What are the risks of international trade?
The main objective of any global sales transaction is to exchange goods or services for money. However, there is always a risk that the seller or the buyer may not be able to fulfill his share of the contract. This reversal may be intentional or completely beyond the control of the parties. International trade involves many risks, which mainly slow down its growth. Commercial risks also exist in the domestic market. On the other hand, the impacts on world markets are much greater. The increase in exports is very profitable for the economy of a country. On the other hand, the increase in imports can be a considerable threat.
Although this sector actively contributes to the development of a nation, the multinational companies which reign in this market are sometimes so powerful that they influence the decisions of a government to their profits, especially in small countries.
Risks arising from international trade operations may include economic risks, political risks, commercial risks, currency risks, and other risks such as cultural and environmental risks. Ultimately, managing international trade risks is the main factor that determines the documentation and payment methods used by the importer and the exporter. On the other hand, variations in the purchase prices of raw materials or supplies, as well as an increase in wages, can jeopardize the profitability of a company that operates in foreign trade, especially for exporters.
The main risks related to export and importation
Even if technological progress has had an impact on the management of business risks, the nature of the risks linked to international trade has not really changed. Therefore, small businesses or startups planning to invest in this area should determine the common risks.
Quality and supply risk
When the goods do not conform to the quality or quantity required by the buyer, prices may drop, or worse, the contract may be terminated. For the importer, the sales or production objectives will not be achieved if the goods delivered do not have the expected quality or quantity. Major machine failure can be the cause, as this will affect the seller's products and provide a poor quality product.
Buyers may be unable to settle payments due to company bankruptcy or simply refuse to pay. This could also happen when the importer encounters unexpected financial difficulties and is no longer able to meet all financial obligations. There may also be misunderstandings, which would lead to the refusal of payment until clarified.
The risk of incomplete documents
It may be a lack of documents necessary for international trade such as invoices, bills of lading, or insurance. It can also be a lack of sales contract, which does not cover certain points by the laws or codes in force.
The risk of inadequate insurance
This is one of the biggest risks in this sector, as most small businesses tend to ignore it. Losses of goods in transit happen quite often, so this risk should not be taken lightly. In general, it is highly recommended to take out insurance of 110% of the value on the invoice.
Risk on the performance of a third party
If the buyer or the seller calls on third-party companies to fulfill certain obligations, their performance may represent risks. This could be, for example, a shipping company, shipping, and customs agency, a customs officer, or an inspection company.
The risk of delay and distance
The transportation of goods may take longer than expected, due to the distance between the seller and the buyer. Consequently, the risks of loss and damage are higher, leading to a risk of non-payment or late payment, especially if several companies are involved in the movement of goods. Transit risks also constitute a common danger for exporting and importing companies. This includes the risk of storms, collisions, theft, leakage, explosion, deterioration, fire, and flight on the high seas, etc.
Changes in transportation costs
Transport costs generally constitute a significant part of the value of the invoice, and therefore any change in transport costs affects the competitiveness of the exporter.
The risk of changes in exchange rates:
In general, sellers note the prices of products in the currency of their own books or in a currency suitable for both parties. Whether for the seller or the buyer, the fluctuation of exchange rates may have a major impact. When the importing company buys on credit in Euro, for example, and sells them in a local currency, it can lose a lot if the local currency depreciates against the Euro. Likewise, for the exporting company, if the latter invoices in Euro by keeping books in a local currency, it will also lose if the local currency gains value compared to the Euro. Even if a third currency is specified for the contract, both the importer and the exporter are subject to possible exchange rate fluctuations.
The risk of legal systems
This is undeniable because all countries have their own legal systems and adopt different import and export laws. In any relationship, however cordial and long-standing it may be, differences are likely to occur at any time. Taking legal action across international borders can be very difficult and quite costly. On the one hand, information about the client is quite difficult to obtain. On the other hand, if you want to sue a company in another country, you have to take into account the judicial system, the language of the hearing of this country, and even cultural differences and spending on international lawyers.
The manufacturing risk
This is a risk that mainly concerns the exporter when the buyer illegally modifies or cancels the order. For a good reason, the seller must find new buyers for partially or finished products. When this happens, the price is often lower than the price originally planned. It is also possible that the merchandise is no longer marketable since it is not adaptable to the specific needs of new buyers.
Risks of foreign countries
These are the risks relating to all events in the country of the buyer or seller, which are likely to affect the payment or supply of the goods. Risks related to foreign countries include political, social, and economic components, including the regulation of exchange control among buyers and sometimes the lack of foreign currency, adverse changes in government policies and laws, or the introduction of trade embargoes. In most cases, they involve the risk of non-payment internationally.
Commercial risks generally concern exporters. These are often caused by a lack of knowledge of the foreign market, the inability to adapt products to the requirements of buyers, the long duration of transit time for goods, and other factors quite difficult to manage. They also exist in the domestic market. However, their impacts on international markets are much greater. The fact is that changes in world trade are dangerous and almost impossible to anticipate. In addition, the acceptability of products is difficult to assess because of fluctuations in supply and demand conditions.
This is one of the major risks in international trade, yet it is a fairly broad term that relates to any form of war, unrest, or disorder that manifests in a country. This can happen very unexpectedly due to events of political violence, riots, or conditions of wars. Most often, due to a poor security situation or a blockade, the exporter can no longer supply the goods in accordance with the contract. For the importer, this kind of crisis can lead to an inability to pay.
When groups of professionals stop working, this will inevitably delay the delivery or entry into service of the goods. This can happen if employees of local transportation or service providers go on strike, affecting delivery. Buyers also may not be able to the country when such a case arises in their countries.
Boycott or embargo
Boycotting foreign trade can be a voluntary measure by the private sector or the state. This occurs when the importing country is subject to an international embargo covering certain products of a company. Consequently, it will not be authorized to supply the goods, even if there has been no fault on its part. Furthermore, following political events, the government of one country could impose a boycott of imports from another country, and this prevents delivery.
Seizure, damage or destruction justified by political decisions
Goods may be seized, damaged, or destroyed as a result of a political decision or influence. For instance, a case generally results from a diplomatic crisis or from reprisals between States. This can also happen when government agencies do not adequately protect their goods and consider their damage as a political act from the demonstrators.
Even importers should expect these risks in international trade because of the political situation in the country of the exporter, the contract cannot be fulfilled, but the goods are confiscated or can no longer be exported. The importer will surely lose the deposits paid. Besides, this means a waste of time, since new suppliers will have to be found.
The risk linked to the transfer
This is a risk that is difficult to pin down because it determines the impossibility of the importer to carry out international payment transactions. This restriction occurs as a result of government or legislative measures that limit or prohibit the export of foreign currency, which prevents the transfer of money abroad. Among the risks of transfers, there is the prohibition of payment imposed by law following a sovereign decision of a State on a particular debtor to make payments. It is not limited in time, and if this restriction applies to the buyer, then the seller will not receive any money from him.
Then, there is the Moratorium of payment in which the country of the importer temporarily suspends the payment of its commitments abroad or, and it postpones it at a certain time. In this case, it is a temporary non-payment that could be imposed during the negotiations of a debt agreement. Finally, there is the prohibition of the convention, by which the public authorities prohibit the conversion of the national currency into the currency of the exporter. Thus, the importer will not be able to pay even if he has the necessary funds. Although the contract is completed, the seller does not receive payment, despite the buyer's ability to pay. For the importer, it may also be affected by these risks in the country of the exporter if payment under guarantees is not possible or if advance payments cannot be refunded.
Currency risk concerns the risks that arise from currency fluctuations. If the two parties do not use the same currency, they must establish a contract currency, which is always a foreign currency, at least for the importer or exporter. As a result, one or the other will be subject to the risks linked to the variation in the exchange rate. If the contract currency corresponds to the exporting country's currency, the importer must pay a higher amount in the event of devaluation of the currency.
Covering the risks of international trade
Admittedly, the risks linked to export, as to those of imports, are fairly encouraging for companies operating in this field. However, by taking the appropriate measures, they can cover or at least reduce these risks. Today, there are banking and insurance products that start at different points to cover individual risks. Only a letter of credit confirmed in the currency of his country could guarantee exporters of all these risks. Import risks can also be reduced to a more manageable level with the support of transport insurance, letters of credit, forward exchange transactions, and other banking products. Credit risk insurance is a great help for exporters and importers, as well as for the banks that finance them.
Trade risks can be reduced by using various forecasting methods and closely monitoring the development of trade conditions and rules in the country concerned, particularly while keeping track of changes in the world economy. Most goods are transported by sea, so to minimize the risks of freight while saving money; each exporter should have a working knowledge of marine insurance to know if they can get the necessary protections against dangers at the lowest cost. Legal risks can be largely avoided by incorporating the provision relating to the appointment of an arbitrator in the event of a dispute over contractual conditions. Some insurance companies may agree to cover some of these risks by collecting additional premiums for political risks.
How can WaysToCap help you anticipate the risks of international trade?
If you want to get into international trade, you must first be ready to face any eventuality and try to foresee the risks to anticipate them better to find adequate solutions. By integrating the WaysToCap community, you will be in direct contact with trusted sellers and buyers. You can collaborate closely to know the constraints and risks in their respective countries and in the targeted market. Having a long experience in the import-export market in Africa, this platform will also tell you how to contact suppliers and experts in sales and foreign trade in this region. In addition, it allows you to market your products directly in complete safety and to know the different precautions and insurance to consider. The group is made up of several experienced people who are ready to do business with you.
There are innumerable risks linked to foreign trade. Therefore, it is all the more useful to have several collaborators who can help you to advance your business by avoiding certain major risk factors. However, this sector still offers many advantages, despite these risks, and that is why our platform makes every effort to provide you with the best services so that you can move forward effectively.
Author: Vicki Lezama