Freight Forwarders

The international freight forwarder acts as an agent for the exporter in moving cargo to the overseas destination. These agents are familiar with the import rules and regulations of foreign countries, methods of shipping, U.S. government export regulations, and the documents connected with foreign trade.

Freight forwarders can assist with an order from the start by advising the exporter of the freight costs, port charges, consular fees, cost of special documentation, and insurance costs as well as their handling fees--all of which help in preparing price quotations. Freight forwarders may also recommend the type of packing for best protecting the merchandise in transit; they can arrange to have the merchandise packed at the port or containerized. The cost for their services is a legitimate export cost that should be figured into the price charged to the customer.

When the order is ready to ship, freight forwarders should be able to review the letter of credit, commercial invoices, packing list, and so on to ensure that everything is in order. They can also reserve the necessary space on board an ocean vessel, if the exporter desires.

If the cargo arrives at the port of export and the exporter has not already done so, freight forwarders may make the necessary arrangements with customs brokers to ensure that the goods comply with customs export documentation regulations. In addition, they may have the goods delivered to the carrier in time for loading. They may also prepare the bill of lading and any special required documentation. After shipment, they forward all documents directly to the customer or to the paying bank if desired.

Packing

In packing an item for export, the shipper should be aware of the demands that exporting puts on a package. Four problems must be kept in mind when an export shipping crate is being designed: breakage, weight, moisture, and pilferage.

Most general cargo is carried in containers, but some is still shipped as breakbulk cargo. Besides the normal handling encountered in domestic transportation, a breakbulk shipment moving by ocean freight may be loaded aboard vessels in a net or by a sling, conveyor, chute, or other method, putting added strain on the package. In the ship's hold, goods may be stacked on top of one another or come into violent contact with other goods during the voyage. Overseas, handling facilities may be less sophisticated than in the United States and the cargo may be dragged, pushed, rolled, or dropped during unloading, while moving through customs, or in transit to the final destination.

Moisture is a constant problem because cargo is subject to condensation even in the hold of a ship equipped with air conditioning and a dehumidifier. The cargo may also be unloaded in the rain, and some foreign ports do not have covered storage facilities. In addition, unless the cargo is adequately protected, theft and pilferage are constant threats.

Since proper packing is essential in exporting, often the buyer specifies packing requirements. If the buyer does not so specify, be sure the goods are prepared with the following considerations in mind.

• Pack in strong containers, adequately sealed and filled when possible.
• To provide proper bracing in the container, regardless of size, make sure the weight is evenly distributed.
• Goods should be packed in oceangoing containers, if possible, or on pallets to ensure greater ease in handling.
• Packages and packing filler should be made of moisture-resistant material.
• To avoid pilferage, avoid mentioning contents or brand names on packages. In addition, strapping, seals, and shrink wrapping are effective means of deterring theft.

One popular method of shipment is the use of containers obtained from carriers or private leasing concerns. These containers vary in size, material, and construction and can accommodate most cargo, but they are best suited for standard package sizes and shapes. Some containers are no more than semi-truck trailers lifted off their wheels and placed on a vessel at the port of export. They are then transferred to another set of wheels at the port of import for movement to an inland destination. Refrigerated and liquid bulk containers are readily available.

Normally, air shipments require less heavy packing than ocean shipments, but they must still be adequately protected, especially if highly pilferable items are packed in domestic containers. In many instances, standard domestic packing is acceptable, especially if the product is durable and there is no concern for display packaging. In other instances, high-test (at least 250 pounds per square inch) cardboard or tri-wall construction boxes are more than adequate.

For both ocean and air shipments, freight forwarders and carriers can advise on the best packaging. Marine insurance companies are also available for consultation. It is recommended that a professional firm be hired to package for export if the exporter is not equipped for the task. This service is usually provided at a moderate cost.

Finally, because transportation costs are determined by volume and weight, special reinforced and lightweight packing materials have been devised for exporting. Care in packing goods to minimize volume and weight while giving strength may well save money while ensuring that goods are properly packed.

Labeling

Specific marking and labeling is used on export shipping cartons and containers to

• Meet shipping regulations,
• Ensure proper handling,
• Conceal the identity of the contents, and
• Help receivers identify shipments.

The overseas buyer usually specifies export marks that should appear on the cargo for easy identification by receivers. Many markings may be needed for shipment. Exporters need to put the following markings on cartons to be shipped:

• Shipper's mark
• Country of origin (USA)
• Weight marking (in pounds and in kilograms)
• Number of packages and size of cases (in inches and centimeters)
• Handling marks (international pictorial symbols)
• Cautionary markings, such as "This Side Up" or "Use No Hooks" (in English and in the language of the country of destination)
• Port of entry
• Labels for hazardous materials (universal symbols adapted by the International Maritime Organization)

Legibility is extremely important to prevent misunderstandings and delays in shipping. Letters are generally stenciled onto packages and containers in waterproof ink. Markings should appear on three faces of the container, preferably on the top and on the two ends or the two sides. Old markings must be completely removed.

In addition to port marks, customer identification code, and indication of origin, the marks should include the package number, gross and net weights, and dimensions. If more than one package is being shipped, the total number of packages in the shipment should be included in the markings. The exporter should also include any special handling instructions on the package. It is a good idea to repeat these instructions in the language of the country of destination. Standard international shipping and handling symbols should also be used.

Exporters may find that customs regulations regarding freight labeling are strictly enforced; for example, most countries require that the country of origin be clearly labeled on each imported package. Most freight forwarders and export packing specialists can supply necessary information regarding specific regulations.

Documentation

Exporters should seriously consider having the freight forwarder handle the formidable amount of documentation that exporting requires; freight forwarders are specialists in this process. The following documents are commonly used in exporting; which of them are actually used in each case depends on the requirements of both the U.S. government and the government of the importing country.

• Commercial invoice. As in a domestic transaction, the commercial invoice is a bill for the goods from the buyer to the seller. A commercial invoice should include basic information about the transaction, including a description of the goods, the address of the shipper and seller, and the delivery and payment terms. The buyer needs the invoice to prove ownership and to arrange payment. Some governments use the commercial invoice to assess customs duties.
• Bill of lading. Bills of lading are contracts between the owner of the goods and the carrier (as with domestic shipments). There are two types. A straight bill of lading is nonnegotiable. A negotiable or shipper's order bill of lading can be bought, sold, or traded while goods are in transit and is used for letter-of-credit transactions. The customer usually needs the original or a copy as proof of ownership to take possession of the goods.
• Consular invoice. Certain nations require a consular invoice, which is used to control and identify goods. The invoice must be purchased from the consulate of the country to which the goods are being shipped and usually must be prepared in the language of that country.
• Certificate of origin. Certain nations require a signed statement as to the origin of the export item. Such certificates are usually obtained through a semiofficial organization such as a local chamber of commerce. A certificate may be required even though the commercial invoice contains the information.
• Inspection certification. Some purchasers and countries may require a certificate of inspection attesting to the specifications of the goods shipped, usually performed by a third party. Inspection certificates are often obtained from independent testing organizations.
• Dock receipt and warehouse receipt. These receipts are used to transfer accountability when the export item is moved by the domestic carrier to the port of embarkation and left with the international carrier for export.
• Destination control statement. This statement appears on the commercial invoice, ocean or air waybill of lading, and SED to notify the carrier and all foreign parties that the item may be exported only to certain destinations.
• Insurance certificate. If the seller provides insurance, the insurance certificate states the type and amount of coverage. This instrument is negotiable.
• Shipper's Export Declaration. The SED is used to control exports and compile trade statistics and must be prepared and submitted to the customs agent for shipments by mail valued at more than $500 and for shipments by means other than mail valued at more than $2,500. For more information, see .
• Export license. U.S. export shipments may be required by the U.S. government to have an export license. ( Refer to Chapter 11, , for a complete discussion of licensing.)
• Export packing list. Considerably more detailed and informative than a standard domestic packing list, an export packing list itemizes the material in each individual package and indicates the type of package: box, crate, drum, carton, and so on. It shows the individual net, legal, tare, and gross weights and measurements for each package (in both U.S. and metric systems). Package markings should be shown along with the shipper's and buyer's references. The packing list should be attached to the outside of a package in a waterproof envelope marked "packing list enclosed." The list is used by the shipper or forwarding agent to determine (1) the total shipment weight and volume and (2) whether the correct cargo is being shipped. In addition, customs officials (both U.S. and foreign) may use the list to check the cargo.

Documentation must be precise. Slight discrepancies or omissions may prevent U.S. merchandise from being exported, result in U.S. firms not getting paid, or even result in the seizure of the exporter's goods by U.S. or foreign government customs. Collection documents are subject to precise time limits and may not be honored by a bank if out of date. Much of the documentation is routine for freight forwarders or customs brokers acting on the firm's behalf, but the exporter is ultimately responsible for the accuracy of the documentation.

The number of documents the exporter must deal with varies depending on the destination of the shipment. Because each country has different import regulations, the exporter must be careful to provide proper documentation. If the exporter does not rely on the services of a freight forwarder, there are several methods of obtaining information on foreign import restrictions:

• Country desk officers in the Department of Commerce are specialists in individual country conditions.
• Industry specialists in the Department of Commerce can advise on product classifications.
• Foreign government embassies and consulates in the United States can often provide information on import regulations.
• The International Air Transport Association (IATA) has a number of publications with information on tariff rules, air waybills, and other international air cargo regulations. Contact the North American office of IATA at 800 Place Victoria, P.O. Box 113, Montreal, Quebec H4z 1M1, Canada; Tel: (800) 716-6326, (514) 874-0202; Fax: (514) 874-9632; Web site: www.iataonline.com.
• The Bureau of National Affairs Export Reference Manual contains complete country-by-country shipping information as well as tariff systems, import and exchange controls, mail regulations, and other special information. Contact the Bureau of National Affairs, Inc., 9435 Key West Ave., Rockville, MD 20850; Tel: (800) 372-1033; Fax: (800) 253-0332.
• Exporters' Encyclopedia contains information on trade regulations and documentation for more than 220 world markets. Contact Dun's Marketing Services, Business Reference Solutions Dept., 3 Sylvan Way, Parsippany, NJ 07054-3896; Tel: (800) 526-0651 or (973) 605-6000.

Shipping

The handling of transportation is similar for domestic orders and export orders. The export marks should be added to the standard information shown on a domestic bill of lading and should show the name of the exporting carrier and the latest allowed arrival date at the port of export. The exporter should also include instructions for the inland carrier to notify the international freight forwarder by telephone on arrival.

International shipments are increasingly being made on a through bill of lading under a multimodal contract. The multimodal transport operator (frequently one of the modal carriers) takes charge of and responsibility for the entire movement from factory to the final destination.

When determining the method of international shipping, the exporter may find it useful to consult with a freight forwarder. Since carriers are often used for large and bulky shipments, the exporter should reserve space on the carrier well before actual shipment date (this reservation is called the booking contract).

The exporter should consider the cost of shipment, delivery schedule, and accessibility to the shipped product by the foreign buyer when determining the method of international shipping. Although air carriers are more expensive, their cost may be offset by lower domestic shipping costs (because they may use a local airport instead of a coastal seaport) and quicker delivery times. These factors may give the U.S. exporter an edge over other competitors, whose service to their accounts may be less timely.

Before shipping, the U.S. firm should be sure to check with the foreign buyer about the destination of the goods. Buyers often wish the goods to be shipped to a free-trade zone or a free port, where goods are exempt from import duties.

Insurance

Export shipments are usually insured against loss, damage, and delay in transit by cargo insurance. For international shipments, the carrier's liability is frequently limited by international agreements and the coverage is substantially different from domestic coverage. Arrangements for cargo insurance may be made by either the buyer or the seller, depending on the terms of sale. Exporters are advised to consult with international insurance carriers or freight forwarders for more information.

Damaging weather conditions, rough handling by carriers, and other common hazards to cargo make marine insurance important protection for U.S. exporters. If the terms of sale make the U.S. firm responsible for insurance, it should either obtain its own policy or insure cargo under a freight forwarder's policy for a fee. If the terms of sale make the foreign buyer responsible, the exporter should not assume (or even take the buyer's word) that adequate insurance has been obtained. If the buyer neglects to obtain coverage or obtains too little, damage to the cargo may cause a major financial loss to the exporter.

Shipper's Export Declarations (SEDs)

Shipper's Export Declarations (SEDs) are used for compiling the official U.S. export statistics and for export control purposes. Separate SEDs are required for each shipment (including each rail car, truck, or other vehicle). A shipment is defined as all merchandise moving from one exporter to one consignee on one exporting carrier.

The SED must be prepared in English, typewritten or in other non-erasable medium. The original should be signed by the exporter or his duly authorized agent. Exporters may list more than one general license and validated license or a combination of general and validated licenses on the same SED.

Where two or more items are classified under the same Schedule B number, the Schedule B number should appear only once on the SED with a single quantity, shipping weight, and value, unless a validated license requires otherwise or, the shipment consists of a combination of foreign and domestic merchandise classified under the same Schedule B number. Shipments involving multiple invoices or packages should be reported on the same SED.

SEDs are not required for the following types of shipments:

• Shipments (excluding postal shipments) where the value of commodities classified under each individual Schedule B number is $2,500 or less and for which a validated export license is not required and when shipped to countries in groups T and V as listed in Supplement 1 to Section 770 of the Export Administration Regulations.
• Shipments from the United States to Canada, except those: (1) Requiring a Department of Commerce validated export license; (2) Subject to the Department of State, International Traffic in Arms Regulations regardless of license requirements; or (3) Subject to Department of Justice, Drug enforcement Administration, export declaration requirements.
• Shipments through the U.S. Postal Service that do not require a validated license when the shipment is: (1) valued $500 or under, (2) either the consignee or the consignor is not a business concern, or (3) the shipment is not for commercial consideration.
• In-transit shipments not requiring a validated export license and leaving for a foreign destination by means other than vessel.
• Shipments from one point in the United States to another point in the United by routes passing through Mexico, and shipments from one point in Mexico by routes passing through the United States.
• Shipments to the U.S. Armed Services.
• Shipments to U.S. government agencies and employees for their exclusive use.
• Other miscellaneous shipments:

1. Diplomatic pouches and their contents.

2. Human remains and accompanying receptacles and flowers.

3. Shipments of gift parcels moving under General License GIFT.

4. Shipments of interplant correspondence and other business records from a U.S. firm to its subsidiary or affiliate.

5. Shipments of pets as baggage, accompanying or not accompanying persons leaving the United States.

• Merchandise not moving as cargo under a bill of lading or air waybill and not requiring a validated export license.

1. Baggage and household effects and tools of trade of persons leaving the United States when such are owned by the person, in his possession at the time of departure and not intended for sale.

2. Carriers' stores, supplies, equipment, bunker fuel, and so forth, when not intended for unlading in a foreign country.

3. Usual and reasonable kinds and quantities of dunnage necessary to secure and stow cargo. (For sole use on board the carrier.)

Shipper's Export Declaration

Cash in Advance

Cash in advance before shipment may seem to be the most desirable method of all, since the shipper is relieved of collection problems and has immediate use of the money if a wire transfer is used. Payment by check, even before shipment, may result in a collection delay of four to six weeks and therefore frustrate the original intention of payment before shipment. On the other hand, advance payment creates cash flow problems and increases risks for the buyer. Thus, cash in advance lacks competitiveness; the buyer may refuse to pay until the merchandise is received.

Documentary Letters of Credit and Drafts

The buyer may be concerned that the goods may not be sent if the payment is made in advance. To protect the interests of both buyer and seller, documentary letters of credit or drafts are often used. Under these two methods, documents are required to be presented before payment is made. Both letters of credit and drafts may be paid immediately, at sight, or at a later date. Drafts that are to be paid when presented for payment are called sight drafts. Drafts that are to be paid at a later date, which is often after the buyer receives the goods, are called time drafts or date drafts.

Since payment under these two methods is made on the basis of documents, all terms of sale should be clearly specified. For example, "net 30 days" should be specified as "net 30 days from acceptance" or "net 30 days from date of bill of lading" to avoid confusion and delay of payment. Likewise, the currency of payment should be specified as "US$XXX" if payment is to be made in U.S. dollars. International bankers can offer other suggestions to help.

Banks charge fees--usually a small percentage of the amount of payment--for handling letters of credit and less for handling drafts. If fees charged by both the foreign and U.S. banks for their collection services are to be charged to the account of the buyer, this point should be explicitly stated in all quotations and on all drafts. The exporter usually expects the buyer to pay the charges for the letter of credit, but some buyers may not accept terms that require this added cost. In such cases the exporter must either absorb the letter of credit costs or lose that potential sale.

Drafts

A draft, sometimes also called a bill of exchange, is analogous to a foreign buyer's check. Like checks used in domestic commerce, drafts sometimes carry the risk that they will be dishonored.

Credit Cards

Many U.S. exporters of consumer and other products (generally of low dollar value) that are sold directly to the end user accept Visa and MasterCard in payment for export sales. In international credit card transactions, merchants are normally required to deposit drafts in the currency of their country; for example, a U.S. exporter would deposit a draft in U.S. dollars. U.S. merchants may find that domestic rules and international rules governing credit card transactions differ somewhat and should contact their credit card processor for more specific information.

International credit card transactions are typically placed by telephone or fax, methods that facilitate fraudulent transactions. Merchants should determine the validity of transactions and obtain proper authorizations.

Open Account

In a foreign transaction, an open account is a convenient method of payment and may be satisfactory if the buyer is well established, has demonstrated a long and favorable payment record, or has been thoroughly checked for creditworthiness. Under open account, the exporter simply bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on open account.

Open account sales do pose risks, however. The absence of documents and banking channels may make legal enforcement of claims difficult to pursue. The exporter may have to pursue collection abroad, which can be difficult and costly. Also, receivables may be harder to finance, since drafts or other evidence of indebtedness are unavailable.

Before issuing a pro forma invoice to a buyer, exporters contemplating a sale on open account terms should thoroughly examine the political, economic, and commercial risks and consult with their bankers if financing will be needed for the transaction.

Other Payment Mechanisms

Collection Problems

In international trade, problems involving bad debts are more easily avoided than rectified after they occur. Credit checks and the other methods that have been discussed can limit the risks involved. Nonetheless, just as in a company's domestic business, exporters occasionally encounter problems with buyers who default on payments. When these problems occur in international trade, obtaining payment can be both difficult and expensive. Even when the exporter has insurance to cover commercial credit risks, a default by a buyer still requires time, effort, and cost. The exporter must exhaust all reasonable means of obtaining payment before an insurance claim is honored, and there is often a significant delay before the insurance payment is made.

The simplest (and least costly) solution to a payment problem is to contact and negotiate with the customer. With patience, understanding, and flexibility, an exporter can often resolve conflicts to the satisfaction of both sides.

This point is especially true when a simple misunderstanding or technical problem is to blame and there is no question of bad faith. Even though the exporter may be required to compromise on certain points--perhaps even on the price of the committed goods--the company may save a valuable customer and profit in the long run.

If, however, negotiations fail and the sum involved is large enough to warrant the effort, a company should obtain the assistance and advice of its bank, legal counsel, and other qualified experts. If both parties can agree to take their dispute to an arbitration agency, this step is preferable to legal action, since arbitration is often faster and less costly. The International Chamber of Commerce handles the majority of international arbitrations and is usually acceptable to foreign companies because it is not affiliated with any single country. For information contact

Vice President for Arbitration
U.S. Council of the International Chamber of Commerce
1212 Avenue of the Americas
New York, NY 10036
Tel: (212) 354-4480; Fax: (212) 575-0327
Web site: www.uscib.org

The American Arbitration Association is also a reputable arbitration agency that handles international disputes; for information contact

American Arbitration Association
1633 Broadway
New York, NY 10019
Tel: (212) 484-4000; Fax: (212) 307-4387
Web site: www.adr.org

C&S/Sovran Corporation

P.O. Box 4899, ATLANTA, GEORGIA 30302-4889
CABLE ADDRESS: CITSOUTH
TELEX NO. 3737650
SWIFT NO. CSBKUS33

OUR ADVICE NUMBER: EA00000091
ADVICE DATE: 08MAR96 ****AMOUNT****
ISSUE BANK REF: 3312/HBI/22341 USD****25,000.00
EXPIRY DATE: 23JUN96

BENEFICIARY: APPLICANT:
THE WALTON BUILDING SUPPLIES CO. BBH HONG KONG
2356 SOUTH BELK STREET 34 INDUSTRIAL DRIVE
ATLANTA, GEORGIA 30345 CENTRAL, HONG KONG

WE HAVE BEEN REQUESTED TO ADVISE TO YOU THE FOLLOWING LETTER OF CREDIT AS ISSUED BY:

FIRST HONG KONG BANK
1 CENTRAL TOWER
HONG KONG

PLEASE BE GUIDED BY ITS TERMS AND CONDITIONS AND BY THE FOLLOWING:

CREDIT IS AVAILABLE BY NEGOTIATION OF YOUR DRAFT(S) IN DUPLICATE AT SIGHT FOR 100 PERCENT OF INVOICE VALUE DRAWN ON US ACCOMPANIED BY THE FOLLOWING DOCUMENTS:

1. SIGNED COMMERCIAL INVOICE IN 1 ORIGINAL AND 3 COPIES.

2. FULL SET 3/3 OCEAN BILLS OF LADING CONSIGNED TO THE ORDER OF FIRST HONG KONG BANK, HONG KONG NOTIFY APPLICANT AND MARKED FREIGHT COLLECT.

3. PACKING LIST IN 2 COPIES.

EVIDENCING SHIPMENT OF: 500 PINE LOGS--WHOLE--8 TO 12 FEET
FOB SAVANNAH, GEORGIA

SHIPMENT FROM: SAVANNAH, GEORGIA TO: HONG KONG
LATEST SHIPPING DATE: 02JUN96

PARTIAL SHIPMENTS NOT ALLOWED TRANSSHIMENT NOT ALLOWED

ALL BANKING CHARGES OUTSIDE HONG KONG ARE FOR BENEFICIARYS ACCOUNT.
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS FROM B/L DATE.

AT THE REQUEST OF OUR CORRESPONDENT, WE CONFIRM THIS CREDIT AND ALSO ENGAGE WITH YOU THAT ALL DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT BY DULY HONORED BY US.

PLEASE EXAMINE THIS INSTRUMENT CAREFULLY. IF YOU ARE UNABLE TO COMPLY WITH THE TERMS OR CONDITIONS, PLEASE COMMUNICATE WITH YOUR BUYER TO ARRANGE FOR AN AMENDMENT.

Extending Credit to Foreign Buyers

Exporters need to weigh carefully the credit or financing they extend to foreign customers. Exporters should follow the same careful credit principles they follow for domestic customers. An important reason for controlling the credit period is the cost incurred, either through use of working capital or through interest and fees paid. If the buyer is not responsible for paying these costs, then the exporter should factor them into the selling price.

A useful guide for determining the appropriate credit period is the normal commercial terms in the exporter's industry for internationally traded products. Buyers generally expect to receive the benefits of such terms. With few exceptions, normal commercial terms range from 30 to 180 days for off-the-shelf items like consumer goods, chemicals, and other industrial raw materials, agricultural commodities, and spare parts and components. Custom-made or higher-value capital equipment, on the other hand, may warrant longer repayment periods. An allowance may have to be made for longer shipment times than are found in domestic trade, because foreign buyers are often unwilling to have the credit period start before receiving the goods.

Foreign buyers often press exporters for longer payment periods, and it is true that liberal financing is a means of enhancing export competitiveness. The exporter should recognize, however, that longer credit periods increase any risk of default for which the exporter may be liable.

Thus, the exporter must exercise judgment in balancing competitiveness against considerations of cost and safety. Also, credit terms once extended to a buyer tend to set the precedent for future sales, so the exporter should carefully consider any credit terms extended to first-time buyers.

Customers are frequently charged interest on credit periods of a year or longer but infrequently on short-term credit (up to 180 days). Most exporters absorb interest charges for short-term credit unless the customer pays after the due date.

Obtaining cash immediately is usually a high priority with exporters. One way they do so is by converting their export receivables to cash at a discount with a bank. Another way is to expand working capital resources. A third approach, suitable when the purchase involves capital goods and the repayment period extends a year or longer, is to arrange for project financing. In this case, a lender makes a loan directly to the buyer for the project and the exporter is paid immediately from the loan proceeds while the bank waits for payment and earns interest. A fourth method, when financing is difficult to obtain for a buyer or market, is to engage in countertrade to afford the customer an opportunity to generate earnings with which to pay for the purchase. See .

The options that have been mentioned normally involve the payment of interest, fees, or other costs. Some options are more feasible when the amounts are in larger denominations. Exporters should also determine whether they incur financial liability should the buyer default.

Commercial Banks

The same type of commercial loans that finance domestic activities--including loans for working capital and revolving lines of credit--are often sought to finance export sales until payment is received. However, banks do not usually extend credit solely on the basis of an order.

A logical first step in obtaining financing is for an exporter to approach its local commercial bank. If the exporter already has a loan for domestic needs, then the lender already has experience with the exporter's ability to perform. Many exporters have very similar, if not identical, preshipment needs for both their international and their domestic transactions. Many lenders, therefore, would be willing to provide financing for export transactions if there were a reasonable certainty of repayment. By using letters of credit or export credit insurance, an exporter can reduce the lender's risk.

When a lender wishes greater assurance than is afforded by the transaction, a government guarantee program may enable a lender to extend credit to the exporter. See .

For a company that is new to exporting or is a small or medium-sized business, it is important to select a bank that is sincerely interested in serving businesses of similar type or size. If the exporter's bank lacks an international department, it will refer the exporter to a correspondent bank that has one. The exporter may want to visit the international department--of the exporter's own bank or a correspondent bank--to discuss its export plans, available banking facilities, and applicable fees.

When selecting a bank, the exporter should ask the following questions:

• What are the charges for confirming a letter of credit, processing drafts, and collecting payment?
• Does the bank have foreign branches or correspondent banks? Where are they located?
• Can the bank provide buyer credit reports? At what cost?
• Does it have experience with U.S. and state government financing programs that support small business export transactions? If not, is it willing to consider participating in these programs?
• What other services, such as trade leads, can it provide?

Other Private Sources

Government Assistance Programs

Several federal government agencies, as well as a number of state and local ones, offer programs to assist exporters with their financing needs. Some are guarantee programs that require the participation of an approved lender; others provide loans or grants to the exporter or a foreign government.

Government programs generally aim to improve exporters' access to credit rather than to subsidize the cost at below-market levels. With few exceptions, banks are allowed to charge market interest rates and fees; part of those fees is paid to the government agencies to cover the agencies' administrative costs and default risks.

Government guarantee and insurance programs are used by commercial banks to reduce the risk associated with loans to exporters. Lenders concerned with an exporter's ability to perform under the terms of sale, and with an exporter's ability to be paid, often use government programs to reduce the risks that would otherwise prevent them from providing financing.

In overview, the Export-Import Bank of the United States is the federal government's general trade finance agency, offering numerous programs to address a broad range of needs. Credit insurance from Ex-Im Bank protects against default on exports sold under open account terms and drafts and letters of credit that are not the obligation of a U.S. entity. (Excluded are drafts that have been accepted by a U.S. bank or corporation and letters of credit confirmed by a U.S. bank.) Other guarantee and loan programs extend project finance and medium-term credit for durable goods.

Other agencies fill various market niches. USDA offers a variety of programs to foster agricultural exports. The TDA provides grant financing for project planning activities conducted by U.S. firms and thereby seeks to give a U.S. "imprint" on project feasibility studies and design. ( See for more information on TDA programs) SBA offers programs to address the needs of smaller exporters. OPIC provides specialized assistance to U.S. firms through its performance bond and contractor insurance programs. AID provides grants to developing nations that can be used to purchase U.S. goods and services. ( See for more information on AID programs.)

Although the Department of Commerce does not offer any financing programs of its own, export counseling is available through its district offices. In addition, current articles on export finance programs are periodically published in Business America .

Export-Import Bank of the United States

The Export-Import Bank of the United States, or Ex-Im Bank, is an independent U.S. government agency with the primary purpose of facilitating the export of U.S. goods and services. Ex-Im Bank meets this objective by providing loans, guarantees, and insurance coverage to U.S. exporters and foreign buyers, normally on market-related credit terms.

Ex-Im Bank's insurance and guarantee programs are structured to encourage private financial institutions to fund U.S. exports by reducing the commercial risks (such as buyer insolvency and failure to pay) and political risks (such as war and currency inconvertibility) exporters face. The financing made available under Ex-Im Bank's guarantees and insurance is generally on market terms, and most of the commercial and political risks are borne by Ex-Im Bank.

Ex-Im Bank's loan program, on the other hand, is structured to neutralize interest rate subsidies offered by foreign governments. By responding with its own subsidized loan assistance, Ex-Im Bank enables U.S. financing to be competitive on specific sales with that offered by foreign exporters.

Ex-Im Bank programs are outlined below. If you require further information, contact your nearest U.S. Export Assistance Center, a regional Ex-Im Bank office, or

Ex-Im Bank, Marketing and Program Division
811 Vermont Avenue NW
Washington, DC 20571
Tel: (800) 565-EXIM, (202) 565-3946
Fax Retrieval (800) 565-EXIM (press 1, then 2 at voice prompts)
Web site: www.exim.gov

Department of Agriculture

The Foreign Agricultural Service (FAS) of the USDA administers several programs to help make U.S. exporters competitive in international markets and make U.S. products affordable to countries that have greater need than they have ability to pay.

One effort to boost U.S. agricultural sales overseas is the Export Credit Guarantee Program, which offers risk protection for U.S. exporters against nonpayment of foreign banks. The program guarantees payment for commercial as well as noncommercial risks. Private U.S. banking institutions provide the operating funds. The guarantee program makes it easier for exporters to obtain bank financing and to meet credit competition from other exporting countries.

FAS also helps carry out food aid programs that provide emergency food donations and long-term concessional and commercial financing for U.S. agricultural products. These sales are intended to stimulate long-range improvements in foreign economies and development of export markets for U.S. farm products.

The Trade Assistance and Promotion Office (TAPO) of the Foreign Agricultural Service (FAS) serves as the first point of contact for persons who need information on foreign markets for agricultural products or assistance in accessing government programs. For more information, contact

Foreign Agricultural Service
Trade Assistance and Promotion Office
Tel: (202) 720-7420; Fax (202) 205-9728
Web site: www.fas.usda.gov

Overseas Private Investment Corporation

The Overseas Private Investment Corporation (OPIC) facilitates U.S. foreign direct investment in nearly 140 developing nations worldwide. OPIC is an independent, financially self-supporting corporation, fully owned by the U.S. government.

OPIC encourages U.S. investment projects overseas by offering political risk insurance; financing businesses through guaranties and direct loans; supporting private investment funds to provide equity for U.S. companies investing in overseas projects; and engaging in outreach activities to inform the U.S. business community of overseas investment opportunities. Projects must have a positive effect on U.S. employment, are financially sound, and promise benefits to the social and economic development of the host country.

For more information, call OPIC's automated information retrieval systems. The InfoLine allows callers to listen to brief recorded program descriptions, request that printed information be sent to them via fax or email, or speak with an OPIC Information Officer (during business hours). You may bypass the InfoLine and proceed directly to OPIC FactsLine, and automated fax retrieval system.

Overseas Private Investment Corporation
1100 New York Ave. NW
Washington, DC 20527
Tel: (202) 336-8400; Fax: (202) 408-9859
OPIC InfoLine, Tel: (202) 336-8799
OPIC FactsLine, Tel: (202) 336-8700
Email: OPIC/S=INFO@mhs.attmail.com
Web site: www.opic.gov

Small Business Administration Assistance

The Small Business Administration (SBA) also provides financial assistance programs for U.S. exporters. Applicants must qualify as small businesses under the SBA's size standards and meet other eligibility criteria. The major programs are outlined below. For more specific information on SBA's financial assistance programs, policies, and requirements, contact the nearest SBA field office or U.S. Export Assistance Center (USEAC) or SBA's Small Business Answer Desk at Tel: (800) 8-ASK-SBA.

State and Local Export Finance Programs

Several cities and states have funded and operational export financing programs, including preshipment and postshipment working capital loans and guarantees, accounts receivable financing, and export insurance. To be eligible for these programs, an export sale must generally be made under a letter of credit or with credit insurance coverage. A certain percentage of state or local content may also be required. However, some programs may require only that certain facilities, such as a state or local port, be used; therefore, exporters may have several options.

Exporters should contact an Export Assistance Center or Department of Commerce district office or their state economic development agency for more information. ( Refer to Appendix III, .)

Service Delivery Options

Service is an important factor in the initial export sale and ongoing success of products in foreign markets. U.S. firms have many options for the delivery of service to foreign buyers.

A high-cost option--and the most inconvenient for the foreign retail, wholesale, commercial, or industrial buyer--is for the product to be returned to the manufacturing or distribution facility in the United States for service or repair. The buyer incurs a high cost and loses the use of the product for an extended period, while the seller must incur the export cost of the same product a second time to return it. Fortunately, there are practical, cost-effective alternatives to this approach.

If the selected export distribution channel is a joint venture or other partnership arrangement, the overseas partner may have a service or repair capability in the markets to be penetrated. An exporting firm's negotiations and agreements with its partner should include explicit provisions for repairs, maintenance, and warranty service. The cost of providing this service should be negotiated into the agreement.

For goods sold at retail outlets, a preferred service option is to identify and use local service facilities. Doing so requires front-end expenses to identify and train local service outlets, but such costs are more than repaid in the long run.

An excellent case study on this issue involves a foreign firm's service approach to the U.S. market. A leading Canadian manufacturer of consumer personal care items uses U.S. distributors and sales representatives to generate purchases by large and small retailers across the United States. The products are purchased at retail by individual consumers. The Canadian firm contracted with local consumer electronic repair facilities in leading U.S. cities to provide service or replacement for its product line. Consequently, the manufacturer can include a certificate with each product listing "authorized" local warranty and service centers.

There are administrative, training, and supervisory overhead costs associated with such a warranty and service program. The benefit, however, is that the company is now perceived to be a local company that competes on equal footing with domestic U.S. manufacturers. U.S. exporters should keep this example in mind when entering foreign markets.

Exporting a product into commercial or industrial markets may dictate a different approach. For the many U.S. companies that sell through distributors, selection of a representative to serve a region, a nation, or a market should be based not only on the distributing company's ability to sell effectively but also on its ability and willingness to service the product.

Assessing that ability to service requires that the exporter ask questions about existing service facilities; about the types, models, and age of existing service equipment; about training practices for service personnel; and about the firm's experience in servicing similar products.

If the product being exported is to be sold directly to end users, service and timely performance are critical to success. The nature of the product may require delivery of on-site service to the buyer within very specific time parameters. These are negotiable issues for which the U.S. exporter must be prepared. Such on-site service may be available from service organizations in the buyer's country; or the exporting company may have to send personnel to the site to provide service. The sales contract should anticipate a reasonable level of on-site service and should include the associated costs. Existing performance and service history can serve as a guide for estimating service and warranty requirements on export sales, and sales can be costed accordingly. This practice is accepted among small and large exporters alike.

At some level of export activity, it may become cost-effective for a U.S. company to establish its own branch or subsidiary operation in the foreign market. The branch or subsidiary may be a one-person operation or a more extensive facility staffed with sales, administration, service, and other personnel, most of whom are nationals in the market. This high-cost option enables the exporter to ensure sales and service quality, provided that personnel are trained in sales, products, and service on an ongoing basis. The benefits of this option include the control it gives to the exporter and the ability to serve multiple markets in a single region.

Manufacturers of similar or related products may find it cost-effective to consolidate service, training, and support in each export market. Service can be delivered by U.S.-based personnel, a foreign facility under contract, or a jointly owned foreign-based service facility. Despite its cost benefits, this option raises a number of issues. Such joint activity may be interpreted as being in restraint of trade or otherwise market controlling or monopolistic. Exporters that are considering it should therefore obtain competent legal counsel when developing this joint operating arrangement. Exporters may wish to consider obtaining an export trade certificate of review, which provides limited immunity from U.S. antitrust laws.

Legal Considerations

Service is a very important part of many types of representation agreements. For better or worse, the quality of service in a country or region affects the U.S. manufacturer's reputation there.

Quality of service also affects the intellectual property rights of the manufacturer. A trademark is a mark of source, with associated quality and performance. If quality control is not maintained, the manufacturer can lose its rights to the product, because one can argue that, within that foreign market, the manufacturer has abandoned the trademark to the distributor.

It is, therefore, imperative that agreements with a representative be specific about the form of the repair or service facility, the number of people on the staff, inspection provisions, training programs, and payment of costs associated with maintaining a suitable facility. The depth or breadth of a warranty in a given country or region should be tied to the service facility to which the manufacturer has access in that market; it is important to promise only what can be delivered.

Another part of the representative agreement may detail the training the exporter will provide to its foreign representative. This detail can include frequency of training, who must be trained, where the training is provided, and which party absorbs travel and per diem costs.

New Sales Opportunities and Improved Customer Relations

Foreign buyers of U.S.-manufactured products typically have limited contact with the manufacturer or its personnel. The foreign service facility is, in fact, one of the major contact points between the exporter and the buyer. To a great extent, the U.S. manufacturer's reputation is made by the overseas service facility.

The service experience can be a positive and reinforcing sales and service encounter. It can also be an excellent sales opportunity if the service personnel are trained to take advantage of the situation. Service personnel can help the customer make life cycle decisions regarding the efficient operation of the product, how to update it for more and longer cost-effective operation, and when to replace it as the task expands or changes. Each service contact is an opportunity to educate the customer and expand the exporter's sales opportunities.

Service is also an important aspect of selling solutions and benefits rather than product features. More than one leading U.S. industrial products exporter sells its products as a "tool to do the job" rather than as a "truck" or a "cutting machine" or "software." Service capability enables customers to complete their jobs more efficiently with the exporter's "tool." Training service managers and personnel in this type of thinking vitalizes service facilities and generates new sales opportunities.

Each foreign market offers a unique opportunity for the U.S. exporter. Care and attention to the development of in-country sales and distribution capabilities is paramount. Delivery of after-sales service is critical to the near- and long-term success of the U.S. company's efforts in any market.

Senior personnel should commit to a program of regular travel to each foreign market to meet with the company's representatives, clients, and others who are important to the success of the firm in that market. Among those persons would be the commercial officer at the US&FCS post and representatives of the American chamber of commerce and the local chamber of commerce or business association.

The benefits of such a program are twofold. First, executive management learns more about the foreign marketplace and the firm's capabilities. Second, the in-country representative appreciates the attention and understands the importance of the foreign market in the exporter's long-term plans. As a result, such visits help build a strong, productive relationship.

Technology Licensing

Technology licensing is a contractual arrangement in which the licenser's patents, trademarks, service marks, copyrights, or know-how may be sold or otherwise made available to a licensee for compensation negotiated in advance between the parties. Such compensation, known as royalties , may consist of a lump sum royalty, a running royalty (royalty based on volume of production), or a combination of both. U.S. companies frequently license their patents, trademarks, copyrights, and know-how to a foreign company that then manufactures and sells products based on the technology in a country or group of countries authorized by the licensing agreement.

A technology licensing agreement usually enables a U.S. firm to enter a foreign market quickly, yet it poses fewer financial and legal risks than owning and operating a foreign manufacturing facility or participating in an overseas joint venture. Licensing also permits U.S. firms to overcome many of the tariff and nontariff barriers that frequently hamper the export of U.S.-manufactured products. For these reasons, licensing can be a particularly attractive method of exporting for small companies or companies with little international trade experience, although licensing is profitably employed by large and small firms alike. Technology licensing can also be used to acquire foreign technology (e.g., through cross-licensing agreements or grantback clauses granting rights to improvement technology developed by a licensee).

Technology licensing is not limited to the manufacturing sector. Franchising is also an important form of technology licensing used by many service industries. In franchising, the franchisor (licenser) permits the franchisee (licensee) to employ its trademark or service mark in a contractually specified manner for the marketing of goods or services. The franchisor usually continues to support the operation of the franchisee's business by providing advertising, accounting, training, and related services and in many instances also supplies products needed by the franchisee.

As a form of exporting, technology licensing has certain potential drawbacks. The negative aspects of licensing are that (1) control over the technology is weakened because it has been transferred to an unaffiliated firm and (2) licensing usually produces fewer profits than exporting goods or services produced in the United States. In certain Third World countries, there also may be problems in adequately protecting the licensed technology from unauthorized use by third parties.

In considering the licensing of technology, it is important to remember that foreign licensees may attempt to use the licensed technology to manufacture products that are marketed in the United States or third countries in direct competition with the licenser or its other licensees. In many instances, U.S. licensers may wish to impose territorial restrictions on their foreign licensees, depending on U.S. or foreign antitrust laws and the licensing laws of the host country. Also, U.S. and foreign patent, trademark, and copyright laws can often be used to bar unauthorized sales by foreign licensees, provided that the U.S. licenser has valid patent, trademark, or copyright protection in the United States or the other countries involved. In addition, unauthorized exports to the United States by foreign licensees can often be prevented by filing unfair import practices complaints under section 337 of the Tariff Act of 1930 with the U.S. International Trade Commission and by recording U.S. trademarks and copyrights with the U.S. Customs Service. Contact the Office of Unfair Import Investigations at Tel: (202) 205-2558; Fax: (202) 205-2158, for information on filing a complaint.

As in all overseas transactions, it is important to investigate not only the prospective licensee but the licensee's country as well. The government of the host country often must approve the licensing agreement before it goes into effect. Such governments, for example, may prohibit royalty payments that exceed a certain rate or contractual provisions barring the licensee from exporting products manufactured with or embodying the licensed technology to third countries.

The prospective licenser must always take into account the host country's foreign patent, trademark, and copyright laws; exchange controls; product liability laws; possible countertrading or barter requirements; antitrust and tax laws; and attitudes toward repatriation of royalties and dividends. The existence of a tax treaty or bilateral investment treaty between the United States and the prospective host country is an important indicator of the overall commercial relationship. Prospective U.S. licensers, especially of advanced technology, also should determine whether they need to obtain an export license from the U.S. Department of Commerce.

International technology licensing agreements, in a few instances, can unlawfully restrain trade in violation of U.S. or foreign antitrust laws. U.S. antitrust law, as a general rule, prohibits international technology licensing agreements that unreasonably restrict imports of competing goods or technology into the United States or unreasonably restrain U.S. domestic competition or exports by U.S. persons.

Whether or not a restraint is reasonable is a fact-specific determination that is made after consideration of the availability of competing goods or technology; market shares; barriers to entry; the business justifications for and the duration of contractual restraints; valid patents, trademarks, and copyrights; and certain other factors. The U.S. Department of Justice's Antitrust Enforcement Guidelines for International Operations (Revised in1995) contains useful advice regarding the legality of various types of international transactions, including technology licensing. In those instances in which significant federal antitrust issues are presented, U.S. licensers may wish to consider applying for an export trade certificate of review from the Department of Commerce ( refer to Chapter 4, ) or requesting a Department of Justice business review letter.

Foreign countries, particularly the EC, also have strict antitrust laws that affect technology licensing. The EC has issued detailed regulations governing patent and know-how licensing. These block exemption regulations are entitled "Commission Regulation (EEC) No. 2349/84 of 23 July 1984 on the Application of Article 85(3) of the Treaty [of Rome] to Certain Categories of Patent Licensing Agreements" and "Commission Regulation (EEC) No. 556/89 of 30 November 1988 on the Application of Article 85(3) of the Treaty to Certain Categories of Know-how Licensing Agreements." These regulations should be carefully considered by anyone currently licensing or contemplating the licensing of technology to the EC.

Because of the potential complexity of international technology licensing agreements, firms should seek qualified legal advice in the United States before entering into such an agreement. In many instances, U.S. licensors should also retain qualified legal counsel in the host country in order to obtain advice on applicable local laws and to receive assistance in securing the foreign government's approval of the agreement. Sound legal advice and thorough investigation of the prospective licensee and the host country increase the likelihood that the licensing agreement will be a profitable transaction and help decrease or avoid potential problems.

Joint Ventures

There are a number of business and legal reasons why unassisted exporting may not be the best export strategy for a U.S. company. In such cases, the firm may wish to consider a joint venture with a firm in the host country. International joint ventures are used in a wide variety of manufacturing, mining, and service industries and are frequently undertaken in conjunction with technology licensing by the U.S. firm to the joint venture.

The host country may require that a certain percentage (often 51 percent) of manufacturing or mining operations

be owned by nationals of that country, thereby requiring U.S. firms to operate through joint ventures. In addition to such legal requirements, U.S. firms may find it desirable to enter into a joint venture with a foreign firm to help spread the high costs and risks frequently associated with foreign operations.

Moreover, the local partner may bring to the joint venture its knowledge of the customs and tastes of the people, an established distribution network, and valuable business and political contacts. Having local partners also decreases the foreign status of the firm and may provide some protection against discrimination or expropriation, should conditions change.

There are, of course, possible disadvantages to international joint ventures. A major potential drawback to joint ventures, especially in countries that limit foreign companies to 49 percent or less participation, is the loss of effective managerial control. A loss of effective managerial control can result in reduced profits, increased operating costs, inferior product quality, and exposure to product liability and environmental litigation and fines. U.S. firms that wish to retain effective managerial control will find this issue an important topic in negotiations with the prospective joint venture partner and frequently the host government as well.

Like technology licensing agreements, joint ventures can raise U.S. or foreign antitrust issues in certain circumstances, particularly when the prospective joint venture partners are major existing or potential competitors in the affected national markets. Firms may wish to consider applying for an export trade certificate of review from the Department of Commerce ( see for more information) or a business review letter from the Department of Justice when significant federal antitrust issues are raised by the proposed international joint venture.

Because of the complex legal issues frequently raised by international joint venture agreements, it is very important, before entering into any such agreement, to seek legal advice from qualified U.S. counsel experienced in this aspect of international trade. Many of the export counseling sources in Chapter 2, , can help direct a U.S. company to local counsel suitable for its needs.

U.S. firms contemplating international joint ventures also should consider retaining experienced counsel in the host country. U.S. firms can find it very disadvantageous to rely upon their potential joint venture partners to negotiate host government approvals and advise them on legal issues, since their prospective partners' interests may not always coincide with their own. Qualified foreign counsel can be very helpful in obtaining government approvals and providing ongoing advice regarding the host country's patent, trademark, copyright, tax, labor, corporate, commercial, antitrust, and exchange control laws.