Sailing Into the Wind: Three Tips to Export Success While Facing Strong Economic HeadwindsMarch 23, 2016
Dylan Daniels is a Senior Trade Specialist and member of ITA’s Vets Go Global Team
The global economic headwinds currently facing U.S. businesses are enough to force even the most intrepid exporter to search for safe harbors. However by mitigating the risk inherent to international trade, you can sail into these economic headwinds with confidence. Trusting in these three tips, you should be better prepared to navigate the turbulent waters of international commerce.
Tip #1: Mitigate Your Foreign Exchange (FX) Exposure
From the viewpoint of a U.S. exporter who chooses to sell in foreign currencies, FX risk is the exposure to potential financial losses due to devaluation of the foreign currency against the U.S. dollar. Obviously, this exposure can be avoided by insisting on selling only in U.S. dollars. However, such an approach may result in losing export opportunities to competitors who are willing to accommodate their foreign buyers by selling in their local currencies.
FX Risk Management options include: Non-Hedging FX Risk Management Techniques; FX Forward Hedges; and FX Options Hedges.
- Non-Hedging FX Risk Management Techniques
The exporter can avoid FX exposure by using the simplest non-hedging technique: price the sale in a foreign currency in exchange for cash in advance. The current spot market rate will then determine the U.S. dollar value of the foreign proceeds. A spot transaction is when the exporter and the importer agree to pay using today’s exchange rate and settle within two business days
- FX Forward Hedges
A forward contract enables the exporter to sell a set amount of foreign currency at a pre-agreed exchange rate with a delivery date from three days to one year into the future. For example, U.S. goods are sold to a French company for €1 million on 60-day terms and the forward rate for “60-day euro” is 0.80 euro to the dollar. The U.S. exporter can eliminate FX exposure by contracting to deliver €1 million to its bank in 60 days in exchange for payment of $1.25 million.
- FX Options Hedges
Option Hedges are used for exceptionally large transactions that have been quoted in foreign currency. Under an FX option, the exporter acquires the right, but not the obligation, to deliver an agreed amount of foreign currency to the FX trader in exchange for dollars at a specified rate on or before the expiration date of the option. While FX options hedges provide a high degree of flexibility, they can be significantly more costly than FX forward contracts.
Tip #2: Insure Your Export Transaction
The Export-Import Bank is one source for export credit insurance (ECI). ECI protects an exporter of products and services against the risk of non-payment by a foreign buyer. ECI generally covers commercial risks, and certain political risks that could result in non-payment. ECI also covers currency inconvertibility, expropriation, and changes in import or export regulations.
Tip #3: Manage Expectations with a Contract
The exporter should negotiate a foreign sales agreement to expressly define the roles and responsibilities of the parties. Most representatives are interested in your company’s pricing structure and product profit potential. They are also concerned with the terms of payment; product regulation; competitors and their market shares; the amount of support provided by your firm, such as sales aids, promotional material, and advertising; training for the sales and service staff; and your company’s ability to deliver on schedule.
The contract may contain provisions that specify the actions of the foreign representative. For example, a non-disclosure agreement, non-compete clause, and instructions on how to handle inquiries from outside their sales territory should be included.
It may be appropriate to include performance requirements, such as a minimum sales volume and an expected rate of increase. Be sure to include an escape clause in the agreement that allows you to end the relationship safely and cleanly if the representative does not fulfill expectations.
Finally, the agreement with the foreign representative should define what laws apply to the agreement. Even if you choose U.S. law or that of a third country, the laws of the representative’s country may take precedence. Many suppliers define the United Nations Convention on Contracts for the International Sale of Goods (CISG, or the Vienna Convention) as the source of resolution for contract disputes, or they defer to a ruling by the International Court of Arbitration of the International Chamber of Commerce.
By mitigating risk factors associated with international transactions you’ll have greater confidence to engage in international trade. Moreover, by making use of these three simple tips, instead of being blown back, you’ll sail forward into the economic headwinds facing exporters today. The U.S. Department of Commerce, including the members of its Vets Go Global team, are here to assist you take your business into new and exciting global markets.