12:51 pm - Thursday April 27, 2017

Risks in international trade

As a practitioner, I have encountered many risks while handling international trade in different locations (domestic and foreign included). I was amazed and at the same time swayed by these risks in international trade. I have meticulously documented them all these years and wish to share them with my readers now.

For a beginner, the characteristics of international trade are – buyer and seller are located in different countries, the goods and the value of goods move in opposite directions and the currencies of the buyer and the seller have their own value, which undergo change every now and then.

The risks in international trade can be grouped under the following four major categories – buyer risk, seller risk, shipping risk and other risk.

The buyer risk may arise due to the following happenings:

After the buyer orders for the goods and after the seller ships the goods, the buyer may not accept the goods once they reach his/her shores. The risk for the seller in this case – s/he has to rebook the goods from the buyer’s country to his/her country or some other buyer in another country or look for alternate buyer in the original buyer’s country. This risk is known as non-acceptance risk.

After the goods are taken delivery by the buyer after they are ordered and shipped by the seller, the buyer may decide willfully not to pay for the goods. This is non-payment risk. This non-payment risk can be sometimes classified as credit risk also. Only costlier legal battles in the buyer country’s court of law may provide some salvation.

Some times some smart buyers may raise quality issues after the goods are taken delivery by him/her and request the seller to write off the goods or ask for sizeable discount. This risk is known as quality claims risk.

The seller risk may manifest itself in any one of the following manners:

After the buyer makes 100% advance payment for the shipment of goods ordered, the seller may not ship the goods. Once again costlier legal battles in the seller country’s court of law have to be waged to get mitigation. This risk is known as non-shipment.

Sometimes, the seller may ship inferior goods after receiving 100% advance payment. The buyer will come to know only after shipment is made and the goods taken delivery. This risk therefore arises due to quality goods not supplied.

In international trade, goods are ordered for seasons and if the ordered goods are not received in time, the buyer may not be able to dispose them off. Many times s/he may have to offer hefty discounts thereby incurring heavy losses. This arises due to late or delayed shipments effected by the seller.

The third major risk category is shipping risk and they arise on account of any one of the following:

Goods mishandled – Once the goods are handed over to the shipping company for transportation from the seller’s country to the buyer’s country, they are physically handled by the shipping company’s representatives at different points of time during the journey. There is every possibility that the goods may be mishandled during the journey.

Goods abandoned – The shipping company has a right to abandon the goods on board the ship, to save the ship in extreme conditions during the journey. The ship may face rough weather enroute and to ensure stay afloat and safe navigation the captain of the ship may decide to abandon the goods.

Goods siphoned – Some times, part or whole of the goods may be siphoned off during the journey by unscrupulous elements.

Goods wrongly delivered – Some times, the shipping company may deliver the goods to a wrong person. This can happen in the case of premium goods, which are very much in demand.

Goods delivered at another destination – Sometimes, the shipping company may change the route and deliver the goods at a different destination. This can happen in war or warlike conditions in the destination country or en-route.

Goods appropriated for freight payment – In the case of goods shipped with ‘freight to collect’ conditions, the shipping company will auction the goods and appropriate the proceeds towards their dues if the buyer fails to take delivery of the goods within the prescribed time.

Transhipment risk – Some goods require faster transportation to ensure against decay or damage during shipment and normally the seller and buyer would require the goods to be delivered without any transshipment enroute. Though the shipping companies offer this service, sometimes they may be forced to transship the goods due to reasons beyond control.

Piracy attack – Some sea routes are notoriously known for piracy attack. In such piracy attacks, either the goods are damaged or taken over by the sea pirates. Some times, even the entire ship is stolen.

The other risks in international trade are: –

Bank failure risk – The banks provide intermediary facility in international trade. When the goods are delivered by the seller and when the payments are made by the buyer, the proceeds are routed through banking medium. There is a possibility for these banks to fail do exist in international trade.

Documents risk – Sometimes, fraudulent documents are created and passed on in international trade. They are very serious and very difficult to identify them in the first place.

Legal risk – In some countries, the local legal environment may not facilitate the buyer or seller.

The following risks are specific to the particular trade – competition risk, price risk, spread risk and market absorption or rejection risk.

One should not be afraid and get completely taken over by these various risks in international trade. The real thrill and satisfaction lies in encountering them and managing them successfully.

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