Tools for Global Supply

Tools for Global Supply

 

  • Countertrade – a fancy term for a barter agreement but with some variations:
    • Barter/Swaps – involves the exchange of goods instead of cash.  Barter takes place when a country, which is short of hard currency, agrees to exchange its product for another country’s product.
    • Offset Arrangements – distinguished by the condition that one part of the countertrade be used to purchase government and/or military-related exports. The selling company agrees to purchase a given percent of the sales price in the customer’s country.  Even if specific deals are unprofitable, firms engaging in countertrade usually are looking for long-term, meaningful, and mutually advantageous relationships with the other country.
    • Counterpurchase – require the initial exporter to buy (or to find a buyer for) a specified value of goods (often stated as a percentage of the value of the original export) from the original importer during a specified time period.
    • Buyback/Compensation – the selling firm agrees to set up a producing plant in the buying country or to sell the country capital equipment and/or technology.  The original seller then agrees to buy back a specified amount of what is produced by the plant, equipment, or technology.  Buybacks can span ten years or more.
    • Switch Trade – a third party applies its “credits” to a bilateral clearing arrangement.  The credits are used to buy goods and/or services from the company or country in deficit. Usually a broker or trading house handles the switch.

Because countertrade is a “way of life” for many supply professionals, several guidelines are suggested: (1) decide whether countertrade is a viable alternative.  If a company does not have the organization to do the international sourcing required, it should refuse to participate; (2) Build the cost of counter trade into the selling price; (3) Know the country-its government, politics, and regulations; (4) Know the products involved and what is available; and (5) Know the countertrade negotiation process – offset percentage, penalties, and time period.

 

  • Foreign Trade Zones (FTZs) – are special commercial and industrial areas in or near ports of entry.  Foreign and domestic merchandise, including raw material, components, and finished goods, may be brought in without applying customs duties.  These are known as “free trade zones” in the U.S.  Merchandise brought into these zones may be stored, sold, exhibited, repacked, assembled, sorted, graded, cleaned, or otherwise manipulated prior to reexport or entry into the national customs territory.  There are two categories of FTZs:
    • General Purpose Zones – handle merchandise for many companies and are typically sponsored by a public agency or corporation, like a port authority.
    • Subzones – special-purpose zones usually located at manufacturing plants.

 

 

Each FTZ differs in character depending upon the functions performed in serving the pattern of trade peculiar to that trading area.  The six major functions that may be conducted within a zone are:

 

    • Manufacturing – manufacturing involving foreign goods can be carried on in the zone area.  Foreign goods can be mixed with domestic goods and, when imported, duties are payable only on that part of the product consisting of foreign goods.
    • Transshipment – Goods may be stored, repacked, assembled, or otherwise manipulated while awaiting shipment to another port, without the payment of duty or posting a bond.
    • Storage – Part of all of the goods may be stored at a zone indefinitely.
    • Manipulation – Imported goods may be manipulated, or combined with domestic goods, and then either imported or reexported.  Duty is paid only on imported merchandise.
    • Refunding of duties, taxes and drawbacks – When imported merchandise that has passed through customs is returned to the zone, the owner immediately may obtain a 99% drawback of duties paid.  Likewise, when products are transferred from bonded warehouses to FTZs, the bond is canceled and all obligations in regard to duty payment and time limitations are terminated.
    • Exhibition and display – Users of a zone may exhibit and display their wares to customers without bond or duty payments.  Duty and taxes apply only to goods that enter customs territory.
    • Maquiladoras – Mexico’s maquiladoras are examples of the foreign trade zone concept or industrial parks.  Non-Mexicans can own the maquila (plant) in the maquiladora in order to take advantage of low Mexican labor costs.  Maquilas are best suited to labor-intensive assembly.  Parts and supplies enter Mexico duty free, and products exported to the United States are taxed only on the value added in Mexico.

 

  • Bonded Warehouses – utilized for storing goods until duties are paid or goods are otherwise properly released.  The purpose of bonded warehousing is to exempt the importer from paying duty on foreign commerce that will be reexported or to delay payment of duties until the owner moves the merchandise into the host country.
  • Temporary Importation Bond (TIB) and Duty Drawbacks – permits certain classes of merchandise to be imported into the United States.  These are articles not for sales, such as samples, or articles for sale on approval.  Duty drawback permits a refund of duties paid on imported materials that are exported later.  The buyer enters into a duty drawback contract with the U.S. Government, imports the material for manufacture, and pays the normal duty.