Many times, business people hold back from investing in international trade due to a negative perception. It is mostly assumed to be highly complicated and full of risk. However, in order to overcome such negative thoughts, it would be wise to conduct a proper assessment of the risks involved in this form of trade and weigh them against anticipated benefits. Using such a comparative analysis, it will be easy to make an informed decision.
Benefits of International Trade
International trade has continued to flourish over the years thanks to the remarkable benefits associated with it. It accounts for a significant part of many countries’ GDP and makes a crucial revenue stream for most developing countries. In the year 2016 alone, the total value of international trade was almost $31 billion making up 26% of the global economy. Let us look at some of the outstanding benefits of international trade:
- Product Variety
International trade makes it possible for individuals in different parts of the world to access products that are not available in the domestic market. This adds to the quality of life on a global scale as no country or community is limited to the products found solely in their domestic market. It gives buyers more choice in their purchases and provides exposure to unknown products.
- Reduced Cost of Living
At times, though it may be possible to produce certain goods locally, production costs would make the end product extremely costly. However, the same products might be available elsewhere at a much better price. International trade in this case helps consumers access the goods at better prices than would be the case from the local market. High competition from international traders also helps to reduce product prices. This is particularly helpful in sectors where one domestic company has a monopoly and has to reduce prices or face extinction.
- Reduced Wastage
Surplus produce especially with regard to perishable items leads to massive wastage. This type of trade reduces such wastage by making it possible to sell the surplus to markets with a deficit. Especially with the advent of technological tools, it is becoming easier to sell perishable goods overseas without compromising quality. This in turn leads to proper use of natural resources and reduced wastage.
- Enhances International Relations
Foreign trade fosters good will between nations that have to partner and work together. Interdependent relationships make it necessary for such nations to maintain good relations since conflict would jeopardize access to crucial goods or markets. They therefore learn to coexist peacefully and this serves to enhance peace on an international level.
- Economic Stability for Traders
Traders who deal in seasonal products have to contend with overwhelming demand during high season and low or no demand for the rest of the year. This would ordinarily lead to major sales fluctuations even forcing some to close down completely during low season. International demand for products offers some level of consistency all year round. This keeps companies in business and allows traders to enjoy stability.
Global trade allows different countries to specialize on specific products that best allocate their resources. For a long time, Africa was known to be the agrarian stronghold of the world. This was because of the availability of vast arable land and easy access to cheap labor. Other countries like Saudi Arabia have massive oil reserves. Identifying such strengths makes it possible for traders to pick a strong point and make economic success out of it.
The high competition on the international trade scene has led to widespread innovation. Traders have to innovate in order to elevate their products above competitors. They also innovate to reduce production costs lowering prices for consumers. Innovation also leads to the creation and launch of new products that serve to improve quality of life.
- Higher Return on Investment
Companies have to invest greatly in innovative and promotional processes. It would take much longer to realize a return on their investment if they only had to focus on domestic markets. But due to the size of the global market, they realize returns much faster and in effect make higher profits.
- Higher Employment Rates
As market size increases, so does the need for employees to keep up with demand. International demand offers the biggest market possible. It leads to the creation of new businesses and industries to meet demand. This in turn creates more employment opportunities and addresses the global unemployment menace.
Common Risks Associated with International Trade
In this section, we are going to look at some of the most common types of export risk and a suitable solution for each one. This should help alert you to the various challenges involved in the trade and help you to prepare an effective approach to tackle them.
Movement of goods within a domestic market presents numerous hazards. The risk is magnified when such movement takes place between countries. There is the risk of damage while in transit, loss of entire consignments or theft of parts of it.
It is imperative that you understand international logistical laws. Different incoterms determine liability terms and could make or break your business. Insurance covers come in handy in global trade. They reduce the level of risk associated with transport and logistical matters. They also give you peace of mind and make business easier.
Foreign trade policy and export administration regulations change constantly. There are also cases whereby the same trade policy is applied differently in different markets. The law in both the exporting and importing countries affects the outcome of any international trade deal. It seems rather challenging to get these ever-evolving facts at your fingertips with regards to all the different target markets.
One way to mitigate the risks involved is to make use of import export agents or trading houses to carry out trade. These ones are usually familiar with the policies applicable in different markets. They also have a network of associates through whom it is easy to access export control information and pertinent legal requirements.
- Cultural Risks
When dealing with a market that differs greatly from your own in terms of language and culture, it is wise to tread cautiously. This sometimes leads to misunderstandings that could greatly complicate matters. At times also, some things that are considered appropriate and harmless in domestic markets could be offensive in other markets.
This calls for due diligence on your part to ensure you fully understand market nuances. Adapt your packaging to different markets to avoid causing offence. You might even plan a visit to get a hands-on feel of the culture so as to better trade with that market.
- Political Risks
The political climate in the target market country is very important. Failure to keep updated on the latest developments could cost you a fortune. Keep in mind that when there is political instability, even major institutions like banks might bear the brunt. This could complicate payment for goods and lead to costly delays.
Additionally, some governments intervene in trade activities and hamper liberalization. Before trading with such countries as Cuba or South Korea for instance, it would be wise to investigate this.
The most important consideration when dealing with such problems of exporting goods is to keep abreast of current developments. This will prevent heartache further on when you have to deal with non-payment.
One of the biggest risks in export business is credit risk. It is very difficult to verify the creditworthiness and reputation of importers. This is because of the distance factor and alien surroundings in foreign markets. This increases the risk of late payment or lack of payment for goods. It could also lead to outright fraud particularly when you fail to conduct a thorough background check.
In order to surmount this obstacle, you need to expend energy and time in assessing the reputation of each trading partner. And in order to shield yourself against financial loss, it would be best to make use of foolproof payment methods. International payment processes like Letters of Credit guarantee payment for goods and help to reduce the anxiety associated with waiting for payment.
- Currency Fluctuations
All world currencies are subject to fluctuations on a daily basis. It is impossible to predict accurately what the future holds for any currency. This means that exporters at times have to rely on speculation and it might at times lead to massive losses when the market takes an unexpected turn.
One time-tested strategy that exporters follow to avoid this risk is purchasing forward exchange terms. This helps to hedge the payment against fluctuations and helps mitigate loss.
One of the biggest risks of importing goods for sale is that of getting poor quality products. This at times makes importers reject a whole shipment and leads to financial loss. Distance makes it difficult for one to be present at dispatch time to ensure you get what you ordered for.
Other times, you might export a load of good quality products only to have it rejected by a dishonest importer. Some do this in a bid to get a lower price on the goods, a move that will also cause massive loss.
This requires that you shield yourself from loss whether you are importing or exporting. Some seasoned traders make use of third party inspection companies to ensure that the goods dispatched meet agreed upon standards. You could split this expense or negotiate to have it included in the contract.
Others choose to ship samples in advance of a big order. If an importer accepts the quality, then you need to make sure that you send the same quality in the bulk order. You could have a binding agreement in place that requires the importer to accept the shipment if it matches the sample standards.
How to Export Successfully In Spite of Risks
The first step to overcoming negative thoughts and becoming an effective export trader is to identify the particular risks that apply in your line of trade. This will help you to weigh them and assign them equivalent attention in order to prevent negative results. In all of the above mentioned challenges, there is a proven way of mitigating the risk and protecting your business interests.
Do not be tempted to reduce costs by avoiding any of the expenses associated with the risk solutions. It might end up being a lot more costly or even causing the eventual collapse of your business. Prepare your mind and devise a counter strategy long before you face any of these problems of exporting goods. This will help you take advantage of the numerous benefits associated with the trade and enjoy certain success.
Waystocap is Your Best Bet
A look at the above risks associated with international trade reveals an important truth – that figuring out how to export and import is actually the easy part. Protecting your business from loss is much harder than setting up shop. However, it is also clear that the benefits associated with this trade far outweigh the risks. Additionally, there is no form of trade that is entirely risk-free. This would make it unwise to shun international trade simply because it is a risky venture. It makes a lot more sense to partner with an experienced player and let them do all the hard work for you.
Waystocap is the first African B2B platform that makes it easy for you to trade on the international platform. We help you get access to regulations and logistical data on the different target markets in Africa. We also assist you to access relevant insurance cover to protect your cargo while on transit.
Our site provides a trustworthy trading platform and allows you to form reliable partnerships with buyers and suppliers on a global scale. We provide a secure and verified environment for traders allowing for smooth trade.
We are your one-stop shop for all your international trade requirements. Working with us you will find it easy to overcome the common negative perception on international trade. With a positive outlook and a supportive partner, you will be sure to reap big from this lucrative opportunity. So sign up today and start enjoying the benefits.