Risks in foreign trade

Although foreign trade provides great advantages compared to domestic trade, the risks encountered in domestic trade are much less than in foreign trade. There are differences between countries in terms of delivery methods, payment methods, documentation, cultural, political, economic, and legislative aspects, and these differences can create some problems when carrying out trade activities. Companies that want to export or import should be prepared by understanding the risks arising from the problems thoroughly and should make the right risk management. Trading while avoiding risks completely reduces the maneuver area of the companies, so instead of trying to completely avoid the risks, the correct management of the risks should be applied by the companies.

1.     Political Risks

Even though countries that have a stable political environment have fewer risks compared to countries that have been struggling with turmoil, corruption, and instability for years, we can't say there is never risks. As a result of political and economic developments, tensions between countries may increase, and subsequently, policies that will prevent trade can be implemented by governments. For example, the decision of the country you export to boycott Turkey as a result of a momentary tension may cause great damage to all commercial activities. For this reason, in order to minimize the risks arising from political reasons, international relations should be constantly monitored and commercial relations should be developed with more than one country in order to prevent damages that may occur as a result of decisions such as boycott.

2.     Interest Rate Risks

Interest policies also change in accordance with the economic policies of the countries. In this case, as a result of the increase or decrease in interest rates, the income to be generated as a result of commercial activities decreases or increases. At the same time, interest rates can affect the debt burden of firms either positively or negatively.

3.     Risks Related to Product

In cases where the buyer cannot fully examine or see the goods, the buyer may create problems related to the goods after the exporter has sent the goods. The quality of the ordered product may be insufficient or it may lack the features described by the buyer, or the buyer may not like the product for no reason at all. At this point, the goods have now reached the buyer and the exporter company falls into a difficult situation as bringing the goods back will create extra costs. For example, if the payment method is chosen against goods, the seller is in a very disadvantaged position. In order to reduce this risk, the product to be sold should be explained to the buyer with all the details.

4.     Transportation Risks

Every method of transportation carries great risks, whether it is by sea, land, or air. As a result of natural events or technical errors, the goods may be damaged during transportation processes and it is often not possible to prevent these damages. For this reason, the risk should be minimized by carrying out transportation insurance.

5.     Risks Related to Payment

It is difficult to find out the financial status of companies that you are currently working with or will start to work but it is possible to obtain information to some degree from attachments and banks. The financial situation of the firm may be very bad and in the bankruptcy stage, depending on the relationship, the firm may delay payment or make no payment at all. For this reason, companies should choose payment methods that will secure themselves. Advance payment is the method that protects the exporter most clearly, but since the other company will try to reduce its risks too, the methods of letter of credit or cash against documents that protect both sides can be selected. If these methods cannot be agreed on, trade insurance offered by Eximbank or Euler Hermes can be used.

6.     Risks Related to Price

If a good is sold by the exporter at a fixed price and the buyer sells this good in an environment dominated by the free market, it is inevitable that the prices will vary. According to these changes, the pressure on the exporter may increase or decrease and as a result, profitability rates may vary.

7.     Currency Risks

In countries where floating exchange rate policies prevail, exchange rates may enter into a trend of appreciation or devaluation over time or may experience sudden jumps as a result of momentary crises. These changes can be reflected in firms' balance sheets and portfolios as profit or loss.

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