Export Risks In International Trade

İhracatta Riskler

In addition to the big advantages it provides, exporting brings a number of risks along. Small and medium-sized enterprises that haste to start exporting asap generally plunge into contacting potential buyers in an attempt to sell their products without studying the markets and export risks. As such they ignore scrutinizing the entry conditions in the beginning and make the deals with the leads. In the following process, they learn that they are required to fulfil a series of criteria such as tests, permissions, certifications or export-import related documents.

In addition to not knowing about the procedures, they may also be unaware of the potential risks that arise from various reasons like political, legal, cultural or financial risks. You can never be safe and prepared without recognizing these risks.

Photo by Zakaria ABDELKAFI / AFP

“I don’t want to take risks, so I don’t work with the Middle East, Asia, Africa, and South America. Europe is enough for me.” bla bla bla…

Firstly, I have to say that this is not an original idea. Everyone wants to sell to developed countries, but they are not endless markets; plus there’s no guarantee you run your business smoothly. With such an idea, you will find yourself in a very competitive environment in a very narrow area, and you will not be able to increase your prices even when your costs increase in order not to lose those markets; so you will inevitably be tied to the buyers’ apron strings (I recommend you learn about the blue ocean strategy). Even in this case, it is not a guarantee that you will keep your customer base.

When it comes to trade, the risk is always there, whether it’s domestic or international. So, as a company that exports or wants to export you cannot set up a risk-free business, but you can mitigate them by knowing what export risks are and taking preventive precautions. The point is not to avoid risks, but to learn to live with them, and beyond that, to love and manage them.

Life itself is an uncertainty. We can only survive with our adaptability. See how the companies that can survive the pandemic test and run their businesses.

It is not the strongest of the species that survives, nor the most intelligent. It is the one most adaptable to change”.

Charles Darwin

Risks in Export

Political Risks

As countries are independent and different from each other in structure and governance, the types of risks and their probability of occurrence also vary.

For example, as an exporter from Turkey you had a robust penetration in Egypt and Saudi Arabia and focused entirely on these two markets. Then, out of the blue, you find out that Turkish goods were boycotted for political reasons. What now? All your loyal business partners’ hands are tied; they cannot import your goods no matter how much they want it. In a panic, you’re searching around to switch the market and turn back to your old customers from other countries. However they already have their suppliers and may be reluctant to work with you in such a short time.

If you have implemented a strategy of doing business in different markets with the aim of spreading the risk by taking into consideration such problems beforehand; congratulations!. 

If the country you do business in has political risks, you have to closely follow it against an embargo threat, civil or military uprising, non-tariff barriers, arbitrary practices and restrictions. When the circumstances turn against you,  you can revise the payment method in your favor with the companies you work with, or you can take additional measures such as applying to Eximbank or a similar institution for export credit insurance.

Economic and Financial Risks

Just as it is important to be cautious for a new customer, it is equally important for the existing customers. This year may be their last business year and they may not tell you about it. They may go bankrupt; or they delay the payments based on the trust established between you. In other words, there is always a risk of late payment or nonpayment of the goods for some reason with your existing customers.

It is always beneficial for your long-term business relationship to agree on a payment method that will make you confident. For example, cash payment is the best method for the exporter. However, it may not be easy to get the other party to accept it because they will think the same for you and demand “Cash Against Goods“. In this case, you can work with payment terms that protect both parties such as letter of credit , BPO or Cash Against Documents (although CAD does not cover you as much as an L/C, it is better than Cash Against Goods). 

The customers may be reluctant to work L/C due to its complicated procedures and expenses. If you don’t want to lose your customer for such payment terms you can accept Cash Against Goods anyway, but apply to export insurances to secure yourself. These ECI organizations also conduct intelligence work on the buyer.

Quality Risks

Especially in the cases where the sample is not checked by the buyer, the exporter may face some objections by the buyer after sending the goods. The ordered goods may not be of the desired quality, do not meet all the specifications specified by the buyer, or the buyer may deliberately not accept the merchandise even though the order is correct. They can do this to reduce the price and put you in unexpected trouble as the goods are already at the buyer’s port and the cost of returning them will be high. If your agreement is on Cash Against Goods or a certain sum of it is paid on delivery, the buyer has a leverage over you.

In order to prevent this, you can send samples, photographs, videos of the product or documents indicating that the goods meet the desired specifications.

You can also make use of third party inspection services such as SGS, Bureau Veritas, and assure that everything will be done properly by your side.

Transport Risks

Each mode of transport has its own risks. In maritime transport, the ship may sink. It may be lost, hijacked, containers overturned into the water or damaged in transit. In road transport, problems arising from transit documents, movement certificates may come out; truck could have an accident and damage to the goods. Food products may spoil as a result of long waiting at the customs. Although it is not possible to completely prevent these problems, having transportation insurance will help to minimize the damage for both the buyer and the seller.

Language and Cultural Risks

Language, religion and cultural differences have a significant impact on the business world. When you know about the culture of people from different countries, your communication becomes stronger and you can express yourself easily. There are many factors that will leave a positive impact on the person you are talking to. By ignoring etiquette, the relationship you try to develop may not be effective and you will not be able to put your relationship on a solid foundation in the long run. At the end of the day, everyone gets closer to the person they can get along with.

Another point is having a command of a language. Misunderstanding of incoming e-mails or calls may end up with signing an incorrect contract. Saying “This is not what we agreed on!” won’t be of help to anyone later. Therefore, make sure that your words are fully understood by the other party and confirm that you have correctly understood what the other party has said. It is very common to see such disputes as payment and delivery terms or the order itself. In order to avoid such problems, your foreign trade department should have very good communication and language skills.

Other Risks

If it was 2 years ago, I’d not even have mentioned a virus affecting the whole world and becoming a global disaster. But today we’re experiencing a new type of risk which affects people’s lives causing deaths, let alone trade being interrupted. In such an extraordinary situation, the outbreak caused global inflation. We have witnessed a tremendous surge in shipping prices, food and raw material prices. Ports stopped or slowed down and there is now a lot of congestion at the ports all around the world. The Container crisis is another issue along with trade wars. In such chaos the world is yet trying to get back to normal and uncertainty dominates the world at the moment. This is a new and big challenge for exporters to quote, supply, produce and ship.

In addition to the risks I have listed above, there are other risks that are likely to arise:

  • Corruption and bribery in the country of destination,
  • Quarantine regulations differ from one country to another,
  • Currency volatility risk affecting profit and loss,
  • Legal issues such as patents, licenses, intellectual property rights,
  • The risk of not making or delaying the payment as a result of not preparing the documents correctly,
  • Failure of your bank to notify the incoming transfer in time, not examining the export documents carefully or losing them,
  • The issuing bank’s delivery of export documents without collecting the cost of goods.

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