Making Exports Affordable: Investment Strategies For Trade Success

Exports are goods and services that are produced in one country and sold to buyers in another. They are one of the oldest forms of economic transfer and occur on a large scale between nations. Exports can increase a firm's sales and profits and can present an opportunity to capture significant global market share. Companies that export heavily are typically exposed to a higher degree of financial risk. There are several ways to reduce the costs associated with exporting goods, such as choosing an affordable shipping method, negotiating with suppliers, taking advantage of free trade agreements, and utilizing tax incentives.

Choose an affordable shipping method

When it comes to choosing an affordable shipping method, several factors come into play. Here are some guidelines to help you make an informed decision:

• Consider the size and weight of your package: Shipping rates are often based on package dimensions and weight. Opt for smaller and lighter packaging where possible, as this can significantly reduce costs.
• Compare shipping carriers: In the US, the three main shipment companies are USPS, UPS, and FedEx, all offering flat-rate shipping options. For smaller, lighter packages travelling shorter distances, USPS is usually the most affordable choice. UPS and FedEx tend to be more competitive for larger packages and longer distances.
• Evaluate delivery speed: If you need faster delivery, UPS and FedEx provide reliable next-day and overnight services, but at a higher cost. USPS also offers expedited options, albeit with some recent pandemic-related delays.
• International shipping: When sending packages internationally, rates vary by destination. Canada is typically among the cheapest options for all three major carriers.
• Use shipping rate calculators: Utilize shipping rate calculators provided by carriers to get accurate quotes based on your package's specifics. This allows for easy comparison and informed decision-making.
• Flat-rate shipping: Consider flat-rate shipping options, which offer predictable pricing regardless of parcel weight or size. This can be especially advantageous for domestic delivery.
• Local delivery and pick-up: For the most affordable option, offer local delivery or pick-up services. This not only saves costs but also provides a more personalised customer experience.

Negotiate with suppliers

Negotiating with suppliers is a critical aspect of managing your supply chain and can have a significant impact on your business's profitability and competitiveness. Here are some strategies to negotiate with suppliers to make your exports cheaper:

Bring New Value to the Supplier:

This is often the easiest approach. Instead of solely focusing on getting the lowest price, think about what else you can offer the supplier. For instance, you can serve as a gateway to new markets by helping them expand their reach or reduce their risks by offering stable and long-term commitments. This approach can strengthen your relationship and put you in a better position to negotiate better terms.

Change How You Buy:

Consider consolidating your purchase orders, rethinking purchase bundles, or reducing purchase volume. By doing so, you can gain more negotiating power and potentially secure volume discounts. Additionally, you can explore alternative suppliers or bundles that may offer more competitive pricing without compromising quality.

Create a New Supplier:

While this option carries more risk, it can be transformative. You can either bring in a supplier from an adjacent market or vertically integrate and become your own supplier. This strategy may be particularly effective if you have specialized knowledge or capabilities that give you a competitive advantage in supplying the required goods or services.

Negotiate Competitive Terms:

When writing international sales contracts, carefully consider the terms you offer to protect your business while remaining competitive. Explore different pricing strategies, methods of payment, and financing options for your foreign buyers. Incoterms, for example, can help you set the terms of sale and minimize your export transaction risk.

Set a Minimum Price:

Before entering negotiations, determine the absolute minimum price you can offer while still making a profit. Conduct a thorough cost-price analysis by assessing the unit or list price of your product against all relevant costs, such as freight, import duties, insurance, inland transport, and warehouse storage. This will give you a clear understanding of how low you can go while maintaining profitability.

Agree on a Time Frame:

When agreeing on a price, be mindful of the time frames you are committing to and assess the potential risks to your long-term interests. For example, if you agree to a fixed price for an extended period, you may be exposed to fluctuations in the cost of raw materials or other variables. Ensure you understand the potential implications of price validity over different periods.

Understand Your Competition:

Be aware of who you are competing with in the market. If you are up against similar-sized companies, you may have more room to negotiate on price. However, if you are competing against larger corporations or state providers, it may be more effective to focus on other areas, such as product quality or extended warranty periods, to differentiate yourself.

Cultural Sensitivity:

Recognize that the accepted process for negotiating may vary across different cultures and markets. In some cultures, face-to-face meetings may be expected, while in others, price negotiations may be conducted remotely or even via email. Work with local partners or advisers who have experience in the region to navigate these cultural differences effectively.

Take advantage of free trade agreements

A free trade agreement (FTA) is a pact between two or more nations to reduce barriers to imports and exports among them. The concept of free trade is the opposite of trade protectionism or economic isolationism. Free trade agreements reduce or eliminate barriers to trade across international borders.

The United States, for example, has a number of free trade agreements in place, including multi-nation agreements such as the United States-Mexico-Canada Agreement (USMCA) and the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). Collectively, these agreements mean that about half of all industrial goods entering the U.S. are free of tariffs.

• Reduction or elimination of tariffs: A country that normally charges a tariff on imported products will eliminate that tariff for products originating in another country that is party to the FTA. This makes products more competitive in the market.
• Intellectual property protection: FTA partner countries provide protection and enforcement of American-owned intellectual property rights.
• Product standards: U.S. exporters can participate in the development of product standards in the FTA partner country.
• Selling to the government: U.S. companies can bid on certain government procurements in the FTA partner country.
• Service companies: U.S. service suppliers can supply their services in the FTA partner country.
• Fair treatment for investors: U.S. investors are treated as favorably as the FTA partner country treats its own investors or those from any third country.

In summary, free trade agreements can help companies enter and compete more easily in the global marketplace through zero or reduced tariffs and other provisions. They create a more predictable and transparent trading and investment environment, making it easier and cheaper for companies to export their products and services to trading partner markets.

Utilize tax incentives

Tax incentives are a crucial tool for governments to encourage businesses to export goods and services. These incentives can take various forms, including tax breaks, regulatory relief, export subsidies, direct payments, low-cost loans, and tax exemptions on export profits. By utilizing these tax incentives, businesses can reduce their tax burden and increase their competitiveness in the global market.

In the United States, for example, businesses can take advantage of two separate export tax incentives: the Interest-Charge Domestic International Sales Corporation (IC-DISC) regime and the Foreign Derived Intangible Income (FDII) regime. The IC-DISC regime allows companies to defer income and convert ordinary income into qualified dividend income taxed at a lower rate. This can result in tax savings of 13.2% or $13,200 per $100,000 of qualified net export income. On the other hand, the FDII regime offers a 37.5% deduction for corporate taxpayers, reducing the US corporate tax rate from 21% to 13.125% on foreign-derived intangible income, resulting in tax savings of $7,875 per $100,000.

These tax incentives are not limited to specific industries and can benefit a wide range of sectors, including media and entertainment, technology, agriculture, healthcare, and service industries. By taking advantage of these incentives, businesses can increase their profitability and competitiveness in international trade.

It is worth noting that while tax incentives can be beneficial, they also have potential drawbacks. Critics argue that export incentives can distort markets and introduce inefficiencies by artificially creating barriers to free trade. Additionally, the effectiveness of these incentives may be impacted by changes in tax policies and regulations. Therefore, businesses should carefully evaluate the potential benefits and remain updated on any proposed changes to tax laws that may affect their export strategies.

Overall, tax incentives play a crucial role in encouraging exports and promoting economic growth. By utilizing these incentives effectively, businesses can reduce their tax liability, increase their global competitiveness, and contribute to the economic well-being of their country.

Monitor exchange rates

Monitoring exchange rates is crucial when investing to make exports more competitive and cheaper. Exchange rates reflect the relative values of currencies, with a higher demand for a country's goods leading to a stronger currency.

A weaker domestic currency stimulates exports by making them more affordable in foreign markets, while a stronger domestic currency hampers exports, making them more expensive for foreign buyers. For example, a $10 electronic component exported from the US to India will cost an Indian importer 500 rupees if the exchange rate is 50 rupees to the dollar. If the dollar strengthens to 55 rupees, the same component will cost 550 rupees, making it less competitive compared to local alternatives.

Fluctuations in exchange rates can significantly impact a country's exports and overall economic performance. A depreciating currency can make exports more competitive, while an appreciating currency can make them less so. However, the response is often asymmetric, with exports reacting more strongly and quickly to currency appreciation than depreciation. This may be due to the time it takes to establish new trade relationships and find new clients, as well as the nature of the goods being exported.

To make exports cheaper and more competitive, it is essential to monitor exchange rates and understand how they impact the relative pricing of exported goods. This can help businesses and policymakers adjust their strategies, such as through export promotion and improving price competitiveness, to ensure exports remain attractive in foreign markets.

Frequently asked questions