Question

Discuss two major risks in foreign trade and how to manage them.

Answer 1

Industries engaged in foreign trade have to deal with threats not only globally but also other threats of business growth such as ethics, shipping, intellectual property, credit, currency, and much more.

Such risks can impede the smooth running of the company and hence adequate steps must be taken to minimize its impact. Here are 6 challenges that businesses engaged in international trade usually face and the successful ways to handle them.

Credit Risk- The risk associated with not receiving an account receivable is counterparty or credit risk. There are various ways businesses can protect against this danger when expanding to global markets.

Taking 100 percent of the amount due, or a reasonable proportion, may be used to minimize operating costs and funding charges before providing the services at the time of placing an order. That reduces the possibility of failing to pay. Though this could be complicated for new companies and exporters, with little negotiation, it can be worked out.

Letter of credit This applies to an agreement issued by a financial institution where the entity offers to pay the service / product provider a fixed amount in return for delivery within a defined timeframe. That gives both the seller and the buyer security. It provides a thorough description of the shipment and the terms of sale.

Foreign Exchange Risk- It generally relates to the accounts payable and receivable for contracts that are, or will soon be, in place. Currency exchange rates are continuously in flux. Accordingly, companies will be forced to make transfers of funds produced overseas at levels below what is budgeted.

Which is why an effective exchange strategy is important for companies to have in place. This will assist in – Stabilizing profit margins on profits made. Minimizing the negative effect of fluctuating revenues and procurement costs, Enhanced cash flow management, Simplification of domestic and international prices

Country and Political Risks- There are threats such as non-tariff barriers to trade, central bank exchange controls or the prohibition of selling those goods in particular countries. For example, a number of countries have banned products derived from endangered animal species.

There will be other things, such as sanctions, that will never be under your influence, and you must be prepared to conquer them. More information on these restrictions can be found by searching the relevant country's official web site of the Ministry of Foreign Affairs and Trade.

Many developing nations operate such regulations for exchange control which are related to the flow of money from and to their country. You must determine if those regulations are applicable in the country in which you wish to trade. It is because their payments can be overdue. If you export such goods, checking them is necessary so that they fulfill the requirements of the nation to which you will be exporting. Having an export certificate is mandatory until you can begin trading globally.