May/June 1988
How to get started in global sales.
By Debra R. Levin
Debra R. Levin is director of environment, trade, and transportation and assistant counsel for the Institute of Scrap Recycling Industries, Washington, D.C.
Economics professors proclaim the virtues of the theory "export or die!" Politicians win applause with impassioned pleas to do something about the size of the U.S. trade deficit. Is there an opportunity for scrap processors and recyclers to help their country and their companies by boosting sales to foreign buyers?
If you ask the Office of Export Trade Company Affairs (OETCA) of the U.S. Department of Commerce, the answer is an enthusiastic "yes." The purpose of this trade office is to carry out the Export Trading Company Act of 1982, P.L. 97-290, 96 Stat 1233, including promotion of export trading companies (ETCs).
This major legislation was adopted in October 1982 to enhance U.S. export capabilities. Congress recognized that only 10 percent of the estimated 250,000 manufacturing firms export, with fewer than 1 percent of these companies accounting for 80 percent of U.S. exports. Tens of thousands of small- and medium-sized businesses with exportable products are not active in export trade. Congress reasoned that size and inexperience are barriers to foreign market participation by these relatively smaller companies. Perhaps grudgingly, Congress found itself flattering the Japanese by imitating the Asian success model: close to two-thirds of Japan's exports are handled by their ETCs. With the ability under the new law to form an ETC or use the services of an American ETC, more U.S. companies can expand their markets, an advantage attractive to virtually any business.
The purpose of an ETC is to export goods and services produced in the U.S. by the ETC's members or third persons. Under the Export Trading Company Act, entities eligible to participate in an ETC include domestic and foreign individuals, partnerships, associations, corporations, or similar organizations (whether operated for profit or as a nonprofit). The law itself contains little in the way of organizational requirements. Issues of control, what happens upon dissolution, capitalization, structure, compensation, and others are principally matters of business judgment as they are in the formation of any new company.
The ETC Act is designed to benefit exporters in three basic ways:
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by creating OETCA, an office extending a variety of services designed to facilitate increased export volume;
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by permitting various banking entities to infuse ETCs with capital; and
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by protecting much export-related conduct that would otherwise be prohibited by the antitrust laws. The last of these benefits should be of specific interest to the scrap processing industry, particularly since it is not necessary to form an ETC to enjoy the antitrust immunity conferred by the ETC Act.
Government at Your Service
The OETCA's mission is to promote ETCS. To accomplish this goal, the Office supports a network of International Trade Administration (ITA) District Offices that serve as the point of first contact with American firms interested in expanding export activity. These offices provide information to exporters on forming and using ETCs, on the government's export referral and financing services, and on how to invoke the antitrust protections created under the Act. According to Department of Commerce publications, you can learn more about the following services from District Offices around the country or be referred by the local office, as appropriate, to staff in Washington:
Education: Representatives conduct conferences and workshops on ETCS.' Recently, at the April Board of Directors meeting in Washington, D.C., a representative spoke to ReMA's Foreign Trade Committee. Each District Office is responsible for setting its own schedule of educational events.
Business Counseling Service: A District Office can schedule an appointment for you with the counseling unit in Washington, D.C. In such a meeting you can learn how to get started, how to select support services, and what the trade practices are in a given country. Whether you will be able to get very specific market data will depend to a large extent on the resources available to the desk officer covering the country or industry sector of interest. ITA trade specialists in Washington can be contacted by phone.
Agent/Distribution Service (A/DS): This service provides a customized, on-site search for qualified representatives interested in handling your business. The U.S.-based office sends your request and information you supply to describe your products to commercial officers in U.S. embassies abroad. Using the commercial network in the country you designate, these U.S. officials circulate your request and collect the responses from foreign agents and distributors. For a fee of $90, you receive up to six names. Estimated turnaround time is 30 to 45 days.
World Traders Data Reports (WTDR): To get credit and other general business data on foreign firms, consult the World Traders Data Reports. The information costs $75 per firm, and estimated turnaround is 30 days. If the last review of the firm was performed over six months ago, a new investigation is performed. Frequently, this service is used to investigate further those firms identified in an A/DS inquiry.
Foreign Trader's Index (FTI): This listing covers foreign firms in a given industry Over 140,000 entities, including importing firms, agents, distributors, service organizations, manufacturers, retailers, and end-users of American exports in 143 countries are identified. Specialists at U.S. embassies obtain information for this data base and code the firms by U.S. SIC codes. The SIC code is a classification system originally designed for use in the U.S. for gathering economic data. (If properly coded, SIC categories for some of the most likely end-users of scrap materials are 2631—Paper Mills, 331—Steel Mills, 332—Iron Foundries, 3341—Nonferrous Secondary Smelting, and 336—Nonferrous Foundries.) Information is provided from this data base through Export Mailing List Service (EMLS) or the Commercial Information Retrieval Service (CIRS). A tailor-made list of potential customers based on your specifications such as country, industry sector, and business activity gives you the name, address, key contact, telephone, cable, and type of business. The cost is a flat $25 access fee plus 25 cents per record found. The requester specifies the format for the information: mailing labels, computer tape, printout.
Contact Facilitation Service (CFS): This information service allows you to conduct a search for a partner to form a new ETC or use an existing one, or to register your interest as an exporter for others to retrieve. To locate potential partners to form a new ETC or use an existing ETC, the OETCA operates a computer "dating" service. Registration in the data base is free. (CFS Application forms are available in ITA District Offices.) The fee for a data base disk is $20. ITA published a hard copy directory of registrants in 1987, entitled, "Partners in Export Trade Directory." Over 4800 U.S.-based companies such as manufacturers, export trading companies, export management companies, banks, accountants, attorneys, freight forwarders, and service organizations are included. Scrap processors might use the directory to locate existing trade facilitation firms that provide the services of an in-house export department, to promote their interest in exporting, or to identify potential export financing sources.
Exporters Licensing Service: This service helps exporters to determine what licensing requirements are applicable under the Export Administration Act regulations. Virtually all exporting is subject to license requirements, but not all licenses are alike. The exporter needs to know whether the good is controlled or, like some forms of metallic scrap, is subject to advance approval under a so-called validated license. If you call 202/377-4811, this office will tell you if an advance, validated license is necessary; or, the office will respond in writing within 10 days of receiving your written request. (Office of Export Licensing, PO. Box 273, Washington, D.C. 20044.)
These and other services available from the government are detailed in "A Basic Guide to Exporting" (003-009-00487-0, $8.50). Further background material on forming an ETC is published in "The ETC Guidebook" Revised August 1987 (003009-00523-0, $8). Exporters who want to receive the latest information from the U.S. Government Printing Office (GPO) on export-related publications can add their names by writing Priority Announcement List (N524), Superintendent of Documents, Mail List Branch, Mail Stop SSOM, Washington, D.C. 20402-9374.
Money, Money, Money
Title 11 of the ETC Act liberalizes many rules that prevented, banking organizations from becoming more involved in export trade activities. Of course, a scrap processor or recycler needs to know less about these changes than does a bank official. Most discussions of Title 11 use the terminology "bank holding company" (BHC) to include bank holding companies, their "Edge Act and Agreement" subsidiaries, bankers' banks, and foreign banks.
The pertinent features that affect anyone who might ask a bank to become an equity partner in an ETC are:
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A BHC can invest in an ETC that meets the statutory definitional requirements for an ETC as stated in Title 11. The purpose of the definition and other Title 11 restrictions on BHC participation is to provide adequate separation between the BHC's role in export trade and its deposit-taking functions.
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A BHC's investment in and extensions of credit to an ETC are limited to stated percentages of its capital and surplus.
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A BHC must notify the Federal Reserve Board (FRB) and obtain its approval to invest in an ETC.
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If the ETC engages in certain transactions like taking a position in commodities, securities, or foreign exchange, the FRB can require the BHC to end its investment or comply with certain conditions.
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Services performed by an ETC formed with a BHC are limited to only those defined in the statute as "export trade services." These services do not include acting as principal, agent, or broker on risks located or activities performed in the U.S.
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The BHC/ETC must be engaged exclusively in activities related to international trade and operated principally for purposes of exporting U.S. goods or services. "Principally" means that more than 50 percent of the BHC/ETC's revenues are derived from exporting measured over a consecutive two-year period.
The ETC Act also assists exporters' search for money by expanding the amount of bankers' acceptances that a bank may have outstanding. Title 11 raises the limit from 50 percent of its capital and surplus to 150 percent. This new flexibility should help not only in obtaining funds outright, but also in financing the storage of goods and refinancing sight letters of credit.
In a third manner, the ETC Act improves access to capital for exporters. The Export-Import Bank (Eximbank) administers a new program known as the ETC Loan Guarantee Program. The program provides access to working capital loans for creditworthy ETCs and other exporters that otherwise would not have been provided without Eximbank's assistance and without which the exporter would not have been able to expand exports. Eligible lenders are any financial institution or other public or private creditor applying for the ETC Loan Guarantee. Eligible loans are specific loans or revolving lines of credit. To avoid competition between Eximbank and the Small Business Administration's (SBA) Export Revolving Line of Credit Program (ERLC), the guarantee applicant (creditor) must state why the loan cannot be guaranteed by SBA. The loan applicant must give adequate reasons why the loan would not be made without Eximbank's guarantee and provide evidence it approached, and the reason it was turned down by, SBA or a private institution. The guarantee will generally have a term of from 1 to 12 months, will cover up to 90 percent of the principal amount and interest up to the lesser of the stated loan rate or 1 percent above the U.S. treasury rate for comparable maturities up to the default date. Eximbank requires that the lender be secured with inventory of exportable goods or export accounts receivable or a combination of both, so long as the security has a value determined by the lender and Eximbank of not less than 110 percent of the outstanding loan balance.
The new ETC Loan Guarantee program is in addition to existing loan programs of Eximbank (Small Manufacturers' Discount Loan Program, Medium Term Credit Program, Export Credit Insurance Program, Commercial Bank Guarantee Program) and the Small Business Administration (Export Revolving Line of Credit, Regular Business Loan Program, Small Business Investment Companies).
Conquering the Fear of Antitrust
The single most dramatic feature of the Export Trading Company Act is the antitrust protection it makes available to businesses, regardless of whether they even form an ETC. The protection takes the form of a certificate issued by OETCA (with Justice Department concurrence) approving proposed activities in connection with exports as consistent with criteria in the Act. Conduct which would be a classic antitrust violation if engaged in by competitors in the domestic market (such as allocation of customers or markets or agreed pricing) can be largely immunized through this procedure.
In the first five years of the ETC program, 82 certificates conferring antitrust immunity for export activities were issued, including four each to individual trade associations and shipper associations. OETCA Director John Stiner offers four major reasons why more applicants have not sought certificates: economic factors such as a strong dollar, debt problems in developing nations, and slower growth rates among our trading partners; overcoming inertia resulting from years of tough antitrust enforcement; the need to overcome legal doubts with judicial support; and a lack of awareness.
What is it that American businesses have been missing? An opportunity to apply for and receive an export trade certificate of review that gives immunity from federal and state antitrust liability for specific export activities and significantly reduces the risks of private antitrust suits.
Eligible applicants include any individual or legal entity that is either a resident or citizen of the U.S. A foreign firm cannot apply. However, if that foreign company is a member of an ETC, it can be protected under the ETC's certificate for covered conduct.
Eligible conduct includes "export trade" and "export trade activities and methods of operation," as defined in Title III. "Export trade" means "trade or commerce in goods, wares, merchandise, or services exported, or in the course of being exported, from the United States ... to any foreign nation." It is important to distinguish production or manufacture of export goods in the U.S. from export trade activities: the production or manufacture is not eligible conduct. The term includes services such as the sale and shipment of goods abroad, advertising, international market research, joint trade promotion, financing, processing of foreign orders, and negotiating export contracts with foreign buyers. "Export trade activities and methods of operation" is defined as "activities or agreements in the course of export trade." Agreements can include those among members of a joint export group (not necessarily a formal ETC) on allocations of export shipments, on price setting and other terms and conditions of sale for or in foreign markets. If the agreement involves nonmembers, the certificate's protection will cover only members of the applicant identified in the certificate. Specified methods of operation might include using exclusive or nonexclusive export distributors, the manner in which export prices will be established, how business information will be exchanged among members, and restrictions on members' activities in export markets or upon their withdrawal from the organization.
The statute contains four standards for reviewing applicants' proposed conduct. The OETCA, with the concurrence of the Justice Department, will certify export proposals if the applicant demonstrates such conduct will result in
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no substantial lessening of competition or restraint of trade,
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no unreasonable price effects,
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no unfair methods of competition, and
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no resales in the United States.
It is important to note that the focus of the government's evaluation is on anticompetitive effects in the domestic rather than the foreign market.
Anyone considering an application should read the most current edition of "Guidelines for the Issuance of Export Trade Certificates of Review" issued by the International Trade Administration, U.S. Department of Commerce. (50 FR 1804-12, January 11, 1985). Not only do these comments illustrate the type of analysis that the two agencies will use to evaluate industry structure, market structure, and proposed forms of vertical and horizontal restraints, but it is also probably one of the most thought-provoking documents to aid you in visualizing the specific outlines of your planned enterprise before you meet with OETCA's counselors.
The OETCA Challenge
John Stiner's team of trade specialists, economists, and lawyers is ready to help you boost your export sales in America's big win-win game. Says Stiner, "If the attitudes derived from being domestic competitors can be set aside for the business of exporting, firms can join together to compete more effectively ... overseas.... The full potential of the ETC Act has not been exploited by American business. … Promotion efforts by the federal government and willing minds in the business community are essential to reaching that potential." ("Export Trading Companies After Five Years," Business America, October 12, 1987.)
How Title III Stacks Up
Once American businesses overcome their timidity, they may come to trust the antitrust protection in Title III of the Export Trading Company Act. But how does Title III stack up to other legal options?
To appreciate how potentially superior the Title III immunity for joint activity is to the legal alternatives, consider each of the specific protections it affords. Applicants' members are assured virtual immunity from U.S. and state criminal and civil antitrust and unfair competition suits contesting covered conduct. The risk of dubious private actions is lowered. Private action liability is reduced from treble to single damages. A shorter statute of limitations governs—two years. A challenger has to overcome the presumption that the certified conduct is permissible. (A denial and the reasons therefore are not admissible in an antitrust suit.) And, a prevailing certificate holder can collect defense costs, including attorney's fees, from the plaintiff. Also, a certificate can protect the planning phase, not just operations of an export enterprise.
An additional strength of the certification process is that it can be used in tandem with another major program designed to foster exporting: An ETC or other group seeking Title III certification can be structured as a Foreign Sales Corporation (FSC) or a shared FSC to achieve the associated tax benefits given exporters.
Without Title III, the very limited options for those businesses with planned export activity posing antitrust risks include forming a Webb-Pomerene association, forming a shipper's association, and/or obtaining a Department of Justice business letter of review. While circumstances exist in which one of these alternatives might be better, the associated shortcomings are many.
The Webb-Pomerene Act gives an antitrust exemption to associations engaged solely in the export of goods. In the 80 years of its existence, it is believe only 30 associations were ever formed because of the business community's anxiety over the scope of the antitrust protections. Webb-Pomerene differs from Title III certification in many important ways: it covers the export of goods but not services; it requires that the entity registered with the Federal Trade Commission be an association, not any person or single company; only persons engaged solely in exporting can form the association; there is no antitrust preclearance process; awards in private suits are not limited to single damages; and payment of attorney's fees or a winning defendant is not authorized.
Shipper associations have long been a permitted form of organization under transportation law. The Shipping Act of 1984 attempted to boost their popularity, allowing shippers to band together to negotiate agreements with ocean rate conferences. The hopes of Shipping Act drafters have not been realized because of lingering uncertainty over antitrust exposure that the "business review letter" process does not fully address.
Justice Department "business review letters" and FTC "advisory opinions" allow either agency to state their enforcement intentions concerning your proposed export conduct in a document that is not legally binding. They do not preclude private or state enforcement actions, although no conduct receiving a favorable business letter of review has yet been successfully challenged by private action.
A fair assessment of the certification process requires examination of its several disadvantages. A certificate offers no protection from foreign trade laws. Persons not named in the certificate and conduct outside the certificate's scope are unprotected. Certificates obtained by fraud are void from the start. Substantial time is involved in planning and preparing the application and meeting with OETCA counselors to assure the smoothest possible processing. The minimum time required for approval is 30 days from the required
Federal Register publication of an application summary drafted by the applicant. More often, the time is 90 days if no requests for further information are made. Applicants will be disclosing confidential business information; that which is submitted in connection with the application itself is not subject to Freedom of Information Act discovery. However, the application summary and the actual text of the certificate are available to the public.