During the last decade, U.S. exports have increased significantly. In fact, from 1985 through 1995, on a balance of payments basis, U.S. exports of goods and services increased from $288.8 billion to $786.5 billion—an increase of more than 172 percent. This pace is expected to accelerate.

"Exports now account for almost one-third of real U.S. economic growth and are expected to grow faster than overall economic activity for the remainder of this decade," said President Clinton. And export participation by small and medium-size companies is significantly higher, according to a recently published report by the Institute for International Economics and The Manufacturing Institute, research organizations both based in Washington, DC.

According to the report, exporting manufacturing plants:

  1. Are larger than non-exporting plants, on average four times larger in employment and six times larger in sales;
  2. Adopt new technologies more frequently;
  3. Had an annual failure rate of 3 percent, compared to 9 percent for non-exporters, on average for the period of 1976 to 1987;
  4. Have a small advantage in avoiding shut downs compared to non-exporting plants of the same size, capital intensity and industry; and
  5. Avoided employment shrinkage to a greater extent than other similar manufacturing plants during the period of 1976 through 1987.

As international trade has increased, so too has the degree of sophistication in trade finance among exporters of all sizes—so much so that trade finance has become a regular treasury function for many companies. More and more U.S. firms now use it as “just another tool” to sell their goods—often providing an increasingly important advantage over European and Asian competitors. Effectively managing international financial risk has become essential for export-oriented firms and a process that has already become streamlined by many.

As growth in exports accelerates, the demand for new, more creative financing by companies of all sizes will continue to increase. Assessing their needs can be difficult, especially those of firms that have not yet fully developed their international strategies. Understanding their global opportunities and risks, providing the right tailored solutions, and finding the appropriate delivery channel can be challenging.

In an effort to effectively compete in the ever-changing and increasingly dynamic financial services environment, banks must first focus on niche markets and develop the necessary international expertise. And identifying the right niche market is not always an easy task—especially since each market is more like a moving target.

Focus on the Markets Best for You

Markets can be identified in a number of ways. Companies, for example, can be classified by their size (small, medium or large), or by their geography (i.e., those located in Southeastern states). They can be categorized by their industry (i.e., producers and sellers of automobiles and parts), or by their needs (i.e., companies new to international trade requiring simple solutions and much personalization). They can even be categorized by their target export markets (i.e., industrialized or developing countries).

If many of your customers sell into developing countries, and you wish to increase your value to these companies, it’s vital that your organization understands the obstacles they face and can provide the right solutions to overcome them. For example, a real impediment to selling to companies in developing countries is their inability or difficulty in obtaining financing to pay for imports. And obtaining medium and long-term financing can be especially burdensome for small and medium-size companies there. By assisting developing country importers with liberal payment terms, U.S. exporters can often export more of their products.

This strategy is becoming more important due to the exponential increase in global competition. Exporters that can manage risks and move quickly to arrange financing at attractive rates can seize new opportunities—not only benefiting themselves, but their banks as well.

Whatever markets you choose to target, keep in mind that companies that export have demonstrated certain advantages over companies that don’t.

An Understand of Global Trends Will Help You to Better Understand What Your Customers Are Up Against

A new economic era is upon us. Many of our old realities are being replaced by new ones yet to be defined. For hundreds of years nations with an abundance of natural resources were considered to have the competitive edge. Today, this is no longer the case. Human skill has taken front seat.

The world is quickly becoming economically integrated, forcing unprecedented changes at every level of industry. U.S. companies, small and large, are facing record levels of foreign competition for domestic market share. In addition to this, the world landscape is changing as never before. And the proliferation of trade agreements and trade blocs among countries are not only increasing the complexity of international trade, but also heightening the level of competition.

In an effort to gain secure and preferential access to foreign markets, and in turn achieve a higher degree of economic security while maneuvering into the 21st century, many countries have entered into trade agreements with one another. From 1947 through 1994, a total of 108 regional trade agreements were notified to the General Agreement on Tariff and Trade (GATT), the international body that governs approximately 90 percent of world trade. Some of these agreements are between two countries; others are among many, creating trade blocs.

Banks Need to Understand the Implications of Trade Agreements on their Customers’ Businesses and Provide Appropriate Solutions

The 15-member European Union (EU) encompasses Belgium, Britain, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. On January 1, 1995, Austria, Sweden and Finland became members. In years to come, it is likely that East European countries join the 350 million population of the EU, expanding the market to include 850 to 900 million consumers.

The implosion of Soviet Communism and the fall of the Berlin Wall have exposed East Europeans to a free market economy for the first time in several decades. In an attempt to shift from central planning to a free market, the economies and political systems of many East European countries have experienced chaos to various degrees. And the eruption of ethnic conflict in former Yugoslavia and elsewhere in Eastern Europe has accelerated economic deterioration.

Much of the EU's vested interest in allowing East European countries to eventually become full members is primarily aimed at preventing a potentially large mass migration westward. By integrating East European economies with the EU, the economic and political stability of the region will likely improve. Very importantly, as the degree of cohesion and internal support increases in Europe, outsiders will be at a competitive disadvantage.

In recent years, trade among East Asian nations has increased at a much faster pace than trade outside the region. Through the development of several trade agreements, such as ASEAN, with a population of 325 million comprising Malaysia, the Philippines, Singapore, Thailand, Brunei and Indonesia, the region is becoming more trade-cohesive. However, economic integration is mostly influenced by Japanese investment in the region, which is creating an informal trade bloc. According to trade analysts, Japan appears to be the only major industrial country whose domestic market remains protected from both foreign trade and direct investment. They conclude that with Japanese expansion in East Asia, North American firms may increasingly lack access to an East Asian bloc.

According to the late Secretary of Commerce Ron Brown, “The European and Japanese, and even the emerging markets themselves are investing more of their leaderships’ energy and resources to do battle with U.S. Companies... and foreign governments’ efforts to increase this will likely continue.” This does not exclude foreign government export financing programs that can give their companies a competitive edge. With an understanding of this, U.S. bankers can appreciate the degree of competition facing U.S. exporters and their need to obtain globally competitive financing solutions.

In an effort to increase the competitiveness of North America, the North American Free Trade Agreement (NAFTA), which built on the achievements of the U.S.-Canada Free Trade Agreement, was implemented on January 1, 1994. Preferential access to Mexico and Canada, guaranteed by NAFTA, has put U.S. companies at a competitive advantage relative to rapidly expanding European and East Asian trade blocs. The Agreement not only opens up the Mexican market of 92 million customers, but creates a trade area of 360 million consumers ensuring secure markets for U.S., Canadian and Mexican products to each other's markets. In the decade ahead, NAFTA is expected to expand south to include Central and South America in the Free Trade Agreement of the Americas (FTAA).

Since NAFTA was implemented, there has been a proliferation of joint ventures and strategic alliances between U.S., Mexican and Canadian companies. This, the development of the FTAA, and other factors leading to greater cohesiveness in the hemisphere will result in greater hemispheric trade. In fact, former U.S. Trade Representative Mickey Kantor says that by the year 2010, the United States will export more goods to Latin America than to Japan and Europe combined. More creative finance solutions will be demanded as U.S. exporters seek opportunities offered by Latin American firms—developing country firms that need access to creative financing solutions.

The GATT Uruguay Round Agreements (URA), implemented on January 1, 1995, by the United States and over 100 other countries, further integrate trade policies among its members. It phases out quotas and cuts tariffs by about one-third on most products traded globally.

GATT, now known as the World Trade Organization, is responsible for reducing international tariffs from an average of 40% in 1947 to 5% in 1990, and has permitted international trade to expand enormously, national incomes to increase substantially and international competition to flourish. This resulted in higher quality, lower priced goods. As a result of this agreement, global trade is expected to increase significantly—benefiting many U.S. industries while generating more risk for some.

The dynamics of NAFTA, the increasing cohesiveness of EU and East Asian trade blocs, and the impact of the GATT agreement on U.S. business is profound. Unraveling the complexities of these agreements and understanding their implications can be a very difficult, time consuming and expensive process for U.S. exporters. This is especially true for smaller firms that do not have the available staff nor resources. Understanding these global trends will greatly assist you in assessing your customer’s needs, realistic abilities, and help you to provide the right solutions. Importantly, by offering knowledge and expertise in these matters, banks can significantly increase their value to their customers.

Solutions to Consider

The Export-Import Bank (Ex-Im Bank) of the United States and private insurers, like FCIA Management and American International Underwriters, are well positioned to meet many of the challenges presented by the projected growth in international trade.

As international trade has increased, so too has the number of Ex-Im Bank programs and transactions. In over 60 years, the independent U.S. government agency has supported more than $300 billion in U.S. exports. Their incentives to banks to work with fledgling exporters and provide programs like Working Capital Guarantees are steps in the right direction.

Many U.S. firms, however, cannot take advantage of Ex-Im Bank's programs because some of their positions are policy driven and can be too restrictive. For example, in order to utilize Ex-Im Bank finance solutions, at least 50 percent of a product's content must be of U.S. origin. Not all companies can achieve this.

Like other U.S. government agencies, Ex-Im Bank must adhere to U.S. foreign policy directives that can terminate or restrict Ex-Im support to various countries without notice. This can make planning difficult for a company if they are relying on Ex-Im Bank support. For example, on March 1, 1996, President Clinton decertified Colombia as a beneficiary of U.S. aid because Colombia was not found to be fully cooperative in the effort to stem the drug trade. Consequently, Ex-Im Bank support for Colombia has been terminated. In April, directed by the U.S. State Department as a result of alleged violations of intellectual property protection, Ex-Im Bank terminated support for China. Within one month, however, a U.S. government policy reversal resulted in agency re-establishing support. And government shutdowns for unspecified periods of time can throw a wrench into the most well-laid plans.

Additionally, Ex-Im Bank support is either limited or not available on guarantee programs, export credit insurance and loans to Bolivia, Brazil and Venezuelan.

Private providers are not subject to the same government policy restrictions and often have a different criteria for determining risk. FCIA Management Co., a subsidiary of Great American Insurance Co., American International Underwriters, a subsidiary of American International Group, and Trade Underwriters Association owned by Reliance, for example, offer very competitive insurance products.

Four Steps to Meeting Our Objectives

As international trade increases, exporters are requiring more sophisticated financing solutions—especially medium-term. To keep up and, more importantly, be proactive, it’s essential to constantly develop new strategies to satisfy these needs. In doing so, we believe it’s important to:

  1. Target the best niche markets where your bank demonstrates a competitive advantage;
  2. Understand how international trade agreements, emerging trade blocs and global trends will impact your customer base;
  3. Identify and assess your customers’ needs and abilities, opportunities and risks in this environment; and
  4. Provide the best solutions and delivery channels to satisfy customers’ growing needs for creative finance.
This article appeared in Bankers Magazine, November 1996.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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