AVOIDING RISK

AVOIDING RISK

Doing business across international borders always involves risks related to financial exposure. However, avoiding or controlling risks in global trade is an everyday occurrence for importers and exporters, and understanding the instruments available for avoiding risk is not difficult. Essentially four kinds of risks exist:
BUSINESS or
COMMERCIAL   Not being paid; nondelivery of goods;
insolvency or protracted default by the buyer; competition;
and disputes over product, warranty, etc.

FOREIGN
EXCHANGE       Foreign exchange fluctuations

POLITICAL        War, coup d'etat, revolution, expropriation, expulsion, foreign exchange controls, or cancellation of import or export licenses

SHIPPING Risk of damage and/or loss at sea or via
other transportation

Most risks allow for a method of avoidance. Of course, there is no insurance for such problems as disputes over quality or loss of markets due to competition, but there are avoidance instruments for three aspects of risk: not being paid, insurance, and foreign exchange exposure management. Though uncertainty is natural in doing business across international borders, you can hedge and control most of it. All major exporting countries have arrangements to protect exporters and the banks who provide their funding support.

Avoidance of Business Risk
The seller wants to be certain that the buyer will pay on time once he has shipped the goods, and he wants to minimize risk of nonpayment. But the buyer wants to be certain the seller will deliver on time and that the goods are exactly what the buyer ordered.
These concerns most often are heard from anyone beginning an import/export business. Mistrust across international borders is natural; after all, there is a certain amount of mistrust even in our own culture and domestic market. One key to risk avoidance is a well-written sales contract. In chapter 2, you learned that an early step in the process of international trade is to gain agreement between yourself and your overseas business associate. This agreement should include method of payment.

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