International Sales Contracts
International sales contracts are the riskiest form of contract, as little is often known about the buyer. Currency, tariff, insurance, and title risks must be considered, especially concerning bills of lading, upon which monies are usually borrowed. The buyer invariably requires possession to release the goods from the port.
Globalising the world’s economy has made it easier for domestic and international organisations to trade products and services globally. With the advent of worldwide logistics, e-commerce, and more accessible language translation, global marketplaces have been opened to businesses of all sizes.
Global Trade Risks
The disadvantages and commercial risks of conducting trade on a worldwide basis are:
- Shipping Customs and Duties.
- Exchange Rates.
- Language Barriers.
- Cultural Differences.
- Servicing Customers.
- Returning Products.
- Intellectual Property Theft.
Exchange rate risks affect an organisation’s profitability as their volatility can reduce profitability. Exposure can occur in three ways:
- Transactional: Time-related in terms of exchange rate volatility between ordering and payment for goods and services.
- Translational: In terms of financial resources held in foreign subsidiaries.
- Economic or Operating: In terms of future exchange rates affecting the valuation of cash flows and capital.
The fundamental types of exchange rate policy are:
- Fixed: Exchange rates are fixed or allowed to fluctuate within narrow margins against a nation’s currency value, either in terms of gold, another currency, or a basket of currencies.
- Freely Floating: A freely or flexible floating exchange rate is freely determined by market forces without intervention.
- Pegged: Exchange rates are “pegged” against a nation’s currency value, either in terms of gold, another currency, or a basket of currencies.
- Managed Float: The nation’s fiscal policy influences the exchange rate, which is loosely controlled by the nation’s central bank intervention.
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Global Trade Restrictions
Governments have three primary means to restrict trade:
- Quota: A system imposes restrictions on the specific number of goods imported into a country, allowing governments to control the number of imports to help protect domestic industries.
- Tariffs: These increase the price that consumers pay for imported goods and services in line with the fees charged by domestic producers.
- Subsidies: These are given to assist domestic industries in competing with foreign markets to increase their competitiveness by influencing the pricing of domestic markets.
The danger of supporting domestic industries through tariffs and subsidies is that prices can increase, market choices are reduced, environmental issues are not considered, and the production of products and services is vested in the least efficient organisations.
Governments must ensure their country’s wealth by promoting the use of local resources in which they can be the most competitive by utilising training, regional market development and research to increase the financial stability of the trading environment to negate any harmful effects caused to the environment through global warming and decreasing their carbon footprint. Free Trade Agreements must be encouraged to harmonise the legal standards of international trade to minimise its inherent risks and harm to the environment.
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