The risks of international trade exist. And knowing them is vital to avoid future headaches. These risks are called “commercial risks”, and are mainly preceded by the difficulty of obtaining sufficient information about the seller or buyer, the commercial customs of the country in which we are conducting the negotiation and, therefore, the legal environment.
There are different types of commercial risks, which we can differentiate and distinguish according to the moment or state in which the purchase/sale operation is located.
Main risks of international trade
Default: The risk par excellence occurs when the buyer, after receiving the merchandise, does not comply with his payment obligation. There are means to counteract the risk of non-payment, among them the Export Credit Insurance, which provides coverage for the risks inherent in commercial operations between contracting parties from different countries.
In Spain we find CESCE, the Spanish Export Credit Insurance Company, which offers coverage for both commercial and political or extraordinary risk.
Fraud: The risk of fraud is nothing more than an authentic form of premeditated deception with the intention of illicit enrichment. Companies that start out in foreign trade are mainly exposed to this risk.
Delivery: Risk that the merchandise that the seller makes available to the buyer does not meet the contractual requirements of quality, time and form of delivery, or that it never arrives at all.
Transport: international trade involves a greater distance between the point of departure and arrival of the goods, therefore a significant increase in risk. For this reason, it is important to have trustworthy logistics companies, experts in the market/s to which we are going to export or import. Freight forwarding companies, preferably with their own structure, that are capable of managing our operations, both conventional and triangular if applicable.
The risk of transport involves different variables, including the means of transport used. In this case, both the sender and the recipient must know, evaluate, and neutralize all the risks that transport represents. One way to limit the risks of transporting goods is the Incoterms 2020.
Exchange risk: when it derives from the use of a currency that is not one’s own, since it can alter the expected benefit. For this reason, it is always convenient to base yourself on stable currencies and cover that exchange risk through clauses or insurance.
legal risk: Lack of knowledge of the laws, legal systems, agreements. Especially to take into account for companies that operate with goods for human consumption, since certain countries modify their laws as a protectionist measure.
It is also necessary to ensure that all the documents are in order to avoid misunderstandings when clearing the merchandise through customs. Any error in the information that appears on the bill of lading, on the commercial invoice that does not match what appears on the documentary credit, if we have it, can lead to costly delays.
In addition to commercial risks, there are other types of risks, which to a certain extent we must always keep in mind and more specifically in large-scale operations, these risks of international trade are known as extraordinary and catastrophic risks.
In this classification we can include risks derived from natural catastrophes, wars, strikes, etc.
In short, there are all kinds of risks, but also measures to reduce them. Before embarking on an international sales operation, it is necessary to know the destination market in depth, and very importantly, the potential buyer or seller, and, in the event that this is not possible, ensure everything that we can insure in exchange for reducing the profitability of the operation.