International Sales: A Chance to Boost Biz

From the vantage point of Adam Briggs, a Godfrey Kahn attorney, it seems that every day there is a new Wisconsin company thinking about making its first sale to a customer overseas. The past five years have been the glory days for Wisconsin exporting, and despite the current economic environment (indeed, because of it), the ranks of exporting businesses in Wisconsin continues to expand.

Being part of it is not as daunting as you might think, but it does require a bit of homework from a legal compliance standpoint. Exporting companies have to be as concerned with U.S. trade laws as they are with foreign regulations, especially as international trade controls become more numerous and more complex and the penalties for a violation have been getting stiffer.

"Understanding these regulations is a critical part of success in the international market," said Briggs.

Those who dip their toes in the water will not be lonesome. Thanks to a 92% increase in exports since 2003, Wisconsin has become the nation's 18th largest exporting state. An estimated 6,011 companies export from Wisconsin locations, with small and medium-sized firms generating more than 23% of the state's total exports. While exports were down in the first quarter of 2009, Wisconsin generated $20.6 billion in export revenue last year (a 9.2% increase over 2007), led by industrial and electrical machinery, which accounted for 45% of exports.

Approximately $1.6 billion of state exports are generated from Dane County, with chemicals, machinery, computer and electrical equipment, and appliances and components leading the way. Dane County also is among the most productive agricultural counties in the state, consistently ranking in the top five for corn and soybean grain production, corn silage production, and total milk production.

The reason to export comes down to basic market economics, as 95% of the world's consumers live outside of the United States. Exporting products enables companies to diversify their portfolios and weather downturns in the domestic economy, and such companies also have higher growth rates in employment, output, and productivity, and lower failure rates.

"The number one [trade] opportunity for smaller companies is to have incremental and additional sales to a wider audience of nonWisconsin or non-U.S. customers," said Ken Wasylik, president of the Madison International Trade Association (MITA). "Initially, they can do it very effectively if they keep it narrow and simple and go after those opportunities on a very opportunistic basis."

Trade Agents

When it comes to testing international markets, the first step is to identify the requirements imposed by the U.S. on exports (both general and particular to your product). Step two is to identify the import requirements imposed by your target country, and the final step is to obtain the appropriate certificates.

There are three federal agencies that impact trade. The first is the Office of Foreign Asset Control (OFAC), an agency under the Department of Treasury. Since an overseas purchaser can be a government entity, a business, or an individual, OFAC's role is not specifically to restrict the export of products but to enforce government sanctions against restricted parties or countries. The U.S. restricts trade to several nations, particularly "rogue states" like Cuba, North Korea, and Iran, and to businesses or entities that are associated with terrorism, nuclear proliferation, and illegal drug trade.

OFAC keeps a complete list of all export restrictions to these countries on their Web site.

"You need to be careful about the businesses and individuals that you're working with overseas because in some cases, businesses may find out too late that they were dealing with a business that was heavily restricted by the federal government," Briggs commented.

The second agency that impacts trade is the Bureau of Industry and Security, or BIS, which is part of the U.S. Department of Commerce. The BIS is in charge of regulating exports, specifically products and in some cases technology, for any non-military good or non-military technology.

That's literally everything from high-speed computers to cotton T-shirts. Commerce does not require a license for all exports, but "you can't make a decision about whether you need an export license until you've identified what category the product fall into, and what country you hope to send it to," said Briggs, who noted that Commerce has a detailed chart to guide its judgments.

Even though it saves time, this is not a do-it-yourself exercise, he added. "If you're wrong, simply saying 'Boy, we thought we had it right' doesn't necessarily protect you from exposure to a civil penalty," Briggs said. "So you can also request that the Commerce Department tell you what category your product is, but that process can sometimes take several weeks or, in some cases, several months."

The third agency is the State Department's Directorate of Defense Trade Controls, which governs the manufacture and export of any good, technology, or service designed or modified for a military or defense use.

There are common trade mistakes that get people into trouble, including an error that frustrates manufacturers who make products for the U.S. military. If you manufacture anything — including small components — specifically designed or modified for military use (even if you do not export anything outside the country and sell only to the U.S. military domestically), you are still required to register with the State Department.

"That's an area that some businesses are surprised to learn about," Briggs said.

Exporting businesses may not realize that in the post Cold War era, the world map of export controls is a lot more complex and sometimes counterintuitive. In the Cold War era, nations either picked a super power to align themselves with or remained neutral. Today, CEOs can probably guess that exports to countries like China are more highly restricted than exports to Canada, but how many realize that exports to Israel, an ally and business partner of the United States, are actually more restricted than exports to China?

Similarly, how many people know that even with the 47-year-old Cuban trade embargo, there are two exceptions that play to Wisconsin strengths — medical supplies and agricultural commodities. "It's hard to say exports to country X are always fine, or exports to country Y are never okay," Briggs said. "It's so fact dependent on what's being sent to whom in what country."

At the moment, politics is rearing its ugly head even with allies. A deterioration in the United States' trading relationship with Mexico, one of the signatories of the North American Free Trade Agreement and Wisconsin's second largest trading partner, is a concern of Lori Barger, vice president and international sales manager for TRAEX, a food service company based in Dane that sells items like dish racks, napkin and straw dispensers, and food and bar trays overseas.

Due to concerns about the safety of Mexican trucks, the U.S. has banned them from traveling on its roads, prompting Mexico to respond with a tariff on dozens of American products.

Plastics is one of those products that has been slapped with what Barger called a punitive 20% duty, which puts TRAEX at a disadvantage with countries that have no duties on products exported to Mexico.

The situation is making it more difficult for U.S. exporters to fully leverage the NAFTA treaty, which is something Barger would advise any would-be exporter to do.

"In every company I've worked for in the past, our first step was always Canada," she stated. "I guess in this case, because of the NAFTA treaty, I would say Canada and Mexico. If you're going to start small, start with the neighboring countries and start with countries the U.S. has treaties with."

Briggs said the maximum per-shipment civil penalty, which would be for defense or military exports, is $500,000 per violation.

In some cases, even non-defense exports can yield maximum civil penalties of $250,000 per violation, or twice the value of the transaction, whichever is greater.

On the criminal side, the fines can rise to $1 million per violation, and they can even result in federal prison time.

According to the BIS, it has reached a settlement with Bruker AXS, a Madison-based manufacturer of X-ray systems. Bruker will pay a civil fine of $7,500 after voluntarily disclosing that it exported an X-ray system to the Karachi (Pakistan) CBW Research Institute at the University of Karachi's Husein Ebrahim Jamal Research Institute of Chemistry without a license. At the time of the 2004 sale, the institute was on the BIS's "Entity List," which requires an export license.

 

Trade Compliance

An organizational compliance program, complete with exporting checklists, can help prevent such errors. Educating key employees — particularly those involved with sales, business development, and shipping — on the rules and regulations of trade is a best practice, but it does not require a college degree.

An overlooked point is to train employees to recognize when additional guidance is needed from a superior or perhaps a business consultant or attorney.

Internal policies should make the company's export compliance expectations clear, and spell out the roles of sales and business development people in both compliance and finding new customers and markets. Policy development establishes lines that can't be crossed. It also can involve getting signed statements from key employees who are in sales or business development or shipping, essentially pledging that (1) they understand what can and can't be done according to export rules; (2) that they are required to seek additional guidance if they have questions, and (3) that they to be good stewards of the company's compliance policies.

Focusing on the character of a business, its products, and where international customers are likely to be is part of any decision-making process. Depending on the size of the business, trade policies often dictate the identification of a person of authority (usually an executive) that reviews any export going to a given country, oversees exporting processes, and serves as the organization's point person on export documentation.

Regulations not only vary by country, but by product and industry. Since the average international shipment involves 46 separate documents, and the specific documents required for any given shipment are different for every product and every country, the biggest difference between selling domestically and selling abroad is the amount of paperwork involved.

Perhaps the biggest mistake made by new exporters is not doing enough research about the country they wish to export to, the requirements for exporting to that country, and the buyer(s) they are looking to sell their product to.

Exporters must conform to the laws of two countries, not just one, and it can feel overwhelming at first to learn about all the rules and requirements and to keep up with all the documentation.

In times like these, the rules are a moving target. Barger (TRAEX) said her company's biggest issue is the changes in customs, particularly for food and food-related products. More countries are asking for written verification that TRAEX's food-service products are approved by federal agencies like the Food and Drug Administration. "They are asking for more and more back-up to prove that our product is going to be saleable for food service," Barger said. "We're getting our legal department more involved with compliance issues, and that is happening on a regular basis. Where it used to never come up, I'm getting new requests monthly."

Barger agreed that concerns about the safety of Chinese products might have something to do with new requirements, and speculated that "Buy American" provisions of the American Recovery and Reinvestment Act have led to more reciprocity-minded compliance requests.

In an era of shrinking government revenues, federal agencies are pushing compliance and policing costs onto businesses, but that has a silver lining.

Said Briggs: "We've found when businesses do have a true internal compliance program, and they have made an effort to educate their workforce and key employees about rules, and they do seem to have real robust, up-and-running compliance programs, the government will usually see that as an important mitigating factor that can reduce — or in some cases even eliminate — a penalty for a violation."

Market to Market

Economic concerns aside, there are some foreign economies where consumer demand is still on the upswing. China's growth has slowed, but it is still growing, while Japan is struggling. As a whole, Europe's economy is in about the same condition as the U.S., while some countries in the Middle East are holding their own thanks to petroleum sales. Brazil continues to be a leader in alterative fuels, especially ethanol and wind power, while Taiwan is stabilizing after a rough six- month stretch.

Globally, economic strength may be a mixed bag, but consider the possibilities represented by the so-called BRIC countries alone. Brazil, Russia, India, and China encompass 40% of the world's population and have a combined GDP of more than $15 trillion dollars.

Asia, in particular, loves U.S. products, but although China is Wisconsin's third largest trading partner, new exporters can expect a sometimes contentious trade relationship where intellectual property is concerned.

American companies have long accused China — which requires U.S. companies to sell copyrighted products to state-run or state-approved businesses — of software piracy and other forms of IP theft. That led to the filing of a formal complaint with the World Trade Organization, which recently ruled in favor of U.S. companies. China can appeal the ruling, or it may choose to drag its feet in implementing it.

Either way, Wisconsin software developers and music publishers should be aware that trade barriers remain.

"They don't follow or recognize intellectual property, so a lot of companies have run into issues where their products are copied there," Barger said. "I would say the barrier to entry in China is difficult."

Other considerations are the strength of the U.S. dollar — a weak dollar helps exports — and currency exchange rates, which can change quickly. Earlier in 2009, there was some flight to U.S. dollars that skewed exchange rates and made it very expensive for overseas buyers to purchase U.S. products with American dollars. More recently, exporters have seen a stabilization in the exchange rates, which is normalizing trade.

Exporting businesses may find it advisable to negotiate some protections for fluctuations in currency rates and tariffs.

Wasylik's advice to would-be exporters is to keep it simple and stay with dollars. "If you want to gravitate to their currency, keep it a hard currency like the British pound or the Euro or the Japanese yen," he counseled.

The Wisconsin International Trade Team (WITT), a collaboration of (1) Wisconsin Department of Commerce and (2) Wisconsin Department of Agriculture, Trade, and Consumer Protection, helps companies sell products overseas. Among WITT's services are assistance in obtaining export certificates and documentation, one-on-one consultations to help evaluate export potential, export education seminars, and buyer's missions.

The Department of Commerce also provides help with export plans, market assessments, and assisting companies that want to expand their existing export initiatives. The department, whose trade niche is the small- to medium-sized company that does not have its own international staff or department, also attends trade and catalog shows and coordinates the Governor's trade missions.

For exporters, taking the long view is practically required. "Exporting is something you have to make a commitment to," said Commerce spokesman Tony Hozeny. "It's about relationship-building over time."

Trade's Economic Multiplier

According to the USDA's Economic Research Service, every dollar of exports creates another $1.48 in supporting activities to process, package, finance, and ship agricultural products, so trade can play a role in moving the U.S. economy past the recession.

While the United States is still the largest market for TRAEX, international trade has been very lucrative. Barger, who noted that 20% to 25% of TRAEX's total sales are made overseas, said export markets often bring higher margin dollars. "I'm sure there are industries where they have seen some declining sales with exports, but I really believe that exporting is a very strong opportunity for the U.S. to get out of this economic crisis," she stated. "I really think that export business and global business is the answer to resolve a lot of our issues."