Trade Beyond the USA

Cecilia Rivas Schuermann, International Trade Specialistschuermannc@cochise.edu

Workshop Content• Are you ready to export?

• Why look beyond the USA?

• Assessing and prioritizing world markets

• Market research - Finding import/export data on your industry, free and fee based

• Finding buyers & making contact

Workshop Content – Part 2• Payment methods in international trade

– Cash-in-advance– Letters of credit– Open account

• Trade Financing– Development programs backed by SBA, Ex-Im Bank– Working Capital Programs– Export Credit Insurance– Foreign Buyer Guarantee

• Questions

Are you ready to export beyond the USA?

• Do you have the additional capacity, financial resources, and above all commitment to look beyond the USA markets?

Why look beyond the USA?• Made in the USA is a valuable brand - U.S. goods

and services are the gold standard of innovation, quality, and safety abroad

• Foreign demand is growing: 95% of potential customers live outside of the USA & 75% of purchasing power is outside the USA

• Some foreign markets are growing 4-8% per year

Resource: Why look beyond the USA?

Why look beyond the USA?• USA Dollar vs Euro

• The USA Dollar vs the Euro devaluation since 1999 to 2014: 36.38%

Why look beyond the USA?● USA Dollar vs South Korean Wong; 11.9% devaluation over the last 2 years

Why look beyond the USA?● South Korea Growth

Why look beyond the USA?Projected economic growth

Assessing and prioritizing world markets

Example: USA tomato grower has excess capacity, financial resources, and committed to expand

abroad. What are the top markets/countries to consider?

Assessing and prioritizing world markets

Canada Mexico $-

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

Tomatoes Export Trends 2013-2011 in USA Dollars

2013 2012 2011

Assessing and prioritizing world markets

Bahamas Trinidad & Tobago China Japan $-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

Tomatoes Export Trends 2013-2011

2013 2012 2011

Second Step – Assessing MarketsWhat are you looking for?

• Growth trends, clues for fertile ground

• Preconditions for sales activity

• Even shrinking or stagnant economies might be great markets depending on your strategy

Second Step – Assessing MarketsInvestigative Areas

• Definition of country attributes

• Key industry indicators

• Ease of doing business

• Presence of competitors

• How goods are found or sold in market

Tomato Market– Country Selection Process

• All countries, 100%

• Priority Markets, 5%

• Deep Dive Markets, 1%

• Countries of interest, 15%

Tomato Market– Country Selection Results

Deep Dive MarketsJapan

Priority MarketsTrinidad and TobagoBahamasMéxico

Countries of InterestChinaCanada

Tomato Market – Japan

Tomato Market – Japan● Annual production fell by 15% from 2000 to 2010 and further affected by 2011 tsunami

• Most tomatoes are grown in greenhouses tomatoes with high gel and brix content tomatoes unsuitable for burgers, sandwiches

● Fresh tomato shortages are common particularly during the winter season

Tomato Market – Japan● Japan is the largest food importer in the world

• Japanese households spend 23 % of disposable income, per capita on food, which is higher than

anywhere else on earth; USA averages 14%

• Japanese value high quality and convenience and are willing to pay extra

• Japan remains the world‘s third-largest economy, after the United States and China, with a GDP of roughly $5.8 trillion

Tomato Market – JapanEase of doing business in Japan

Ranked in position #27 out of 189 countries; Singapore ranked #1; USA #4; and México #53

Picking your market/Trade Research Statistics

• The Census Bureau’s Foreign Trade Division collects, compiles and disseminates official U.S. export and import statistics,

• www.usatradeonline.gov provides detailed information on over 18,000 commodities on exports and imports

Picking your market/Trade Research Follow market access negotiations• The United States Trade Representative (USTR)

Office’s web site www.ustr.gov to find out about new and developing trade negotiations

• The USTR negotiates agreements to open markets for US exports and to enforce trade agreements to level the playing field

Picking your market/Trade Research Market Research Library

• www.export.gov contains an extensive research library that gives you access to reports on countries, industries, and commercial development

• Country Commercial Guides have up-to-date information on doing business in most countries: the economic environment, leading sectors, trade regulations, customs and standards, and much more

Picking your market/Trade Research The FTA Tariff Tool

• The US negotiates trade agreements with partnering countries to eliminate tariffs, remove nontariff barriers, and secure non-discriminatory treatment of US goods and services

• www.export.gov/fta/tarifftool, go to find search for tariff information on specific goods covered under Free Trade Agreements (FTA)

• The USA has 20 partner countries

Tariff reductions open marketsfor a USA company:

Tariff reductions open markets

Series10

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U.S. Orange Juice Growth in South Korea

2014 2013 2011

Current 13.2 million gallons

account only for January to

April 2014 purchases .

Calculating even monthly

growth: 240%

Tariff reductions open markets

• South Korean orange juice consumption has remained constant over the last three years

• Brazil had been their main supplier due to low production costs until the USA and South Korea signed a trade deal eliminating a 54% tariff in effect until 2012

Finding Buyers/Making Contact at Trade Events

Trade events: go to www.export.gov and tab “trade show” and “trade missions” for upcoming events; events include:

• Foreign trade missions- one-on-one meetings with potential business partners,

• Foreign buyer delegations at US trade shows – match buyers with US exhibitors

Finding Buyers/Making Contact at Trade Events

• Major foreign trade shows – showcase your products or services, often in US exhibitor pavilions

• Reverse trade missions – foreign delegates come to the US to see products and technologies

Finding Buyers/Commercial News USA

• Commercial News USA – advertise worldwide for $499 per issue: magazine reaches an estimated 250,000 readers in 178 countries worldwide, in print and online

• To advertise, contact export@thinkglobal.us , 1-800-581-8533

Finding Buyers/Global B2B Platform• www.thinkglobal.us is a trade leads for

importing and exporting

• Search for Buyers, Sellers & Service Providers

• You can: post a free profile, request a quote, and upload videos

• Free

Finding Buyers/Making Contact – Local US Export Assistance

• The US Commercial Service has offices in 108 US cities and US Embassies and Consulates in more than 70 countries,

• Offices in Tucson and Phoenix,

• Services offered:– Customized services – wide range of services– Trade counseling – develop effective market entry

strategies

Finding Buyers/Making Contact – Local US Export Assistance

• Services offered, continuation:– Business matchmaking – connect with pre-

screened potential foreign buyers, participate in trade events, and meet with industry and government officials in your target market(s)

– Market intelligence – analyze market potential and foreign competition

Finding Buyers/Making Contact – SBDC’s Network of the America’s

International SBDC Expansion Countries:México, Guatemala, Belize, El Salvador,

Honduras, Costa Rica, Panama, Colombia, Jamaica, Dominican Republic,

Barbados, St. Lucía, Dominica

Brazil has an agreement to use SBDCGlobal.com

Finding Buyers/Making Contact – Small Business Development Centers

• www.sbdcglobal.com is an internet selling and buying platform, similar to alibaba.com, where SBDC of the America’s clients can post their products and services and search for items wanted

• SBDCGlobal.com can help: increase sales, lower costs, reduce risk, and build trade expertise

• Platform is by invitation only, with client’s analyst extending invitation

Payment Methods-International TradeFor exporters, any sale is a gift

until payment is received

For importers, any payment is a donation until the goods are

received

Payment Methods-International Trade

• Cash-in-Advance – the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. This is the least attractive option for buyers and can lead to reduced sales if competitor offers terms.

Payment Methods-Cash-in-AdvanceApplicability

Recommended for use in high-risk trade relationships or export markets and ideal for internet-based businesses

Risk Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the importer

Pros • Payment before shipment• Eliminates risk of non-payment

Cons • May lose customers to competitors over payment terms• No additional earnings through financing operations

Payment Methods-International Trade• Letters of Credit (LCs) – one of the most secure

instruments available to international traders when used properly. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents.

• Ensure letter of credit matches risk with INCOTERMS

Payment Methods-International TradeExample matching letter of credit with INCOTERMSSeller sells goods to an established client using Ex-Works Incoterms terms and with a letter of credit requiring seller to submit bill of lading to confirm

shipment of goods. The seller was wondering why payment was being delayed since past payments were always prompt. The seller contacted the bank and bank

asked for bill of lading; however such document is in the buyer’s possession. Buyer has received goods and

is not inclined to forward required document.

Payment Methods- Characteristics LCsApplicability

Recommended for use in new or less-established trade relationships when the exporter is satisfied with the creditworthiness of the buyer’s bank

Risk Risk is evenly spread between seller and buyer, provided that all terms and conditions are adhered to

Pros • Payment made after shipment• A variety of payment, financing, and risk mitigation options

availableCons

• Complex and labor-intensive process• Relatively expensive method in terms of transaction costs

Payment Methods- Different LCs• Confirmed LCs – a greater degree of protection for

the exporter when an LC issued by a foreign bank (the importer’s issuing bank) is confirmed by a US bank. Confirmation means that the US bank adds its engagement to pay the exporter to that of the foreign bank.

• Transferable LCs – the payment obligation under the original LC can be transferred to one or more “second beneficiaries”

• Standby LCs – not intended as a means of payment but can be drawn upon in the event of a contractual default

Payment Methods- Tips for Exporters & LCs• Consult with your bank before the importer applies for

an LC and determine if all LC terms can be met within the prescribed time limits

• Consider whether a confirmed LC is needed

• Ensure that all the documents are consistent with the terms and conditions of the LC

• Beware of many discrepancy opportunities that may cause non-payment or delayed payment

Payment Methods-International Trade• Open Account – transaction is a sale where the goods

are shipped and delivered before payment is due, which is usually in 30 to 90 days. Most advantageous to the importer in terms of cash flow and cost and the highest risk option to the exporter. Exporters agree to this option often because of intense competition and fear of losing the sale. Exporter can mitigate risk by buying export credit insurance.

Payment Methods- Characteristics Open AccountApplicability

Recommended for use (a) in low-risk trading relationships or markets and (b) in competitive markets to win customers with the use of one or more appropriate trade finance techniques

Risk Significant risk to exporter because the buyer could default on payment obligation after shipment of the goods

Pros • Boosts competitiveness in the global market• Helps establish and maintain a successful trade relationship

Cons • Significant exposure to the risk of non-payment• Additional costs associated with risk mitigation measures

Payment Methods- How best to offer an Open Account

• Export Working Capital Financing

• Guarantee Export Working Capital Programs - guaranteed by SBA and Ex-Im Bank

• Export Credit Insurance

• Export Factoring – discounting of short-term receivables, up to 180 days

SBA Financing Export Development

• The Export Express Program from the SBA provides financing up to $500K; eligibility requirements:

– Companies need to have been in business for at least 12 months or have personnel with exporting experience and prior business success

SBA Financing Export Development • The Export Express Program eligibility

requirements continuation:– Companies need to demonstrate that the loan

proceeds will support export activity such as: participating in a foreign trade show, translating product literature , financing specific export orders, or financing fixed assets used in the production of goods or services for export.

SBA Financing Export Development

• The International Trade Loan provides loans for up to $5 Million with a 90% guarantee to lenders for business modernization or expanding facilities in order to meet growing export demand.

Financing Export Working Capital Programs

Both the SBA and the Export-Import Bank (Ex-Im) offer export working capital loan programs

Characteristics Working Capital Programs Applicability

Used to purchase raw materials, supplies, and equipment to fulfill a large export sales order or many small sales orders

Risk Significant risk of non-payment for exporters unless proper risk mitigation measures are used

Pros • Allows fulfillment of export sales orders• Allows exporter to offer open account terms to remain competitive

Cons • Generally available only to SMEs with access to strong personal

guarantees, assets, or high-value receivables• Additional costs associated with risk mitigation measures

Financing Export Working Capital Programs

• SBA’s Export Working Capital Program (EWCP) provides loans with up to 90% guarantee on export loans of up to $5 Million as a credit enhancement. You can apply for EWCP loans before finalizing an export sale or contract to give you greater flexibility to negotiate export payment terms.

Financing Export Working Capital Programs

• Ex-Im Bank’s Working Capital Guarantee Program companies must have been in business for at least one year and have a positive net worth. Products must be shipped from the US and have at least 50% US content. Services must be performed by US based personnel.

Export Credit Insurance

• Ex-Im Bank Export Credit Insurance (ECI) can protect you against the political and commercial risk of a foreign buyer defaulting on payment. You can obtain insurance policies for single or repetitive export sales. Short-term policies generally cover 90% of the principal for political and commercial risk.

• Insurance is also available from private commercial risk insurance companies

Coverage Export Credit Insurance

Short term ECI, which provides 90-95% coverage against commercial and political risk that results in buyer payment defaults normally covers

(1) consumer goods, materials, and services up to 180 days, and

(2) small capital goods, consumer durables, and bulk commodities up to 360 days

Coverage Export Credit Insurance by Ex-Im • Coverage is available in riskier emerging foreign

markets where private insurers may not operate

• Enhanced support is offered for environmentally beneficial exports

• Products must be shipped from the US & have at least 50% US content

• Ex-Im does not cover support military products or purchases made by foreign military entities

Coverage Export Credit Insurance

Medium term ECI, which provides 85% coverage of the net contract value, usually covers large capital equipment up to 5 years. It is recommended that ECI’s cost be incorporated into the selling price as a cost of doing business and exporter should buy it before a customer becomes a problem.

Foreign Buyer GuaranteeEx-Im Bank provides guarantee of commercial loans to foreign buyer of US goods or services against both political and commercial risk of nonpayment. This can service as financing aid since you can arrange attractive financing through your lender by using insured foreign receivables as additional collateral

Foreign Buyer Guarantee

• Ex-Im Bank Medium-Term Guarantees cover the sale of capital goods such as trucks and construction equipment, scientific apparatus, food processing machinery, medical equipment, or project-related services – including architectural, industrial design, and engineering services.

Foreign Buyer Guarantee

• Ex-Im Bank Long-Term Guarantees are available for major projects, large capital goods, and/or project-related services.

Guarantees and medium-term insurance cover 85% of the contract price (100% of the financed portion). The foreign buyer is required to make a 15% cash payment.

Characteristics Foreign Buyer GuaranteeApplicability

Suitable for the export of high-value capital goods or services or large-scale projects that require extended-term financing

Risk Risk is transferred to Ex-Im Bank and to the foreign buyer who is required to make a 15% down payment to the exporter

Pros • Buyer financing as part of an attractive sales package• Cash payment upon shipment of the goods or services

Cons • Subject to certain restrictions for US government policy reasons• Possible lengthy process of approving financing

Foreign Exchange (FX) Risk Management• FX risk is the exposure to potential financial

losses due to devaluation of the foreign currency against the US dollar

• Exporter’s insistence on selling only in US dollars might mean lost opportunities

• Most foreign buyers prefer to trade in their local currencies to avoid FX risk exposure

Characteristics Foreign Currency Dominated Export Sale

Applicability Recommended for use in competitive markets and when foreign buyers insist on trading in their local currencies

Risk Exporter exposed to the risk of currency exchange loss unless a proper FX risk management technique in used

Pros • Enhances export sales terms to help exporters remain competitive• Reduces non-payment risk because of local currency devaluation

Cons • Cost of using some FX risk management techniques• Burden of FX risk management

FX Risk Management Options• Non-hedging FX – simple non-hedging

technique is to price the sale in a foreign currency and cash in advance; the current spot market rate will determine the US dollar value of the foreign proceeds

• FX Forward Hedges – a forward contract enables the exporter to sell a set amount of foreign currency at a pre-agreed exchange rate with a delivery date from 3 days to 1 year into the future

FX Risk Management Options• FX Option Hedges – worthwhile considering

when a sale will be completed; here the exporter acquires the right, but not the obligation, to deliver an agreed amount of foreign currency to the lender in exchange for dollars at a specified rate on or before the expiration date of the option. If the value of the foreign currency goes down, the exporter is protected from loss; more flexible and more costly than FX forward hedges

Missing links• Certificate of origin

• Channel selection – agents, distributors, wholesalers, end users, sales reps

• Price setting, freight charges, currency, delivery

• INCOTERMS

Missing links, part 2• Production, packaging, warehousing, certificate

of quality control

• Insurance certificate, shipping bill, bills of lading, airway bill, packing list, customs invoice, etc.

Thank you!Cecilia Rivas Schuermann, International Trade Specialist

schuermannc@cochise.edu

Trade beyond the USA