RISKS IN INTERNATIONAL TRADE

International Trade, particularly exports,  gives a business edge to Indian companies because of factors like rupee depreciation, penetration into diversified markets and various incentives offered by the Government etc. Exporters also need to import good quality raw materials in order to make their products more competitive. However there are certain types of risks associated with International Trade. I would like to give a very brief overview of these risks and the risk mitigation measures in this article.

Risks of exporting

Political risks :  After the Indian exporter sends goods abroad, there could be a war, civil strife, riot or coup in the country of import as a result of which, the goods may be lost and export  proceeds may not be realised. There could be a sudden change in the import policy of the country as a result of which goods sent may be confiscated by the authorities concerned.

Sometimes even  if the importer pays the bill amount in local currency equivalent, his banker may not be able to transfer the US Dollar amount to the nostro account of exporter's banker for the reason that the Central Bank of that ( importer's ) country may be running out of dollar reserves. This exchange transfer blockage will affect the exporter.

Legal risks :  There could be differences in the law in overseas countries, differences in import procedures, taxation, currency dealings  which may jeopardise the clearance of goods or payment of proceeds.

Graft and corruption : This is illegal and exists in varying degrees in different countries. There are known cases of a major Indian PSU trading company, losing crores of rupees in their export to one of our neighbouring countries when they didnt pay bribe  to the customs officials in that country.

Credit and Financing risks : After export of  goods to the foreign country, the importer there, may default in taking delivery of goods or in payment (after taking delivery on acceptance of the non LC usance bill).

The exporter after realisation of foreign exchange may run the risk of rupee appreciation and incur huge losses.

Quarantine Compliance : In case of export of perishable goods like fruits and vegetables etc, the Indian exporters may run risk in case they do not comply with the quarantine rules prescribed for proper preservation.

Risks of Importing

Clean Payments :  When an importer makes an advance payment to the foreign supplier, the supplier may utilise the money but default in sending the goods. 

Shipping of inferior goods :The foreign supplier may send the goods, but of inferior quality. 

Supplier becoming insolvent :  The foreign supplier after receiving the  payment may become insolvent and the importer may not receive the goods ordered.

Exchange Transfer risk :  Indian importer may remit funds to the foreign supplier's bank's nostro account in another country. If that nostro account is suddenly frozen, the supplier may not receive payment and importer may not receive the goods.

Country risk :  If the importer makes payment first, and war erupts in the country of supplier or the country of supplier bans export of that particular item, importer will incur losses.

Risk mitigation measures

Political ( country) risks :  The political risks for the Indian exporter are covered by ECGC ( Export Credit and Guarantee Corporation Of India). ECGC gives policy to the exporter on payment of premium offering protection from losses on account of political risks in the counrty of import.

The risk in not getting payment on account of exchange transfer blockages is covered again by ECGC through a guarantee called Transfer gurantee, given to the exporter's banker on payment of premium. Normally this guarantee is needed in respect of countries with weak foreign currency reserves.

Legal risks :  Generally there are no problems of this nature when exports are made to developed countries. When exports are contemplated to new virgin areas or underdeveloped countries, it would be prudent to consult the solicitors in the overseas countries  before embarking on actual export.

Credit and Finance Risks :  The first and foremost action on the part of exporter should be to obtain a proper reference or credit report on the overseas buyer through bank or agencies like Dun & Brad street or ECGC before entering into contract.

To cover the risk of default by the foreign buyer ( mostly in  case of non LC transactions), Indian exporter can take a policy as stated earlier from ECGC. The Standard Comprehensive Risk policy of ECGC covers both political and commercial risks for the exporter after the goods reach the destination. ECGC sets up buyer wise limits  in this policy.

Transport risk, i,e, the risk of loss of goods in transit over air or sea for the exporter is covered by the marine insurance companies like New India Assurance Company , Oriental Insurance Company etc.

Exchange rate risk can be covered by exporter  as felt necessary by booking forward contract, option or currency future etc.

As far as importer's risks are concerned, the importer may obtain opinion or credit report on the foreign supplier through bank or Dun & Brad street before taking a decision to send advance payment. In case the amount involved is more than USD 100000, as per FEMA guidelines, he may call for a foreign bank guarantee from the supplier before making the advance remittance.

For sending advance remittances, or to avoid loss on account of exchnage transfer blockages, the importer may avoid countries with record of war or poor forex reserves etc.