Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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Countertrade, one of the oldest forms of trade, is a

government mandate to pay for goods and services

with something other than cash. It is a practice

which requires a seller, as a condition of sale, to

commit contractually to reciprocate and undertake

certain business initiatives that compensate and

beneﬁt the buyer. In short, a goods-for-goods deal

is countertrade.

Unlike monetary trade, suppliers are required to

take customers’ products for their use or for resale.

In most cases these are multiple deals that are

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TERMS OF SALE AND PAYMENT

PURPOSE OF CHAPTER

The trade practices of Asian countries (e.g., Malaysia, Indonesia) and Eastern/Central European countries

illustrate the fact that money is not the only means of payment.Due to the fact that many Eastern European

countries and less developed nations often lack hard currency, they resort to alternative pricing mecha-

nisms. International marketers may thus be forced to enter into some kind of countertrade scheme so as

to do business with those countries. Although countertrade may be complex and time-consuming, it is man-

ageable. 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 com-

petitive, it is the job of a responsible exporter to provide a quotation that is complete and meaningful. It

is important for both the buyer and the seller to specify and know the point of delivery where risk shifts

from one party to another. A poorly prepared quotation results in confusion and possibly a loss of sale.

Finally, the chapter ends with a review of payment methods. The different payment methods involve a

certain degree of ﬁnancing and risk. It is thus critical to specify the timing and means of payment that are

satisfactory to both parties. A misunderstanding regarding delivery terms may cause an exporter to become

responsible for unintended shipping costs. To make the matter worse, by unknowingly failing to meet

contractual obligations, the exporter may not be able to collect payment. While certain safeguards are

necessary, they should not be so cumbersome or costly as to deter business.

Malaysia’s 15 billion ringgit ($3.95 billion) plan aims

to expand and electrify 635 kilometers of railway that

runs down the spine of Malaysia Peninsular. Most of

the project will be ﬁnanced by barter trade. The

country will use palm oil to pay Indian and Chinese

state-owned railway companies for more than 10

billion ringgit in construction contracts. Funds from

palm oil sales are put in a special account and will be

paid out to Indian and Chinese contractors as

progress payments on the railway job. In the 1990s,

Malaysia also used palm oil to buy Russian-built

combat planes. Just like Malaysia, many Asian and

Eastern and Central European countries have done

countertrade deals. Thailand, for example, has

exchanged 200,000 tons of 15-percent broken rice for

such Indonesian goods as aircraft, freight-train car-

riages, and ammonia. Indonesia, being cash-strapped,

set up a countertrade agreement with Russia in 2003.

In order to get four Sukhoi Su-30 ﬁghter jets, four

helicopters, and spare parts, Indonesia agreed to trade

palm oil, tea, coffee, and ﬁfteen other commodities.

The deal was worth $150 million to $175 million.

Sources:

“Indonesia Reportedly to Deal Goods for Arms,”

San José Mercury News

, April 11, 2003.

MARKETING ILLUSTRATION NONCASH TRADE

COUNTERTRADE

separate yet related, and a contract links these sepa-

rable transactions. Countertrade may involve several

products, and such products may move at different

points in time while involving several countries.

Monetary payments may or may not be part of the

deal.

There are three primary reasons for countertrade:

(1) countertrade provides a trade ﬁnancing alterna-

tive to those countries that have international debt

and liquidity problems, (2) countertrade relation-

ships may provide developing countries and MNCs

with access to new markets, and (3) countertrade

ﬁts well conceptually with the resurgence of bilat-

eral trade agreements between governments.

The

advantages of countertrade cluster around three sub-

jects: market access, foreign exchange, and pricing.

Table 17.1 lists potential motives for countertrade.

Countertrade offers several advantages. It moves

inventory for both a buyer and a seller. The seller

gains other beneﬁts, too. Other than the tax advan-

tage,the seller is able to sell the product at full price

and can convert the inventory to an account receiv-

able.The cash-tight buyer that lacks hard currency

is able to use any cash received for other operating

purposes.

Countertrade constitutes an estimated 5 to 30

percent of total world trade. Countertrade greatly

proliferated in the 1980s. Perhaps the single most

important contributing factor is LDCs’ decreasing

ability to ﬁnance their import needs through bank

loans.

Regarding Russia, its ofﬁcials have estimated that

90 percent or more of the transactions having to do

with “critical imports” involve reciprocal trade

exchanges. Countertrade in Russia may proliferate

because, with the Russian banking system in disar-

ray, it is difﬁcult to arrange traditional export

ﬁnancing (e.g., letter of credit). Noncash forms of

payment may account for as much as two-thirds

of all transactions in Russia.There are thousands of

intermediaries acting as barter specialists. One

deal involves a governor paying for a $17 million

airplane by trading gas paid to his government in

lieu of energy royalties, giving a middleman com-

mission of 10 percent. Velta Co., once one of the

Soviet Union’s biggest bicycle makers, stays in

business by swapping its bicycles for raw materials

and electric power.The company’s 4000 employees

have to accept one bicycle a month in lieu of a

paycheck.

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Table 17.1 Potential motives for countertrade

Types of countertrade

CA/ST

Avoids using foreign exchange Yes Yes No Rarely No

Avoids repayment of external debt Yes Yes No No No

Hides price discounts Yes Yes No No No

Shifts risk Yes Yes Yes Yes Sometimes

Substitute for foreign direct investment No No Yes Yes Yes

Political factors dominant No Yes No No Yes

Notes

1 BT Barter

2 CA/ST Clearing arrangement/switch trading

3 CP Counterpurchase

4 BB Buyback

5 OF Offset

Source:

Jean-François Hennart, “Some Empirical Dimensions of Countertrade,”

Journal of International Business Studies

(No. 2, 1990): 248.

Russia is a virtual economy dominated by barter,

mutual nonpayment, and money surrogates, such

as promissory notes (veksel), and tax authori-

ties have been forced to collect in-kind tax pay-

ments. Countertrade is a consequence of failures in

corporate governance. In this regard, countertrade

is both a means of avoiding payment of private or

public debts in cash and a way of concealing the real

state of affairs – not only from tax authorities but

also from minority shareholders and employees.

Noncash settlements make it possible for owner-

managers to degrade assets and divert cash ﬂows in

a less transparent way.

Countertrade is pervasive in Russia for a number

of reasons. Direct subsidies to enterprises were cut

and demand for many industrial products fell after

price and trade liberalization. The ensuring credit

crunch could not be solved by banks because bank

lending to enterprises is very limited. As a result,

the enterprises ran up arrears to suppliers and

ﬁnally used offsets to settle these arrears.The state

itself also fostered the noncash economy by allow-

ing tax offsets. The federal and local governments

accepted goods in lieu of tax payments, and state

utilities also accepted most of their receipts in kind.

Noncash transactions, by substituting for trade

and bank credit, help ﬁrms to survive in a credit-

constrained environment. In the case of time-lagged

nonmonetary deals, an enterprise essentially enjoys

a credit from its partner because a payment does not

have to be made until later. Even in the case of a

spot barter, a seller is forced to accept either goods

now or money later, being mindful of the fact that

“later” may turn out to be “never.” This artiﬁcial

demand allows goods to be produced by the old-

style, inefﬁcient enterprises that should have gone

out of business.

Because of the nontransparent nature of coun-

tertrade, there are implicit subsidies from the state

in the form of tax offsets which amount to tax dis-

counts. Because barter prices are arbitrary, tax

evasion is facilitated. In addition, by allowing inefﬁ-

cient enterprises to remain, countertrade acts as an

entry barrier for new ﬁrms.There is a vicious cycle:

barter makes it harder to screen ﬁrms and monitor

their performance. As their access to bank credit is

further reduced, they have to barter even more.

Types of countertrade

There are several types of countertrade, including

barter, counterpurchase, compensation trade,

switch trading, offsets, and clearing agreements.

Figure 17.1 provides a classiﬁcation of countertrade.

Barter

Barter, possibly the simplest of the many types of

countertrade, is a one-time direct and simultaneous

exchange of products of equal value (i.e., one

product for another). By removing money as a

medium of exchange, barter makes it possible for

cash-tight countries to buy and sell. Although price

must be considered in any countertrade, price is

only implicit at best in the case of barter. For

example, Chinese coal was exchanged for the con-

struction of a seaport by the Dutch, and Polish coal

was exchanged for concerts given by a Swedish band

in Poland. In these cases, the agreement dealt with

how many tons of coal were to be given by China

and Poland rather than the actual monetary value of

the construction project or concerts. It is estimated

that about half of US corporations engage in some

form of barter, primarily within the local markets

of the USA.

Counterpurchase (parallel barter)

Counterpurchase occurs when there are two con-

tracts or a set of parallel cash sales agreements, each

paid in cash. Unlike barter, which is a single trans-

action with an exchange price only implied, a coun-

terpurchase involves two separate transactions –

each with its own cash value.A supplier sells a facil-

ity or product at a set price and orders unrelated on

nonresultant products to offset the cost to the initial

buyer. Thus the buyer pays with hard currency,

whereas the supplier agrees to buy certain products

within a speciﬁed period. Therefore, money does

not need to change hands. In effect, the practice

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Buyback Counterpurchase Offset

Clearing arrangement

Barter-type

Countertrade

Counterpurchase, buyback or offset

No Yes

Switch

trading

Are third parties

involved?

Buyback and

Counterpurchase

Clearing

arrangements

Simple

barter

Yes

Are the goods taken back

by the exporter the resultant

output of the equipment sold?

Does the transaction extend

over long time periods and

involve a basket of goods?

Does the transaction

involve reciprocal commitments?

(other than cash payments)

Yes

NoYes

Yes No

Reciprocal commitment limited

to purchase of goods?

Does the transaction

involve the use of money?

Straight sales

(cash or credit)

Figure 17.1 Classiﬁcation of forms of countertrade

Source:

Jean-François Hennart, “Empirical Dimensions,” 245.

allows the original buyer to earn back the currency.

GE won a contract worth $300 million to build air-

craft engines for Sweden’s JAS ﬁghters for cash only

after agreeing to buy Swedish industrial products

over a period of time in the same amount through

a counterpurchase deal. Iraq persuaded the New

Zealand Meat Board to sell $200 million worth

of frozen lamb for a purchase of the same value of

crude oil. Brazil exports vehicles, steel, and farm

products to oil-producing countries from whom it

buys oil in return.

Compensation trade (buyback)

A compensation trade requires a company to

provide machinery, factories, or technology and

to buy products made from this machinery over

an agreed period. Unlike counterpurchase, which

involves two unrelated products, the two contracts

in a compensation trade are highly related. Under a

separate agreement to the sale of plant or equip-

ment, a supplier agrees to buy part of the plant’s

output for a number of years. For example, a

Japanese company sold sewing machines to China

and received payment in the form of 300,000 pairs

of pajamas. Russia welcomes buyback.

Switch trading

Switch trading involves a triangular rather than

bilateral trade agreement.When goods, all or part,

from the buying country are not easily usable or

saleable, it may be necessary to bring in a third party

to dispose of the merchandise.The third party pays

hard currency for the unwanted merchandise at

a considerable discount. A hypothetical example

could involve Italy having a credit of $4 million for

Austria’s hams, which Italy cannot use.A third-party

company may decide to sell Italy some desired

merchandise worth $3 million for a claim on the

Austrian hams. The price differential or margin is

accepted as being necessary to cover the costs of

doing business this way. The company can then sell

the acquired hams to Switzerland for Swiss francs,

which are freely convertible to dollars.

Offset

In an offset, a foreign supplier is required to manu-

facture/assemble the product locally and/or pur-

chase local components as an exchange for the

right to sell its products locally. In effect, the sup-

plier has to manufacture at a location that may not

be optimal from an economic standpoint. Offsets

are often found in purchases of aircraft and military

equipment. One study found that more than half of

the companies countertrading with the Middle East

were in the defense industry and that the most

common type of countertrade was offset.

These

companies felt that countertrade was a required

element in order to enter these markets.

Clearing agreement

A clearing agreement is a clearing account barter

with no currency transaction required.With a line

of credit being established in the central banks of the

two countries, the trade in this case is continuous,

and the exchange of products between two govern-

ments is designed to achieve an agreed value or

volume of trade tabulated or calculated in noncon-

vertible “clearing account units.” For example, the

former Soviet Union’s rationing of hard currency

limited imports and payment of copiers. Rank

Xerox decided to circumvent the problem by

making copiers in India for sale to the Soviets under

the country’s “clearing” agreement with India. The

contract set forth goods, ratio of exchange,and time

length for completion.Any imbalances after the end

of the year were settled by credit into the next year,

acceptance of unwanted goods, payment of penalty,

or hard currency payment. Although nonconvert-

ible in theory, clearing units in practice may be sold

at a discount to trading specialists who use them to

buy saleable products.

Problems and opportunities

Although countertrade is a common and growing

practice, it has been criticized on several fronts.

First, countertrade is considered by some to be a

form of protectionism that poses a new threat to

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world trade. Such countries as Sweden, Australia,

Spain, Brazil, Indonesia, and much of Eastern

Europe demand reciprocity in order to impose a

discipline on their balance of payments. In other

words, imports must be offset by exports.Indonesia

links government import requirements in contracts

worth more than Rp. 500 million to the export of

Indonesia products, other than oil and natural gas,

in an equivalent amount to the foreign-exchange

value of the contract.

Second, countertrade is alleged to be nothing but

“covert dumping.” To compensate any supplying

partners for the nuisance of taking another product

as payment, a countertrading country frequently

trades its products away at a discount. If the coun-

tertrading country discounts directly by selling its

goods itself in another market instead of through

a foreign ﬁrm, dumping would clearly occur, but,

according to an International Trade Commission

study, the practice does not seem to be harmful to

the USA. Countertrade activity actually results in

US exports always greatly exceeding the value of

imports. Thus it would appear that many products

which US ﬁrms agree to take from their customers

for overseas marketing are not dumped back on the

US market.

Third, countertrade is alleged to increase over-

head costs and ultimately the price of a product.

Countertrade involves time,personnel, and expense

in selling a customer’s product – often at a discount.

If another middleman is used to dispose of the prod-

uct, a commission must also be paid. Because of

these expenses, a selling company has to raise the

price of the original order to compensate for such

expenses as well as for the risk of taking another

product in return as payment. The fact that the

goods are saleable – either for other goods or, in

the end, for cash somewhere else – means that

additional and probably unnecessary costs will be

incurred.As explained by Fitzgerald,“Countertrade

requirements, like any trade restrictions, increase

the cost of doing business. These costs cannot be

passed into the international market but must

be borne within the country imposing the require-

ments.”

It is believed that barter transactions are

responsible for reducing Russia’s revenues by 500

billion rubles.

Related to this charge of increasing costs is the

problem of marketing unwanted merchandise

that may remain unsold. A company may have to

take on the added job of marketing its customer’s

goods if it does not want to lose business to rivals

who are willing to do so. McDonnell Douglas

was able to secure a contract to sell 250 planes

to former Yugoslavia only after agreeing to market

such Yugoslav goods as hams and other foods, tex-

tiles, leather goods, wine, beer, mineral water, and

tours. The company had a difﬁcult time selling

the $5 million worth of hams and ﬁnally did so

to its own employees and suppliers. With regard

to the Yugoslavian tours, the best the company

could do was to offer the trips as incentives to

employees.

Financing, essential in virtually all types of con-

ventional transactions, becomes more complicated

in the case of countertrade. This is especially

true when the sale of one product is contingent on

the purchase of an unrelated product in return.

Understandably, banks may hesitate to provide

credit for such a deal because of their concern that

the exporter may not be able to proﬁtably dispose

of the product given to the exporter as payment.

When a company is unable or does not want to

be concerned with disposing of the product taken

from its customer, it can turn to companies that act

as intermediaries.The intermediaries may agree to

dispose of the merchandise for a commission or they

may agree to buy the goods outright.The Mediators

is one such middleman organization which operates

a $500 million a year business globally.

An examination of countertrade literature found

that an overwhelming number of the published arti-

cles were theoretical rather than empirical.

There

are a few empirical studies, however, that have shed

some light on the practice of countertrade.Accord-

ing to one model, developing countries which

impose countertrade have the following characteris-

tics: declining foreign exchange reserves, commod-

ity terms of trade, balance of trade, and increasing

debt service ratios.There is some evidence that these

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variables can help exporters identify those countries

which are likely to be countertraders.

The results of one study dispel some widely held

views about countertrade. First, the relationship

between a country’s credit rating and its propensity

to countertrade is not as strong as commonly

believed. Second, buyback and counterpurchase are

substitutes for foreign direct investment. Third,

there is a surprisingly large volume of countertrade

between developing countries themselves. Fourth,

each countertrade type seems to have its own sep-

arate motivation (see Table 17.1). Barter allows

exchange without the use of money and explicit

prices. Barter is therefore useful in order to bypass:

(1) exchange controls, (2) public or private price

controls, and (3) a creditor’s monitoring of

imports.

Those ﬁrms that tend to beneﬁt from counter-

trade are the following: (1) large ﬁrms that have

extensive trade operations from large, complex

products; (2) vertically integrated ﬁrms that can

accommodate countertrade takebacks; and (3) ﬁrms

which trade with countries that have inappropriate

exchange rates, rationed foreign exchange, import

restrictions, and importers inexperienced in assess-

ing technology or in export marketing. In contrast,

ﬁrms whose characteristics are the opposite of those

enumerated above are likely to encounter signiﬁcant

barriers to countertrade operations and to receive

few beneﬁts.

In general, the US government is opposed

to government-mandated countertrade. However,

recognizing that countertrade is a fact of life, the

US government has maintained a hands-off policy

toward countertrade arrangements that do not

have government intervention or that American

exporters choose to pursue. It does not oppose

participation by American ﬁrms in countertrade

transactions when they do not have a negative

impact on national security, but the US policy pro-

hibits federal agencies from promoting counter-

trade in their business and ofﬁcial contacts.

Interestingly, the US government itself has

published a guide on countertrade practices so

that US ﬁrms may take advantage of marketing

opportunities in the former Soviet Union.

The

irony is that the Russian government, seeking hard

currency earnings, now appears to prefer cash

transactions and has begun to discourage counter-

trade transactions of marketable commodities.

However, those Russian products that do not have a

ready market will probably still require some form

of countertrade.

There is no question that countertrade is a

cumbersome process: yet a ﬁrm is unwise not to

consider it. Similar to other trade practices, coun-

tertrade presents both problems and opportunities.

More often than not, problems of countertrade are

psychological rather than real obstacles. Problems

may be overcome. One need only remember that in

the ﬁnal analysis all goods can be converted into

cash.

PRICE QUOTATON

A quotation describes a speciﬁc product, states the

price for that product as well as a speciﬁed delivery

location, sets the time of shipment, and speciﬁes

payment terms. When a company receives an

inquiry from abroad, the quotation must be very

detailed in terms of weight, volume, and so on

because of the customer’s unfamiliarity with foreign

products, places, and terms. Since the time of ship-

ment is crucial, the prepared quotation should spec-

ify whether the time mentioned is from the factory

or the port of export and whether it includes the

estimated inland transit time. Furthermore, price

quotations should state explicitly that they are sub-

ject to change without notice. It is a good idea to

specify the precise period during which a speciﬁc

price or offer remains valid.

Because it is often requested by a buyer, a pro

forma invoice may have to be prepared and sup-

plied with or instead of the quotation. Even when it

is not requested, it is still good business practice to

include it with any international quotation.This type

of invoice is not for payment purposes; it is essen-

tially a quotation in an invoice format. The buyer

uses it to apply for an import license or to arrange

for funds.A pro forma invoice should be conspicu-

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TERMS OF SALE AND PAYMENT

ously marked “pro forma invoice,” and it should

include a statement certifying that the pro forma

invoice is true and correct as well as a statement

describing the country of origin of the products.

TERMS OF SALE

Trade terms

The quotation must include terms of sale. In the

USA, it is customary to ship FOB factory, freight

collect, or COD. Such terms, however, are inap-

propriate for international business, and other

terms such as EXW, FAS, FOB, CFR, CIF, DEQ,

and DDP should be used instead.

All companies should use Incoterms which are a

set of international rules used to interpret the most

common terms in foreign trade. Developed under

the auspices of the International Chamber of

Commerce,Incoterms are recognized by the United

Nations Commission on International Trade Law as

a global standard. By deﬁning the responsibilities

of buyers and sellers for delivery of goods under

sales contracts, the use of Incoterms reduces uncer-

tainties by eliminating varying interpretations of

foreign trade terms. Because there are several ver-

sions of Incoterms, the seller should clearly refer to

Incoterms 2000 whenever the terms are used (e.g.,

FOB London Incoterms 2000).

Incoterms have four basic categories.The E terms

are used when seller will make goods available to the

buyer on the seller’s own premises.F terms are used

when the seller will be required to deliver goods to

a carrier appointed by the buyer. C terms are used

when the seller will be required to contract for car-

riage, but will not assume risk of loss or damage to

goods, or of additional costs that may occur after

shipment and dispatch. Finally, D terms require the

seller to bear all costs and risks needed to bring

goods to the place of destination. In general,

Incoterms base the interpretations on the party who

is best equipped to handle the task. For example,

loading and unloading obligations have been shifted

to the seller under the free carrier seller’s place

term because this shipment is being unloaded at

the seller’s place and because the seller will have

personnel and equipment available to load.

Table 17.2 describes the point of delivery and

risk shift for these different terms of sale. These

terms are discussed next.

Ex works (EXW) or ex – named point of

origin

Ex means from, and the price quoted is calculated

from the point of origin.There are several variations

of this term, and they include ex factory, ex warehouse,

ex mill, ex plantation, and ex mine. Under these terms,

the seller makes goods available to the buyer at a

speciﬁc time and place, usually at the seller’s place

of business or warehouse.The buyer takes delivery

at the seller’s premises and bears all risks and

expenses from that point on.

FAS – named port of shipment

FAS stands for free alongside ship. Under this term,

the price includes delivery of goods along side the

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Table 17.2 Point of delivery and where risk shifts from seller to buyer

EXW FAS FOB CFR CIF DEQ DDP

Supplier’s warehouse X

Export dock X

On board vessel X X X

Import dock X

Buyer’s warehouse X

Main transit insurance risk on Buyer Buyer Buyer Buyer Seller Seller Seller

vessel or other mode of transportation, and the

seller pays all charges up to that point. This term

does not include the cost of loading. It is customary

to use the port of export as the point of origin for

this transaction.The seller’s legal responsibility ends

once it has obtained a clear wharfage receipt.A sig-

niﬁcant change should be noted. Under Incoterms

2000, the seller is required to clear the goods for

export. Previous Incoterms versions required the

buyer to arrange for export clearance.

FOB – named point

FOB stands for free on board. Like the other terms

within the quotation, the point where the price is

applicable must be mentioned.There are a number

of classes, and the point in question may be any one

of these: the named inland carrier at the named

inland point of departure, the named inland carrier

at the named point of exportation, the named port

of shipment, and the named inland point in the

country of importation.

Nevertheless, the point used for quotation is

usually the port of export. In such a case, the price

includes local delivery and loading. The seller’s

responsibility does not end until goods have actually

been placed aboard the ship and a bill of lading

issued. The buyer arranges for overseas trans-

portation and bears all costs and risks from the

time the goods are placed on board (i.e., passes

the ship’s rail).

CFR – to named point of destination

CFR stands for cost and freight. Usually, this term

will name the overseas port of import as the point

in question.The price generally includes the cost of

transportation to the named point of debarkation.

The buyer, in turn, is expected to pay for insurance.

Like FOB, the risk of loss or damage to the goods

is transferred from the seller to the buyer when the

goods pass the ship’s rail.

CIF – to named point of destination

CIF stands for cost, insurance, and freight. Again, the

point used for quotation may be any location, but

the International Chamber of Commerce recom-

mends that this point should be the destination.The

CIF price includes the cost of goods, insurance, and

all transportation charges to the point of debarka-

tion (destination). The delivery costs are thus

extended beyond the country of export. Although

the price covers more items or activities than

FOB, the seller’s obligations still end at the same

stage (i.e., when goods are aboard or loaded).The

seller pays for insurance, and the seller’s insurance

company assumes responsibility once the goods

are loaded. Firms exporting to the EU should note

that duties are imposed on the CIF value of the

shipment.

Delivered ex quay (DEQ) – named port of

destination

The seller is required to deliver the goods to the

quay at the predeﬁned port of destination and clear

them for importation.The seller must also take on

all risks and costs including duties, taxes, and any

other charges.To avoid confusion, the term should

mention either “duty paid” or “duty unpaid.”

DDP – delivered duty paid

An example of this kind of quotation is “duty paid

landed US.” With the payment of this price, the

seller undertakes the delivery of goods to the place

named in the country of import, generally the

buyer’s warehouse, with all costs and duties paid.

The seller obtains an import license if required and

arranges for an overseas customhouse broker to

clear the merchandise through customs and to act

as a freight forwarder by forwarding the goods

locally to the ﬁnal destination.

The terms of sale mentioned above also have

some variations. For example, CPT (carriage paid

to) and CIP (carriage and insurance paid to) – to a

named place of destination – are used in place of

CFR and CIF respectively for shipment by modes

other than water.

In the case of FCA (free carrier)

to a named place, the term replaces “FOB named

inland port” and may be used for multimodal trans-

port, container stations, and any mode of transport

(including air).

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Quotation guidelines

Although the potential buyer will probably specify

the terms to be used, the seller should make certain

that the quotation or price is meaningful when spe-

ciﬁc terms are not requested. It is unwise for a

company in a suburb of Chicago to quote a price as

“FOB Evanston, not export packed.”The buyer may

have no way of knowing that Evanston is a suburb

of Chicago. Even if the buyer does know where

Evanston is, that ﬁrm would have difﬁculty deter-

mining how much the local transportation or freight

charges would be to move the goods from Evanston

to the Chicago port. Moreover, the buyer would

surely be interested in knowing what the packing

costs for export are, since the merchandise would

have to be packed for export.Without a meaning-

ful quote, it is difﬁcult to receive serous considera-

tion from a potential buyer.

Whenever possible, the exporter should quote

CIF. Better still, the quote should include a break-

down for the C(ost), I(nsurance), and F(reight).The

buyer is then aware of all the relevant costs needed

to get the product to the port in its country, and the

buyer can decide whether it should arrange for the

insurance and/or freight. If the seller needs assis-

tance,a freight forwarder would be helpful in deter-

mining the CIF price.

Although theCIFprice yields the greatest amount

of information for the buyer, terms other than CIF

may prove more appropriate under certain circum-

stances. If the exporter needs to conserve cash, the

exporter should not quote CIF or any terms beyond

it (e.g., delivered duty paid). If currency convert-

ibility is a problem, FOB terms may be more desir-

able for both parties; that is, the buyer pays freight in

its own currency or arranges to use a ship from its

own country. China, for example, controls shipping

arrangements for imports and exports in order to

preserve foreign exchange and retain the insurance

business. The country’s foreign trade corporations

(FTCs), responsible for most foreign trade, prefer

selling on CIF terms while buying FOB in order to

underwrite all freight charges and insurance them-

selves. One potential problem encountered in this

case is that ships arranged for the Chinese FTCs have

been known to arrive considerably late, incurring

high interest and warehousing costs for American

ﬁrms.Moreover, delays at Chinese ports are another

problem, and that can hold up the payment even

more.

METHODS OF FINANCING AND MEANS

OF PAYMENT

There are several payment methods. It should be

noted that how buyers handle payments can vary

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TERMS OF SALE AND PAYMENT

A quotation describes the product, its price, time of

shipment, terms of sale, and terms of payment. A good

quotation should include the following:

1 buyer’s name and address

2 buyer’s reference number and date of inquiry

3 brief description of requested products

4 price of each item

5 gross and net shipping weight

6 total cubic volume and dimensions packed for

export

7 trade discount

8 delivery point

9 terms of sale

10 terms of payment

11 insurance and shipping costs

12 validity period for quotation

13 total charges to be paid by customer

14 estimated shipping date to factory or US port

15 estimated date of shipment arrival.

Source:

“Price, Quotations, and Terms of Sale Are Key to

Successful Exporting,”

Business America

, October 4, 1993,

12–15.

MARKETING STRATEGY 17.1 QUOTATION