International trade involves the undertaking of business transactions across territorial borders (Levi, 2009). Global trade earns a country revenue adding value to the gross domestic product. In this kind of business transaction, currencies are exchanged, which helps determine the strongest currency. Although importation and exportation have to present to foster good relations among the nations, policies have to be laid out to control the number of goods and services. Laws are established to help govern and influence the trade among the nations. Such rules and policies are laid out to help enhance competitiveness. Many nations have gone international, whereby to gain a competitive advantage over other countries, they produce those items they are good at while allowing their neighbors to do the same. Operating in an international market involves adhering to other nations’ demands and policies together with tariffs and taxes put in place.
The global events in the international market determine the price of goods and services amongst the nations. Such forces that impact prices include political instability, diseases, and epidemics, civil wars, to mention but a few. These forces may cause the exchange rates and goods’ prices to fluctuate due to the unfavorable marketing environment. In the global market, a country’s resources do not equal their neighbors, making them specialize in areas that will benefit them immensely. For instance, a nation producing products A and B, and being good at creating product B will major in this single product and allow her neighbors who are superb in making A to manufacture it. Product specialization is brought about by the difference in the availability of labor, resources, and materials. Trade between nations is essential, and thus, various countries have merged to create a free trading environment through the formation of trading blocs like the ECOWAS and Commonwealth, to mention but a few. Members of such trading blocs do businesses freely and impose policies on non-members. With benefits in line, the international business faces numerous risks as discussed below:
Risks in the International Trade
Commercial risks have risen to limit the smooth operability of international trade. Such risks emanate from longer lead times, inadequate knowledge concerning foreign markets, inability to adapt to the prevailing market conditions and changes, and market uncertainties. Commercial risks in the international market are much impactful in comparison to the domestic market.
The sudden change of exchange rates poses a threat to a country’s global business. The alterations in exchange rates might work to the benefit of a nation or otherwise. If the exchange rates are changed, lessening the home currency value of a particular country, the exporters benefit. The exporter will have benefitted because her currency will have appreciated at the expense of a particular country.
Tariff barriers, which are not limited to trade licenses and import quotas, determine the goods’ prices. Such barriers are usually in a tax form, and a rise in imports would mean that the product’s competitiveness will decline. Many of the established markets, upon being exposed to change in the international markets, import duties, and introduce new tariff barriers, disorientate the smoothness of business activities.
Political risks are also a significant hindrance to a conducive international market environment. Political risks are brought by the change of a government, civil wars, war between nations, and cargo theft while in transit. Upon the change of a government, new leaders come into power who possess different ideologies compared to their predecessors, passing laws that make foreign investors and neighboring nations afraid to do business with such a country. Civil wars and war among nations make international business hard to exist as resources get destroyed, and peaceful coexistence is ruined.
The cargo faces immense risks during transit. The goods and products for trade get transported by water, road, air or by rail. The four means of transportation are efficient based on the destination of the cargo. The far the destination, the more risks the cargo faces. Nations that choose to import or export products by water face uncertainties that are a threat to the business. During transit, the cargo could be attacked by pirates or, worse, sank due to bad weather in the sea, which destroys the expensive goods. The ship transporting the cargo could malfunction and explode, leading to loss of both products and the anticipated good business relations with outside countries. Transportation by road with the use of trailers faces numerous threats that cause risk to international trade. Bandits might attack the vehicles transporting the cargo and steal its components. Many nations are underdeveloped, meaning they have no excellent infrastructure that would allow the movement of goods from one place to another. Bad weather makes transit of goods by air a problem. Many airplanes have been recorded to lose direction due to poor weather or due to attacks by terrorists.
Credit risks have been an issue in international business. The selling of goods and products on credit is common in international trade. To gain the consumers’ confidence, the exporters give goods on credit in a promise to pay the debt in a short while after consumption of partial or entire commodities. The selling of goods in credit creates competitiveness among the nations such that failure to give goods on credit will mean that no people will consume. Nations give out goods, which accumulates a considerable debt that is difficult for their debtors to pay at a go.
Cultural differences are also a significant risk to international trade. Lack of adequate market research of overseas markets causes uncertainties about what products and goods are consumable by people of a particular nation. For instance, the Muslims do not consume pork, and a nation with inadequate knowledge about them will supply them with foodstuffs they do not consume. For the Colgate business, different people have different tastes and preferences. While others buy toothpaste to make their teeth clean, others use it due to its good taste (Jensen et al., 2011). The people of West Africa rarely use toothpaste for it makes their teeth whiter instead of yellow, which is their pride. There is no common tongue for all the communities and nations involved in trade in the international market, making the language barrier an obstacle. For a business to do well in a foreign nation, communication is critical, which will require the use of a common language. Nations consider payment of tax and a small fee as a requirement for a successful business.
In conclusion, international trade benefits nations and, at the same time, causes uncertainties as discussed herein. The political environment, a nation’s culture, economic and legislative environment determine the success or otherwise, of an international business. With a country going global, more opportunities are realized, and its GDP increases due to imports and exports. Trading blocs have from the past created a conducive trading environment for their member states, enabling them to trade freely. Nations agree to produce products based on the resources and materials, which brings out the comparative advantage.
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Pearson Australia.
Jensen, O., Gabre, P., Sköld, U. M., & Birkhed, D. (2011). Fluoride toothpaste and toothbrushing; knowledge, attitudes and behaviour among Swedish adolescents and adults. Swed Dent J, 35(4), 203-13.
Levi, M. D. (2009). International finance 5th edition. Routledge.
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