EXPORTING

Exporting refers to the act of producing goods or services in one country and then selling or trading them abroad. Exporting is usually conducted by the company that manufactures the product or provides the service, through either direct or indirect channels. Exporting is just one of several methods that companies use to participate in economies outside of their home country.

Exporting has played an important role in global trade throughout history, and the United States in particular has always been heavily dependent upon exports. Even before its Declaration of Independence, the United States relied on exports of cotton, tobacco, and other agricultural products to Europe for much of its commerce. U.S. merchants were penalized by English duties and restrictions in Europe and the West Indies after the Revolutionary War. But those impediments prompted new trade ties with overseas buyers in Africa, India, and East Asia, laying the groundwork for a legacy of U.S. trading overseas.

Despite America's significant cross-border activity during its first 100 years, it was not until the industrial revolution in the late 1800s that exporting began to proliferate rapidly. Export growth was largely a corollary of technological advancements in communications, manufacturing, transportation, and food preservation techniques. It was during that period—the late 1800s and early 1900s—that the United States made the transition from a supplier of agrarian products to a manufacturer of industrial goods, such as ships, railroad equipment, clothes, and cars.

Importantly, global trade during the early 1900s was also characterized by a rise in protective trade barriers and restrictions created by countries to further their own trade interests. In the United States, elements of the Sherman Antitrust Act of 1890, the Federal Trade Commission Act of 1914, the Trading with the Enemy Act (1917), the Smoot-Hawley Tariff Act of 1930, and many other laws were used to protect domestic industries and give local firms an advantage in trade. Unfortunately, though, the adversarial and repressive trade environment that emerged is credited with helping push the world into depression during the 1930s.

Realizing the importance of a more cooperative world trade climate, the United States and other nations worked to reduce trade barriers during the mid- and late 1930s. The Reciprocal Trade Agreements Act of 1934 in the United States led an international movement toward lower tariffs and duties imposed on imports. Likewise, the Most Favored Nation (MFN) trading program extended the benefits of any bilateral tariff reductions negotiated by the United States to all MFNs.

In addition to gains achieved through reduced trade barriers, World War II served to bolster U.S. exports. Warring nations that were forced to turn to the United States for supplies began to recognize the fledgling industrial power as a source of high-quality goods. After the war, moreover, the United States emerged as the undisputed international trade leader, as devastated European and Japanese manufacturing sectors scrambled to rebuild. In fact, between the late 1940s and the mid-1960s, the U.S. trade surplus (defined as the value of U.S. exports less the value of imports into the country ballooned at a rate of 20 percent annually.

U.S. exports continued to rise rapidly, swelling from about $43 billion in 1970 to nearly $225 billion by 1980. However, increased competition, particularly from Western Europe and Japan, began to erode U.S. international market share during the 1970s. In the 1980s, in fact, U.S. exports were overshadowed by imports as the national trade deficit plunged to more than $160 billion annually by the late 1980s. Although much of that deficit was the result of oil imports, the improved manufacturing prowess of Japan was also a major factor. Nevertheless, increasing globalization of markets and a continued move toward lower trade barriers vastly expanded global trading. Going into the 1990s, annual U.S. exports were rapidly approaching $400 billion, and the total global export market outside of the United States was estimated to be more than $2 trillion. By 1997 U.S. exports had reached $689 billion, slightly more than one-eighth of the world total of $5.5 trillion.

BENEFITS OF EXPORTING

The chief goal of any company's export ventures is usually to maximize profits by exploiting opportunities in foreign markets that don't exist in the domestic market. For example, products that have become obsolete in U.S. markets, such as washboards, can sometimes be marketed very successfully abroad. Thus, by increasing a product's life span, a manufacturer is able to reduce new product development costs and capitalize on learned efficiencies related to production, distribution, and marketing.

Likewise, when markets for products that are still viable in the United States begin to mature and become saturated, many producers are able to continue to achieve steady sales and profit gains through cross-border sales. Because markets in other countries are often less mature and less competitive, exporters can typically achieve faster sales growth and higher profit margins. Foreign markets often provide relief not only from maturing domestic markets, but also from intensifying competition from imports. In addition, as manufacturing volume grows, benefits related to economies of scale may improve the exporter's competitiveness in both foreign and domestic markets.

In addition to the profit opportunities available in untapped markets, another major benefit of exporting is market risk diversification. In other words, a company can generally lessen its vulnerability to cyclical economic downswings or regional disturbances by extending its geographic reach. For instance, companies that were active in both the United States and Western Europe during the late 1980s likely benefitted from the lag between the U.S. recession and the European Community economic slump that peaked several months later, just when the United States was beginning to cycle out of its downturn. Geographic diversification also lessens risks affiliated with the seasonality inherent in some products (like fishing tackle) and increased competition in individual regions.

EXPORT ROUTES

The typical export arrangement is a company-owned export department, whereby a manufacturer sells products directly to companies or consumers in foreign countries. The company has almost total control over the marketing and distribution of its goods and services, and coordinates research, distribution, sales, marketing, pricing, legal, and other efforts in-house. This stereotype, however, is not representative of the export systems utilized by most U.S. exporters. In fact, most companies depend on one or a mix of specialized export channels outside of their organization.

Aside from company-owned exporting operations, the two major routes an individual company can take to become an exporter are indirect and direct. Indirect exporting entails selling goods through home-based proxies or resellers. Direct exports are sold through foreign-based parties. Both methods can be conducted through either merchants or agents, the delineation being that merchants actually assume ownership of the goods while agents simply represent the manufacturer or owner. Manufacturers may also trade goods abroad through barter. Finally, firms that export certain services are generally classified separately. For example, an engineering firm might provide design services for a dam in India; it would likely bid on the job, perform the services at home and in India, and then bill its foreign client.

INDIRECT AGENTS

A company exports its goods indirectly when it utilizes a home-based merchant or agent to essentially find and deliver goods to foreign buyers. Indirect exporting represents the least expensive and lowest-risk method of participating in foreign markets because it is relatively easy to initiate and requires a meager up-front capital investment. Indirect exporting agents essentially act as intermediaries, matching exporters and customers and facilitating the flow of goods.

A common type of indirect agent is an export management company (EMC). EMCs typically represent several companies within one or many industries. They profit by charging domestic companies fees or commissions. In return, they offer the manufacturer instant access to foreign channels of distribution and to in-depth knowledge about markets. EMCs often act as a division of the manufacturer, even utilizing its letterhead and negotiating with buyers on its behalf. They may also perform services such as billing and credit management, pricing, and complying with various trade restrictions. EMCs are particularly beneficial for small- and medium-sized firms that are unable to launch an export program in-house. The obvious disadvantage of EMCs is that their compensation may substantially reduce profit margins for exporters.

A second class of indirect export agencies is Webb-Pomerene Associations (Webb-Pomerene Act of 1918), of which about 40 existed in the United States in the early 1990s. They are organizations comprised of competing U.S. manufacturers formed for the purpose of exporting. The benefit of the associations is that they are exempt from U.S. antitrust laws, including restrictions related to price setting, discounting, and sharing of customer information. Members may also combine efforts toward market research, product development, and distribution.

Export trading companies (ETCs), or American Trading Companies, were initiated in the United States in 1982 (Export Trading Company Act of 1982) by the federal government to help exporters compete against powerful Japanese trading conglomerates. ETCs provide many of the advantages of both EMCs and Webb-Pomerene Associations, but usually on a larger scale. Although ETCs were still in their infancy in the early 1990s, several major U.S. manufacturers, such as General Electric and Bank of America, were utilizing them effectively.

Another form of indirect export agency is the export commission house, or commission agent. Commission agents represent buyers in foreign countries. When the foreign buyer places an order, the commission agent solicits bids from domestic manufacturers. The agent usually awards the lowest bidder with the order and is compensated by the foreign buyer with a fee or commission. The advantage of this arrangement for the exporter is that payment is usually received almost immediately and there is very little effort required to complete the sale. However, the bidding process sometimes diminishes profit opportunities. An arrangement similar to the commission agent is the resident buyer, which differs in that resident buyers usually do not require bids. Instead, they build relationships with preferred suppliers and simply provide ongoing local representation for their foreign sponsor.

Among the many other forms of indirect trading agents, some of the most popular include foreign freight forwarders, which simply manage overseas shipments of goods to foreign ports in return for a fee or product discount; brokers, which only bring buyers and sellers together and are removed from handling or distributing the exported goods; and export agents, who represent the manufacturer, act under their own name, and generally contract for two years or less.

INDIRECT MERCHANTS

Direct exporting occurs when an intermediary takes title to a company's products (or services) and trades the goods under its own name. A common indirect exporter of this type is the export merchant, which buys the goods and then resells them to its foreign contacts at a markup. Thus, the export merchant essentially acts in the same role as a domestic wholesaler. A class of export merchant is the export vendor, which specializes in purchasing surplus or poor quality goods that producers can't profitably sell domestically. Similarly, overseas military market representatives specialize in selling to U.S. military post exchanges around the world. The representatives typically buy in bulk from producers and receive commissions from the government.

Another means of indirect merchant exporting is cooperatives. Cooperative exporting, or piggybacking, takes place when a company with an established distribution channel for its own products contracts to export the goods of a non-competing foreign manufacturer. For instance, a Japanese maker of consumer electronics might contract with a U.S. producer of home appliances to market and distribute its appliances in Japan. As another example, a U.S. producer of electronics that exports its goods to Europe may contract to market the same appliance manufacturer's wares through its established European channels.

DIRECT AGENTS

Several types of agents serve U.S.-based companies from foreign countries. Foreign sales representatives, for example, are paid by U.S. firms through commissions, work on a contract basis, and usually do not simultaneously represent competing products. The exporting firm may train the representative and supply him or her with literature with which to sell its goods. The exporter benefits from the representative's knowledge of and access to local markets.

Purchasing agents are similar to commission agents and resident buyers, described above. They are sent to a foreign country to purchase goods for a company or government in their homeland and are paid fees or commissions by the foreign sponsor. They are different from commission agents in that they are sent for a short time period (to buy heavy equipment for a large project, for instance) and then leave the United States.

DIRECT MERCHANTS

Direct merchant exporters are organizations in foreign countries that buy goods in the United States, or some other country, and then resell them domestically. Export distributors, for example, buy goods from U.S. manufacturers and resell them for a markup in their own country. They typically provide complementary services to their buyers, such as maintenance, parts sales, and technical assistance. The export distributor often has a close relationship with the exporter and secures exclusive rights to sell and service its goods.

Sometimes a U.S. exporter will sell its goods directly to a foreign retailer, such as a department store chain. The retailer may buy/order from catalogs or sales literature, or through an order taker representing the exporter. Similarly, export "jobbers" in foreign countries serve exporters by determining exact customer needs, buying the goods abroad, and then reselling to their customers.

BARTER TRADING

Although bartering is not a distinctly different channel of exporting, it represents a departure from conventional indirect and direct exporting arrangements in that it does not involve the use of money. Instead, goods and services are traded for other goods and services in another nation. Such an arrangement may reduce trade barriers, minimize tax burdens, or result in a more lucrative swap for both parties. Although bartering has traditionally been utilized in command economies that discouraged the exchange of currency, it gained popularity in the 1980s and early 1990s in many free markets.

There are four primary forms of barter. "Counterpurchase," or pure barter, arrangements entail an equal exchange between traders of goods. For instance, a timber manufacturer may trade logs for tractors of an equal value. "Switch trading" is similar to counterpurchase, but more parties are involved; cash and goods are effectively exchanged between three or more parties until an equitable trade is achieved. A "clearing agreement" involves the long-term exchange of goods between two governments and factors exchange rates into the value of the trade. It is useful for a trade in which one party receives goods long before the other party. Finally, in a "buyback barter" a company buys capital equipment, such as an earth moving machine, through the output created by the equipment. For example, a coal mining firm might pay for its earth mover by supplying coal to the foreign heavy equipment manufacturer.

GOVERNMENT EXPORT BARRIERS AND
SUPPORTS

Governments have erected a wide array of different barriers to the export and import of goods. The barriers are designed to serve a number of purposes, such as protecting specific industries, maintaining national employment levels, discouraging dumping of foreign products at prices below manufacturing cost, and improving the national trade balance. Despite an effort by the United States and several other nations to reduce trade barriers, many leading industrial countries, particularly Japan, sustain an intricate network of restrictions that severely impact the world export market.

The two major classes of trade restrictions are tariff and non-tariff. Tariffs equate to duties that are imposed on goods leaving or coming into a country. In addition to the goals listed above, tariffs may be used to ensure that the prices of imported goods are equivalent to domestic substitutes, or simply to garner revenue for the government. In addition, tariffs are often used to penalize other countries for trade or political actions. The United States, for instance, may elect to impose a tariff on cars imported from France as a way of punishing France for erecting a large tariff on wine imported from the United States.

Nontariff barriers include restrictions such as quotas, taxes, and exchange rate controls. They can be classified into six major categories:

1. Specific trade limitations, such as quantity limits (quotas), price limits, embargoes, and license requirements
2. Customs and administrative entry restrictions, which encompass miscellaneous entry fees and documentation requirements
3. Standards, which generally include qualitative mandates related to safety, minimal quality standards, and packaging
4. Government participation, which refers to government buying policies, taxes, and export subsidies
5. Import charges, such as deposit requirements, administrative fees, and credit discrimination
6. Miscellaneous categories, such as voluntary export agreements and formal agreements between trading partners.

Besides the mass of trade barriers, most governments also engage in various global export initiatives designed to foster free trade. The General Agreement on Tariffs and Trade (GATT), for example, was agreed to by 117 nations in 1993. It effectively calls for a reduction of both tariff and non-tariff barriers on a worldwide scale. It incorporates the United States' Most Favored Nation principle, which extends the best trade terms to all GATT members. Other recent agreements include: the Asian-Pacific Economic Cooperation Forum (APEC), signed in 1989; the North American Free Trade Agreement (NAFTA) of 1993; and the European Economic Community, or Common Market, which aims to eliminate trade barriers between member European nations. Other supranational supports include programs sponsored by political organizations, such as the International Monetary Fund (IMF).

On the national level, most governments support specific industries or companies through: financial assistance, such as lower tax rates, loans, or even direct grants to companies that enter new overseas markets or export certain products; state-sponsored trading companies, like American Trading Companies; and government research and information services, particularly services that help exporters identify potential markets and the risks inherent to those markets. Exports can also be stimulated through trade missions, whereby political figure and business leaders from one nation visit another nation to explore markets and make contacts. Since exports create jobs, local economic development organizations often encourage exporting as a way of creating jobs in the local community.

RECENT TRENDS IN U.S. EXPORTS

U.S. exports have not followed a consistent pattern in the 1990s. After increasing significantly at the end of the 1980s, they declined from 1990 through 1993. Two years of export growth in 1994 and 1995 were followed by a decline in 1996, growth in 1997, and decline in 1998. Several factors affect the volume of U.S. exports, including economic conditions abroad, the strength of the U.S. dollar, and the state of the domestic economy. Export declines in the early 1990s coincided with a recession at home. The Asian economic crisis and recessions in several Latin American countries contributed to a decline in U.S. exports in 1998. Currency devaluations in several Asian countries, coupled with a strong U.S. dollar, made U.S. goods more expensive abroad and contributed further to a decline in exports in 1998. Current data on U.S. exports is published by the International Trade Administration of the U.S. Department of Commerce and can be found on the Internet and in many libraries.