International trade is the buying and selling of goods and services across international boundaries. Although, technology have impacted business risk management however, the nature of international trade risk have not heavily changed. Therefore, small businesses or startups that are considering to export or import goods, should understand some of the common risks associated with an international trade business.
The main purpose of any sales transaction is to exchange goods or services for money. However, there is a risk of either party failing to carry out their own part of the contract. The failure may be intentional or completely out of the parties’ control. This risk in international trade has been the major factor that determine the documentation and method of payment used between buyers and sellers.
1. Country Risk
Country risk is any event in the buyer or seller’s country that may affect payment by the buyer to the seller or affect the supply of goods/services by the seller to the buyer. Country risk comprises political, social and economic components and includes: Exchange control regulations in buyer’s and sometimes lack of foreign currency. Country risk also includes unfavourable change in government policies, laws or introduction of trade embargoes.
2. Buyer Risk of payment
Buyer’s ability to pay the seller for reasons that are not country risk. Example buyer goes bankrupt or unwilling to pay.
3. Seller Risk of supply
Seller’s ability to supply the right quality and/or quantity of goods at the right time and place for reasons other than country risk. Example a major machine failure will affect seller’s production or even supply a poor quality product.
4. Risk of Honouring – Bankers
Bankers ability to honour their own undertakings for reasons other than country risk. For example if a bank issued a bank guarantee or endorsed a bill of exchange, but could not honour it on demand.
5. Incomplete Documents
Example sales contract may not be completely or correctly drawn in line with relevant laws or codes. These issue can also be applicable to other documents in international trade such as invoice, bill of lading or insurance.
6. Inadequate Insurance
Insurance is one of the key risk in international trade and many small business tend to ignore it. Goods in transit are exposed to the risk of lost or drowned containers. Most experts recommends 110% insurance of the invoice value.
7. Performance risk of third parties
Either buyer or seller may rely on third parties in other to fulfil their own obligation. The performance of these parties can affect international trade risk nature. For example inspection companies, shipping companies, forwarding and clearing agents or customs departments
8. Distance and Delay
Due to the distance between buyer and seller, delivery of goods may takes longer. There may also be more than one company involved in the transport of the goods. This increases the risk of damage or loss of the goods and consequently increases the risk of late or non-payment of the goods ordered.
9. Exchange Rate Fluctuations
The seller often quote prices in the currency of their own books or some other acceptable hard currency. Varying exchange rates may have a severe impact on either party. For example if the importer buy stocks on credit in USD and sell them in local currency, the firm will lose when local currency depreciate against USD. If the exporter invoice USD but maintain books in local currency, they will lose when local currency appreciate against USD.
10. Different Legal Systems
Each country has its own laws and legal system. This makes it difficult for exporters and importers to enforce the sales contracts they concluded. Taking legal action across international borders can be very complicated and expensive. For example if a Nigerian residence firm want to sue a Chinese firm, they have to consider the court system, language of the hearing, cost of international lawyers etc.
What other risk do you want to share about international trade?