How to Start an International Trading Business – Part 4
This article is the 4th installment in our series on the business of international trade. Readers might recall our first post titled How to Start an International Trading Business. In this piece, we will attempt to address the risks inherent in international trade and how to determine and manage these risks.
Inspiration for this article came from our client who purchased 50,000 low cost smartphones from a supplier in the Middle East with the intent to sell them to a buyer in Uganda. We had a number of questions that our client could not immediately answer. Questions like:
- Were you sure that upon arrival at the dock, the buyer would be able to pay you, and in what currency?
- Would these phones work in Uganda’s mobile network?
- Were the phones insured while in transit?
And then we asked ourselves, “What could go wrong?”
Contents
Trading Risks
International trading involves the buying and selling of goods. The buyers and sellers are always in different countries, and the transactions are usually quite large. As a result, there are many risks to consider in every trade. They include:
- Political and Regulatory Risks – Political and regulatory risks can include changes in government policy, political instability, political disagreements, changes in tariffs, or trade restrictions.
- Economic Risks – Fluctuations in exchange rates, inflation, and changes in interest rates are typical economic risks.
- Commercial Risks – Commercial risks can occur when the buyer or seller does not fulfill their obligations.
- Operational Risks – Usually involves logistics such as shipping delays, damage or product quality.
- Legal Risks – Legal risks often occur with documentation issues.
- Market Risks – Market risks are related to changes in market conditions, demand fluctuations, and competition. It is important to remember that many trades, especially goods that move by ocean transport can take months to move from the seller to the buyer.
- Cultural Risks – Differences in language and communication styles can lead to misunderstandings and impact business relationships. Variances in business practices, customs, and etiquette can affect negotiations and business interactions.
- Compliance Risks – Violations of trade regulations, sanctions, or embargoes can result in legal consequences and damage a company’s reputation. Adhering to anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA), is essential to avoid legal issues.
- Force Majeure Events – Unforeseen events such as natural disasters, wars, pandemics can disrupt supply chains and impact ability to fulfill contracts.
- Financial Risks – Financial risks should never occur if transactions are properly structured and documented. Obviously, the greatest financial risk would be for the seller to not be paid.
Determining Risks
Now that we know what the risks are in international trade, we need to know how to determine the specific risks in each of the transactions we take on. Here are 3 ways to determine the specific risks in a given trade:
- Risk Assessment Tools – Risk assessment tools are software programs which allow the buyer or seller to enter the details of a trade and after doing so, learn the risks that could occur in each specific transaction. These tools help businesses make informed decisions, mitigate potential threats, and enhance the overall resilience of their international trade operations.
- Due Diligence – Due diligence is the process of collecting, analyzing and reviewing information and documents on a particular matter. The main objective of due diligence is to find and obtain relevant and material information so you can make an informed decision regarding a specific transaction.
- Partners – Your “partners” in an international trade are your best sources of determining the specific risks of a proposed transaction. Your partners are your insurance company, your logistics company and your bankers. Remember, your partners often have as much to lose (and sometimes more) if your transaction goes bad. Remember also that your partners have a huge amount of experience in international trade. You can rely on them.
These risk determination tools are often used in combination, and businesses should tailor their approach based on the specific nature of their international trade activities and the countries involved. Regular monitoring and updating of risk assessments are crucial to adapting to changing conditions in the global business environment.
Risk Management
There is no such thing as risk-free business of any kind, including international trade. Risk management is about taking steps to ensure that buyers and sellers know what and how much risk each faces in a transaction and how much of that risk they are able to mitigate. To mitigate these risks, businesses engaged in international trade should conduct thorough risk assessments, stay informed about global economic and political developments, establish robust contracts, diversify markets, and invest in risk management strategies such as insurance and contingency planning. Additionally, building strong relationships with local partners and staying adaptable to changing conditions can enhance a company’s resilience in the international trade landscape.
Conclusion
Companies participating in international trade must assess their risk management strategies. Balancing risk with growth means keeping a close eye on country risk, credit quality of foreign customers, currency movement, and volatility. Companies should also be increasingly vigilant and take steps to protect interests and prepare for scenarios that might impact their ability to operate successfully.