Risks in International Trade

By: EconomyWatch   Date: 29 June 2010

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Risks in International Trade are the major barriers for the growth to the same. International trade has been a much debated topic. Economists have differed on the real benefits of international trade. The increase in the export market is highly beneficial to an economy, but on the other hand the increase in imports can be a threat to the economy of that country. It has been the worry of the policy makers to strike the right balance between free trade and restrictions.

International trade can develop an economy, but at the same time certain domestic players can be outperformed by financially stronger multi nationals and forced to close down or get merged. Sometimes these multinational companies become so powerful, especially in smaller countries, that they can dictate political terms to the government for their benefit.

International trade is characteristically costlier in terms of domestic trade. There are a number of reasons such as, tariffs, cost of delay, cost related to differences in legal system, etc. The factors of production like labor and capital are more mobile within the territories of the country than across other countries. International trade is restricted to the exchange of goods and services. It does not encourage the exchange of production factors, which may be more beneficial in certain cases. The assessment of risks in the international trade plays an important role in deciding the modes of payment to be used for the settlement between buyer and seller.

Risks in international trade can be divided under several types, such as,

Economic risks

  • Risk of concession in economic control
  • Risk of insolvency of the buyer
  • Risk of non-acceptance
  • Risk of protracted default i.e. the failure of the buyer to pay off the due amount after six months of the due date
  • Risk of Exchange rate

    Political risks
     

  • Risk of non- renewal of import and exports licenses
  • Risks due to war
  • Risk of the imposition of an import ban after the delivery of the goods
  • Surrendering of political sovereignty

    Buyer Country risks
     

  • Changes in the policies of the government
  • Exchange control regulations
  • Lack of foreign currency
  • Trade embargoes

    Commercial risk
     

  • A bank's lack of ability to honor its responsibilities
  • A buyer's failure pertaining to payment due to financial limitations
  • A seller's inability to provide the required quantity or quality of goods

    Others Risks
     

  • Cultural differences e.g., some cultures consider the payment of an incentive to help trading is absolutely lawful
  • Lack of knowledge of overseas markets
  • Language barriers
  • Inclination to corrupt business associates
  • Legal protection for breach of contract or non-payment is low
  • Effects of unpredictable business environment and fluctuating exchange rates
  • Sovereign risk - the ability of the government of a country to pay off its debts
  • Natural risk – due to the various kinds natural catastrophes, which cannot be controlled

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