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International FAQ's

Why Export? Benefits and Risks

Getting Started: Basics of Exporting

Terms of the Trade: Exporting Vocabulary



Why Export? Benefits and Risks

Q: Why is exporting so important?
A: In today’s competitive economy, many organizations are assessing their future in the global market place. Most are concluding that expanding into receptive markets is more important than ever. Ninety-five percent of the world’s population (two-thirds of its purchasing power) exists outside the United States. As developing economies expand, demand will increase and new markets will emerge.

Exporting can be considered a risk-hedging tool against economic decline. Market conditions around the world are never static so when one particular market is in a state of downturn, export diversity can help minimize the impact for a small, vulnerable business.

Q: What does exporting do for the economy as a whole?
A: Exporting in the global market has many economic advantages. Most directly, profitably exporting goods brings new capital into the domestic economy, thus contributing to real growth. In the past decade, exports have been responsible for one-third of the overall growth of the U.S. economy. This growth in turn leads to more domestic jobs, better wages, and a higher standard of living.

Beyond providing a means of macroeconomic growth, exporting can be an appealing solution to reducing trade deficits. Export growth helps sustain and grow domestic industries by adding jobs, promoting growth, and keeping the U.S. in a favorable global trading position. Exports are also politically important. Open trade policies encourage interdependent world economies, which in turn make political conflicts less desirable worldwide. U.S. exports can also serve as a means of communicating American cultural and diplomatic information to foreign markets.

Q: What are the benefits of exporting for my company?
A: Exporting can lead to an increase in sales and profits. A larger market means more demand for your product; a higher sales volume helps to reduce average unit costs and raise profits. Exporting helps diversify your markets, extends product life cycles by using idle capacity, and helps reduce unit costs through economies of scale. Exports also help sharpen competitiveness, broaden contacts, and enhance understanding of global markets and cultures. In addition, involvement in a wide range of markets spreads out risk, so that dependence on domestic markets is reduced.

The technological capabilities of foreign markets often lag behind the advanced American market, particularly in newly industrialized nations. The world market offers new sales options when domestic business slows down. Exports can help offset sales downturns during recessions and seasonal changes. When the domestic economy stagnates, the economy in other countries may be growing. As their production and consumption increase, their import demand rises. In your slow periods, rather than accumulate inventory, idle more capacity, or lay off people, explore export opportunities in growth economies. Similarly, when it's summer or winter in your country, it's just the reverse in other parts of the world. When your season ends, these countries are looking for the seasonal products you just stopped selling at home.

Q: The U.S. Department of Commerce states that only one in three companies in the U.S. that could export actually does. Why?
A: American firms often perceive the costs and risks of selling their products in foreign markets as greater than the benefits of doing so. Common misconceptions include the fear that more exports will lead to a greater openness to imports, eventually hurting American workers; that exporting seems to benefit foreign markets more than our own; and, small businesses may see exporting as monopolized by large, recognizable firms. Firms feel insecure about the unknown aspects of foreign markets, especially when they are satisfied with business domestically.

In fact, exporting can be a highly profitable venture for companies of any size. With quality products, careful market research, and the commitment to succeed, firms that choose to export can reap the benefits of expanded sales and opportunities for growth, at home and abroad.

Q: Exporting may be good for the firm's top executives, but how does it affect employees?
A: The power of exports to introduce real growth to the nation's economy affects all workers, not only those at the highest levels. Selling to a larger market increases the need for efficient workers, often creating more jobs at the manufacturing level. More importantly, exporting increases job quality. Workers in firms with an export market, whether large or small, receive, on average, 15% higher wages than workers in firms operating solely within a domestic market. Plus, employees benefit from exposure to international markets; their jobs are more interesting and their skills more broad, making them more productive and also more marketable in the future.

Q: There are benefits to exporting, but what are the risks?
A: Expanding business outside of U.S. markets involves many risks, although these risks can be reduced through careful research and business practices. Although many foreign nations are politically stable, trading beyond the domestic marketplace carries some political risk. Unfortunately, companies have little or no control over political upheavals abroad, effects of which could range from economic sanctions to the physical dangers of outright war. Firms dealing with developing nations with a volatile history must be especially ready to change directions quickly as situations dictate. Yet even politically stable nations can pose problems to exporters, especially regarding currency fluctuations. In currency situations, a firm has to be aware that changes in third-party competitors' currency valuations can affect one's own sales. However, while foreign market volatility creates economic risks, it can also produce significant profits and financial advantages. Close monitoring and flexibility can help prevent exporters from experiencing any major political catastrophes.

The major financial risk of exporting is buyer non-payment after goods have been shipped. Generally, such situations can be avoided, especially if a relationship of trust has been developed with the buyer, and the seller takes adequate financial precautions. Just as in domestic business transactions, companies should be aware of potential scams. Companies should also be aware that payments for exported goods often involve a longer credit time than domestic trading, and plan accordingly.

The most common, and most avoidable risks of exporting occur when companies fail to complete adequate research about target markets. Exporters need to be aware of the business practices, customs, and commercial laws of foreign markets. Product marketing should be adapted to individual trade arenas and languages and extra care should be taken to protect your intellectual property. However, with knowledge and planning, these risks are relatively minor. A wealth of resources exists, from reference books to export consultants, to help any interested firm learn the basics of exporting.

The possibilities and benefits a company can gain through exporting usually outweigh the risks involved. Proper research and business strategies can help avoid many of the pitfalls of foreign trade, allowing businesses to take advantage of exciting global opportunities.




Getting Started: Basics of Exporting

Q: Which companies should export?
A: Any company can export if they are willing to invest the time and resources into researching markets of interest and are patient about results. Your firm should evaluate the commitment of its management and staff to exporting, the funding options available, and your capabilities to increase production. Important factors in deciding if exporting will be a profitable venture include determining if there is a need for the product and determining which channel of distribution would be most successful. If your product has been successful domestically, remember that it may need to be modified to be marketable abroad. Products that do not require a great deal of training for use, versatile products, and unique products tend to have a higher export potential, but investing the time to adjust your product to a viable target market can produce good results for products that do not fit into these categories. After you have assessed these marketing challenges, you will be better able to determine if exporting is right for your company.

Q: What about size? Isn't exporting dominated by large companies?
A: It's true that the greatest volume of exported goods comes from a small number of very large American companies. But actually, the number of medium and small sized firms that exports is quite high and growing. Studies have shown that all companies who export can derive benefits from trade, regardless of the volume of goods sold. Expanding markets can help companies of any size increase profits. Small companies also may find exporting to be a good way to grow in size.

Successful exporting requires a large investment of time and resources. While large companies may have extra capital, small companies often have a higher potential for success with exports. Small firms have shorter communication chains and decision-making processes, making international dealings more direct and personal. As long as smaller firms take advantage of the resources available to assist them, exporting can be a very successful business venture.

Q: What planning is necessary before my company begins to export?
A: Successful exporting depends upon generating a detailed export plan. Writing out an export plan can help communicate your company's goals, strengths, weaknesses and responsibilities before you invest time, money, and energy into developing foreign markets for your products. Often, financial agencies require businesses to have an export plan to gain investment capital assistance.

Trade counselors or managers can help you to develop a realistic export plan. These outlines should include the reasons you wish to begin exporting, an assessment of your exporting potential, target markets, business strategy, pricing, payment and delivery details, and finance requirements and options.

Guidelines for preparing a good export plan.
How to develop an export business plan.

In many cases, however, this ideal approach is not feasible because the company may be responding to an inquiry from a prospective customer. In this situation, evaluate the costs and benefits of the potential sale and seek help from experienced advisors before proceeding.

Q: Where should I export my products?
A: Detailed research will help you find foreign markets where your product could be profitably exported. A good first step would be finding out where your industry is successful globally, to determine where your product might be in demand. Good research will also help you to identify competitors, necessary marketing adjustments, and possible barriers in your chosen trade arena. Most businesses conduct primary research - directly from the foreign marketplace, via telephone, surveys, and potential customers - and secondary research from published resources and government agencies. A great deal of research information is available on the Internet. Click here to see Country Commercial Guides (CCG's), which are prepared annually by U.S. embassies with the assistance of several U.S. government agencies. These reports present a comprehensive look at countries' commercial environments; using economic, political and market analysis. A trade consultant can be of assistance in this area as well.

Once you have chosen target markets, making personal visits becomes an important part of your research. Acquainting yourself with export markets will help you to negotiate foreign customs, business practices and values. In addition, personal visits will demonstrate your company's commitment to potential buyers, helping you build good business relations based upon mutual trust.

Don’t overlook opportunities to follow your existing customers overseas. Many firms begin their international expansions as part of the global supply chain to large multinational clients where a relationship already exists.

Q: How can I establish good channels of communication with buyers and contacts in my export market when I don’t speak the language?
A: The most important point to remember when you do business abroad is that you are the foreigner. The market doesn't have to adapt to you, instead, you have to adapt to the business practices and customs of the market. Even if your clients speak fluent English, they may not follow the same codes of etiquette. Gestures, slang, and humor could all be misunderstood in other cultures. When you conduct market research, be sure to investigate the communication methods of your target export area.

While it may seem daunting, learning the language of your export market is a valuable investment. Beyond showing clients your genuine interest in their market, knowing their language will ensure fewer communication difficulties. You will also become more qualified for the future in an ever more global marketplace. Even if you can't learn an entire foreign language, take the time to learn a few key phrases - 'hello,' 'please,' and 'thank you,' for example - to foster friendly relationships with your buyers abroad.

If your clients understand English, be sure to speak slowly and clearly to avoid misunderstandings. Many people abroad can read English better than they can speak it, so you may want to put crucial transactions down on paper. If you only speak English and your clients do not, you should hire translators when doing business abroad.

Q: How can I prepare my staff to be effective in my company's export ventures?
A: As long as you educate your staff at each step of the export process, exporting will be a rewarding experience for your company. You will need to hire foreign market representatives, who should be educated about your products, your competition, and your goals. Your management and employees at home are key players in your success as well. Familiarize them with your export plan and continue to keep them informed about your progress. Encourage employees to learn the language(s) of new markets. The more you educate your employees, the better they will be able to perform. To their benefit, the international experience they gain will make their jobs more interesting and make them more marketable in the future.

Q: What costs can I expect?
A: Exporting doesn't have to be a high-cost venture, but will require some extra financial investment. Initial research, advertising costs, and personnel additions are typical expenses. Communication with foreign markets is more expensive than in the domestic arena. Be sure you have a fax machine, and consider email as a lower-cost method of communication (although using email requires your clients to be as technologically up-to-date as you are). Traveling costs are sure to increase as well.

Overall, with good planning, your costs should not exceed the eventual profits of exporting. If you're careful, you should be able to avoid costly mistakes and scams. Low-cost research and advertising opportunities are available, and if you have limited funds, you may be able to obtain business loans to get you started. Exporting is like any other business expansion decision and needs to be thought of as an investment rather than a quick way to increase profits.

Q: Where can I get financial assistance?
A: Begin looking for loans at your local banks. A bank with an international department may be more receptive to export proposals, but any lender will be sensitive to the risks of your enterprise. Riskier international business moves may find financial support with venture capitalists, but the capital they provide will be exchanged for equity in your business. As your company grows, the venture capitalist's share in it will grow proportionally. If you have trouble securing loans, you can contact government agencies that provide export financing. Below is a list of resources you can access for more information:

Programs for Financing Exports

Export Finance Matchmaker
A U.S. Department of Commerce program designed to match, via the Internet, U.S. exporters with sources of export financing or risk mitigation.

Export-Import Bank of the United States
The Export-Import Bank of the United States (Ex-Im Bank) is an independent U.S. government agency that helps finance the overseas sales of U.S. goods and services. Programs offered include: Credit Insurance, Working Capital and Loan Guarantees.

SBA International Trade Loans
Provides financing for small businesses to expand their export markets or upgrade their facilities to improve their competitive position.

US Trade and Development Agency Market Feasibility Studies
Grants are available to fund feasibility studies and other project planning activities for major projects in developing and middle-income countries.

Overseas Private Investment Corporation (OPIC)
OPIC's political risk insurance and loans assist U.S. businesses to invest and compete in emerging markets and developing nations.
Programs for Financing Agricultural Exports
WUSATA
The Western United States Agricultural Trade Association, is a non-profit organization that provides grants to promote the export of food and agricultural products from the Western region of the United States.

USDA Export Credit Guarantee Program
Can be used to underwrite credit extended by the private banking sector on exports of food and agricultural products.

USDA Supplier Credit Guarantee Program
Encourages exports to buyers in countries where credit is necessary to maintain or increase U.S. sales, but where financing may not be available without CCC guarantees.

USDA Facility Guarantee Program
Provides payment guarantees to facilitate the financing of manufactured goods and services exported from the United States to improve or establish agriculture-related facilities in emerging markets

USDA Export Enhancement Program
Helps products produced by U.S. farmers meet competition from subsidizing countries, by paying cash to exporters as bonuses, allowing them to sell U.S. agricultural products in targeted countries at prices below the exporter's costs of acquiring them.

FAS Market Access Program Funds
Provides direct cost-share assistance to non-profit agricultural trade associations who assist U.S. companies in entering and expanding sales in foreign markets.

Q: Do I need an export license to sell goods in foreign markets?
A: Most products can be shipped to other countries without an export license and can be cleared by entering "NLR" (no license required) on the Shipper's Export Declaration. Licenses are generally required for high tech or strategic goods or goods shipped to certain countries where national security or foreign policy controls are important. The Bureau of Industry and Security (BIS) is responsible for implementing and enforcing the export administration regulations and can answer related questions. Their on-line Simplified Network Application Process (SNAP) allows you to submit export and re-export applications, high performance computer notices, and commodity classification requests via the Internet in a secure environment. Regulations are constantly changing so be sure to seek assistance from experts in logistics and in the markets you have targeted.

Q: How do I determine the pricing of my exported products?
A: Just as in domestic markets, prices are determined by local supply and demand. Your product must be priced high enough to make some profit, but low enough that it can compete in a foreign market. Pricing products so they are competitive in international markets can be a challenge; a pricing strategy that works in one market may be a total failure in another. Market research is of the utmost importance in determining product pricing. Your market research should include analyzing your foreign marketing objectives (for example; are you planning to follow a loss leader strategy that will allow you to enter a market more quickly or a market skimming strategy that may result in higher margins). Your costs should be analyzed as well as market demand levels and competition in each market. Each of these factors is described in detail in the Basic Guide to Exporting.

Pricing exported goods is certainly a challenge. More than domestically sold products, exports are subject to constantly changing market conditions. Currency fluctuations, tariffs, import quotas and variable customer needs can all influence, for better or worse, the pricing of your goods. Once again, careful research can help your firm to successfully navigate the complex economic conditions that determine export pricing.

Q: What payment method should I select for my export sales?
A: The best payment option to protect your company from loss is payment by the buyer in advance. Small businesses, especially, may only ship goods if they receive cash in advance. However, this arrangement is much better for the seller than the buyer, and could reduce sales potential, especially if competitors do not impose such strict payment restrictions.

Letters of credit are another relatively low-risk payment method, in which the buyer applies to a bank for the letter of credit, which is in turn confirmed by a U.S. bank. This safe option comes with some costs, however, in the form of bank fees that are often higher for buyers than for sellers, and again, less than satisfactory.

Some exporters operate under a payment-on-delivery system, which allows the buyer to pay by cash or check when the product arrives. The buyer signs a written agreement to pay, but unfortunately, if the buyer refuses the product, the seller must absorb shipment costs.

Open account payment arrangements should only be used if you have a well-established relationship with a trusted foreign buyer, as this method carries the greatest financial risks.

Q: How can I protect myself from financial losses in exporting?
A: Financial credit insurance is available to protect your company from exporting risks. Smaller companies are best served by government programs for this insurance, while larger companies may be able to secure private insurance. Although insurance cannot prevent losses due to buyer-seller disagreements, it can mitigate commercial risks like buyer default, bankruptcy, as well as political risks, such as war or sovereign acts. Keep in mind, however, that insurance costs will reduce your overall profits.

Currency fluctuations are another source of risk for exporting companies. International bankers can formulate sophisticated plans to help reduce the risk of loss due to exchange rate changes, but the simplest way to protect your firm is to exercise all business transactions in U.S. dollars. This way, the burden of currency fluctuations falls on the buyer, rather than on you, the seller.

Q: I've done my research, set my prices, and found buyers in export markets. Now, how do I get my products to foreign customers?
A: Shipping your goods can be very costly, as well as risky. Again, the key concept is research - you will have to create a personalized blend of shipping strategies that best serves your company and product.

Freight forwarders can provide international shipping advice, and can be a very useful resource. Make sure that you carefully document shipping and billing transactions, to avoid delays and lost funds. Depending on the destination of your product and the shipping method you choose, you will need to consider particular packing challenges. Remember that your goods will be subject to customs inspections, as well as possible rough handling conditions. You may want to consider buying shipping insurance to protect against loss.




Terms of the Trade: Exporting Vocabulary

Q: What is an export broker?
A: Export brokers bring together international buyers and sellers. They charge a fee, but are not involved in actual business transactions. Brokers may be individuals or large firms.

Q: What is a Certificate of Origin?
A: The Certificate of Origin (CO) verifies your commodity's country of manufacture. Depending on where you are exporting to, your product may need to be accompanied by evidence of its origin. The CO may be required because of established treaty arrangements, varying duty rates, and preferential duty treatment dependent on the shipment’s origin. The commodity being exported and its destination determine if the CO is required. Certificates can be obtained for a small cost at your local chamber of commerce. Click here to view a sample of a Certificate of Origin.

Q: How can I get a 'Made in the U.S.A.' label on my product?
A: If your goods are made with 51% U.S. components, the Federal Trade Commission allows them to be labeled as 'Made in the U.S.A.' Click here to learn more about complying with the made in the USA standard.

Q: What is the Harmonized Tariff System?
A: The Harmonized Tariff System classifies products by a standardized numerical method. Products receive a ten-digit number that enables customs agents worldwide to determine duties, taxes, and regulations on that product. You can obtain a harmonized number for your product through the U.S. Census Bureau (http://www.census.gov/foreign-trade/schedules/b/). The 2005 Harmonized Tariff Schedule can be ordered from http://bookstore.gpo.gov using stock number 949-021-00000-9, or click below to view online.

Q: What is a carnet?
A: Carnets are international customs documents permitting the holder to carry or send merchandise temporarily into certain foreign countries without paying duties or posting bonds. They do not replace export licenses but help to reduce the cost of exporting by eliminating some taxes and import security posting. Carnets also help to simplify Customs procedures, as they can be used for up to one year, for multiple entries and exits into foreign countries and the U.S. Carnets may be obtained from the U.S. Council for International Business.

Click here to apply for a carnet online.

Q: What is a Freight Forwarder?
A: Freight Forwarders are international shipping specialists. They can orchestrate the shipment of goods from start to finish, often in the most cost-efficient way possible, and can provide a great deal of shipping information and assistance to exporters.

Q: What is a Free Trade Area?
A: When two or more countries eliminate tariffs and trade restrictions between one another, the area becomes known as a free-trade zone. However, each country continues to negotiate tariffs and restrictions on non-member imports on its own.

Q: What is a Foreign Trade Zone?
A: A Foreign-Trade Zone (FTZ) is a specially designated area, in or adjacent to a U.S. Customs Port Of Entry, which is considered to be outside the Customs Territory of the U.S. Goods can be brought into a zone without formal Customs entry or without incurring Customs duties or excise taxes unless and until they are imported into the United States. FTZs are intended to promote U.S. participation in trade and commerce by eliminating or reducing the unintended costs or obstacles associated with U.S. trade laws. Employment that might normally be shifted to a foreign country is thereby encouraged to remain in the United States. The Foreign-Trade Zones Board provides more information.

Q: Where can I find more information about exporting?
A: The following Web sites provide a great deal of useful information, including links to export assistance within the Commonwealth of Massachusetts, as well as U.S. governmental agencies, trade data and statistics, financing sources and information, and electronic newsletters. (Web Site List)