Question

What is commercial risk in international trade?

Answer 1

The term commercial risk means there's a potential for loss with a trading partner. What kind of loss? Basically it can happen one of three ways:

Your customer can't pay for the products or services you provided according to the terms of your agreement.Your trading partner doesn't live up to their obligations within the agreement (i.e. not meeting delivery dates).You and your trading partner may have differences in interpreting the agreement.

If you and your trading partner are in different countries, the degree of difficulty is magnified. Think about dealing with different laws, languages, cultures, currencies, and customs policies, and you can see where the complexity comes in. Let's look at some areas of concern.

Shipping your products overseas is an exercise in risk and rewards

Different Types of Commercial Risks

Country Risk

Let's say your trading partner is located in a country where there is political unrest or labor strikes. Or maybe your country is in a trade war with another country and imposes tariffs (a tax levied against imports to help domestic producers) or quotas(quantity restrictions) on products you're importing. There are also country-specific administrative procedures, bureaucratic procedures, regulations, and technical standards. Does all this change the equation? Absolutely it does.

Currency Risk

The value of currencies and exchange rates (value of a currency for conversion purposes) frequently fluctuate, which makes international deals complicated. Variations in the exchange rate can affect the payments that trading partners owe each other, and large swings in currencies can affect the actual values of companies. One country could be suffering from inflation while the trading partner's country is not. This can make returns on investment uncertain, and businesses typically don't like uncertainty.

Cross-Cultural Risk

Cultural misunderstandings or language barriers can contribute to business snafus. For example, some areas like South America require more detailed explanations of agreements (we'll call that high context) than their counterparts in the US or Canada (we'll call that low context). Even simple words like ''yes'' can take on different connotations; in some parts of the world it signifies agreement, in other parts it simply means you were understood but not necessarily in agreement. Business practices and making relationships are also handled differently.

Strategic Risk

Suppose you chose poorly when you picked an international trading partner due to lack of local knowledge, or that you miscalculated shipping times due to inexperience. Also, your product might not be suitable in another market. For example, not all smartphones work in international markets; different chip sets might be required. People in one country may not be willing or able to pay an equivalent amount for a product as the consumers in another country. Strategic risks are usually associated with a lack of knowledge about the foreign country or trading partner.

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