A section of this chapter is devoted to the examination of countertrade as an alternative method of trading. The various types of countertrade are discussed. Another section of this chapter deals with pricing terms used in international quotations. To be competitive, it is the job of a responsible exporter to provide a quotation that is complete and meaningful.
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Pricing Strategies:
Countertrade and Terms
of Sales/Payment
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Chapter Outline
Countertrade
- Types of Countertrade
- Problems and Opportunities
Price Quotation
Terms of Sale
- Trade Terms
- Quotation Guidelines
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Chapter Outline
Methods of Financing and Means of payment
- Consignment
- Open Account
- Cash in Advance
- Bill of Exchange (Draft)
- Bankers' Acceptance
- Letter of Credit
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Countertrade
goods for goods trade (vs monetary trade)
government mandate to pay for goods and services with something else other than cash
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Countertrade
Advantages
serving as trade financing
buyer getting rid of surplus of own products
no concern for fluctuation of exchange rates
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Countertrade
Disadvantages
cumbersome and time-consuming
costly
inferior form of exchange
- requiring "double coincidence of wants"
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Types of Countertrade
Barter
- single transaction of direct exchange of products of equal value
Counterpurchase (Parallel Barter)
- two transactions of cash sales agreements (of
unrelated products)
Compensation Trade (Buyback)
- products sold and later bought by a party are related
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Types of Countertrade
Offset
- for the rights to sell its product in a foreign market, the seller must manufacture the product locally (in the host country)
Clearing Agreement
- line or credit established in central banks of two countries
- use "clearing account units" for exchange of
products
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Trade Terms
EXW (Ex Works)
- price of product only; nothing else being included
FAS (Free Alongside Ship)
- EXW + local transportation in seller's country
FOB (Free on Board)
- FAS + loading onto the vessel
CFR (Cost & Freight)
- FOB + international transportation
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Trade Terms
- CFR + insurance
- CIF + unloading
- DEQ + local transportation in buyer's country
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Methods of Financing &
Means of Payment
- Sight Draft
- Time Draft
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Methods of Financing &
Means of Payment
- Revocable vs Irrevocable
- Unconfirmed vs Confirmed
- Standby
- Back-to-Back
- Transferable
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Export Payment Terms and Risk Level
Open account (highest risk for exporter)
Sight draft
Time draft
Irrevocable L/C
Confirmed irrevocable L/C
Cash in advance (least risk)
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Export Payment Terms and Cost
Open account (least cost for importer)
Sight draft
Time draft
Irrevocable L/C
Confirmed irrevocable L/C
Cash in advance (highest cost)
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L/C: Advantages/Disadvantages
Advantages
Disadvantages