Foreign Trade

Foreign Trade


Four basic business arrangements govern the trade of goods and services across national borders: single trade transaction, installment sales, license arrangement, and joint venture.

The most basic arrangement is the single trade transaction. For example, someone in Florida has a shipment of orange juice to sell abroad. That seller either hires someone to find a buyer or personally finds someone who would like to purchase the shipment of orange juice. A buyer is found in France, a contract is signed after legal matters are settled, and the orange juice is shipped abroad. In the single trade transaction, there is only one contract and one shipment.

The second type of arrangement is for installment sales: More than one transaction will take place between the seller and the buyer. A series of contracts for shipments may be signed, or one contract may be signed that outlines a series of sales over time. Either way, the key to an installment sales arrangement is an extended relationship between the seller and the buyer for continued supplies across the border with multiple deliveries and payments. Many products are bought with such regularity that a continued supply of an item can be counted on to sell. This pattern allows the importer to develop regular customers who rely on the continual receipt of goods from abroad. Wine, cheese, and many other food items are shipped on installment contracts.

A third type of international sales arrangement is the license arrangement. License arrangements are more complex because they involve the production of the item in the country where it is to be sold, while the right to produce the item (a patent or copyright) remains with the country that originally produced the items. For example, an American author might have a book published in Germany under a licensing arrangement in which the German publisher pays the author a set fee for each book sold.

The joint venture is the fourth type of arrangement for foreign trade. Two companies, one from each country, agree to produce something in a cooperative effort. They may choose to produce the item under one or both companies' names, or they may choose to create a third company with an independent function from the two parent companies. Both parent companies get benefits from the sales of the items produced by the joint venture. Car manufacturers regularly engage in joint venture projects.

Subsidiary companies are branches set up in foreign countries. Many Fortune 500 companies have branches all over the world. Oil companies commonly have branches abroad, as do large banks, investment firms, and automobile manufacturers. Foreign affiliates of American manufacturers sell roughly $5 trillion of products each year.

Multinational corporations are companies that have operations in two or more countries. As multinational companies proliferate, the average size of the companies is shrinking, creating what is known as micro-multinational companies and opening the door for small businesses, start-up companies, and entrepreneurs to reach an international market. These companies may operate production branches in countries where it is cheaper to manufacture the product or where the raw materials may be close at hand. They also may produce the item in one or two locations and then use the other operations for sales and administration.

The United States government has several agencies that deal with foreign trade. The U.S. Commercial Service, part of the Department of Commerce, is charged with supporting American businesses engaged in foreign trade. It has a staff of more than 1,400 trade professionals, approximately 100 offices within the United States, and more than 120 commercial offices in the U.S. embassies and consulates in about 75 countries. The agency provides advice—such as how to deal with foreign countries' red tape—market intelligence, pro-trade diplomacy, and business matchmaking.

The Export-Import Bank of the United States aids exports by providing loans, loan guarantees, and insurance to foreign buyers who cannot get credit or risk protection from commercial banks and insurers. Most percent of the bank's transactions benefit small businesses.

The U.S. International Trade Commission (ITC) administers American laws that set tariffs and that prohibit unfair trade practices. For example, in 2011 a Texas manufacturer of high-pressure steel cylinders petitioned the ITC, accusing Chinese manufacturers of exporting cylinders to the United States at a price lower than the cost of production. (This practice is called dumping.) An ITC investigation determined that the Chinese government was providing a 16 percent subsidy to their manufacturers, enabling these exporters to sell the cylinders at anywhere from 7 to 31 percent below the cost of production. As a result, the ITC instructed the U.S Customs and Border Protection service to charge an equivalent tariff to offset this unfair advantage.

Another agency has the mission of encouraging agricultural exports. The Foreign Agricultural Service has about 1,400 personnel in the 90 offices that cover 170 countries. The agency acts to remove trade barriers and enforce U.S. rights under existing trade agreements. It also provides information and advice for agricultural exporters, offers an export credit guarantee program, and administers international development and food aid programs to help developing countries.

There are a wide variety of jobs in the foreign trade industry. Among the professions are buyers, purchasers, economists, marketing research analysts, delivery and logistics experts, and administrative and clerical support. Accountants, international affairs specialists, and interpreters and translators also work with businesses that conduct foreign trade. A December 2017 International Trade Administration report indicated that exports of goods and services supported an estimated 10.7 million U.S. jobs in 2016.