International trade poses challenges for companies dealing with foreign legal systems, customs, languages, and currency exchange rates. Insolvency, political intervention, and unforeseen events can also create risks, as can tariffs and quotas on imports. Trade disputes and restrictions on foreign investment can further complicate matters.
Companies operating internationally have to deal with issues involving foreign legal systems, different customs and possibly different languages. This can cause problems with international trade, especially for small and medium-sized businesses that lack the resources to get the necessary professional advice. Other issues include trading in a different currency and the risk of exchange rate fluctuations. Misunderstandings with commercial contracts could arise and it could be difficult to initiate dispute resolution procedures or obtain compensation. Financing and settling payments for international contracts is more complex and risky than for domestic contracts.
Companies engaging in international trade face various business risks in addition to those present in the domestic market. It is more difficult to get to know the customer in another country and this can create a higher risk of insolvency due to the customer’s insolvency or dissatisfaction with the goods or services provided. Problems with international trade can arise from government regulations in areas such as product standards or health and safety, and the possibility of political intervention in the form of a freeze of funds or property seizure. There may also be an increased risk of unforeseen events such as war or natural disasters.
Additional problems with international trade are caused by the imposition of tariffs or quotas on imports. This could make goods exported abroad less competitive in the foreign market, where the foreign country’s government may want to protect its domestic industries. While much has been done to remove such barriers to international trade, many countries impose tariff barriers to protect some domestic industries. Some industrialized countries and trading blocs also protect their agricultural sectors with tariffs and subsidies.
Problems with international trade could arise in the form of trade disputes, with the imposition of retaliatory measures such as countervailing tariffs on some goods. Many countries maintain lists of sectors in which foreign investors are not allowed to invest. These normally include the defense and strategic industries, but can also extend to the retail, financial and chemical sectors. Licensing regulations can make it difficult for a company to expand its business into a foreign country.
Some countries export more value than they import, creating a large trade surplus, while other countries will run a trade deficit. The extent to which this can become a problem is disputed by economists. The size of a trade surplus or deficit will tend to be reduced by currency movements where currencies float freely. Over time, however, a country can build up a large public debt which can in itself become a problem. Such imbalances in global trade can lead to international disputes and further problems with international trade.
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