What are the Different Challenges to International Trade?

Entering and succeeding in international trade is not without its challenges, but overcoming those challenges can lead to global entrepreneurial success. Recognizing sources of potential difficulties and planning to meet and overcome them is the key to success. Global marketing has inherent risks from external factors—such as economic or political changes in individual countries—as well as the internal factors of organizational capacity. Successful global marketers are well informed about trade conditions and geopolitical affairs. They also make the internal preparations required to manage an international customer and/or supplier base.

Economic Risk

When a company begins to trade outside its home country, it assumes economic risk, which is the possibility that changes in the economy of the country where it does business will cause financial or other harm. Factors such as the inflation rate, availability of financial resources, and the like can work in favor of a global company, or against it.

Prudent international entrepreneurs learn all that they can about the economy of the countries where they intend to do business and stay current with respect to changes where they are active. They also work with merchants and agents that can help to minimize economic risk, due to their knowledge and experience in the local markets. In addition, the U.S. Export-Import Bank (Ex-Im Bank) provides information about the economic and political risks in a given country and has an export credit insurance program to protect against failure—for economic or commercial reasons—of repayment by foreign customers.

A particular risk facing global entrepreneurs is the foreign exchange rate (FX). The rate of exchange between any two currencies can shift favorably or unfavorably for one of the trading partners in the interval between ordering and payment, sometimes radically altering profitability. For a firm located abroad and operating in terms of the local currency, this can pose particularly serious problems. You can insulate imports or exports being affected by rate changes by trading in U.S. dollars and by using financing strategies known as currency hedging. By making the transaction in U.S. dollars, the business shifts exchange-rate risk to your trading partner.

Political Risk

As you might expect, there is also political risk inherent in global marketing, the possibility of a country’s political instability reaching a breaking point or a government’s new policies negatively impacting foreign companies doing business inside its borders. To minimize these risks, it is critical that you carefully assess the political environment of a potential host country and understand its laws and leadership. The relative stability of the government will largely define the political risk. While researching potential trade areas, it is critical to understand the overall sociopolitical environment, as well as specific laws and regulations as they pertain to your business field. Aspects to evaluate include:

  • The attitude of the government toward foreign companies/foreign investment, including direct investment. Is it welcome or unwelcome?
  • The political structure of the host nation and its stability. Is the current leadership solidly entrenched or might a regime change be imminent?
  • Anticipated reactions from the host government. How, if at all, will it support, challenge, or prevent your operations?
  • Any potential points of conflict, or friction between the planned venture and the national interests of the host country. What are the potential problems?

Examples of political challenges would be for a country to ban all exchange of goods with the United States, the prohibition of direct foreign investment, or a government seizure of foreign assets. More subtle, but equally disastrous, would be regulations requiring a full disclosure of product information that stripped away the intellectual property protection enjoyed in the United States, thus revealing trade secrets.

The London School of Business and Finance is the one-stop solution to learn more about International trade and marketing.

Author: External Author

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