Export trading companies are slow to catch on with US banks
The United States experiment with export trading companies (ETCs) is earning only mixed reviews four years after its inception. Nonetheless, experts say the concept has produced gains in some cases.
The idea -- promoted by lawmakers in Washington and by business groups as a move to unleash United States export capabilities -- is failing to attract an essential component of the original plan: America's multinational banking titans. Bankers are generally not yet enamored of the trade innovation.
Washington reckoned that if banks' financial power were grafted onto export expertise, a much greater volume of overseas sales would be tallied by small-to-medium-size firms.
``We understood that most companies [interested in exporting their products abroad] were too new to the whole trade game,'' says William Reinsch, a trade expert on the staff of Sen. John Heinz (R) of Pennsylvania. ``They needed money, tips on all the `how-tos,' and some intelligence on risk analysis in a particular country. Small business needed a real foundation that was lacking.''
Senator Heinz and others hoped that by coupling major banks' financial resources and overseas networks with the commercial process, a whole host of marketing and distribution tools would become available to US exporters.
In 1982 Congress enacted the Export Trading Company Act, which permitted banks to form ETCs. Since then, however, a scant 50 to 60 banks have filed the necessary applications with the Federal Reserve Board. Some 300 to 320 US banks could qualify to form an ETC.
Not that the bankers have stayed completely aloof. Some appear to be scoring modest gains. One giant, Chase Manhattan, has a roster of more than 200 companies that its ETC serves as an export agent. Security Pacific Bank is faring well. Bank of America has had some success from recent excursions into the trading-company realm.
Many banks, however, are sour on their forays into exporting. Sears First Chicago has trimmed its early expectations substantially; its ETC lost more than $20 million during the past 18 months. But its purchase of Hagemeyere N.V. (a Dutch general trading company) could assist in East Asian and European plans.
Such alliances and mergers may be the route to ETC success, argues Ralph Chu, a leading exporter in New York City. Banks should form joint ventures with established trade houses, he maintains, rather than trying to set up their own export enterprises from scratch.
Before the ETC era, a different approach -- export-management companies -- had existed. Those entities were hardly a factor in trade, for in those days few US small-to-medium-size companies even thought about the potential in foreign exports.
One weakness among many export-management companies was their inability to take title to merchandise. The 1982 law corrected this flaw as far as an ETC itself goes, but questions remain over whether regulations allow banks themselves to take title to export goods.
Critics of the export-trading company plan felt that American ETCs would be lame copycats of Japan's heralded soga shosha -- the big trading powerhouses exemplified by Mitsui, Mitsubishi, and C. Itoh.
In the deregulation hoopla that has swept US business, ETC supporters were able to leap past some traditional antitrust barriers. Provisions of the law allow a trading company to handle market research, insurance, and licensing for companies that would otherwise be deemed competitors, and even to create joint ventures between such companies. Virtually all aspects of sales also are covered. Any number of smaller businesses can be pooled under a single umbrella.
``The flexibility is a major benefit,'' says Dennis Unkovic, a Pittsburgh lawyer who has followed ETCs closely over the years.
Some critics charge that overly cautious administration of the law places impediments in the way of bankers seeking ties with fledgling ETCs. The Fed's approval process is sometimes portrayed as slow, and regulations governing ETCs include methods of financial calculation that are a disincentive to would-be participating banks.
For example, a 50 percent rule on import-export balance aims to prohibit what the Fed considers a boon to imports. Countertrade is treated as just that -- and supposedly runs against the grain of an ETC's purposes.
``It's hard for some companies to reach the 50 percent level on straight exports,'' argues James V. Lacy, an official at the US Commerce Department who oversees ETCs. ``This is a burdensome regulation.''
A nonregulatory stumbling block: Some banks are geared toward getting customers for their own ends rather than promoting the quest for global trade.
``I'm not sure if the values we place on ETC performance are realistic,'' says Barry Owen, director of Vextrac, an ETC chartered by the Hampton Roads (Va.) Port Authority. A range of products -- from peanuts to manufactured steel items -- are sold abroad under the Vextrac umbrella. ``ETCs are catalysts, and we are introducing small business to trade.''
Still, as trade expert Reinsch notes, ``The ETCs have opened doors'' for trade-minded companies.