International trade poses greater risks than domestic trade due to differences in culture, language, laws, and economic and political factors. Exchange rate fluctuations, complex contracts, and unfamiliarity with foreign markets and legal systems are additional risks. Political risks include changes in government policies and expropriation of assets.
A firm engaged in trade across international borders is likely to find that the risks are greater than normal business risks in the domestic market. The risks of international trade arise from having to deal with a different corporate culture and possibly a different language, while also dealing with different laws in another country. Economic risks include movements in interest rates or exchange rates, buyer default risk and credit risk. If the goods are shipped abroad, risks may arise from damage or loss of the goods, contractual disputes or rejection of the goods by the buyer. The political risks of international trade include the possibility of expropriation of goods by a foreign government or changes in government policies on import tariffs or quotas.
Exchange rate risk is an issue that any international trader must address. Exchange rates sometimes fluctuate unexpectedly, and a business holding foreign currency funds is open to the risk of a foreign exchange loss. Similar risks can be presented by factors such as inflation or changes in interest rates in the other country, making the transactions more expensive for the trader. The use of letters of credit can expose the company to risks arising from the inability of a bank to meet its obligations, and exchange control regulations can make it difficult to repatriate funds. The foreign buyer may refuse to accept the goods, non-payment or insolvency before the completion of the transaction.
International contracts can require complex terms that assign responsibility for transportation and insurance between the buyer and the seller. Despite the standardization of international contractual conditions, disputes may arise regarding the conditions of transport or insurance or the liability for damaged or missing goods. Dispute resolution procedures for international contracts may not be familiar to the trader and the procedures may not be clear.
Political risk must be taken into consideration by any enterprise engaged in international trade. A foreign government may decide to change regulations in relation to foreign trade, change trade licensing laws, expropriate corporate assets or adopt a policy of nationalization. There may be a change in foreign government policy following an election or coup. An international crisis could arise and the economic 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 functioning. A company may find that it has done insufficient research regarding potential overseas customers and market trends. It may underestimate the competition or adopt a strategy that is not appropriate for the foreign country’s culture. The risks of international trade can also arise from familiarity with the foreign legal system, ways of doing business or tax regulations.
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