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Starting
out in International Trade
Engaging in international trade is exciting, rewarding and enriching. It is,
however, risky and complex. While technology and communication capabilities are
making it increasingly easier to engage in international commerce, risks such as
political and economic volatility, fraud, disputes in unfamiliar legal contexts,
and logistical challenges remain. In this business, completing the deal is no
guarantee of success, as margins can be destroyed by unexpected delays, expenses
and a multitude of factors beyond those impacting domestic commerce.
Starting out in international trade requires up-front "homework":
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Is your organization prepared to venture to foreign markets? The
investments in time, research and travel can be significant before payback
is achieved |
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What country(ies) are you targeting, with what type of value-added product
or service? |
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What resources are available to help, locally and overseas? |
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What options are there for securing against risks and losses associated
with international trade in the selected markets? |
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What financing options are available to support expansion to new markets? |
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What special characteristics, customs, business practices should you be
aware of in your target markets? |
It is recommended that a systematic and thorough assessment of objectives,
capabilities, risks and anticipated returns be effected before initiating any
significant international business.
Sources
available to help
The Internet provides a rich set of sources to assist in every phase of a
trade transaction, from initial market research to identification of key
partners and service providers, to all manner of trade-related expertise.
Whether accessed through the Internet or otherwise, common sources include:
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Government agencies and departments |
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Embassies, consulates and their Commercial Officers |
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Banks with Trade specialists |
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Non-governmental Organizations (NGO's) such as the United Nations, and the
World Trade Organization |
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Chambers of Commerce |
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Consultants and other specialists |
Selecting
a Market
Very carefully! The complete answer to this question depends on specific
circumstances such as the product involved, the rate of growth of your company,
the driver for International expansion, and the experience/knowledge of your key
decision makers.
In general, consider the following:
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Your product or service offers a clear advantage or value-added over
competitors in the target country |
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You have trusted contacts or
established relationships in the market, or have been referred by a trusted
intermediary |
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The risk/reward picture in the
market is consistent with a level that your company finds acceptable |
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Your time horizon matches that of the
target market: is this a
long-term, relationship-based strategic approach, or a one-off transaction?
How do the conditions in the market support your objectives? |
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Obtain professional help in effecting
market studies and analysis, in
proportion to your intended investment |
Structuring
a Transaction
Once again, the specifics are very dependent on individual circumstances. An
Open Account transaction may be perfectly adequate in one situation (established
relationships, low-dollar value and/or low-risk market), and a Confirmed Letter
of Credit may be advisable in another. In addition to traditional approaches,
Internet-based business models are coming into the picture, and may offer some
new alternatives.
The best approach is to become familiar with the options at a high level, and
tailor a transaction which suits the requirements of buyers, sellers and other
key partners (such as lenders). Your best bet here is to be educated enough to
make informed and effective decisions.
Mitigating
Risk
Risk is not only an accepted part of doing business, it is actually
desirable, since reward usually comes in direct proportion to the (real or
perceived) risk involved. The appropriate response to risk is not to aim for its
elimination, but to strive for its effective management, in line with business
strategy and objectives. In effect, risk mitigation should be viewed not as
elimination or minimization, but optimization, again in line with
business objectives.
In international trade, there are a variety of products, services and
financial instruments available to assist in the management or mitigation of
multiple types of risk:
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Advisory Services & Consulting |
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Documentary Letters of Credit (with various features, terms &
conditions) |
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Export Credit Insurance |
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Non-payment or non-performance insurance |
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Forward foreign exchange contracts and other currency risk mitigators |
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Specially drafted contracts, guarantees and other legal instruments |
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Cargo Insurance |
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Inspection Certificates |
Eliminating
the risk of Fraud
Simply put, the risk of fraud will almost always be present somewhere in a
Trade transaction, even in cases where the buyers and sellers (and their
respective representatives) are acting in good faith. Relationship-building is
powerful in matters of trade; experience is equally key, particularly in being
able to identify potentially risky transactions.
Clarity in documentation, communication and in record-keeping can be helpful
after the fact, and the retention of expert counsel (including legal counsel) is
highly recommended in the event that fraud is alleged.
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