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International Trade is usually defined as the exchange of goods and services across international borders or territories. It acts as a significant factor in many of the national economies, as there is a direct proportional relation between export growth and the economy’s Gross Domestic Product GDP. World trade plays a vital role in humans’ lives, taking a look at a supermarket or a shopping center, Brazilian coffee, Swiss chocolate, English tea, and Egyptian textiles, in addition to many other imported products could be found showing the impact of world trade nowadays.
Along the international trade process, there are some risks that the business practitioners would struggle with and should be taken into consideration while approaching world trade and needed to be responded to and monitored. These risks can be classified into four major risks: Commercial Risk, Country Risk, Currency Risk, and Cross-Cultural Risk (NerdySeal, 2021). Commercial risk is a potential for loss with a trading partner due to the inability of paying for the products or services provided, the inability to meet the delivery dates, or the differences in interpreting the agreement with the trading partner (Study.com, 2022).
Secondly, country risk, or the so-called political risk, ‘Country risk broadly refers to the likelihood that a sovereign state may be unable or unwilling to fulfill its obligations toward one or more lenders. It involves an assessment of economic performance in the context of a country’s demand for external financing and judgments about the prospect for changes in financial returns’ (Wagner, 2012). For example, China usually interferes with and highly controls the national business procedures, especially while being in a trade war, by imposing tariffs and quotas on imported products, so there are considerations that should be taken by the international firms willing to do business there.
A great example of a foreign trade war is the one that started in 2018 between the US and China when the largest two economies in the world started imposing tariffs on each other’s goods worth hundreds of billions of dollars. Tariffs were imposed on more than $360bn of Chinese goods, and China responded with tariffs on more than $110bn of US products (BBC News, 2020). Washington delivered three rounds of tariffs in 2018, and a fourth one in September 2019. The last round targeted Chinese imports, from meat to musical instruments, with a 15% duty. Beijing hit back with tariffs ranging from 5% to 25% on US goods (BBC News, 2020). In January 2020, after markets got affected and pressure was put on the global economy, negotiations succeeded between the US and China and an agreement has been signed aiming to ease the trade war. China has undertaken to boost US imports by $200bn above 2017 levels and strengthen intellectual property rules. In return, the US has agreed to reduce almost one-half of some of the new tariffs imposed on Chinese products (BBC News, 2020).
Moving on to the currency risk, which is also named the exchange rate risk, and considered to be one of the remarkable risks regarding the international trade processes. It can be referred to as the frequent fluctuation of the currencies’ values and the uncertainty of future exchange rates. Variations in the exchange rate can have an effect on the payments that trading partners owe each other, and the actual values of companies could change by the great vicissitudes in currencies (Study.com, 2022). If the seller is not properly protected, he could lose money in case of a devaluation or depreciation of the foreign currency. To explain the idea, if the buyer has agreed to pay ¬500,000 for trade, and the Euro is valued at $0.85, then the seller would expect to receive $425,000. Ifâ¯the Euro’s value decreased to $0.84, then the payment under the new rate would be only $420,000, meaning a loss of $5,000 for the seller (International Trade Administration, n.d.).
Lastly, the cross-cultural risk refers to the cultural differences between countries and the risk affecting the international trade process between them in case of misunderstanding those differences. Culture is a term that points to a large and diverse set of mostly intangible aspects of social life. According to sociologists, culture consists of the values, beliefs, language, communication, habits, and customs that people share in common and that can be used to define them as a collective. Culture also includes the tangible objects that are common to that group or society (Cole, 2017). These values indicate the common mindset in the country, how the business is managed and the buyers’ shopping manners, as the foreign customers are totally different from the domestic ones.
Globalization has enhanced the ability of many organizations seeking to conduct business internationally to manage the accompanying cultural differences. The focus has been on overcoming the uncontrollable factors including the legal, political, technological, and economic barriers, while cultural barriers are often ignored. The expected results of ignoring the cross-cultural differences may be losing market share or acquiring a weak one, low or negative return on investment, missing opportunities, and reputational damage as well as legal challenges, productivity losses, expatriate failure, and the premature termination of contracts, joint ventures, and partnerships. The misunderstandings, tensions, and biases caused by cultural differences can even lead to complete failure (Menzies, 2019).
A good example to understand the risk of language differences and how it may affect business agreements If one side is not fully aware of the other one’s language is the literal meaning of the words. In the Spanish language, ‘ma±ana’ literally means ‘tomorrow’ but in the business environment, it means ‘not today’, or ‘indefinite time in the future’ which simply refers to a procrastination manner. So, if the buyer is from Latin America and the English seller asked about the payment time and the answer is ‘ma±ana’, the seller likely will not confirm when the payment will be transferred and there is no guarantee as the word is so vague (Wikieducator, 2007). So, some regions like Latin America need the business agreements to be in high context and more detailed than their neighboring countries in the US or Canada so that the low context agreements may be accepted for them. Even simple words like ”yes” may have various connotations in business agreements, in some regions it means an agreement is taken, while in other regions it simply means that the term is recognized but there is no guarantee for an agreement. (Study.com, 2022).
Religion is another important cross-cultural aspect that affects international trade. For example, in regions where Islam is the predominant religion, the public, and some private sectors comply with what is called Sharia law which is the Islamic constitution and the main principles of Islam that regulates Muslims’ lives. According to Sharia, usury is prohibited, which is financially dealing with interests by collecting, lending, taking loans, or making payments. Trading in financial risk is forbidden as well because it is considered to be a form of gambling. Sharia also prohibits investing in businesses that sell illegitimate ‘haram’ products such as alcohol, pork, and meat that are produced by a non-Islamic way of slaughter. A committee of domestic Islamic scholars is formed by the country’s government to check whether the traded food products entering the market are accepted, and the ‘halal’ label must be stuck on them, otherwise, the whole shipment could be rejected. Furthermore, businesses that produce media contradicting Islamic values are prohibited such as gossip columns or pornography. And even if those products got governmental permission, the end users’ religious sense may get provoked which may lead to losing the market share or getting a bad reputation. International business traders need to understand these cultural barriers before dealings with companies located in such countries as they may limit their success chances and make trading with them risky (Wikieducator, 2007).
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