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What Are the Risks of International Trade?
A business engaging in trade across international borders is likely to find the risks are greater than normal business risks in the domestic market. Risks of international trade arise from the need to deal with a different business culture and possibly a different language while also coping with different laws in another country. Economic risks include movements in interest rates or currency exchange rates, risk of default by the purchaser, and credit risk. If goods are shipped abroad, risks may arise from damage or loss of goods, contract disputes or rejection of the goods by the buyer. Political risks of international trade include the possibility of expropriation of assets by a foreign government or changes in government policies on import tariffs or quotas.
Exchange rate risk is a problem that must be addressed by any international trader. Currency rates sometimes fluctuate unexpectedly, and a business holding funds in foreign currency is open to the risk of a foreign exchange loss. Similar risks may be presented by factors such as inflation or interest rate movements in the other country, making transactions more expensive for the trader. The use of letters of credit may expose the business to risks arising from any failure by a bank to carry out its obligations, and exchange control regulations may make it difficult to repatriate funds. The foreign purchaser may refuse to accept the goods, default on payment or go into insolvency before the transaction is completed.
International contracts may require complex terms allocating responsibility for freight and insurance between the buyer and seller. Despite the standardization of international contract terms, disputes may arise over the freight or insurance terms or responsibility for damaged or missing goods. Dispute resolution procedures for international contracts might be unfamiliar to the trader and the procedures may be unclear.
Political risk must be taken into account by any business engaged in international trading. A foreign government may decide to change the regulations in connection with foreign trade, change business licensing laws, expropriate business assets or adopt a policy of nationalization. There could be a change in the policy of the foreign government as a result of an election or a coup. An international crisis could arise and the business climate could suddenly turn hostile to foreign companies.
Other risks of international trade may arise from the company's unfamiliarity with the foreign market and its operation. A business may find it has done insufficient research with regard to potential overseas customers and market trends. It may underestimate the competition or adopt a strategy that is not appropriate for the culture of the foreign country. Risks of international trade may also result from unfamiliarity with the foreign legal system, forms of doing business or tax regulations.
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![Political risks of international trade include the possibility of expropriation of assets by a foreign government.]()
By: RawpixelPolitical risks of international trade include the possibility of expropriation of assets by a foreign government. -
![Political risk must be taken into account by any business engaged in international trading.]()
By: michaeljungPolitical risk must be taken into account by any business engaged in international trading. -
![Buisinesses must take into account foreign shipping regulations and transportation costs.]()
By: Janis SmitsBuisinesses must take into account foreign shipping regulations and transportation costs.
Discussion Comments
Interest rates, exchange rates and taxes cannot be controlled. But knowledge of the business culture in another country can be. Trading with a country without knowing how business works there is like suicide.
@literally45-- I see what you're saying but a lot of that is not predictable or avoidable. International trade and international politics go hand in hand. If a sudden political problem pops up between the governments of two countries, naturally this will affect trade between them. But how can you predict that? You can't.
Business, by nature, is risky. International companies have to be prepared for the worst.
International trade is definitely risky. There are so many factors to consider and so many precautions to take before engaging in it.
I personally think that the biggest risks in international trade comes from politics and cultural differences. Some governments in the world are anti-American or they simply don't like the idea of foreign companies working in their country. These governments can impose unfair taxes and tariffs on foreign companies to intentionally push them out or to make extra money off of them.
So I think that it's very important for American companies to work in countries that are favorable to international trade, favorable to American government and who are stable in terms business rules and regulations. Otherwise, there are bound to be unpleasant surprises while trying to do business in that country.
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