The Practice of International Trade

By Karl Miville de Chene

This practical guide aims at creating, through training, a pool of professionals capable of handling effectively international trade transactions. They will eventually be able to join existing trading houses or work for a manufacturing company that already exports or wishes to do so.

• Language: English
• Publisher: AuthorHouse
• Release date: Oct 21, 2014
• ISBN: 9781496943682

Karl Miville de Chene

Mr. Miville-de Chêne has worked on the international scene since 1984. Starting out as a coffee trader for the last fifteen years, he has dedicated himself to promoting the export industry, developing his trade profession, and coaching many trade promotion organizations. In reference to strategic planning, trade finance, international marketing, risk management analysis, and management of commercial marketing organizations and exports, Karl Miville de Chêne is a recognized name in training, consulting, and coaching not only in North America but in Latin America and Africa as well. Mr. Miville de Chêne has developed many training programs (public, private, and university level) on these subjects and has trained many instructors originally from export marketing organizations and teaching institutions. Mr. Miville-de Chêne has published numerous articles and books in French and English.

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CHAPTER 1

THE ROLE OF INTERNATIONAL

TRADING HOUSES

CHAPTER 1:  THE ROLE OF INTERNATIONAL TRADING HOUSES

The trade liberalization and the constant lowering of tariff barriers, coupled with the mounting industrialization of developing countries, have had the effect that our past client countries have become supplier countries. Since the creation of the World Trade Organization (WTO) which replaced the (General Agreement on Trade and Tariff (GATT), we have less protection or privileged situations in our traditional markets, whether it is preferential customs treatment or rates of duties.

We are therefore faced with increased competition, not only on our foreign markets, but also on our domestic markets. However, there is a positive aspect to all this. The firms that succeed in holding onto the domestic markets in the face of foreign competition, either through modern technology or improved product lines, are proving that they can also compete internationally, even if they never exported before.

In their efforts to keep their place in world trade or in entering markets, small and medium-sized enterprises (SMEs) can call on Trading Houses (THs) which can be strong allies in export development initiatives. All parties will profit by working together.

In practical terms, manufacturers and producers serve a given market, whereas THs serve the manufacturers and producers. THs are dependent on their suppliers for exportable products, while manufacturers have two choices: to work with a TH or create their own in-house export department.

What do Trading Houses do? The following figure illustrates how a TH can be the link in the transactions that flow between producers and buyers on all markets.

Figure 1: Trading Houses as intermediaries

Trading Houses are involved in four types of commercial activities:

1) Exporting to a foreign country goods produced in the USA;

2) Importing to USA goods produced elsewhere;

3) Offshore trading between foreign producers and buyers. In this case, the goods do not touch local soil.

The agility and flexibility of Trading Houses allows them to work on many markets simultaneously and to handle more than one line of merchandise. They are, therefore, better equipped to handle three-cornered transactions. Although a particular Trading House may play all these roles, the profile of the industry, as a whole, will show the following breakdown:

Whatever the activities of the United States, their profits should return to the country where they are legally based.

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Who can use Trading Houses? Trading Houses are service companies. They do not manufacture anything and must, therefore, justify their intervention by the value added that their services can bring to an international transaction. For a manufacturer, the type of market he is prospecting will determine if a Trading House is useful to him.

The Manufacturer’s markets

The markets available to a manufacturer can be categorized as:

• Local markets,

• Cross-border markets (neighbouring and regional states and countries), and

• Overseas markets (all others).

Figure 2: Local market

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Figure 2 is a simple illustration of the activity on the local market.

The first, and prime, market for the manufacturer is the domestic market in the USA. He knows the competitive environment and his marketing and shipping departments can easily handle the sale and delivery of his goods. The commercial practices, the language and the currency of transaction are uniform across the country. Inter-provincial trade barriers are non-existent for most manufactured products. When he needs to deliver to a distant market, he can call on public carriers without difficulty.

Figure 3: Cross-border markets

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Cross-Border Markets

If the manufacturer has a competitive product and wishes to export it, he will usually start with the cross border markets (Figure 3). Because living standards, personal tastes, technical norms, banking and commercial practices tend to be similar in the two countries, the North America market tend to become an extension of the domestic markets. There is also a common language.

Three elements differentiate the two countries, but the difficulties that are generated can be overcome:

• The currencies are different, but they are readily convertible and there is not one businessman who cannot handle this;

• There is an international border to be crossed, but customs brokers can easily handle the paper work and the payment of duties;

• The two governments can vote different trade policies, but the Free Trade Agreement goes a long way to reduce the barriers.

The local manufacturer can deliver his goods directly from his plant to a neighbouring country. He can also arrange very easily for public storage and handling facilities in the States in order to schedule the deliveries according to the client’s needs. The manufacturer’s marketing department can identify neighbouring countries buyers and distributors in the same way it would do it in the local market.

However, if the manufacturer wants to sell overseas, he is faced with some difficult tasks as illustrated in Figure 4.

The manufacturer can choose to set up an export department quite distinct from his domestic sales services, in order to develop and serve the overseas² markets. This distinction is important because these markets represent different challenges: tastes and living standards, commercial and banking practices, currencies and, most often, language have to be mastered; tariff and non-tariff barriers have to be taken into account; payment and pricing methods are more complex, and political, legal and commercial risks more numerous than in domestic and US markets.

To establish a presence in overseas markets requires a sustained effort over 2-3 years, at least. An export department dedicated to this task will succeed on condition that management gives it a status equal to that of the domestic sales department. The enterprise must adjust its marketing methods accordingly, and earmark the budgets necessary to a long-term export development initiative.

The manufacturer has the alternative choice to use Trading Houses because of their expertise in international trade and their well-established networks over the year. Trading Houses specialize in specific markets with product lines that they know thoroughly.

Figure 4: Overseas markets

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A Trading House that acts as a principal or merchant in a transaction offers a particularly important service to the manufacturer: it provides a ready market at his door, and saves him the export formalities and risks. In effect, the transaction is negotiated as if it were a domestic sale.

Overseas markets can have different degrees of importance for the manufacturer who can adjust his market strategy so as to maximize profits and minimize costs and risks. It could be a very promising market that is entrusted to a Trading House or, even a marginal niche too small to be serviced directly by the manufacturer. This being said, the strategy will evolve over time to coincide with the firm’s priorities.

The manufacturer’s responsibility is limited to supplying goods of the quality, in a quantity, at a price, and in the time frame agreed upon with the TH. All other export elements are performed by the TH whose functions can be described as follows:

1) To identify a potential market for a given product

2) To find buyers or agents and to elicit their interest

3) To establish the product specifications in the light of market needs, standards and regulations and in accordance with the supplier’s capabilities

4) To determine the appropriate mode of transportation and the routing, with regard to cost, quality of service and security

5) To price the goods for delivery at destination

6) To determine the buyer’s credit worthiness

7) To negotiate the transaction

8) To execute all the logistics steps which are necessary to receive and deliver the merchandise

9) To obtain, if necessary, proper coverage for maritime risks and currency fluctuations

10) To prepare the documentation as prescribed in matters of international trade

11) To finance the transaction and pay for the goods and services received

12) To collect payment for goods delivered

13) To respond to and settle claims

14) To ensure all necessary follow-up and smooth relations with suppliers and clients

15) To maintain and update commercial information on market developments.

Most Trading Houses act as principals for their own account. They are not consultants. They are firm buyers making a profit (or a loss, sometimes) on the transactions.

Other traders will act as manufacturers’ agents and will represent a wide spectrum of complementary products. They can then distribute their costs over the whole range of products from a number of suppliers. Agents earn a commission if a deal is concluded and … after payment has been received by the manufacturer. In this manner, the cost to the supplier is in proportion to the results and will only affect the direct costs of the transaction. Overhead is not affected. Furthermore, the manufacturer will save some of the time and cost of opening a new market by working with a TH already established in that markets. This is especially important in the case of products with a relatively short commercial life.

In annex 2, section 4.3, we shall revert on the services offered by Trading houses and the various roles they can play.

After establishing a secure presence abroad, and after fulfilling the reciprocal agreements between principal and agent, the manufacturer can decide to establish his own in-house export department.

When a manufacturer begins to export, the production activity becomes subsidiary to international marketing. It is the foreign market that dictates the qualities of the product, its presentation, the delivery schedules and the price in relation to international competition.

The manufacturer must acquire an international mentality and give all the necessary support to his export department, or to the Trading House, as the case may be. Otherwise he should better invest his resources in improving productivity and competitiveness in order to better serve familiar markets.

CHAPTER 2

SOURCING

CHAPTER 2:  SOURCING

1.  THE PRODUCT, THE BUYER AND THE SUPPLIER

Products are the basis for all international transactions. They link the supplier to the buyer whether the trader is trying to source or sell a product. The trader has two possible scenarios:

1) To find a buyer for a product, or

2) To find a product for a buyer.

When a product has been designed for a given market, usually domestic, it is specifically tailored to the needs of that target market. A product may seem inferior to a similar one on a foreign market, but it has been designed to meet the habits, taste, and uses of consumers on the local market.

In the first scenario, a trader tries to find a niche in a foreign market for a product that has only been sold on the local market up until now. For example, a local vacuum cleaner manufacturer may fill local demand for his product and decide to test the product on the international market. The vacuum cleaners will obviously not sell as is in all countries if it does not require the same electricity voltage 110V vs 220V. One of the trader’s tasks is to advise the manufacturer on how to adapt a product to the needs of a given market.

In the second scenario, the buyer asks a trader in the country where the product is manufactured to find supplies. Suppose that, one African country importer is looking for hen house equipment and a manufacturer in another African country is interested in the transaction. Using the trader as a moderator, the two parties have to work out the importer country poultry breeding requirements so the manufacturer can modify his equipment accordingly. The trader’s role is to find the best product adaptation that will satisfy both partners.

The Trading House needs to have the following assets in order to finalize the transaction:

• EXPERIENCE on the local and export markets

• FLEXIBILITY to ensure that the transaction will take place

• CONCERN for the quality of service and client satisfaction.

In all cases, suppliers are a key element in the transaction since it is they who decide if the sale will take place or not. However, the trader is instrumental in the relationship between the supplier (product) and buyer (market).

A trader will usually start out by contacting his regular suppliers. If they cannot supply a product, then the trader looks for new manufacturers and provides them with the necessary product specifications.

2.  THE DIFFERENT TYPES OF SUPPLIERS

2.1.  Manufacturers and producers

They supply and establish the technical feasibility of a product. They set the factory price (ex-works) which is the first and most important component in final pricing.

The manufacturer’s main advantage is that he has control of his product, his technology and, therefore, his manufacturing process. Neither the trader nor the buyer can shape a product even if they can describe or draw it.

One common characteristic among manufacturers is that they are not aware of the workings of the international market, its clientele, techniques, methods, laws, and financial practices. Unless a company has an international division, something which is usually only found in large firms, small and medium-sized companies should use the services of experienced intermediaries.

Another common trait is that there is always some limit to a manufacturer’s production capacity.

These two characteristics have a direct effect on the supplier/trader relationship (see # 4.4 below).

2.2.  Distributors

A distributor is another potential supplier. Traders usually call on them if a product cannot be found on the local market or when a buyer requests a specific brand that is not manufactured locally.

This is often the case in many countries. Since most of needed products are not manufactured in the country, a local distributor can request the product from his foreign manufacturer with precise specifications, and even prepare a detailed offer including guarantees and installation costs. Another possibility is to deal directly with the foreign manufacturer. Even if this is more complicated and can take more time, the product will often cost less.

Like Trading Houses, distributors and wholesalers can also play two roles. They can act as both suppliers and export intermediaries.

When manufacturers want to control their export market, the same way as they control their local market, they work with foreign distributors. Manufacturers have to work closely with foreign distributors, just as they would with a local distributor. This can affect company operations.

The same considerations also apply for wholesalers.

2.3.  Wholesalers

2.3.1.  Description

According to the Statistics Office of the European Community, wholesalers are companies or commercial establishments whose main or exclusive economic activity is to sell merchandise to retailers, processors, professional users, craftsmen or other wholesalers and volume users. Merchandise can be resold as is, or after processing and packaging, in accordance with wholesaling practice. The activities of wholesalers basically include warehousing and taking title to the goods with the right of disposal.

Practically all wholesaler-exporters have gone beyond mere wholesaling because they have an influence over the product itself (production, modifications, processing). This allows them to better tailor their offers to foreign markets.

Various circumstances have led wholesalers to become exporters:

• Sales territories have been extended because of proximity to borders.

• Producer-exporters may need to maintain inventories of parts abroad, thus encouraging their wholesaler into an exporter’s role.

• Being specialized in a product makes it tempting to sell to foreign markets.

2.3.2.  Range of products

Wholesalers usually work on a range of products instead of just one product. They try to offer a full line and add new products only when they are complementary.

Wholesalers work with all types of products (from basic foods to light industrial equipment). They often provide after-sales service for the latter.

2.3.3.  Territory

Wholesalers near borders tend to only work with the neighboring country. However, some companies are starting to branch out into other markets.

2.3.4.  Wholesaler practices

Wholesalers handle a group of products and offer a wide selection from a number of manufacturers (up to 10,000 items in some cases). Offering a full range allows them to better react to the needs of foreign buyers. Their main advantage is that they can respond to a bid for a mix of products where each individual manufacturer would not be able to.

Wholesalers actually offer more service