2.3 Risk In International Trade

Risks in International Trade are the major barriers for the growth to the same. International trade has been a much debated topic. Economists have differed on the real benefits of international trade. The increase in the export market is highly beneficial to an economy, but on the other hand the increase in imports can be a threat to the economy of that country. It has been the worry of the policy makers to strike the right balance between free trade and restrictions. International trade can develop an economy, but at the same time certain domestic players can be outperformed by financially stronger multi nationals and forced to close down or get merged. Sometimes these multinational companies become so powerful, especially in smaller countries, that they can dictate political terms to the government for their benefit. International trade is characteristically costlier in terms of domestic trade. There are a number of reasons such as, tariffs, cost of delay, cost related to differences in legal system, etc. The factors of production like labor and capital are more mobile within the territories of the country than across other countries. International trade is restricted to the exchange of goods and services. It does not encourage the exchange of production factors, which may be more beneficial in certain cases. The assessment of risks in the international trade plays an important role in deciding the modes of payment to be used for the settlement between buyer and seller.

The risks that exist in international trade can be divided into two major groups

Economics Risks:

• Risk of insolvency of the buyer,

• Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date

• Risk of non-acceptance

• Surrendering economic sovereignty

• Risk of exchange rate

• Susceptibility to changing standards & regulations within other countries

• Risk of concession in economic control

Political Risks:

• Risk of cancellation or non-renewal of export or import licenses

• War risks

• Risk of expropriation or confiscation of the importer's company

• Risk of the imposition of an import ban after the shipment of the goods

• Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages

• Surrendering political sovereignty

• Influence of political parties in importer's company

• Relations with other countries

Others Risks:

• Cultural differences e.g., some cultures consider the payment of an incentive to help trading is absolutely lawful

• Lack of knowledge of overseas markets

• Language barriers

• Inclination to corrupt business associates

• Effects of unpredictable business environment and fluctuating exchange rates

• Sovereign risk - the ability of the government of a country to pay off its debts

• Legal protection for breach of contract or non-payment is low. [8,291-293]

CONCLUSION

International trade, or trade for any matter, is designed to allow certain people,or in this case nations to specialize. Specialization allows companies to produce products for a lower price, and the products are usually of a better quality than otherwise.

Also, these nations are able to specialize in something they are good at, and trade for other things they aren’t or don’t have the resources to produce.Trade between different countries takes place because it is to their mutual advantage. International trade takes place because of the differences in the productive possibilities of different countries. If each country tries to produce all the commodities which it needs, it will not be able to do so and if at all it succeeds, it will be done at an enormous cost besides Trade between two countries is mutually profitable even when one country is in a position to produce the goods at a cheaper rate than the other country.

International trade has directly contributed to the industrialization of many countries. Ocean shipping advances have made it possible for corporations to do business all over the world. The standardization of practices is recognized worldwide. This helps countries to overcome problems that used to be associated with international business.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization and without it, nations would be limited to the goods and services produced within their own borders.The other group of economists, which speaks in favor of globalization and international trade, come with a brighter view of the international trade and its impact on economic growth of the developing nations. According to them developing countries, which have followed trade liberalization policies, have experienced all the favorable effects of globalization and international trade. China and India are regarded as the trend-setters in this case. There is no denying that international trade is beneficial for the countries involved in trade, if practiced properly. International trade opens up the opportunities of global market to the entrepreneurs of the developing nations. International trade also makes the latest technology readily available to the businesses operating in these countries. It results in increased competition both in the domestic and global fronts. Open trade policies also bring in a host of related opportunities for the countries that are involved in international trade. However, even if we take the positive impacts of international trade, it is important to consider that international trade alone cannot bring about economic growth and prosperity in any country. There are many other factors like flexible trade policies, favorable macroeconomic scenario and political stability that need to be there to complement the gains from trade.There are examples of countries, which have failed to reap the benefits of international trade due to lack of appropriate policy measures. In conclusion it can be said that, international trade leads to economic growth provided the policy measures and economic infrastructure are accommodative enough to cope with the changes in social and financial scenario that result from it.

REFERENCE

1. Douglas A. Irwin, A Brief History of International Trade Policy, Library Economics Liberty, 2001

2. Choi. E.Kwan and Harrigan James, Handbook of International trade. 2003

3. Love. Patrick and Lattimore. Ralph, International Trade ‘free,fair and open?, OECD Insights, 2009.

4. Donald R. Davis, Notes on Competitive Trade Theory,Columbia University, 2001.

5. Suranovic. Steven, International Trade Theory and Policy Analysis, The George Washington University, 1997-2006.

6. WCO Council Session and HLSG, New trends in International Trade, 2004.

7. Rodrigue. Jean-Paul, World Merchandise Trade, 1960-2011, Hofstra University.

8. Feenstra. Rober, Advanced International Trad: Theory and Evidence, 2002.

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