based on each of these approaches
to the question. Most studies view internationalization
as a process, that may begin with passive
exporting, go through conscious and increasingly
direct forms of export marketing and import
arrangements, and then entail foreign investment
and even cross-national management and
ownership.
EXPORT LOGISTICS
(see DRS Chapter
13)
Marketing
See lecture
notes
on
export marketing.
Note the importance of intermediaries to
assist with export logistics. Export
management companies (EMCs) and export
trading companies (ETCs) may take
title to goods to be exported, in which case the
producer is engaging in indirect
exporting. EMCs and ETCs may manage export
marketing, sales, shipping, and billing on
behalf of the producer, who then engages in
direct exporting.
Intermediary:
a business organization (which may be
state-owned) that handles buying, selling,
or shipping for other organizations or
households. An intermediary adds
value (and gets paid) because of the
process knowledge, contacts, and breadth
of clients the intermediary brings to the
buyer or seller -- the buyer or seller is
usually focused on production, marketing,
or consumption. Intermediaries can
also spread the risk a buyer or seller
faces when relying on one seller or buyer.
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Brokers or
principals
take ownership of the item to be
traded, removing all risk from the buyer
or seller. Most export trading
companies and some export management
companies act as brokers.
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Agents do
not take ownership, but make arrangements
for shipping or trading. Most
freight forwarders are agents.
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ETCs tend to be larger, and (in the U.S.) can be
formed as consortia of producers in the same
sector, by banks, or by state and local
governments. ETCs, like their foreign
counterparts (e.g., Japanese-based sogo
shoshas and Korean-based chaebols,
each of which is typically much more vertically
integrated than U.S. ETCs), engage in import and
export arrangements, often being at least as
concerned about international sources of supply
for clients who need inputs or products to sell
as they are about finding export markets for
producers.
Shipping
Freight forwarders, foreign or domestic,
are important intermediaries, used for shipments
even by producers who make their own export
sales. Because of their volumes
(especially on particular routes), freight
forwarders can obtain much better freight rates
and terms than the producer/shipper.
Export documentation
(defined in the DRS text, pages
470-1):
export license: document declaring
that the exporter has permission to export the
precise good or service to an importer in the
specific country; necessary for shipment
of certain types of militarily or
intelligence-relevant products.
pro forma invoice (to be shown
and discussed in class): written like an
invoice, it is essentially a detailed list of
the items, prices, payment currency/terms/forms,
and delivery time/means that the exporter is
offering the importer.
commercial invoice: "a bill for
the goods from the buyer to the seller,"
including "a description of the goods, the
address of the buyer and seller, and delivery
and payment terms" (DRS, p. 470)
bill of lading: This one document
has four functions:
- manifest of items being shipped (as in "bill
of loading")
- contract between the shipper [typically, the
exporter or the importer] and the carrier;
- receipt from the carrier that the goods are
now in its control; and
- title document.
When the original bill of lading is signed by the
importer, the importer has officially taken title
to the goods, and the sale is complete. This
is the moment from which the time terms of payment
(upon sale, 30 days, etc.) begin. The signed
bill of lading is a key document for the exporter
to prove that it has a financial receivable, which
the exporter could sign over to a factoring
company to receive immediate payment (at a
discount from the amount receivable).
See link
1 and link
2 to sample bills of lading, and a document
that
describes the items required on the second
sample.
certificate of origin: note that
this is critical in the case of trading within a
free-trade area, in which goods must have a
minimum local content (i.e., percentage of total
value that is a result of activity within the
free trade area, as opposed to imported from
outside the area) to move freely within the
trade area.
shipper's export declaration: document
prepared by the exporter for use by its
government's trade statistics.
export packing list: "itemizes
the material in each individual package,
indicates the type of package used, and is
attached to the outside of the package" (DRS,
p.471); useful for shippers, carriers,
receiving port workers, and freight forwarders.
Payment
There are three
variables for export payment.
Below, the alternatives are listed under each of
the three variables.
Alternatives are listed in order of declining
preference or security to the exporter. Which
method
is used depends on the relative bargaining
power of exporter and importer.
CURRENCY
- exporter's (avoids currency risk on the part
of the exporter)
- importer's (avoids currency risk on the part
of the importer)
- third currency
TERMS (i.e., timing of payment
with respect to the receipt of goods)(see DRS pp. 684-6)
- in advance of shipment
- upon receipt of goods
- 30-, 60-, 90, 180-day credit
- open account
- consignment (importer pays as it sells the
goods in the foreign market)
METHOD OR FORM (see DRS pp. 684-6)
- letter of credit: standard
medium of international trade; it is,
essentially, a letter from the importer's
bank, assuring the exporter of payment;
it can also be confirmed by a bank in the
exporter's country, for additional assurance
of the credit-worthiness of the importer and
the importer's bank. It can be irrevocable,
so that its terms can only be changed with the
written agreement of all three (or four)
parties. (A confirmed, irrevocable letter of
credit is the most common form of
payment).
- draft (or bill of exchange): a draft
is analogous to our everyday check -- a
statement from the importer to a bank
instructing the bank to pay to the
importer. The importer can exchange this
at its bank or some other financial entity,
which would try to get payment from the
importer or the importer's bank.
- countertrade (in lieu of currency) (see
DRS pp. 474-5)
Financing export sales
Given the credit basis of most export sales, the
expenses of production and marketing have to be
borne up front. This is a major barrier to
substantial export activity by smaller
companies. Companies can get assistance
from:
- factoring
- government-guaranteed export finance loans
(e.g., Ex-Im Bank)
- direct government loans (e.g., Small
Business Administration)
Most commonly, however, companies finance export
sales in the same way they finance domestic sales
on which they grant credit: through their
working capital, or through a line of credit with
a bank.
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