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1) Various Risks associated with International Trade:

The Increase in Export Market is highly beneficial for Economy as it generates the Foreign Exchange for the Country, whereas on the other side Import can be a threat to the economy as it reduces or flow out the Foreign Exchange from the Country. Government tries to build the Balance of both. Also, In International Trade, the factors of productions like, capital, raw material and labour are more mobile across countries.

International Trade helps in the development of the economy by way of Global players entering new market and offering better Infrastructure, Technology, Methods, Quality Products and Services and Developing Manpower Skills and abilities. International Trade can also bring threat to local players as they may be forced to close down or merge with bigger corporations as demand for their product and services goes down due to better quality products offered by Global players at a better and affordable cost. Sometimes these Global players are becoming so powerful in small countries that they start to dictate their terms to the Local Government for their Benefits.

Businesses engaged in International Trade have to deal with Risk associated with doing Business Locally as well as Globally. These Risks are major barriers for the growth or expansion of the Business. Therefore understanding these Risks associated in International Trade plays an important role in decision making for getting into International Trade and also taking corrective action to minimize them or to reduce them.

Various Risks associated with International Trade:

1. Credit Risk:

Credit or Counterparty Risk is kind of a Risk associated with not collecting the Accounts Receivable. In simple words we can say that, once the goods are sold by the exporter on Credit basis, this Risk arises in realizing the Sale Proceeds. The Risk may arise on the inability of the buyer to pay or the intention of the buyer not to pay or delay the payment. Sometimes it may also happen that the Buyer have made the payment but due to situation changed in Buyer’s country the funds are not reached to Exporter may be due to civil war or outbreak of war or natural calamities or trade sanctions etc. In such an instance the Exporter suffer the risk of not getting the funds.

Credit Risk situation arises due to the following:

  • Importers are Dominant Players of the Market.
  • Competition between Exporters is huge.
  • The Exporter have high capacity to Manufacture have huge surplus to dispose.
  • The exporter must have sufficient funds to offer credit to the Buyers.
  • The exporter should be prepared to take Credit Risks.

Risk can be minimized or eliminated by way of:

  • Advance Payment: Exporter can seek full payment in advance or before shipment to avoid this Risk.
  • ECGC Cover: Exporters can take Cover for their Export through Export Credit Guarantee Corporation of India Limited.
  • Letter of Credit: Transaction under LC is more safe.
  • Financial Guarantee: These policies are issued to banks for covering the Risk in extending Pre-shipment and Post shipment Credit to Exporter.
  • Standby letter of credit: A standby letter of credit is used to guarantee creditworthiness of the Buyer and is not intended to be cashed but taken as guarantee  of payment under the contract.

2. Intellectual Property Risk:

This Risk arises when third parties may make unauthorized use of the Strategic Business Information such as Contracts, Agreements, Studies, Research, Client Lists and Trade Secrets etc., or the Property that directly or indirectly affect the value of Product and Services, Patents, Trademarks, Designs, Copyrights, know-how etc. In International Trade it is imperative that companies face these challenges and Risks more often.

Intellectual Property Risk arises due to the following:

  • Authorizing counterparties or partners to use these Intellectual Property.
  • Not Registering Intellectual Property in the host country.
  • Improper / no contract with Counterparty or partner over the issue.

Risk can be minimized or eliminated by way of:

  • Companies must register their corporate name, trademarks etc with the host country.
  • Well defined contract with the counterparty or the partner over the use of these Intellectual property items.
  • Hire Consultants and Legal partners to handle any such dispute if arises.

3. Foreign Exchange Risk:

This Risk is associated with both Accounts Payable and Receivables for the due contracts or the future contracts are to be settled in Foreign Currency. The foreign exchange rates are highly volatile, which may result into additional profit due to favorable movement of currency or losses due to unfavorable movement of currency.

Foreign Exchange Property Risk arises due to the following:

  • Unfavorable movement for Foreign Exchange Rates.

Risk can be minimized or eliminated by way of:

Here are the main types of foreign exchange policies:

  • Natural hedging: When a company is into the business of Exports as well as Imports, the flows are naturally hedged to the same extent.
  • Currency Forward: When a contract done for future date with specific value and at a certain fixed rate for buy or sell of currency is Forward Contract. In some cases there is flexibility in the contract for utilization period.
  • Currency Swap: When 2 cross trades are carried out at the same time in equivalent amounts and they are used to match the inflow and outflow of 2 different foreign currencies occurring on same or different dates. For example, Payment of FCY Term Loan in Euro to be settled against the Exports in USD.
  • Vanilla option: When contract is done to buy of sell foreign currency on specific date at specific price but with an option  to put (execute) or call (do not execute) the deal at given fixed rate. If market is favourable can take the benefit of the same.

4. Shipping Risks:

In International Trade, one of the major risk associated is with Shipping. Shipping goods from one location to other location is a huge task and have Risk associated with Safety,

Timely Delivery, Accurate Delivery, Accident, Seizure, Vandalism, Theft, Loss and Breakage etc.

Shipping Risk arises due to the following:

  • Natural Calamities, Disasters of Accidents.
  • War, Terrorism or Theft.
  • Tariffs and Fees.
  • Delays in Transit due to any reason.

Risk can be minimized or eliminated by way of:

  • Defined Risk and Responsibilities of Both Parties defined by International Chamber of Commerce and Incoterms.
  • Appropriate Risk Assessment and Insurance.

5. Commercial Risks:

The term Commercial Risk is associated with the risk of loss partially or fully against the export contract with a trading partner.

Commercial Risk arises due to the following:

  • Partial / No realization of payment for the goods sold in foreign country.
  • Delay in shipment leads to loss of sale or not realization of money in full.
  • The terms of agreement are interpreted incorrectly by both parties.
  • Change in Exchange Rates, Cost of borrowing, Duties, Tariffs and Taxes.
  • Other situations not anticipated before agreement or exports.

Risk can be minimized or eliminated by way of:

  • Well defined contract or agreement.
  • Following strict schedule and timelines for delivery.
  • Appropriate Risk coverage for Shipment, Currency Fluctuations etc.

6. Product Risks:

The term Product Risk is associated with the Importing and Exporting of Product. This Risk also covers the demand and supply of the product, competitors, pricing sensitivity, packaging, delivery etc., of the product.

Product Risk arises due to the following:

  • High Change in Demand of the product.
  • No relevance or demand of the Product at the time of sale of the same.
  • Competition lower price of their Product which lead to low demand for these Products.

Risk can be minimized or eliminated by way of:

  • Well detailed research on Demand and Supply, Competition, Price Sensitivity and Cost Factors associated etc well in advance.
  • Prices should be well competitive and offer uniqueness and better products with better design and packaging.

7. Operational Risks:

Operational Risks are associated with any kind of Risk that arises due to the internal breakdown of process, procedures, human errors and imperfect systems. This Risk may be related to actual production of goods or paperwork or documentation involved in the procedure.

Operational Risk arises due to the following:

  • This may arise due to operational inefficiencies, like system breakdown, process flaw or human errors or imperfect systems.
  • Incomplete or Incorrect or Inappropriate documentation.

Risk can be minimized or eliminated by way of:

  • Regular Checks and Audits of Systems and Processes.
  • Inspection of final Product before dispatch.
  • Proper documentation and paperwork at all stages of transaction.

8. Legal Risks:

Legal Risk are associated with any kind of Risk that arises due to Legislation or Law of the host country. These Risks could arises not following the Law of the country related to Intellectual Property, Product and Process and other guidelines as prescribed.

Legal Risk arises due to the following:

  • Less / no awareness of the Law of the host country.
  • Due to Product, Quality or Quantity norms as prescribed.
  • Issues related to Warrantee, Guarantee or After Sales Service etc.

Risk can be minimized or eliminated by way of:

  • Clear understanding of the Law and other Legalities as applicable in host country.
  • Maintaining the norms, terms and conditions as prescribed as per law and company’s terms and conditions.
  • Following strict compliance related to each items as prescribed.
  • Hiring Legal Consultants or lawyers to get best advise and handle any Legal issues.

9. Market Risks:

Market Risk is associated with any kind of changes in the market or prices. These Risks could arise due to fluctuation in the prices of goods, currency, market conditions or other conditions affecting the market or prices.

Legal Risk arises due to the following:

  • Change in market conditions and prices.
  • Fluctuations in prices of raw material or products and currency.
  • The difference in Interest rates and inflation.

Risk can be minimized or eliminated by way of:

  • Taking appropriate risk coverage or planning for short term and long terms.
  • Covering for fluctuation risk of currency and commodity.
  • Adding appropriate margins for reducing the risk.

10. Interest Rate Risk:

Interest Rate Risk arises due to the fluctuations or volatility in Interest rates over a period of time. It change the cash flow needs of the company for Interest Payments and Receivables.

Interest Rate Risk arises due to the following:

  • Change in Interest Rates due to volatility or fluctuation in the market.
  • Floating Interest Rates.

Risk can be minimized or eliminated by way of:

  • Taking fixed Rate of Interest at the time of sanctioning of debt.
  • Taking Insurance or Risk coverage for Risk of changes in Interest Rate.

11. Country and Political Risks:

Country and Political Risk arises due to the risk related to Government Policies & Regulations, Stability of the Government, Trade barriers, Tariffs and Taxes in the host country.

Country and Political Risk arises due to the following:

  • Change in Government, Government Policies and Regulations.
  • Political Instability or Control and Governance.
  • War, Civil Wars, rebellions etc activities in the country.
  • Trade Barriers, Tariffs and Tax System and policies of the Government.

Risk can be minimized or eliminated by way of:

  • Close monitoring of Government, Policies and Regulations and changing or upgrading accordingly.
  • Understanding Rules and Regulations for Trade, Tariffs and Taxing System.
  • Taking Insurance or cover adequately for the Risk.

12. Other Risks:

A. Liquidity Risk: This Risk arises due to the inability of the company to meet short term financial demands. This may occur due to the non-realization of export proceeds on time, inability to convert security or asset into cash without losing the capital or income in the process. Sometimes the market becomes illiquid and companies are unable to liquidate their securities or assets or they may suffer the loss in the realization of cash this is known as Liquidity Risk.

B. Cultural and Ethical Risks: This Risk arises due to the Cultural and Ethical differences between the countries and geographies. People speak different languages, follow different cultures and religions, have different thoughts, tastes, preferences, needs and demands. This can be a Risk while entering that country, therefore thorough study and research is require to address the issue and take appropriate measures.

C. Investment Risk: These risks are associated with Investments and Trading activities. These risks are mainly related to fluctuations in the market or wrong decisions making or investment done at the wrong time.

Reputational Risk: These risks arise due to the uncertainty about the events of how the image of the entity will be perceived. These risks are associated with the activities of failure on the part of the organization meeting their financial commitment, and they may suffer Reputational Risk due to the same.

About the Author

BankReed Admin

Banking Professional with 16 Years of Experience. The idea to start this Blogging Site is to Create Awareness about the Banking and Financial Services.

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