International trade is encouraging but it is very risky and requires certain caution. It has many advantages, also risk. First, getting understand them; and then, find what exporters must learn and know to get advantages and avoid risk. there are some tips include in this. This will lead you do your tasks.
INTRODUCTION Nowadays, many companies choose international trade as a way to extend their business and reach more new markets in the world This way not only brings them many benefit but also give them risky Everything has two sides So once they choose international trade, they have to prevent themselves from being risk to gain the stable development CONTENT I Definition: International trade International trade is the exchange of goods or services along international borders This type of trade allows for a greater competition and more competitive pricing in the market The competition results in more affordable products for consumer The exchange of goods also affect the economy of the world as dictated by supply and demand, making goods and services obtainable which may be otherwise be available to consumer globally Increasing international trade is crucial to the continuance of globalization International trade is also brand of economics It is more costly than domestic trade II Advantages and risks of international trade Advantages of international trade With the help of modern production techniques, highly advanced transportation systems, transnational corporations, outsourcing of manufacturing and services, and rapid industrialization, the international trade system is growing and spreading very fast The benefits of international trade have been the major drivers of growth for the last half of the 20th century Nations with strong international trade have become prosperous and have the power to control the world economy The global trade can become one of the major contributors to the reduction of poverty Several benefits that can be identified with reference to international trade are as follows: 1.1 Greater variety of goods available for consumption International trade brings in different varieties of a particular product from different destinations This gives consumers a wider array of choices which will not only improve their quality of life but as a whole it will help the country grow 1.2 Efficient allocation and better utilization of resource Efficient allocation and better utilization of resources since countries tend to produce goods in which they have a comparative advantage When countries produce through comparative advantage, wasteful duplication of resources is prevented It helps save the environment from harmful gases being leaked into the atmosphere and also provides countries with a better marketing power Let’s take a simple example: Country A and country B both produce cotton sweaters and wine Country A takes three hours to produce ten sweaters and two hours for six bottles of wine a year while country B produces six sweaters in one hour and take three hours to produce ten bottles of wine a year But these countries realize that they could produce more by focusing on those products with which they have a comparative advantage Country A then begins to produce only wine, country B produces only cotton sweaters We can see then that for both countries, the opportunies cost of producing bother products is greater than the cost of specializing… 1.3 Promotes efficiency in production International trade promotes efficiency in production as countries will try to adopt better methods of production to keep costs down in order to remain competitive Countries that can produce a product at me lowest possible cost will be able to gain larger share in the market Therefore an incentive to produce efficiently arises This will help to increase the standards of the product and consumers will have a good quality product to consume 1.4 More employment More employment could be generated as the market for the countries’ goods widens through trade International trade helps generate more employment through the establishment of newer industries to cater to the demands of various countries This will help countries to bring-down their unemployment rates When labour specilises skills may improve Labour therefore becomes more mobile thus allowing for greater trade in labour 1.5 Consumption at cheaper cost International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high Therefore it becomes cost cheaper to import from other countries through foreign trade 1.6 Reducing trade fluctuations International trade equalizes the prices of goods throughout the world As the area of markets is enlarged by trade, the effects of the disturbing factors are spread over this large area and prices become more stable If, at any time, the price of a commodity goes up abnormally, it can be imported from abroad and its price brought down 1.7 Utilization of surplus produce Due to international trade, goods are produced not only for home consumption but for export to other countries also It enables different countries to sell their surplus products to other countries and earn foreign exchange 1.8 Exchange of technical know-how and establishment of new industries Underdeveloped countries can establish and develop new industries with the machinery, equipment and technical know-how imported from developed countries This helps in the development of these countries and the economy of the world at large 1.9 Encouraging FDI International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets For the receiving government, FDI is a means by which foreign currency and expertise can enter the country These raise employment levels, and, theoretically, lead to a growth in the gross domestic product For the investor, FDI offers company expansion and growth, which means higher revenues 1.10 Fostering peace and goodwill International trade fosters peace, goodwill, and mutual understanding among nations The people of different countries come in contact with each other Commercial intercourse amongst nations of the world encourages exchange of ideas and culture It creates co-operation, understanding, cordial relations amongst various nations Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them Risks of international trade International trade is regarded is safe way for trade related activities; however, it is also fraught with a number of risks We may say that any business activity involves many risks of several types Because of these risks, firms are starting to ask some questions related to the threats that may affect their activity The most important questions are: What is the commercial risk in international business? How commercial risks arise in export import trade of international business? What are the factors caused for commercial risk under import export activity? There are three types of risks that any organization should be aware when it is decided to operate in the international market 2.1 Political risk Political risk refers to the complications that buyer or seller may expose due to unfavorable political decisions or political changes that may vary the expected outcome of an outstanding contract Examples of political/sovereign risk are changes in fiscal/monetary policy, war, riots, terrorism, trade embargoes, etc These risks arise due to change in political situations in the concerned importing and exporting countries Following are the factors, affecting the political situation: - Changes in the party in power in the concerned countries, followed by head of the Government - Coups, civil wars and rebellions - Wars between the countries or among- many countries - Capture of cargo by enemies during war Political Asks can be avoided, to a certain extent, by judicious selection of the countries to which goods are exported Insurance companies may agree to provide cover for some of these risks, by collecting additional premium Export Credit Guarantee Corporation (ECGC.) also 'covers seine of the risks 2.2 Transportation risk Transit risk is the risk of goods being damaged during shipment from the place of origin to the place of destination Failure in addressing transit risk may result in heavy replacement cost or performance risk Transport costs constitute, generally, a major part the invoice value and so any change in transport costs affects the competitive edge of the exporter Due to long distance between countries, goods are despatched by shipping or airways Sea and transport are exposed to many types of additional risks 2.3 Foreign exchange risk It can be defined as the variability of a firm’s value due to uncertain changes in the rate of exchange A buyer or seller may deal with foreign currencies in their daily course of business This implies that they are exposed to fluctuations in foreign exchange market which may result in paying more (by the buyer) or receiving less (from the buyer) in terms of the local currency Three aspects of foreign exchange risk: • Transaction risk: The risk of changes in the expected value of a contract between its signing and its execution as a result of unexpected changes in foreign exchange rates • Translation risk: Gains or losses from the expected value of exchange rate a contract between its changes that occur as signing and its a result of converting execution as a result financial statements of unexpected from one currency to changes in foreign another in order to exchange rates consolidate them • Economic risk: Changes in competitive position as a result of permanent changes in exchange rates III Lessons the exporters must learn Offer customers attractive sale terms and appropriate payment methods To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported by appropriate payment methods Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer Open account An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days The importer periodically transfers money to the debt account to pay the exporter Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors When an open account payment method is used, the exporter in essence grants the importer a commercial credit, so normally it only applies to parties who have regular and interrelated relations However, the exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using of one or more of the appropriate trade finance techniques, such as export credit insurance Pay suppliers in advance An advance payment is a type of payment that is made ahead of its normal schedule, such as paying for a good or service before you actually receive the good or service It is the most preferable method of payment, helps your cash flows positive, and minimizes your risk However, few buyers will be willing to pay in advance because they concerns that the goods may not be sent if payment is made in advance At this point, exporter can come up with the solution that the importer just need to pay a part of the cost to secure benefits for both parties. IV Some tips about security in payment exporters must know Letter of credit One of the most secure instruments is a commitment by a bank on behalf of the buyer that payment will be made to the exporters once paperwork is complete They are most commonly used when a buyer in one country purchases goods from a seller in another country The seller may ask the buyer to provide a letter of credit to guarantee payment for the goods The main advantage of using a letter of credit is that it can give security to both the seller and the buyer Moreover, both bank charge a fee but letters of credit shift the risk from the business owner to the bank and free up the business’s credit line Payment in advance In the corporate world, companies often have to make advance payments to suppliers when their orders are large enough to be potentially burdensome to the producer, should the buyer decide to back out of the deal before delivery This can assist producers who not have enough capital to buy the materials needed to produce a large order, as they can use part of the advance payment to pay for the product they will be creating Terms of delivery Importing or exporting will be covered by an effective set of delivery terms, such as using Incoterms Incoterms (International Commerce Terms) is a set of internationally recognized rules of trade and widely used worldwide The Incoterm provides rules that relate to the price and responsibility of the parties (the seller and the buyer) in an international trade It helps to set out fair compensation rules in the event of a late, damaged or missing delivery CONCLUSION If you walk into a supermarket and can buy South American bananas, Brazilian coffee and a bottle of France wine, you are experiencing the effects of international trade Economic theory indicates that international trade raises the standard of living A comparison between the performance of open and closed economies confirms that the benefits of trade in practice are significant International trade allows us to expand our markets for both goods and services, helps economic develop, connects other country, and make success of individual businesses However, shifting politics, new business models and changing societal expectations are creating new challenges As a result of international trade, the market contains greater competition and more competitive prices, therefore exporters must study and learn lessons carefully in order to gain the success in their own business ... III Lessons the exporters must learn Offer customers attractive sale terms and appropriate payment methods To succeed in today’s global marketplace and win sales against foreign competitors, exporters. .. bananas, Brazilian coffee and a bottle of France wine, you are experiencing the effects of international trade Economic theory indicates that international trade raises the standard of living A comparison... performance of open and closed economies confirms that the benefits of trade in practice are significant International trade allows us to expand our markets for both goods and services, helps