Chapter 15 - Exporting, Importing and Counter trade

Exporting, Importing and Counter trade

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Chapter 15 - Exporting, Importing and Counter trade
Learning objectives
 Explain the promises and risks
associated with exporting.
 Outline the steps managers can
take to improve their firm’s
export performance.
 Identify the information sources
and government programs that
exist to help exporters.
 Grasp the basic steps involved
in export financing.
 Articulate how countertrade can
be used to facilitate exporting.
Previous chapters have presented exporting as just one of
a range of strategic options for profiting from international
markets. This chapter looks more at the nuts and bolts of
how to export.
Exporting is not just for large enterprises; many small
firms have benefited significantly from the moneymaking
opportunities of exporting.
The volume of export activity in the world economy is
increasing as exporting has become easier. The gradual
decline in trade barriers under the umbrella of GATT and
now the WTO (see Chapter 5) along with regional
economic agreements such as the European Union and the
North American Free Trade Agreement (see Chapter 8)
have significantly increased export opportunities. At the
same time, communication and transportation technologies
have alleviated the logistical problems associated with
exporting.
Firms are increasingly using fax, the World Wide Web,
toll-free 800 numbers, and international air express
services to reduce the costs of exporting. Consequently, it
is no longer unusual to find small companies that are
thriving as exporters.
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OUTLINE OF CHAPTER 15: EXPORTING, IMPORTING AND
COUNTERTRADE

Opening Case: Exporting and Growth for Small Businesses

Introduction

The Promise and Pitfalls of Exporting

Management Focus: FCX Systems

Improving Export Performance

An International Comparison
Information Sources
Utilizing Export Management Companies
Export Strategy

Management Focus: Exporting with a Little Government Help

Management Focus: Export Strategy at 3M
Management Focus: Red Spot Paint & Varnish

Export and Import Financing

Lack of Trust
Letter of Credit
Draft
Bill of Lading
A Typical International Trade Transaction

Export Assistance
Export–Import Bank
Export Credit Insurance

Countertrade
The Incidence of Countertrade
Types of Countertrade
The Pros and Cons of Countertrade

Chapter Summary

Critical Discussion Questions

Closing Case: Megahertz Communications

CLASSROOM DISCUSSION POINT

Ask students if they have ever imported a product. Many students may have done so
without realizing it simply by purchasing something from a foreign buyer via eBay.
Similarly, many students may have engaged in direct exports when they have sold
something to a foreign buyer via eBay.

Ask students to formalize the process by picking a product they would like to export.
Then ask students which markets will they target and why? Next, ask students how they
could get their product to consumers in that market. What additional information will
they need to proceed with their plan?

Organize the responses from students on the board in an export plan format. Then, ask
students to visit some of the Department of Commerce web sites to fill in the gaps.
Discuss why it is important to get the various pieces of information, and which elements
are easier to obtain and why. Refer back to the export plan as the material in the chapter
is presented.

Another Perspective: Export.gov has a great web site covering the basics of exporting. Within
the site {http://www.export.gov/exportbasics/exp_001602.asp} you can click on various topics
related to getting ready to export, developing an export plan, finding leads and so on. The site is
well worth a visit, and could be used as the basis for an in-class export project.

OPENING CASE: Exporting and Growth for Small Businesses

The opening case explores how three small companies, Morgan Motors, Wadia, and
Malden Mills, have successfully increased their sales and profits through exports.
Morgan Motors, a British sports car manufacturer ships 70 percent of its production
overseas. Wadia, a Michigan-based producer of high end compact disc players relies on
exports for 70 to 80 percent of its sales. Malden Mills, an American manufacturer of high
technology textiles earned over half of its 2006 sales from exports. Discussion of the
case can revolve around the following questions:

QUESTION 1: Why did Morgan Motors and Wadia make the decision to export? What
does this tell you about the opportunities for small exporters?

ANSWER 1: Both Morgan Motors and Wadia made the decision to export for similar
reasons. Morgan Motors makes sports cars for a very small market niche. The size of the
niche in Britain is too small for the company to survive, so Morgan had to expand into
other markets to remain in business. Wadia shares a similar predicament. Wadia
produces premium priced compact disc players for audiophiles. Its product is so
specialized that just 20 percent of its sales come from the local marketplace. Students
will probably recognize that for both of these companies survival meant foreign
expansion, and that by targeting similar niches in foreign markets, they could grow their
sales.
QUESTION 2: How does Malden Mills export strategy differ from those of Morgan
Motors and Wadia? Why did Malden Mills need export assistance?

ANSWER 2: Malden Mills, the producer of Polartech, a high technology textile used in
premium priced outwear, faced a different kind of challenge than Morgan Motors and
Wadia. While the latter two companies produced specialty products for small market
niches, Malden Mills produced a product for a bigger market, but a market that was in
decline thanks to globalization and the emergence of low cost manufacturers in
developing countries. Malden Mills, together with the South Carolina Export
Consortium, identified new opportunities for its product and obtained a loan through the
Export-Import Bank that allowed the company to better utilize its capacity and develop
its export markets.

LECTURE OUTLINE FOR CHAPTER

This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view”, then on “notes”. The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.

Slide 15-3 Introduction

Exporting firms need to
 identify market opportunities
 deal with foreign exchange risk
 navigate import and export financing
 understand the challenges of doing business in a foreign market

Slides 15-4-15-5 The Problems and Pitfalls of Exporting

Exporting offers the opportunity to take advantage of a bigger market, and the economies
of scale that come with producing for a bigger market. However, it is also a more
complex market.

Common pitfalls include poor market analysis, poor understanding of competitive

conditions, a lack of customization for local markets, a poor distribution program, poorly
executed promotional campaigns, problems securing financing, a general underestimation
of the differences and expertise required for foreign market penetration, an
underestimation of the amount of paperwork and formalities involved.

Slide 15-6 Improving Export Performance

There are various ways to gain information about foreign market opportunities and avoid
the pitfalls associated with exporting.
Another Perspective: The UK Trade and Investment office is devoted to helping
companies develop their export business. The web site is available at
{https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/home?_nfls=false&_nfpb=true}
Click on “Business Opportunities” to see a sample of a trade lead, or click on “Country
Report” to see the types of information available in a typical report on a specific country.

Slide 15-8 An International Comparison

A big impediment to exporting is the simple lack of knowledge of the opportunities
available. To overcome ignorance firms need to collect information.

Another Perspective: Your students may wonder how firms U.S. firms find buyers in
foreign countries. To find foreign customers, exporters often use '"trade leads" that are
provided by organizations dedicated towards the activity of matching "buyers" and
"sellers" in an international context. An example of a site that provides trade leads is the
Export.gov at {http://www.export.gov/index.asp}.

Slide 15-9 Information Sources

The U.S. Department of Commerce is the most comprehensive source of export
information for U.S. firms.

Another Perspective: Students may want to explore the U.S. Department of Commerce’s
web site {http://www.commerce.gov/}and click on “Free Trade.”

Another Perspective: The Small Business Administration (SBA) also has an extensive
web site {http://www.sba.gov/} with information about exporting to different countries,
contacts and leads, and so on.

Slides 15-10-15-11 Utilizing Export Management Companies

Export management companies (EMCs) are export specialists that act as the export
marketing department or international department for client firms.

Another Perspective: The FITA Directory of Export Management Companies web site
{http://www.fita.org/emc.html} provides information on export management companies, and also
trade leads and international market research.

Slide 15-12 Export Strategy

Firms can reduce risk by carefully choosing their export strategy, and following some
basic guidelines. Firms should firms should hire an EMC or export consultant, to help
identify opportunities and navigate through the tangled web of paperwork and regulations
so often involved in exporting, focus on one, or a few, markets at first, enter a foreign
market on a fairly small scale in order to reduce the costs of any subsequent failures,
recognize the time and managerial commitment involved, develop a good relationship
with local distributors and customers, hire locals to help establish a presence in the
market, be proactive, consider local production.
Another Perspective: A great web site to visit to determine whether a company is ready to
export is the International Trade Centre, run by UNCTAD/WTO. If you go to the site
{http://www.intracen.org/ec/welcome.htm }you can use the interactive quiz to gauge
export readiness. Click on “Export Fitness Checker”, then on “Use the Export Fitness
Checker online” to see the quiz.

Slide 15-13 Export and Import Financing

Firms engaged in international trade face a problem - they have to trust someone who
may be difficult to track down if they default on an obligation.

Slides 15-14-15-15 Lack of Trust

Including a third party in a transaction adds an element of trust to the relationship.

Slide 15- 16 Letter of Credit

A letter of credit is issued by a bank at the request of an importer and states the bank will
pay a specified sum of money to a beneficiary, normally the exporter, on presentation of
particular, specified documents.

Slide 15-17 Draft

A draft is simply an order written by an exporter instructing an importer, or an importer's
agent, to pay a specified amount of money at a specified time.

Slide 15-18 Bill of Lading

The bill of lading is issued to the exporter by the common carrier transporting the
merchandise.

Slides 15-20-15-21 A Typical International Trade Transaction

The typical international trade transaction involves 14 steps as outlined in Figure 15.4.

Slide 15-23 Export Assistance

There are two forms of government-backed assistance available to exporters:
1. Financing aid is available from the Export-Import Bank
2. Export credit insurance is available from the Foreign Credit Insurance Association

Slide 15-24 Export-Import Bank

The Export-Import Bank (Eximbank) is an independent agency of the U.S. government
that provides financing aid to facilitate exports, imports, and the exchange of
commodities between the U.S. and other countries.
Slide 15-25 Export Credit Insurance
Export credit insurance protects exporters against the risk that the importer will default
on payment. In the U.S., export credit insurance is provided by the Foreign Credit
Insurance Association (FICA).

Slide 15-26 Countertrade

Countertrade refers to a range of barter-like agreements that facilitate the trade of goods
and services for other goods and services when they cannot be traded for money.

Slide 15-27 The Incidence of Countertrade

Countertrade began in the 1960s primarily in the Soviet Union and Eastern bloc
countries. Its popularity increased during the 1980s when many developing countries
that were short of hard currencies used countertrade instead. More recently, its use
increased after the 1997 Asian financial crisis.

Slides 15-28-15-31 Types of Countertrade

There are five distinct versions of countertrade:
1. barter
2. counterpurchase
3. offset
4. compensation or buyback
5. switch trading

Slides 15-33-15-34 Pros and Cons of Countertrade.

The main attraction of counter trade is that it gives a firm a way to finance an export deal
when other means are not available. Countertrade is unattractive because it may involve
the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: A firm based in Washington State wants to export a shipload of finished

lumber to the Philippines. The would- be importer cannot get sufficient credit from
domestic sources to pay for shipment, but insists that the finished lumber can quickly be
resold in the Philippines for a profit. Outline the steps that the exporter should take to
effect the export of this shipment to the Philippines?

ANSWER 1: The steps are as follows:

The Philippine importer places an order with the American exporter, and asks the
American if he would be willing to ship under a letter of credit.
The American exporter agrees to ship under a letter of credit, and specifies relevant
information such as prices, delivery terms, and the like.
The Philippine importer applies to the Bank of Manila (or some other international bank)
for a letter of credit to be issued in favor of the American exporter for the merchandise
the importer wishes to buy.
The Bank of Manila issues a letter of credit in the Philippine importer's favor and sends it
to the American exporter's bank, the Bank of Seattle.
The Bank of Seattle advises the American exporter of the opening of a letter of credit in
his favor.
The American exporter ships the goods to the Philippine importer on a common carrier.
The American exporter presents a 90 day time draft to the Bank of Seattle, drawn on the
Bank of Manila in accordance with the Bank of Manila's letter of credit and accompanied
by the bill of lading. The American exporter endorses the bill of lading such that the title
to the goods goes with the holder of the document - which at this point in the transaction
is the Bank of Seattle.
The Bank of Seattle presents the draft and documents to the Bank of Manila. The Bank
of Manila accepts the draft, taking possession of the documents and promising to pay the
now accepted draft in 90 days.
The Bank of Manila returns the accepted draft to the Bank of Seattle.
The Bank of Seattle tells the American exporter that they have the accepted bank draft,
which is payable in 90 days.
The exporter sells the draft to the Bank of Seattle for a discount from the face value and
receives the discounted cash value of the draft in return.
The Bank of Manila notifies the Philippine importer of the arrival of the documents. It
agrees to pay the Bank of Manila in 90 days. The Bank of Manila releases the documents
so that the Philippine importer can take possession of the shipment.
In 90 days the Bank of Manila receives the importer's payment so that it has funds to pay
the maturing draft.
In 90 days the holder of the matured acceptance, in this case the Bank of Seattle, presents
it to the Bank of Manila for payment. The Bank of Manila pays.
(If the exporter feels confident in and can completely trust the purchaser in the
Philippines, then a much simpler procedure than this could be followed.)

Another Perspective: Trade Port provides a Global trade Tutorial on export financing. The
tutorial is available at {http://www.tradeport.org/tutorial/financing}. The site provides excellent
details on the process, and is well worth a visit.

QUESTION 2: You are the assistant to the CEO of a small textile firm that manufactures
high-quality, premium priced, stylish clothing. The CEO has decided to see what the
opportunities are for exporting and has asked you for advice as to the steps the company
should take. What advice would you give to the CEO?
ANSWER 2: This question is designed to stimulate classroom discussion and/or to
encourage your students to “think” about the export process in completing a written
answer for this question. There are a number of approaches that can be pursued in
answering this question. The first step might be to tap into some of the government
information sources that are available, free of charge, to see if international markets are
available for the company’s product. There are also a number of resources on the
Internet, mentioned throughout the text that can assist companies in learning about the
foreign market potential of their products. Another approach would be to contact an
export management company for assistance. While this approach may involve some cost,
it may be the fastest way to get “up and running” in regard to initiating an export
program.

QUESTION 3: An alternative to using a letter of credit is export credit insurance. What

are the advantages and disadvantages of using export credit insurance as opposed to a
letter of credit for (a) exporting a luxury yacht from California to Canada, and (b)
exporting machine tools from New York to Ukraine?

ANSWER 3: Exporters prefer to get letters of credit from importers. However, when the
importer is in a strong bargaining position and able to play competing suppliers off
against each other, an exporter may have to forgo a letter of credit. The lack of a letter of
credit exposes the exporter to the risk that the foreign importer will default on payment.
The exporter can insure against this possibility by buying export credit insurance.
Students may suggest that in the case of the luxury yacht, should the importer fail to
make payment, the clearly defined laws of Canada would make it easier to go after the
importer than would be the case with the machine tools in the Ukraine, and that therefore
a letter of credit is less important for the yacht exporter. On the other hand, students may
note that there is probably more competition in machine tools as compared to luxury
yachts and that the exporter of machine tools may lose the sale if the exporter insists on a
letter of credit.

QUESTION 4: How do you explain the continued existence of counter trade? Under
what scenarios might its popularity increase still further by the year 2010? Under what
scenarios might its popularity decline?

ANSWER 4: Countertrade becomes popular when foreign exchange markets are limited
or importers don’t have access to foreign exchange (low reserves) they need to fund their
purchases. Currency crises and monetary instability are two conditions that lead to
countertrade. As long as countries lack hard currencies and foreign exchange reserves, yet
have an interest in trade, countertrade is likely. If countries erect trade barriers that
decrease world trade, or, on the positive side, if the monetary systems of many countries
strengthen significantly, then countertrade may decrease.

QUESTION 5: How might a company make strategic use of countertrade schemes to

generate export revenues? What are the risks associated with pursuing such a strategy?
ANSWER 5: Countertrade is an alternative means of structuring an international sale
when conventional means of payment are difficult, costly, or nonexistent. The
governments of developing countries sometimes insist on a certain amount of
countertrade. Thus, if a firm is unwilling to enter a countertrade agreement, it may lose
an export opportunity to a competitor that is willing to make a countertrade agreement.
Companies that are willing to entertain countertrade as a means of financing, will have an
advantage over those firms that prefer traditional forms of financing. Firms engaging in
countertrade must be willing to invest in an in-house trading department dedicated to
arranging and managing countertrade deals, and must be aware of the quality of the
products received in countertrade deals.     

QUESTION 6: Reread the Management Focus on FCX Systems, then answer the
following questions:
a) What are the main lessons about the requirements for export success that can be drawn
from the story of FCX?
b) Why do you think that FCX terminated its relationship with an international
distribution company and started to export on its own?
c) What does the story of FCX tell you about the importance of foreign markets for the
growth of a small enterprise?

ANSWER 6:
a) Small companies beginning the export process can find it overwhelming. Not only do
the companies have to deal with additional paperwork, but they also have to learn the
local ways of doing business, how to finance exports, how to make contacts, and so on.
Some firms, like FSX, hire local distributors to help with this process. However, if the
distributor is not looking out for the best interests of the firm, the company, like FSX,
may find it better to take on the process itself. FSX cites persistence and assistance as
being particularly important elements to its success as an exporter.
b) FCX Systems realized that to continue to grow, the company would have to seek
opportunities in foreign markets. The company initially used an international distribution
company to help with the process, but began handling its exports on its own in 1994.
FSX became disillusioned with the distributor and took over the process itself in 1994.
At the time, export sales accounted for just 12 percent of the company’s total sales, but
now that figure is over 50 percent.
c) This question provides students with the opportunity to examine the services provided
by various institutions such as the Small Business Association and the Department of
Commerce in greater depth. Students may also wish to examine some of the services
offered by profit-oriented organizations offering export assistance. FSX credits a number
of federal and state agencies for providing assistance that helped the company become
successful in foreign markets. Not only did the agencies provide help with the exporting
process itself, they also gave FSX contact information.
Another Perspective: Students may want to explore FCX Systems’web site
{http://www.fcxinc.com/} for additional information on the company.

QUESTION 7: Reread the Management Focus on Red Spot Pain & Varnish. What basic
lessons about export strategy can be drawn from the example of Red Spot Paint &
Varnish?

ANSWER 7: When Red Spot Paint & Varnish was beginning its international expansion
in the 1960s, finding information on the process, or people with international experience,
was significantly more difficult than it is today when companies can access resources
such as the Department of Commerce and Small Business Association from their own
offices, and advertise for personnel using Internet-based searches like Monster.com.
Some students will attribute Red Spot Paint & Varnish’s success to its perseverance and
forward-looking thinking. The company hired an expert to focus on international market
development years ago, and despite the slow nature of the process, has allowed its
international business to continue to grow. Students should recognize that one of the key
challenges to operating internationally is the development of relationships between
buyers and sellers. Companies that focus on quick results may do so at the expense of
relationships that may take longer to develop, but could prove to be more profitable in the
long term. A longer term outlook has helped Red Spot Paint & Varnish develop a
thriving international component to its business in a market where competitors have has
little success in foreign markets.

Another Perspective: Go to Red Spot Paint & Varnish {http://www.redspot.com/} to explore the
company’s operations in more depth. Click on “Global Alliance” to see what the company
believes are the advantage of working with other firms.

CLOSING CASE: Megahertz Communications

The closing case describes Megahertz Communications’ export strategy. Megahertz

Communications is one of Great Britain’s leading independent broadcasting system
builders. Megahertz International’s export strategy involved providing turnkey solutions
to emerging broadcast and media entities in Africa, the Middle East, and Eastern Europe,
as well as offering to custom-design, manufacture, install, and test broadcasting systems.
While the company found it easy to make sales, export financing has proven to be a
challenge. The following questions can be helpful in directing the discussion.

QUESTION 1: What was the motivation for Megahertz’s shift toward a strategy of
export-led growth? Why do you think the opportunities for growth might be greater in
foreign markets? Do you think that developing countries are likely to be a major market
opportunity for Megahertz? Why?
ANSWER 1: Before exploring international opportunities, Megahertz was in mature
markets where there was plenty of competition. Export led growth allowed for company
growth without much competition in the export markets. Those opportunities were in
developing markets that had been underserved, in part because the need for broadcast
systems was itself developing in these countries. As countries develop, they will want
major broadcast capabilities. Such capabilities are important to the government and to
the growth of the private sector.

QUESTION 2: Does Megahertz’s strategy for building exports make sense given the
nature of the broadcast industry? Why?

ANSWER 2: Megahertz’s strategy for exports was simple. The company aimed to
provide a turnkey solution to emerging broadcast and media entities in Africa, the Middle
East, and Eastern Europe. Megahertz was so successful with this strategy that the British
government awarded the company a Small business Export Award in 2000. Perhaps a
key to Megahertz’s success was the fact that the company offered to custom design,
manufacture, install, and test broadcasting systems. In a region where there was a lack of
broadcast engineers, these services were important.

QUESTION 3: Why do you think Megahertz found it difficult to raise the working
capital required to finance its international trade activities? What does the experience of
Megahertz tell you about the problems facing small firms who wish to export?

ANSWER 3: Despite its export sales success, Megahertz found that preshipment
financing was a major problem. The company found that banks were very cautious about
making working capital loans to the company when they found out that the company’s
customers were in Africa or Eastern Europe. Even with letters of credit, the banks
perceived the transactions as being too risky. Megahertz’s working capital difficulties
illustrate the challenges faced by smaller companies as they seek to expand their growth
through exports.

QUESTION 4: Megahertz solved its financing problem by selling the company to

AZCAR of Canada. What other solutions might the company have adopted?

ANSWER 4: Megahertz was sold to Canada’s AZCAR in 2002. Megahertz’s managing

director saw the sale as a means of acquiring the necessary working capital to take full
advantage of export opportunities. The company had explored the use of lending
companies that specialize in financing international trade, but found that many of the
companies charged interest rates significantly greater than those charged by banks.
Megahertz could have also explored financing assistance offered through the Export-
Import Bank.
INTEGRATING iGLOBES

There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:

Title: China Rising Part 1: The Boom

China’s Rising Economy

Abstract: This video examines the economic boom that is transforming China.

Key Concepts: economic growth, investment, trade, globalization, global economy

Notes: China may hold on to its traditional practices of tai chi and calligraphy, but the
country is nothing like what it once was. Instead, China is considered to be the fastest
growing major economy in the world, a country with more than twice as many people as
the U.S. and Europe combined. In cities like Shanghai and Beijing the landscape is
changing virtually overnight. Just twenty years ago, Shanghai boasted a single
skyscraper. Today, thanks in part to crews that work three shifts a day, the city has over
three hundred skyscrapers.

China’s economic boom started in the late 1970s, and since then, the Chinese economy
has doubled every eight years. In contrast, the U.S. economy has doubled only once over
the same time period. Chinese consumers now have ten times the purchasing power they
had just a quarter century ago. If the trend continues, China’s purchasing power will
mirror that of the U.S. in only two decades, and exceed that of the U.S in thirty years. The
growth rate in China’s cities is fueled by the influx of peasants from the countryside.
While some 60 percent of China’s population still farms for a living, that number is
dwindling as 20 million people leave the farm each year in search of a better life in the
city. This large migration leads to new demands for housing adding to the economic
boom.

With Chinese factory workers earning about $1.25 per hour including benefits,
manufacturing is booming too. China’s total trade now exceeds that of Japan, and comes
in second only to that of the U.S. Perhaps more importantly, China is now moving into
higher-tech exports such as computers. To move all of these exports, Shanghai has its
sights set on becoming the world’s largest port within a few years. Shanghai’s ambitious
plans reflect a general sense of economic energy and optimism in China, an energy and
optimism that manifests itself in the plans of China’s young people to achieve ever-
greater success.

Discussion Questions:
1. China’s economic boom is extraordinary. What does this boom mean to companies in
other parts of the world? How can companies such as Ford or Microsoft capitalize on
China’s growth? What problems does China’s economic growth create for these
companies?

2. What role does the personal ambition of Chinese citizens play in China’s economic
boom? The U.S. has often been considered the land of opportunity. In your opinion does
the name still fit? Does it apply to China? Why or why not?

3. China’s major cities are receiving an influx of people each year as peasants seek a
better life. Consider the problems associated with this form of migration. How should
the Chinese government respond to the situation?

4. With its red-hot economy, huge population, and movement into higher-tech exports,
China is becoming a force to be reckoned with. What will China’s role be in the global
economy over the next ten years? In twenty years?

INTEGRATING VIDEOS

There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following:

Title 5: The Politics of Trade in Steel

Notes: As a new advocate of protectionism, Nucor, one of America’s largest steel

manufacturers/recyclers, believes tariffs are necessary in some cases. With 32 steel
companies on the verge of bankruptcy, low cost imports were forcing companies out of
business, prompting a cry for help. In 2002, in an attempt an attempt to rescue an
industry that had been shrinking for years, but still provided 160,000 jobs in the U.S.,
President Bush signed a law that applied a 30% tariff to imported steel. The tariffs were
scheduled to remain in place until March 2005.
However, in 2004, when studies revealed that instead of saving jobs as originally
intended, the high cost of domestic steel negatively affected the domestic manufacturing
industry that consumes steel, the tariffs were dropped. Estimates show that as a result of
tariffs, job losses among steel users exceeded those employed in the entire steel industry.
Some 200,000 jobs were lost among steel users, more than the total number of jobs
(187,000) in the whole steel industry. Furthermore, because of the tariffs, other American
industries such as textiles were negatively affected thanks to the retaliatory tariffs
imposed by the European Union.

Discussion Guide:
1. Given the information available at the time of the decision, was President Bush right to
respond to the pressure to impose tariffs on imported steel? How did politics enter the
decision?
2. Consider the threats by the EU to make retaliatory moves if the U.S. imposed barriers
on steel. Was the U.S. within its rights to impose tariffs? Discuss the actions of the EU.
Were their actions successful? Why or why not?
3. Using the theories of absolute and comparative advantage, how would you respond to
the pleas for help from the companies being threatened by cheap imports?

4. Who benefited from the imposition of tariffs? In your opinion, were the tariffs “fair?”
In addition to the steel users, who lost out as a result of the tariffs?

globalEDGE™ Exercise Questions

Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following

exercises:

Exercise 1
Exporting is an important way for small and large companies to introduce products and
develop new markets. In fact, the Internet is rich with resources that provide guidance to
companies wishing to expand their markets through exporting. globalEDGE™ provides
links to these tutorial websites. Identify five sources and provide a description of the
services available for new exporters through each source.

Exercise 2
Understanding the specific terminology used in the export process is necessary prior to
your company’s first export venture. Utilize the globalEDGE™ Glossary of International
Business Terms to identify the definitions of the following exporting terms: air waybill,
certificate of inspection, certificate of product origin, wharfage charge, and export broker.

Answers to the Exercises

Exercise 2
There are a variety of sources that provide guidance to companies that consider starting
exporting. A rich list of those resources can be found by searching the term “exporting”
at {http://globaledge.msu.edu/ResourceDesk/} or by directly entering the “Trade
Tutorials” category under the Global Resources section of the Resource Desk. Some of
the websites that provide information for U.S. exporters are: the Export Institute USA’s
“Ask The Experts”, Ralph Jagodka’s “Skills Needed For Effective International
Marketing”, the U.S. Department Of Commerce’s “Basic Guide To Exporting”, and the
U.S. Small Business Administration's “Small Business Guide to Exporting”. Be sure to
check the “Resource Desk only” checkbox of the search function on the globalEDGE
website.
Search Phrase: “exporting”
globalEDGE™ Category: “Trade: Trade Tutorials”
Resource Name: Multiple Names
Website: Multiple Websites

Exercise 2
An alphabetic list of the terms commonly used in international business can be found
under the glossary section of the resource desk, at
{http://globaledge.msu.edu/resourceDesk/glossary.asp }. The definitions of the terms
mentioned in the exercise are as follows:
air waybill: A nonnegotiable instrument of domestic and international air transport that
functions as a bill of lading.
certificate of inspection: Documents that may be asked for by the importer and/or the
authorities of the importing country, as evidence of quality or conformity to
specifications.
certificate of product origin: A document required by certain foreign countries for tariff
purpose, certifying the country of origin of specified goods.
wharfage charge: A charge assessed by a pier or dock owner for handling incoming or
outgoing cargo.
export broker: An individual or firm that helps to locate and introduce buyers and seller
in international business for a commission but does not take part in actual sales
transaction.

Location: Resource Desk / Glossary

Resource Name: globalEDGE: Glossary of International Business Terms
Website: {http://globaledge.msu.edu/resourceDesk/glossary.asp}
globalEDGE™ Category: “Trade: Trade Tutorials”