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Step-by-Step Guide to Exporting – Step 6 – Opening the door: entering your target market

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It's very important for new exporters to partner with someone who's familiar with the local business culture.

– Export Award Winner

Table of Contents

6.1 Understanding entry strategies

Developing a market-entry strategy simply means finding the best methods of delivering and distributing your goods. Or, if you're exporting services, it means setting up ways to obtain and manage contracts in the foreign country.

Global Affairs Canada has trade commissioners across Canada who can:

6.2 Refining your entry strategy

You've chosen the most promising markets for your product or service. Now, based on your market research, you must decide which entry method best suits your needs.

Some factors to consider:

6.3 Methods of market entry

The traditional means of market entry fall into four broad categories: direct exportsindirect exports, partnerships and acquisitions/investments. We'll examine each of these and then look at the question of intermediaries: agents, distributors and other go-betweens.

6.3.1 Direct exports

For products, you market and sell directly to the client. For services, you negotiate, contract and work directly with the client.

Advantages of direct exporting

Disadvantages of direct exporting

6.3.2 Indirect exports

For products, you market and sell to an intermediary such as a foreign distributor. You can also retain a foreign agent or representative who does not directly purchase the goods.

For services, you contract with an intermediary who then negotiates and contracts on your behalf.

For many new exporters, an intermediary may be the best way to enter a market.

Tip

Consider short-term trial contracts to test-run the arrangement and ensure it will do what you are seeking.

6.3.3 Partnerships

You might find it advantageous to partner with a local company whose strategic position complements or enhances your own. A well-structured partnership can benefit both parties in the following ways:

You develop a partnership strategy in three steps:

  1. Decide whether or not a partnership can work for you. If your needs can be satisfied in-house, a partner may not be necessary. If you need financing, you may be better off looking for investors. But if you require special expertise or a local market presence, then a partnership might work very well.
  2. Define the form, structure and objectives that a partnership must have to suit your needs. To do this, evaluate your company's goals, its ability to achieve them and where you need help in doing so. Then identify how the partnership must work in order to fill in those gaps.
  3. Find a partner who meets these criteria and who will be a good "fit" with your company. It is very important to select a partner that has the values and approach to businesses that match your own for a partnership to be successful.

There are several different forms of partnerships. The primary options are:

Using the expertise of lawyers, accountants, bankers and other professionals is vitally important when setting up any type of partnership.

All parties must be absolutely clear on who holds which rights and which responsibilities.

Tip

Plan your alliances carefully and pay attention to the qualifications of a foreign agent or distributor. The TCS can help vet your potential partner. Talk to a trade commissioner to request a bona fide check to qualify the contact.

6.3.4 Acquisitions and investments

A partnership isn't the only way to tap into the resources of a foreign company. Acquiring a firm in your target market, or making a substantial investment into one, can achieve the same results.

Through acquisitions and investments, you immediately gain access to the local market, as well as patents and other intellectual property, resource availability, access to capital, specialist expertise, proprietary technology and product differentiation.

You may also enjoy lower operating and production costs in your foreign operation than at home.

Working abroad

Exporters of services should be aware of the personal and business issues involved in working outside Canada. Global Affairs Canada publishes Travel Advice and Advisories to tell service exporters about potential problems, visa requirements and how to best handle issues that arise.

6.3.5 Selling to foreign governments

Foreign governments can present a rich source of contracts for exporters. The United States government alone procures more than $500 billion in goods annually. Canada Business provides information on how to navigate foreign government procurement and has services to help you succeed.

To help Canadian businesses sell to foreign government customers, the federal government established the Canadian Commercial Corporation (CCC), a Crown corporation that acts as Canada's government-to-government contracting organization.

Canadian businesses can navigate complex government procurement markets abroad with confidence with CCC at their side. CCC is a trusted Government of Canada partner that offers companies services that reduce risk, improvx`e their access to prospective buyers and differentiate their offer with CCC’s government to government contracting approach and guarantee of contract performance.

CCC also specializes in contracting with the U.S. Department of Defense (U.S. DoD). All U.S. DoD contracts over USD $150,000 are contracted through CCC based on DFARS 225.870. For more information, visit the CCC’s Department of Defense page.

Your opportunities for selling to the U.S. government aren't limited to defence and aerospace, of course. Global Affairs Canada’s Sell2USGov provides a detailed explanation of U.S. government procurement and how you may be able to take advantage of it.

6.3.6 Selling to multinational corporations

To sell goods or services to foreign corporations, it is essential to conduct research to understand their supply chain sourcing practices. Incorporating the mechanism by which you access the supply chain should be considered in developing your market-entry strategy. Corporations have different sourcing needs, practices, guidelines or entry points to their supply chain. Some approach their supply chain management in terms of Tier 1 and Tier 2 suppliers, for example, with Tier 1 suppliers selling directly to the corporation and with Tier 2 selling to Tier 1. Also, some require their potential suppliers to register their business on an online portal for consideration. Many multinational corporations also have corporate supplier diversity initiatives to source from women, minorities and other groups that are traditionally underrepresented in supply chains. For these initiatives, the key contacts and process for entering the supply chain are typically different (i.e. potential requirement for certification). This, however, does not preclude designated groups from accessing other parts of the supply chain; it is simply a unique entry point that may provide them with a competitive advantage.

You may be wondering where to start in understanding the complexities of accessing corporate supply chains. Information on websites, talking to corporate representatives in Canadian subsidiaries, or meeting with representatives during business fairs or networking events can shed light on sourcing needs and practices. The Canadian Trade Commissioner Service can also assist with providing business intelligence and qualified contacts. If you are part of a Canadian women-owned business, contact the TCS’s Business Women in International Trade Program.

Customer success story

Canadian businesses AND TCS working together – TCS led this device development company into the U.S. Northeast and beyond thanks to the Canadian Technology Accelerator.

Watch the video

6.4 Free trade agreements: understanding the role of trade policy in reaching your export and investment goals

6.4.1 Navigating the global trading environment

The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) is a landmark agreement that provides Canadian exporters with guaranteed preferential access to the world’s second largest economy and Canada’s second largest trading partner after the United States. Visit the CETA Portal for key insights into regional and sectoral benefits, as well as market-specific overviews, testimonials from Canadian businesses, and upcoming CETA events and webinars.

The global trading environment has become increasingly complex. The World Trade Organization (WTO) has provided an effective foundation for establishing and enforcing global trade and investment rules. In addition to pursuing their interests in WTO forums, WTO member countries have increasingly sought out other tools to generate opportunities and ensure fair treatment for their businesses, as well as create advantages relative to competitors.

There has been a proliferation of trade and investment agreements:

So what is the trick to finding your way through all these agreements?

Global Affairs Canada provides information on Canada’s FTAs and other trade policy initiatives.

6.4.2 Advantages of FTAs

Canada’s free trade agreements (2016)

The Canada Tariff Finder is a free online tool that allows Canadian exporters to check the tariffs applicable to a specific good in a given foreign market, with a focus on countries with which Canada has a Free Trade Agreement.

The U.S. market is vast, complex and highly competitive, and can be intimidating to enter. But thousands of Canadian enterprises — small, medium, and large — have been very successful south of the border. More join them every year and there is no reason that your company cannot be among them.

Find useful information, tips and resources about entering the United States market in Exporting to the United States - A Guide for Canadian Businesses.

So what are some of the benefits of an FTA to Canadian businesses?

FTAs help our economy by:

Essentially, FTAs enhance Canada’s competitiveness and support business’ access to global markets.

Look at the North American Free Trade Agreement (NAFTA) as an example.

NAFTA:

Since NAFTA’s implementation in 1994, Canada-U.S. trade has increased nearly 173%. Over $2.4-billion worth of goods and services now cross the border every day, and some 2.5 million jobs in Canada depend on Canada-U.S. trade.

6.4.3 Market access for goods: an FTA’s ‘bread and butter’

Parties to an FTA commit to reduce or remove trade barriers for goods.

Not all tariffs are eliminated immediately upon entry into force of an FTA, as countries seek to protect sensitive products or mitigate the effects of tariff elimination by phasing out tariffs over a defined period. The tariff outcome of each FTA is reflected in the parties’ tariff schedules. The modalities for tariff elimination are outlined in the National Treatment and Market Access for Goods (NTMA) chapter.

All of Canada’s FTAs seek to secure the best possible market access outcome for our producers, manufacturers and exporters, while taking into account Canadian sensitivities. Naturally, our trading partners are seeking to do the same for their stakeholders.

That’s why it is important for you to be able to understand the implications of these FTAs for your business.

For example, the existence of an FTA between two countries does not automatically mean that a good exported from one country to the other will not be subject to duties. To take advantage of preferential market access provided in a particular FTA, a good must meet the rules of origin set out in that agreement. Therefore, you need to be aware of:

  1. The product’s tariff classification under the Harmonized System (HS) Code, which will allow you to identify the applicable tariff rate.
    1. While HS codes are harmonized internationally up to the sub-heading (6-digit) level, each country differs at the domestic nomenclature level. In Canada, the domestic nomenclature is eight digits while other countries may be longer.
    2. The Government of Canada offers a HS database search engine tool to help you find the appropriate six-digit level HS code that best describes your product used anywhere in the world
  2. The tariff rate that applies to your products in the countries you are targeting.
    1. It is also useful to know whether your key competitors from other countries benefit from a lower tariff rate.
  3. Whether the tariff rate is being reduced or eliminated for Canadian products as part of a free trade agreement between Canada and the country in question.
    1. If so, the staging category for your products will determine if a tariff is being eliminated immediately upon entry into force of an FTA or if it will be reduced or eliminated over a defined period.
  4. Whether other tariff treatments apply to your products, such as tariff rate quotas, whereby products within a specified quantity are eligible for a preferential tariff rate.
  5. Whether safeguards (a temporary re-imposition of tariffs to protect a local industry against import surges) could be applied to your products.
    1.  Safeguards are typically applied only in exceptional circumstances for certain products as permitted under the WTO or an FTA.
    2. You can contact the country’s Customs Authority for more information on any safeguards that are in effect in that country.
  6. What Rules of Origin (ROOs) apply—both the general ROOs that appear in the body of an agreement’s text, as well as the Product-Specific Rules of Origin (PSROs) in the annex.
    1. If your products do not meet the ROOs, they will not be eligible for the preferential tariff rates from the FTA.
    2. Meeting the ROOs in one of Canada’s FTAs does not mean that you meet the ROOs in another. You need to look at the specific provisions of a particular FTA.
  7. What are the origin procedures outlined in the FTA (e.g. who can apply for an advance ruling on origin and how).
    1. An advance ruling can be a key tool. It can give you an idea of how your product will be treated by the importing party even before the product has left Canada.

Note

6.4.4 It’s not just about tariffs

Examples of non-tariff measures

Technical regulations

Related processes and production methods

Standards

Conformity Assessment Procedures

Sanitary and Phytosanitary Measures (SPS)

Import and Export Restrictions

Internal Taxes

Customs Valuation

There are three important trends to note regarding tariffs and global trade:

  1. Overall, global tariffs have decreased as a result of unilateral tariff reductions as well as WTO agreements. Bilateral and regional trade agreements also provide for the elimination or reduction of tariffs, but only on a preferential basis (e.g. only for goods originating from each party to the agreement).
  2. Because tariffs have generally decreased, there has been an increased focus on non-tariff measures that can affect trade (known as non-tariff barriers). These measures are permitted to meet legitimate public policy objectives, but governments need to ensure that they are the least trade-restrictive option necessary to achieve those objectives. The goal is for regulations to be in place to protect the public, while at the same time allowing trade to flow.
  3. Modern FTAs increasingly address not only tariffs, but also non-tariff barriers that are restricting or distorting trade.

6.4.5 Let’s get back to the rules

What are some of the shared objectives in strengthening rules around trade and investment in an FTA? Generally, FTAs aim to:

We recognize that with increased trade in the digital environment, more extensive global value chains, rapid integration of emerging economies and higher risks associated with intellectual property protection, among other challenges, companies like yours need clear, effective and predictable rules in targeted markets.

It is important for you to be aware of the provisions related to these issues in a trade agreement. Understanding what the rules are and how they can help you, will go a long way in ensuring you maximize the benefits of an agreement.

For example, free trade agreements typically contain provisions related to the following subjects:

National Treatment and Market Access for Goods (NTMA)

Electronic commerce (e-Commerce)

Specific competition issues, such as state-owned enterprises (SOEs)

Investment

Customs administration and/or trade facilitation

Cross-border trade in services

Temporary entry of business persons

Intellectual property (IP)

Note

  • Provisions in specific chapters will outline what is covered by the obligations of the agreement, what new access is permitted and how exporters and investors are to be treated in the market.
  • Technical summaries, usually by chapter, are available on Global Affairs Canada’s website for certain FTA negotiations that have recently concluded (e.g. the TPP and CETA) or certain agreements that have recently entered into force (e.g. Canada-Korea FTA).
  • These technical summaries are an excellent source of information on the key elements of an FTA, presented in a way that is easier to “digest” than the full legal text.
  • As examples, see the technical summaries of the Trans-Pacific Partnership (TPP), the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Canada-Korea FTA.

6.4.6 What else do you need to know?

Exceptions and reservations

Just as you need to familiarize yourself with the market access benefits associated with free trade agreements, you also need to be aware of the exceptions and reservations—in other words, what is not covered by an agreement.

There are also issues that are beyond the scope of trade agreements, such as visa requirements, immigration and permanent employment.

Recognizing the limitations of an agreement can be just as important as being aware of the new market access the agreement affords.

Administration of the agreement

Information on how an agreement’s rules will intersect with those of other agreements (i.e. the agreement’s relation to other agreements) is typically contained in an agreement’s Initial Provisions and General Definitions section. This section, along with any preambular language, is a good starting point for understanding the overall objectives of the agreement, as well as familiarizing yourself with the terminology used in the text.

What can you do if you believe your business is facing unjustified barriers to trade or investment?

Report the issue to your Trade Commissioner in market, providing as many details as possible.

Additional sources of information

The World Trade Organization (WTO) website is a good source of information on the multilateral trade policy framework:

Spotlight

Being aware of the rules and regulations in your market of interest is a great way to manage risk and save money.

For more resources on foreign standards and how your business can benefit from them consult the Trade Commissioner Service’s (TCS) Spotlight on Free Trade.

6.5 Evaluating the use of intermediaries

Before you jump on a plane and start knocking on doors, think about using an intermediary. The right one can save you an enormous amount of time and money. There are several types: agents, representatives, trading houses and distributors.

6.5.1 Agents and representatives

Agents and representatives aren't exactly the same. An agent secures orders from foreign customers in exchange for a commission. A representative specializes in sales within a specific geographic area.

Both types of intermediaries may be authorized and commissioned to enter into contractual sales agreements with foreign customers on your behalf. This is usually less costly than setting up your own direct sales operation. Such an arrangement also gives you control over the price of your product or service—an important advantage.

Tip

Do your due diligence on a potential agent or representative to make sure they will serve your interests. For example, to ensure that they aren't pushing for an exclusive relationship just to keep your product or service out of the market. Consider negotiating a trial period.

Good foreign agents or representatives can research markets, advise on financing and transportation options, clear goods through customs, provide access to potential customers, make collections and supply information on local business practices, laws and cultural traditions.

6.5.2 Trading houses

Trading houses are domestic intermediaries that market your goods or services abroad. A full-service trading house handles a great many aspects of exporting, such as market research, transportation, appointing distributors or agents, exhibiting at trade fairs and preparing advertising and documentation.

Some trading houses act as "principals" or "export merchants," buying products outright from Canadian suppliers, while others act as "agents," selling on commission.

If you prefer not to sell directly to foreign customers or worry about finding a foreign intermediary, you might consider using a trading house.

Tip

Treat foreign agents or distributors as true partners and equals to domestic distribution channels.

6.5.3 Foreign distributors

Unlike agents, distributors actually purchase your product or service and resell it to local customers. Often, they set the selling price, provide buyer financing and look after warranty and service needs.

A bonus is that the distributor can usually provide after-sales service in the foreign market. On the other hand, using a foreign distributor may reduce your profit margins and result in a loss of control over your product and/or price.

6.6 Selecting the right intermediary

You can obtain information about potential intermediaries from the Canadian Trade Commissioner Service in Canada and abroad, as well as from Canadian and foreign trade associations, business councils and banks.

Before you meet in person, talk to several firms and then carry out your due diligence to make certain they're reputable. You can also protect yourself by entering into a limited term trial agreement.

To evaluate a prospective intermediary in detail, use the questionnaire below.

Customer success story

Canadian businesses AND TCS working together – TCS assisted this Quebec-based automotive safety company to get into gear to take on two new markets.

Watch the video

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