What Is an Export?
Exports are goods and services that are produced in one country and sold to buyers in another. Exports, along with imports, make up international trade. Instead of confining itself within its geographical borders, countries often intentionally seek external markets around the world for commerce, allowing greater revenue and transactional opportunities.
Key Takeaways
- Export refers to a product or service produced in one country but sold to a buyer abroad.
- Exports are one of the oldest forms of economic transfer and occur on a large scale between nations.
- Exporting can increase sales and profits if they reach new markets, and they may even present an opportunity to capture significant global market share.
- Companies that export heavily are typically exposed to a higher degree of financial risk.
- In 2021, the world exported nearly $28 trillion of goods and services, led by China ($3.5 trillion of exports).
Export
Understanding Exports
Exports are incredibly important to modern economies because they offer people and firms many more markets for their goods. One of the core functions of diplomacy and foreign policy between governments is to foster economic trade, encouraging exports and imports for the benefit of all trading parties.
Export agreements are often heavily strategic, with countries exchanging agreements to ensure their own country can not only receive the goods they need via export but can distribute goods for more domestic revenue via imports. Also, consider how governments may use exports as leverage over political situations. In response to the war in Ukraine, the White House issued an executive order prohibiting both the importation and exportation of certain goods from Russia.
Companies often measure their net exports which is their total exports minus their total imports. Net exports is a component of measuring a country's gross domestic product (GDP), so exports play a factor in determining a country's financial and economic well-being.
Good may be sent via direct exporting or indirect exporting. Direct exporting entails working directly with the importer. The exporting company will handle all of the client communication; as a result, they do not pay a middleman fee. Because the direct export method may require teams with specialized knowledge, many companies opt to contract out a middle party to facilitate an indirect export.
In 2021, the world exported almost $28 trillion worth of goods. $3.5 trillion of this activity came from China, the world's largest exporter.
The Export Process
In many cases, a country will partner with another country to understand the demand needs for certain products. Instead of blindly manufacturing goods and hoping for an international buyer, the export process often starts with the manufacturing country receiving an order. The exporting country must often receive proper clearance from their home country to export goods; this is often done by obtaining an export license or meeting other country-specific requirements.
The export process usually entails settling several financial matters upfront. First, the exporter may seek out a letter of credit from the importer if applicable. This ensures the exporter can have greater faith in the transaction and will receive compensation for the goods once exported. The exporter and importer also fix the exchange rate at which the exported goods will be exchanged at from the foreign currency to the home currency. At this point, an invoice is most often issued and paid for, finalizing the sale.
As the order is prepared, formal documents are gathered including a permit issued by the customers department, financial document such as a bill of lading and shipping documents are prepared, and and shipment advance information. These documents are remit to the seller; of primary importance is the shipment advance which notifies the importer how goods will be transmitted.
Trade Barriers and Other Limitations
A trade barrier is any government law, regulation, policy, or practice that is designed to protect domestic products from foreign competition or artificially stimulate exports of particular domestic products. The most common foreign trade barriers are government-imposed measures and policies that restrict, prevent, or impede the international exchange of goods and services.
Companies that export are presented with a unique set of challenges. Extra costs are likely to be realized because companies must allocate considerable resources to researching foreign markets and modifying products to meet local demand and regulations.
Exports facilitate international trade and stimulate domestic economic activity by creating employment, production, and revenues.
Companies that export are typically exposed to a higher degree of financial risk. Payment collection methods, such as open accounts, letters of credit, prepayment and consignment, are inherently more complex and take longer to process than payments from domestic customers.
Advantages and Disadvantages of Exports
Pros of Exports
Companies export products and services for a variety of reasons. Exports can increase sales and profits if the goods create new markets or expand existing ones, and they may even present an opportunity to capture significant global market share. Companies that export spread business risk by diversifying into multiple markets.
Exporting into foreign markets can often reduce per-unit costs by expanding operations to meet increased demand. Finally, companies that export into foreign markets gain new knowledge and experience that may allow the discovery of new technologies, marketing practices and insights into foreign competitors.
Cons of Exports
To export goods, countries may need to incur high transportation costs and the risk of loss due to the transportation of goods. If ownership of the goods does not pass to the buyer until goods are received, this may make the exportation unduly risky for the exporter.
Because of logistic and economic constraints, small and medium-sized businesses or governments may find difficulty in exporting goods. In addition, smaller companies often do not have the in-house personnel needed to potentially navigate international trade regulation. Exporting of goods is much more common for larger bodies with greater resources to seek out these outside markets.
Last, exporting to foreign countries may result in currency risk. Depending on exchange rate agreements at the time of contract, a foreign currency's worth may deteriorate, negatively affecting an exporter. Consider when one currency strengthens against another; if the exporter is to be paid in the currency whose value has depreciated, their export may be devalued. This devaluation may also occur based on extenuating tariffs or lower export prices.
Exporting
Pros
Often allows for greater economic activity leading to higher revenue
May result in production efficiencies due to scaling manufacturing
May result in greater innovation and R&D through working with foreign partners
May reduce operational risk in some areas as revenue streams become more diversified
Cons
May result in high transportation charges
May not be achievable by smaller entities due to lack of knowledge and resources
May result in currency exchange risk due to devaluating currencies
May increase operational risk in some areas due to unknown political or geographical risks
Real-World Example of Exports
Every year, the United States is usually one of the top exporters of automotive vehicles. As domestic companies manufacturer cars, trucks, and other vehicles, these are shipped around the world and used by non-U.S. entities.
In 2020, the Observatory of Economic Complexity reported that the United States was the world's third largest exporter of cars, distributing $47.6 billion of vehicles around the world. The United States distributed over $10 billion worth of vehicles to Canada, with other top being countries receiving U.S.-made vehicles being Germany, China, Belgium, and South Korea.
Alternatively, the United States was also the top importer of vehicles in 2020. It imported $144 billion of cars, most of which came from Japan, Canada, and Mexico.
Of the U.S. manufacturers that distribute goods around the world. BMW Manufacturing led domestic companies by the value of cars exported. In 2021, BMW exported nearly 260,000 vehicles to roughly 120 countries, an export total of more than $10 billion. 2021 was the eighth consecutive year that BMW Manufacturing led automotive exports by value, and more than 24% of the company's exports were delivered to China.
What Is Export Policy?
Export policy is the government legislation that dictates how, what, when, and with whom a country exports goods. Export policy defines the tariffs, customs requirements, and limitations on international trade for each country.
Is It Better to Export Goods Than Import Goods?
For each country, this answer will be different. In many cases, it is best to import some goods and export others. Each country is often more proficient in manufacturing certain goods based on their climate, citizen skillset, or access to raw materials. Therefore, it's arguably best for a company to manufacturer and export what it is more efficient at doing so and revert to importing other goods where it may be economically challenging to produce on its own. A great example is produce where certain countries simply have better arable lands and climate conditions to grow certain goods over others.
What Are the Largest U.S. Exports?
The United States largest exports include mineral fuels, machinery, vehicles, medical apparatus, and aircraft.
Who Is The World's Largest Exporter?
Based on most recent export information available for 2020 and 2021, China is the world's largest exporter, followed by the United States, Germany, France, and the United Kingdom.
The Bottom Line
An export is a good that is produced domestically but sold to a consumer overseas. Due to resource constraints, economic policy, and manufacturing strategies of each country, it sometimes makes more sense for countries to make goods to sell for revenue as opposed to retain for consumption.