Exporting

While there are many myths about exporting, there are many more reasons small businesses should start exporting.

Ultimately, this is about you, and for you to be a successful exporter, you will need to first define what success means for your business and what is it that you want to get out of exporting.  Only you can determine your objectives should be, but some common goals will be to:

• Increase sales and profitability by selling abroad
• Better manage risk through market diversification (for example, another country may enter a recession months or years after the USA or recover more vigorously after a downturn)
• Extend product life by entering markets where a product may still deemed new or innovative
• More fully utilize production capacity
• Smooth out business cycles (esp. for seasonal products – remember that when it is winter in Florida, it is summer in the southern hemisphere!)
• Increase value of your intellectual property (by licensing abroad)

• Once you have an idea of what you want to get out of exporting or importing, then the next step will be to develop an export plan to help everyone in your business to understand what it is you are looking to achieve and what the business will need to do to achieve success. Before starting to research export opportunities, you should undertake an assessment of your company’s export readiness.
  • You may find working through a questionnaire to be helpful to this evaluation.
  • If the business is not yours, don’t forget to get buy in from the owner or senior management!

  And when you are getting ready to export, don’t forget to consider protecting your intellectual property before you start trying to make your first foreign sale.  You worked hard to develop your product or idea, and you don’t want someone at a trade show to grab a sample and copy it or your potential distributor to think it is such a great idea that they decide to make it themselves.

  • Protecting your intellectual property will require working with an attorney who knows how to register your rights internationally, with experience in the countries that you want to sell into.
  • You can learn more about protecting your intellectual property on the website of the World Intellectual Property Organization, including on:
  • • Patents (the right to make your product)
    • Trademarks (protection of a feature that identifies your product – e.g., a logo)
    • Industrial design (a distinctive ornamental aspect of your product)
    • Copyright (the right to reproduce a creative work)

• The world is a big and diverse place, so you’re going to need to research your market!
• • Identifying the right market(s) abroad is similar to finding the right market(s) here in the U.S.: you need to undertake market research and competitive analysis to find customers and a market advantage.
  • The Florida Small Business Development Center at UCF can help your company prepare an Export Marketing Plan (EMP), and Enterprise Florida will provide a grant to eligible Florida companies that will cover all but $500 of the costs of this EMP.
  • If you are already exporting and looking to identify new export markets, then the International Trade Administration’s Market Diversification Tool provides a starting point to supplement your market research.
  • Country Commercial Guides provide reports on market conditions, opportunities, regulations and business customs prepared at U.S. Embassies around the world.

• The International Trade Administration also provides market intelligence by country and by industry

• • If you are looking to export food products, then the U.S. Department of Agriculture’s Global Agricultural Information Network (GAIN) has a database of free reports by country and by product category.
    • Another great source of exporting information for Florida producers is the website of the Florida Department of Agriculture and Consumer Services.
  • When you are looking for information about customers, multilateral institutions like the International Monetary Fund (IMF), the World Bank – in particular, its World Development Indicators – and the Organization of Economic Cooperation and Development (OECD) have a reliable economic data about the markets you are researching.
    • Nationmaster is another online source to find market sizing and trends on any sector, in any country
  • There are also many databases that are available for a fee that may be considered – for example the Economist Intelligence Unit and EMIS (the Emerging Market Information System).
  • If you want to find out what already is being sold in a market, you can find a wealth of trade data online.
    • The UN Comtrade database is a repository of official international trade statistics and relevant analytical tables.
    • U.S. international trade data is available from the U.S. Census Bureau.
    • To meaningfully access trade data, it is valuable to know the HS (Harmonized System) code for the products you are looking to export.

• HS coding is the internationally standardized system of names and numbers used to classify internationally traded products.
• To get a reliable answer for exporting, it is best to work with a customs broker (fee for service), but for the purposes of doing market research, you can get away with consulting a guide on product classification or conducting a search of the U.S. or European Union tariff codes for a general idea.
• Just remember that only the first six digits of the tariff codes you find there are the only ones that are internationally agreed and that can be relied upon for undertaking market research.

• Global credit rating companies like Coface provide information on country risks and assessments of country business climates.
• You will need to understand any product safety, quality or conformity regulations on imports for the market that you are seeking to enter.
• Thanks to trade liberalization, greater opportunities may be found in the 20 countries with which the U.S. has free trade agreements.

• • What is access to the market like?

Answers to these questions are complex and may require consulting with experts, but they are intended to give an idea of what you will need to consider in deciding whether to export to a particular market.

• • • How will access of American products compare to those of domestic manufactured goods? Or as compared to exports from other markets?

• Does the United States have a free trade agreement with the market you want to sell into? This may help level the playing field in competing with domestic producers and possibly provide an advantage vis-à-vis competitors from countries that do not have a free trade agreement
• Do your competitors from another country benefit from a free trade agreement with the market you want to sell into? You may be placed at a competitive disadvantage if your competitor has duty-free access to a market where U.S. exports have to pay a duty at the border.

• • • What duties (or tariffs) will your product face at the border?  These border taxes may be expressed as a percentage of the value of the goods you are shipping (ad valorem duties) or be a fixed amount per unit of export (specific duties), e.g., $1 per pound.

• You will need to know the country of origin of the product. Just because you are exporting from the United States does not mean that you will necessarily enjoy preferential access to the market: generally speaking, it is only products made in the United States that will enjoy duty-free access.
  • Determining origin may be simple in the case of, for example, a tomato that you grew here in Florida, but it can be more complex where you are looking to sell a product that contains components from one or more countries other than the United States.
  • NB: it is the rules on country of origin in the country to which you are exporting, not those of the United States, that will apply. Your customs broker can help with this.
  • Some free trade agreements (FTA) may include specific rules of origin in order to benefit from duty-free access to that market.

• • •  Are there any quotas – which limit the number or monetary value of goods that can be imported into a country – on the product you are looking to export?
    • Are there sales taxes or value-added taxes that will be payable?
    • Are there rules or standards – e.g., product safety regulations or labelling requirements – that regulate the sale of your product in that market?
    • Are there export restrictions to that market (e.g., to North Korea or Cuba)?  (See section on Export Compliance for more information)
  • Political risk is the most complicated and will nearly always be beyond your control.  It transpires when a government changes its policies in a way that might negatively affect your business, such as new trade barriers or expropriation of goods.

• The CIA World Factbook provides basic intelligence on the history, people, government and economy of every country in the world.

• One of the biggest decisions you will need to make will be to decide on the right sales channel for your business.
• You will need to consider how you want to sell into a market, in particular how much responsibility you want to assume for those sales.
• One option will be direct sales, where you will handle every aspect of finding the buyer, negotiating the sale, and the exporting process. This will require the greatest investment of time and resources to achieve, but it will allow you to maximize your profits.
  • The U.S. Commercial Service’s Gold Key Service is one way to find customers interested in your U.S.-made product.
    • Enterprise Florida offers a Gold Key-Matchmaker grant.
  • Enterprise Florida also offers virtual matchmaker grants to help eligible Florida businesses in several industry sectors to connect with potential customers in several key markets.
  • Another easy way to connect with potential customers – and to learn about the market for your product in other countries – is to participate in a trade show.
    • You don’t have to be an exhibitor to benefit from a trade show.
    • These shows may be specific to a country or region, or they may bring together the industry from around the world.
    • Some will require international travel, while others take place right here in the U.S.
      • Sometimes you don’t have even have to travel away from home to get to a great trade show: we are fortunate to have the nation’s second biggest convention center – the Orange County Convention Center – right in our back yard!
    • Enterprise Florida hosts many events and organizes Florida pavilions at a variety of trade shows – and they offer grants to help eligible Florida companies participate in them!
    • Do you sell food products? The U.S. Department of Agriculture maintains a list of trade shows for you!
  • Participating in a trade mission – usually organized by the federal or state government – will help raise your company’s profile with potential customers.
    • The International Trade Administration maintains a calendar of federal trade missions.
    • The U.S. Trade Development Agency also hosts reverse trade missions and brings potential buyers to the United States.
  • If you are planning selling in the new market yourself, then you will need to consider the local business culture.
    • Country Commercial Guides contain tips on how to do business in your target country.
    • The way you handle business relationships here in the U.S. may not be appropriate in the country into which you want to sell. For example, in the U.S., we tend to want to get down to business right away, while in many other countries, your potential customer may be accustomed to developing a personal relationship before talking business and may be offended if you skip that step.
  • Having a presence online – selling by e-commerce – is another way to connect with customers abroad.
    • Remember: what works at home won’t necessarily work around the world and you will need to develop an international digital marketing strategy.
    • Be sure your website and online presence is the best it can be to showcase your brand and your business.  Having the best possible international website means localizing it.  This will help your target international audiences to find you easily, securely and in a language and format that they recognize and to which they can relate.
      • • Florida exporters can receive grants of up to $8,000 to help with localization through Enterprise Florida and the Florida Online Global Programs.
        • If you’re not sure where to start with your website for international success, check out this free SEO and performance tool, which will give you some initial recommendations for improvement.
  • Distributors and sales agents can also sell your products for you in a foreign market. The main difference between these two relationships is that a distributor takes ownership of the product and then takes care of all aspects of the sale (including the price and customer service) whereas the sales agent will make the sale on your behalf (they will generally be paid an agreed upon percentage of the sale), so ownership remains with you – but so does responsibility for customer support.
  • On that note, don’t forget to consider how you will provide customer support for your exports, particularly if you are not using a local representative.
    • Your clients will expect that you can interact with them in their language, particularly if there are technically complex issues they need to deal with.
    • Instructions on how to use your product will need to be translated (and Google translate is not a great tool for this).
    • Do you currently travel to your U.S. clients to help them with installation or use of your product? If so, then consider how you will do this for your clients overseas (including how you will communicate with them if you do not share a language in common).
    • You will also need to consider how you will handle returns – including how to potentially dispose of returned merchandise – and how you will repair products.

• Another possibility will be to engage in indirect sales and hire someone to use their contacts to sell your products abroad. The advantage of indirect sales is that you can enter the market more quickly using someone else’s expertise, but at the cost of giving up some control over how your product is marketed and sharing some of the revenue.

You will have several options:

• An Export Management Company can take over the entire exporting process for you, though this comes at a cost.
• Another option is to engage in a strategic alliance with another company to manufacture your products in-market through a joint venture or a licensing arrangement.

NB: It is strongly recommended that you consult with an attorney who has experience with international contracts and the law of the country where the party you will be contracting with resides before entering into any agreement to market your products.

• You may want to consider bidding on international projects:
  • The export.gov trade leads database contains contract opportunities for U.S. businesses selling their products and services to foreign governments and non-governmental organizations.
  • Multilateral institutions like the World Bank or the United Nations have websites that will provide information about how to bid on projects they are funding and databases to search available opportunities.
• As you get started, don’t neglect to establish an export marketing budget
  • You will need to determine what sort of marketing and promotion activities you will want to engage in and how much you are willing to invest in them.

• You will need to consider several issues when working on a pricing strategy: what will it cost you to sell in that market; what price will the market bear; and in what currency should you price your goods or services.
• • There are a few ways to look at pricing goods for export:
    • Cost plus pricing starts with your product costs for servicing the domestic market and then adding all additional costs related to exporting the product.  The advantage is that this is fairly simple to calculate, but it can lead to your product becoming too expensive in foreign markets.
    • Using marginal cost pricing can help you be more competitive by absorbing fixed costs already paid for in your domestic market pricing and only looking at what it will cost you to manufacture each unit for export, and then adding a profit margin.
    • Or you can look at pricing from a top-down perspective and consider what price the market will bear, deduct the profit margin and use that to determine what the cost to produce should be (and whether you can be profitable at that price point).
    • There will be a variety of costs to consider that are different for exports, including:

• Tariffs/duties
• Non-tariff barriers or regulatory matters – you may, for example need to change packaging to meet local rules or have to have your product certified to enter a foreign market
• Shipping costs (see Logistics) – including for possible return of products
• Knowing your Incoterms (see section on Incoterms under Logistics) will be important in determining what expenses should be included in the cost of exporting
• Business travel expenses
• Cost of market research
• Fees for foreign sales representatives

• • The pro forma invoice is the most commonly used document to give price quotations to potential customers.  It is a preliminary bill of sale that is sent to the client before the work is completed and is usually considered binding (though the price can change prior to final sale).
  • You will also need to decide in what currency you want to quote prices/be paid.
    • Getting paid in U.S. dollars is the safest way to ensure you get the return on your sale.

• However, this transfers the foreign exchange risk to the buyer, who also is likely to want to pay in their own currency, and accepting payment in U.S. dollars could lose you the sale.

• • • Complicating your decision on foreign exchange issues is the constant fluctuation in the value of currencies in world markets
    • There are many sites online that will help convert currencies at the going rate – e.g., xe.com or Oanda
    • However, you can avoid these fluctuations and arrive at predictable pricing (in U.S. dollars) by using foreign exchange derivatives to hedge your currency risk.  Note that these derivatives come at a cost, which needs to either be factored into the price or they will reduce the anticipated profit from the sale.

• You will need to determine what method of payment you will want. In descending order of security for your business are:
• • If you require payment by cash in advance, then your customer will pay you before you ship the goods or perform the service. While this is favorable for you, many buyers will be reluctant to accept the risk of paying for goods or services before they are received, particularly where your competitors are willing to accept other forms of payment.
  • A letter of credit (LC) is a payment mechanism under which your customer’s bank (the “issuing bank”) guarantees payment when the documents required by the LC are presented. Because the issuing bank may be in a foreign country (and you may not have any way of knowing if their guarantee is reliable), you may wish to have your bank confirm – i.e., guarantee – the LC.  LCs are generally pretty secure, but they are also the most expensive form of payment (due to fees paid to the various banks involved).
  • A documentary collection may be useful for ongoing business relationships where you do not need the protection (and expense) of an LC. Under this arrangement, the bank holds the shipping documents against payment, i.e., your buyer cannot take delivery of the goods until after they pay for them at the bank.  However, the banks do not verify the documents and do not guarantee payment as they do with LCs (and your buyer can walk away from the transaction).
  • Another option where you already have an ongoing relationship with your foreign customer is cash against documents (CAD). Open account provides the most security for your customer and the greatest risk for you.  Under this method of payment, your customer will pay you after receipt of an invoice, usually after they have taken delivery of the goods or the services are performed.
  • Consignment of your goods – i.e., where you do not get paid until your customer sells the goods – is another option. While your customer will have possession of the goods, title remains with you until the goods are sold.  In effect, your customer acts as an agent for you (rather than as an end-user).

• Providing credit or extending longer payment periods may help you make the sale, but you will need to consider up front the commercial risk of not being paid by your customer.
  • Consider what are the normal commercial terms in your industry for internationally traded products?
  • Undertake due diligence on your customer’s ability to pay, particularly if they will not be paying until after delivery of your product.
    • The U.S. Commercial Service can perform (for a fee) an International Company Profile (background check) of your potential partner.
    • You can order a credit report from a company like Dun & Bradstreet or EulerHermes
  • Export credit insurance – available from EXIM Bank or the SBA (for products made in the USA), as well as some private banks – will help protect your accounts receivable.
    • And if EXIM declines to insure your accounts receivable from that potential partner, then that will give you a pretty good idea of the risk involved dealing with them.

• Other types of risk you face when exporting include:
  • Political risks – e.g., you may not get a U.S. export license or the importing country may decide to implement new regulations for a product you are exporting
  • Economic risks – e.g., foreign currency fluctuation or the letter of credit is dishonored,
  • Cultural risks – e.g., speaking different languages or corruption issues

One challenge you may face exporting is that your lender may be unwilling to provide loans against your foreign receivables.  There are, however, several types of financing available to exporters to help them make those sales:

• Will you need to buy materials in order to produce goods or services for export? Then export working capital financing may be available to you from the SBA or EXIM Bank.
• Will you need to invest in expanding your production facilities in order in order to produce goods or services for export? Then business development financing from EXIM or the SBA may be able to help your company expand your production capacity.
• Will you be involved in a larger-scale project – e.g., building infrastructure – that will need financing? Then you may want to talk to EXIM Bank about their project and structured financing solutions.
  • There may be other project financing solutions for projects in developing nations – for example:
    • USA: the S. International Development Finance Corporation (DFC – formerly OPIC/the Overseas Private Investment Corporation) may help finance your sales to developing countries while the U.S. Trade and Development Agency or the Millennium Challenge Corporation will provide financing for specific projects
    • Multilateral banks like the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the World Bank finance a variety of projects.

Please note: the guidance below is provided for information purposes and is not intended as a substitute for seeking professional consultation with export compliance experts

• Exports are regulated by the U.S. Government in order to protect U.S. national security, foreign policy and economic interests.
• S. export regulations apply not only to your export sale but to subsequent sales as well.
  • In order to help protect your business, it is recommended that you insert an export control-related clause in your contract.
• In determining whether an export license is required, you will need to consider:
  • What are you exporting?
    • Most products and services are not specifically controlled for export and are given the classification of EAR99.

HOWEVER…

• Trade in defense and military related technologies, products and services are regulated by the State Department under the International Traffic in Arms Regulations (ITAR)
  • The list of controlled military goods are found in the S. Munitions List (USML)
• Exporting “dual use” goods and services requires an export license.  These are goods and services that may have both military and civilian uses, and they are identified under the Bureau of Industry and Security’s Commerce Control List.
  • You will need to know your product’s Export Control Classification Number (ECCN) to apply for a license.
• To what country will it be sent?
  • Is that country subject to an embargo or other sanctions?
  • What is the country of ultimate destination or re-export?
    • You need to know whether your buyer is going to re-export the product.
  • Who is going to receive it?
    • You need to know your customer and who will be the end-user of the product.
  • How will it be used?
    • You will need to know the end-use of your product to apply for an export license.
  • If you do need to secure an export license, be sure to account for applying for and obtaining the license into your delivery timeframe.

• • • It normally takes 30-60 days for a license to be issued, so be sure to apply as early in the contracting process as possible.

• The Department of Commerce’s Bureau of Industry and Security (BIS) have published Export Compliance Guidelines to help your business develop an effective export compliance program.
• You need to always be alert to red flags in export transactions in order to ensure that you do not violate export compliance rules. For example, if a small bakery wants to place an order for sophisticated computers from you, this raises a red flag that you need to look into.
• Other rules to be aware of:
  • The Foreign Corrupt Practices Act makes it unlawful for you or your agents or representatives to bribe foreign government officials to obtain or retain business.
  • The Anti-Boycott Act prohibits you from participating in another country’s boycott of a country friendly to the United States. (The Arab League boycott of Israel is the principal unsanctioned foreign boycott that U.S. persons must be concerned with today.)
• You (or your shipper on your behalf) must file an Electronic Export Information (EEI) for shipments with a value greater than $2500 that are sent to any destination other than Canada.
• Other common documentation you may need for exporting includes:
  • Pro Forma invoice
  • Packing List
  • Commercial invoice
  • Certificate of Origin
  • Shippers Letter of Instruction
  • Bill of Lading
  • Ocean Bill of Lading / Air Waybill
• In addition to your exports of goods or services, you need to be aware of the need to obtain an export license for deemed exports.
  • For example, if a potential foreign client wants to come visit your manufacturing facilities or asks for technical information, if the product itself is a controlled technology, then you will need an export license.