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In This Chapter

▶ Looking at why you want to get involved in import/export

▶ Explaining trade agreements and their impact on business

▶ Going global with your small business

▶ Determining how much money you need to invest

▶ Figuring out how much money you can expect to earn

People get involved in international trade for a variety of reasons:

✔ Foreign goods are everywhere. Next time you’re in a store, take a look around: Almost everything is made overseas. Looking overseas can help your business be more competitive.

✔ The U.S. dollar is weak. The value of the dollar is (as of this writing) at a very low point, and a weak dollar is positive for exports because it makes U.S. products cheaper in foreign markets.

✔ The U.S. dollar is strong. The dollar has been very strong in the past, and it’ll likely be strong again in the future. When the dollar is strong, that’s a plus for imports because it makes foreign products cheaper in the United States.

✔ What happens in one part of the world has an immediate impact on the rest of the world. Technological advancements, advancing economies, and trade agreements have combined to make this the case.

In this chapter, you identify why you’re interested in import/export, see what you can get out of adding import/export to your business, and determine the costs – and rewards! – that you can expect.

The Benefits of Import/Export

Existing businesses go abroad for one or both of the following reasons:

✔ To increase profits and sales

✔ To protect themselves from being eroded by competition

Some businesses make their initial entry into a foreign market by exporting. Then they set up foreign sales companies. Finally, if the sales volume warrants it, they establish foreign production facilities.

Other businesses decide to get involved in importing to take advantage of lower manufacturing costs, to protect themselves from lower-priced imports being sold in the U.S., and to remain competitive with other companies that do business in the U.S.

Most businesses that are not exporting to sell products, importing to reduce costs, and competing on a global basis will have difficulty surviving.

In this section, I cover the benefits of going global with your existing business.

Increasing sales and profits

Managers are under constant pressure to increase sales and make their companies more profitable. After a while, most businesses reach a point where they can only sell so much – the market is saturated with the product. When a business reaches this point, it needs to look for new people to sell its products to. Businesses often begin looking for ways to sell their products overseas.

You can earn greater profits either by generating additional revenues or by decreasing your cost of goods sold. Exporting gives you the opportunity to increase sales and generate additional revenues, and importing gives you access to low-cost sources of supply.

Taking advantage of expanding international economies

New foreign markets are appearing and, in some instances, are growing at a faster rate than U.S. markets. Today, U.S. businesses are seeing increases in exports to developing countries, especially in Latin America, Central Europe, Eastern Europe, the Middle East, and Asia. Companies also go overseas to obtain the lower manufacturing costs available in nations with expanding economies.

If you want to be an importer, start by looking at China, Mexico, Malaysia, Thailand, and Brazil, because they’re the largest exporters of goods to the U.S. If you want to be an exporter, look at China, Mexico, Malaysia, Thailand, India, and Turkey, the largest importers of American products.

Economies expand because

✔ They offer a favorable business climate.

✔ Regulations to do business there are not insurmountable.

✔ They have an established transportation infrastructure.

✔ They’ve earned foreign exchange (money) by exporting their products. As countries grow and export more goods to the U.S., they have more money that they can use to purchase goods from the U.S.

Making use of trade agreements

Trade agreements involve a small group of countries getting together to establish a free-trade area among themselves while maintaining trade restrictions with all other nations. These agreements provide improved market access for consumer, industrial, and agricultural products from the U.S.

Trade agreements also can help your business enter and compete more easily in the global marketplace. They help level the international playing field and encourage foreign governments to adopt open rule-making procedures as well as laws and regulations that don’t discriminate. Free-trade agreements (FTAs) help strengthen business climates by eliminating or reducing tariff rates, improving intellectual property regulations, opening government procurement opportunities, and easing investment rules.

These agreements provide the following benefits to small and medium-size exporters:

✔ They reduce high tariffs on U.S. exports, which lowers the cost of selling to customers overseas.

✔ They maximize small-business resources by eliminating inconsistent Customs procedures and improving and reducing burdensome paperwork.

✔ They minimize risks in foreign markets by providing certainty and predictability for U.S. small-business owners and investors.

✔ They enforce intellectual property rights.

✔ They promote the rule of law so that small businesses know what the rules are and that they’ll be applied fairly and consistently.

U.S. importers also benefit from such trade agreements. Just as the countries with whom the U.S. has a trade agreement have to provide improved market access for American goods, the U.S. must provide similar considerations to the countries with which the U.S. has an agreement. So if you’re an importer and you deal with the countries the U.S. has agreements with, you’ll also experience the elimination or reduction of tariff rates.

Countries with trade agreements with the U.S

The U.S. has trade agreements with the following countries (I’ve organized the list by continent):

✔ North America: Canada and Mexico, under the North American Free Trade Agreement (NAFTA)

✔ Central America and the Caribbean: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua, under the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA-DR); Panama, under the United States–Panama Free Trade Agreement

✔ South America: Chile, under the United States–Chile Free Trade Agreement; Colombia, under the United States–Colombia Trade Promotion Agreement; Peru, under the United States–Peru Trade Promotion Agreement

✔ Australia: Australia, under the United States–Australia Free Trade Agreement

✔ Asia: Korea, under the United States–Korea Free Trade Agreement; Singapore, under the United States–Singapore Trade Agreement

✔ Middle East/North Africa: Bahrain, under the United States–Bahrain Free Trade Agreement; Israel, under the United States–Israel Free Trade Agreement; Jordan, under the United States–Jordan Free Trade Agreement; Morocco, under the United States–Morocco Free Trade Agreement; Oman, under the United States–Oman Free Trade Agreement

At the time of publication, the United States was also in the process of negotiating a regional FTA, the Trans-Pacific Partnership, with Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

You can access complete details on these trade agreements at http://export.gov/fta/ or https://ustr.gov/trade-agreements. Or if you’d like additional information on exporting to any FTA partner country, contact the Trade Information Center at 800-872-8723.

In order for an importer to take advantage of the preferential duty rates offered by free-trade agreements, the following conditions must apply:

✔ The goods must be imported directly from the beneficiary country (the country that has signed and is part of the agreement) to the U.S.

✔ The goods must be manufactured in the beneficiary country. This condition is met if the goods are wholly produced or manufactured in the country or if the goods have been substantially transformed into a new article in the country.

In order for an item to change its country of origin, the value added in the beneficiary country needs to be 35 percent. For example, say a company in Mexico imports absorbent gauze from China. Upon receipt of the gauze, the Mexican company cuts the gauze into pieces and sews the pieces into medical sponges used in the operating room. Then the Mexican company washes, wraps, and sterilizes the sponges. Now, even though the initial gauze came from China, it has been redefined as a product from Mexico – as long as someone can show that at least 35 percent of the sponges’ value was added during the production process in Mexico. A U.S. importer of those sponges would then be able to benefit from preferential duty rates.

A winery success story with KORUS

Here’s an example of how a trade agreement created an opportunity to sell American goods abroad.

Andrew Will Winery, established in 1989, is a family-owned winery on Vashon Island, in Yakima, Washington. The winery, which started exporting to Asia over a decade ago, now distributes its wines to 12 countries around the world. The winery began exporting to Korea two years ago, after receiving interest from importer Inquen Lee of Wine 2U Korea. In the past two years, Wine 2U Korea has imported 150 cases of Andrew Will wines.

Following the implementation of the United States–Korea Free Trade Agreement (KORUS FTA), Andrew Will Winery took steps to expand its presence in Korea. With cost reductions from the KORUS FTA and increased interest in Washington wines, the winery sees opportunities to grow its business there. The implementation of the KORUS FTA creates an opportunity for Washington wines by increasing awareness of American products and lowering costs.

Lowering manufacturing costs

Most businesses go overseas to obtain lower manufacturing costs and protect themselves from lower-priced imports being sold in their own country. There are many arguments for and against sourcing goods from overseas suppliers. Sourcing products from overseas can give you the following advantages:

✔ Lower costs: A company can go abroad and enjoy the benefits of lower labor and material costs.

✔ Access to products and technologies not available domestically: Overseas suppliers may provide access to products that aren’t readily available from a domestic supplier.

✔ More product variety: A foreign supplier may offer a greater variety because it has lower carrying costs (lower warehousing and storage costs) and can keep a more extensive product line in stock.

✔ Better-quality products: In some instances, the perception of many buyers is that foreign products are of a higher quality.

✔ The ability to overcome domestic shortages: Having alternative sources of supply is important in case domestic suppliers can’t satisfy your requirements (for example, because of labor or equipment problems).

✔ Less dependency on a limited domestic supplier base: At times, the number of domestic suppliers for a particular good may be limited. Sourcing from overseas can not only give you better prices but also serve as a backup and put you in a better situation when negotiating with your domestic supplier.

Importing is not without risks. If you’re considering importing as a way to lower your manufacturing costs, keep the following in mind:

✔ Currency exchange rates fluctuate. What may work in your favor today because of the exchange rate may not work in your favor next year. Remember: Importers benefit from a strong U.S. dollar, which makes foreign products cheaper in the U.S. market.

✔ Trade barriers in the form of tariffs may make importing difficult or impossible.

✔ Goods can arrive late or damaged.

✔ Negotiations can fail or be delayed because of language and cultural barriers.

Starting from scratch: The entrepreneurial approach

What if you haven’t yet started a business and you’re interested in import/export? You stand to gain all the benefits that an existing business gains by going global. And you don’t have to be a huge business to make a go of importing or exporting; according to the U.S. Department of Commerce, big companies make up about 4 percent of U.S. exporters, which means that 96 percent of exporters are small or mid-size companies.

Still, starting a new business – any new business – is a challenge. Throw in the complexities of international trade, and you’re in for an even bigger challenge. If you’re up for the challenge, here’s what you need:

✔ Knowledge: In addition to finding out what it takes to start a business, you need to be up on everything from documentation and shipping to communications and government regulations. I cover all these issues in this book, but you’ll also want to check out books like Small Business For Dummies, 4th Edition, by Eric Tyson and Jim Schell, and Business Plans Kit For Dummies, 4th Edition, by Steven D. Peterson, Peter E. Jaret, and Barbara Findlay Schenck (Wiley).

✔ Enthusiasm: You need to be an enthusiastic salesperson, someone who likes to spend time tracking things like invoices and shipping receipts. You need to get excited at the thought of seeing where new ideas and products will take you. And you need to enjoy working with people from different cultures. Your enthusiasm will carry you through some of the challenges along the way, so the more enthusiasm you have, the better.

✔ Consideration: Establishing a solid relationship with your supplier or buyer is important in any business, but it’s even more important in the import/export business. Cultural differences play a huge part in buying or selling and in establishing ongoing relationships. The hard sell that’s effective in the U.S. may not produce the same results in foreign markets.

✔ Commitment: You won’t be successful in any venture unless you’re personally committed to its success. As with most businesses, you’ll encounter peaks and valleys, good times and bad. People who are successful in the import/export business are willing to work their way through the valleys.

Determining Your Place in the Food Chain: Import, Export, or Both?

You know you’re ready for international trade, but do you know whether you want to import or export? The answer that’s right for you depends, in large part, on why you want to go global in the first place.

Importing makes sense when

✔ The value of the U.S. dollar is strong – the stronger the dollar, the cheaper purchasing goods overseas is.

✔ You’re faced with increased competition, and the only way to remain competitive is to source goods at lower costs for suppliers overseas.

✔ You want to identify new products or expand your existing product line.

✔ You can’t access products or technologies from domestic suppliers.

✔ Another country can produce a product more efficiently because of available resources.

✔ You’re a good negotiator and enjoy selling.

Exporting makes sense when

✔ The value of the dollar is weak – the weaker the dollar, the cheaper your U.S. – manufactured products are.

✔ You want to increase sales and profits. Rising income levels in many developing countries are creating opportunities for more people to purchase goods.

✔ You want to serve a market that has nonexistent or limited production facilities.

✔ Before your business invests in a production facility overseas, you want to test whether the foreign market accepts your product.

✔ You want to use your excess production capacity to lower per-unit fixed costs.

✔ You want to extend your product’s life cycle by exporting to markets that are currently not being served.

✔ You enjoy selling and dealing with people from other countries and cultures.

Being both an importer and an exporter makes sense when

✔ Countries have negotiated preferential trading arrangements.

✔ You want to remain price-competitive at home. Many businesses import labor-intensive components produced in foreign countries or export components for assembly in countries where labor is less expensive and then import the finished product.

✔ You enjoy buying and selling, dealing with people from different cultures, and traveling.

✔ You’re comfortable dealing with the numerous uncontrollable environmental forces involved in importing and exporting. (See Chapter 1 for details on these factors.)

Deciding Whether to Become a Distributor or an Agent

After you’ve decided to get into the import/export business, you have to decide how you want to set up your business. You have two options:

✔ Be a distributor (an intermediary who purchases and takes title to the goods). For example, you purchase sweaters from a manufacturer in Japan and import them into the U.S. If you’re a distributor, you take title to the sweaters, store them, and then look for customers, eventually selling them to Macy’s, Bloomingdale’s, Nordstrom, and so on.

✔ Be an agent (a firm that brings two parties together but doesn’t take title to the goods). For example, you know the sweater manufacturer in Japan, and you know that Macy’s, Bloomingdale’s, and Nordstrom are interested in buying the sweaters. You can bring the sweater manufacturer and the U.S. department stores together, without ever taking title to the goods.

In both cases, you’re involved in setting up an import/export business. The choice that’s right for you depends on how much money you have to invest and the amount that you hope to earn. A distributor has higher risks and greater expenses than an agent has, but a distributor also has more control over the process.

In this section, I explain what distributors and agents are and help you decide which path is right for you.

Understanding distributors

A distributor is an independently owned business that is primarily involved in wholesaling and takes title to the goods that it’s distributing. A distributor is a middleman who handles consumer or business goods that may be manufactured or not manufactured (such as agricultural products), imported or exported, and then sold. Figure 2-1 illustrates the distributor’s relationship to the seller and buyer.

© John Wiley & Sons, Inc.

Figure 2-1: The distributor is a middleman, working with the supplier and buyer.

Distributors typically purchase goods on their own account and resell them at a higher price, accepting the risks and the rights that come with ownership of the goods. For example, ABC Importing in New York imports women’s sweaters from XYZ International in Japan. If ABC Importing is acting as a distributor, it purchases the goods from XYZ in Japan and arranges to have the goods transported to New York and cleared through Customs. After the goods are cleared, ABC stores the goods in its warehouse and makes arrangements to sell and deliver them to its customers, including Big-Name Department Store.

A distributor

✔ Is independently owned

✔ Takes title to the goods it’s distributing (ownership passes from the seller to the buyer upon purchase)

✔ Is often classified by product line (such as medical, hardware, or electronics products)

In the import/export business, there are two main types of distributors:

✔ Full-service distributors: A full-service distributor provides the following services to its customers and suppliers:

• Buying: The distributor acts as a purchasing intermediary for its customers.

• Creating assortments: The distributor purchases goods from a variety of suppliers and maintains an inventory that meets the needs of its customers.

• Breaking bulk: The distributor purchases in large quantities and resells to its customers in smaller quantities.

• Selling: The distributor provides a sales force to its suppliers.

• Storing: The distributor serves in a warehousing capacity for its customers, delivering the goods to its customers at the customers’ request.

• Transporting: The distributor arranges for delivery of goods to its customers.

• Financing: The distributor provides credit terms to its customers.

✔ Drop-shipping distributors: A drop shipper is a distributor who sells merchandise for delivery directly from the supplier to the customer and does not physically handle the product. The distributor does take title to the goods before delivery to its customer, however.

If you’re an importer and you’ve received a significant order from one of your customers, shipping the goods to the client directly from the overseas supplier may be more efficient because of the size of the order. In this case, you’re acting as a drop shipper. For example, ABC Importing in New York receives an order for 300 dozen sweaters from its customer Big-Name Department Store. ABC Importing purchases the sweaters from XYZ International in Japan. The 300 dozen sweaters will be enough product to fill a complete 20-foot shipping container. When ABC places the order, it provides shipping instructions to XYZ International, telling XYZ that when the goods are ready for shipment, they should be placed into the container, invoiced to ABC Importing, and shipped directly to Big-Name Department Store.

If you’re concerned about the possibility of future direct contact between the supplier and customer, you can instruct the supplier to have the goods packed in neutral shipping containers, have the complete shipment sent to a shipping agent (a Customs broker), and give the shipping agent the specific delivery instructions.

Both situations offer pros and cons. When you’re operating as a full-service distributor, you have a greater level of control. On the downside, you have a greater level of risk and need for working capital because of the significant additional expenses.

Understanding agents

An agent is similar to a distributor in that he’s a middleman. However, an agent does not take title to the goods and provides fewer services than a distributor does. The agent’s role is to get orders and (usually) earn a commission for his services. Figure 2-2 illustrates the relationship among the agent, the supplier, and the buyer.

© John Wiley & Sons, Inc.

Figure 2-2: An agent is similar to a distributor but hasfewer responsibilities.

For example, suppose CADE International is an import/export agent headquartered in New York. CADE is aware that XYZ International is a manufacturer of quality women’s sweaters in Japan and that Big-Name Department Store is interested in acquiring sweaters to sell to its customers. CADE is a middleman, bringing the seller and buyer together but not taking title to the goods and not providing any of the services that a distributor may perform.

An agent

✔ Is independently owned

✔ Does not take title to the products being purchased and sold

✔ Is actively involved in the negotiations for either the sale or purchase of the products

Understanding types of agents

The import/export business has two main types of agents:

✔ Traditional import/export agents: An export agent works in the country where the product is produced. For example, you may identify a producer in the U.S. and work toward representing that producer (the seller) in foreign markets as the export agent. Or you may work as an import agent based in the country where the product will be sold, in which case you represent the buyers. For example, you may know a company in the U.S. that’s looking to buy a certain kind of product overseas. You’d identify sellers of that product overseas and represent the buyer in foreign markets as the import agent.

✔ Brokers: A broker is an independent agent who brings buyers and sellers together. For the most part, brokers work for sellers, although some brokers do represent buyers. A broker differs from the traditional import/export agent in that she doesn’t usually represent a company. Instead, she’s traditionally hired to bring together one-of-a-kind or nonrecurring deals.

For example, a broker is contacted and advised that Company A in New York has an excess inventory of a soon-to-be-discontinued product. This is a one-time deal, because as soon as the goods are purchased, they’ll no longer be available. The broker identifies Singapore Electronics, a potential customer in Singapore, for these items. So the broker brings Company A and Singapore Electronics together for this one-time deal, and in return, the broker receives a commission from Company A.

Looking at the benefits and challenges of being an agent

Some of the benefits of the agent option are the reduced start-up costs and the limited working capital you need. The initial investment and costs of doing business as an agent are significantly lower than those that come along with operating as a distributor.

On the downside, when you’re doing business as an agent, you run the risk that the parties will bypass your firm and deal directly with each other on any future transactions.

To minimize the risk of being eliminated from future transactions, remember that an agent is not someone who makes a call and brings people together just to earn a commission. The key is to develop a sound relationship with your connection and continually work toward increasing sales and improving the relationship.

Representing clients and getting commissions

The rate of commission when working as an agent depends on the nature and type of product, the nature of the market you’re selling to, and the level of competition. (See “Pondering Profit Potential,” later in this chapter, for info on typical commission rates.)

If you bring a buyer from one country together with a seller from another country, can you earn a commission from both parties? The answer is no. Why? Because as an agent, you’re representing someone. If you represent the seller, you have an obligation to sell that company’s products at the highest possible price. On the other hand, if you’re representing the buyer, you have an obligation to secure the products for the buyer at the lowest possible price. Obviously, drawing a commission from both parties would create an ethical dilemma. Think of an import/export agent like a real estate agent: The buyer has an agent, and the seller has an agent, but the same agent doesn’t represent both the buyer and the seller.

If you choose to set up your business working as an agent, decide who you’re going to represent and then work at nurturing that relationship. The greater the effort you make in developing that relationship and representing the company, the more likely that company will be to maintain the relationship.

Analyzing Start-Up Costs

Capital is the money that you need to start and run your import/export business. Here are three types of capital:

✔ Initial/fixed capital: This is the money you use to purchase fixed (permanent) assets, such as office space, equipment, machinery, furniture, and so on, plus any money you need to start the business. You need funds to cover initial legal fees, deposits with public utility companies, licenses, permits, office equipment, advances for rental of premises, and so on. Finally, you need to allocate funds for your opening promotion, which are sometimes referred to as promotional capital.

✔ Operating/working capital: This is your business’s temporary funds. It’s the money you use to support the business’s day-to-day operations, such as salaries, office supplies, utility expenses, and so on.

✔ Growth/reserve capital: This is the money you need, as an existing business, in order to expand or change the primary direction of the business as well as to cover your personal living expenses.