6 Risks In International Trade That Had Gone Way Too Far

There are numerous risks in international trade that is different from the situation in domestic trade.

These risk can affect export business and may constitute disincentive to export and international trade.

Therefore the identification of such risk and adopted measure to manage and eliminate these risk will be a big boost to international trade. Such risk include viz:

  • International acceptability on quality of goods. 
  • Transit Risk. 
  • Credit risk.
  • Payment risk.
  • Political risk
  • Foreign Exchange risk and these could be classified into three major categories.

Importer's Risk
Importer's risk arises as a result of Default in payment for goods on maturity date and
Refusal of buyer to accept the shipped goods.

Exporter's Risk
This risk as a result of weak financial base of the exporter, inability to meet deadlines, lack of capacity and experience to meet the orders and Fraud.

Country's risk
Country risk arises as a result of unstable political climate, severe balance of payment problem, foreign exchange fluctuations and control, import license quantitative restrictions quota and other control measures.

Now lets Proceed to the mean point.

6 Risks In International Trade...

As listed above so it's going to be explained before.
Let's Go.

1. Transit Risks

Since international trade involves the movement of goods from one country to another, the risk of damage is high in the process of shipment of goods overseas from exporter to importer.

Such risk could be total damage by fire, theft by sea pirates, accident in the sea, air or land,  sometimes the vessel itself could sink.

In order to minimize transit risk adequate marine insurance covers must be taken to cover the goods from the time it leaves the factory to the buyer warehouse or the port of discharge  in the buyer country  depending on the term of the contract.

2. Political Risk

This is the risk that payment may not be made or delayed for an export sales due to political events in the buyer country.

This  events in the buyer country include blockade of funds, nationalization, war and revolution, appropriation, cancellation of import license and quot irrespective if a buyer is credit worthy or not or whether he has actually lodged payments with his bank, which adverse political event in the buyer country may block temporally or permanently.

The political or country risk could be minimized by obtaining an up-to-date economic and political reports on any country through the exporters bank or through the exporter embassy in the country of the overseas buyer.

You can minimize such risk through insurance by the Export Credit Guarantee Insurance Scheme which is specifically designed to protect exporters from such risk that could be attributed to political  or economic factors in the buyer country.

3. International Acceptability On Quality Of Goods In International Trade

It's is important for your goods as an exporter to be acceptable in international trade because if the goods exported fails to meet the quality standard, they could be rejected by the importer which may result in selling same at a give-away price since returning them to the exporter country might be more expensive.

To guard against this the service of quality inspection agencies should be engaged to ensure that the quality of goods to be exported meets the standard acceptable in the importing country.

4. Payment  Risk.

This are risk of non-payment for goods accepted on due date, non-acceptance of goods shipped by the exporter.

The importer risk can be reduced or eliminated by obtaining a good status enquiries on all prospective unknown buyers before entering into any contract.

The exporter's bank can do this through her correspondent bank in the Importer's country or by insisting on payments terms to be by only confirmed and irrevocable letters of credit, the problem of default will be eliminated since payment will be certain once the exporter has fulfilled his part of the contract by shipping the goods and presenting the documents to the advising bank within the stimulated period in the credits.

The risk could also be adequately covered by the export credit insurance in the exporter's country.

The serious thing here is that the exporter's risk is also the same as the Importer's risk therefore should be handled in the same way as the Importer's risk from the exporter's end.

5.  Foreign Exchange Risk

An exporter is exposed to foreign exchange risk if he or she sells in a currency other than the currency of his country thereby necessitating the conversion of the export proceed to his on currency.

Because of fluctuations in the foreign exchange rate the rate may move adversely against him between the time of export and receipt of payment.

The exporters is therefore exposed to the risk of loss in his earnings as a result of the changes in exchange rate. To reduce this risk, the exporter should quote all his exporter sales in his own currency, since this will ensure that the amount he will receive is certain while the importer  will bear the risky of any adverse movement that is not convertible.

It is advisable to quote all export sales in a currency that is fairly stable in the foreign exchange market.

Also to cover the exporter's position and reduce the chance of loss in his earnings due to foreign exchange rate movement, the exporter should take out a Forward exchange contract, thereby guaranteeing his return whenever payment is made.

6. Performance Risk

For exporters of services, the risk of non performance is always there. To guard against this problem there is always a demand for bonds to serve as a guarantee against non-performance and such bond are viz:

  • Bid or Tender Bond
  • Performance Bond
  • Advance Payment Bond
  • Retention Bond
So these are the risks in international trade and some possible ways to reduce  the risk rate.

I hope this content will get you going,

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