Across the globe, countries that dot the map are united in their desire for growth and development. Imports and exports help make this possible, with companies accessing trade opportunities in a variety of industries.
Between 2006 and 2016, according to the World Trade Organization (WTO), agricultural-related exports rose by an average of 15 percent each year. Exports of commercial services reached $5 trillion from $2.9 trillion over the same span, and among WTO members, the overall value of merchandise trade reached $15.4 trillion from $11.7 trillion.
With figures like these, it's little wonder why the United States, the largest economy in the world, is also the largest trading nation.
As opportunity-rich as imports and exports may be for the businesses and consumers that exchange and use them, engaging in trade isn't without its risks, be they financial, political or contractual in nature. Taking a risk management approach in the goods and services you export to trade partners can help you and your company avoid running into issues that could derail your long-term goals. Here are some of the potential obstacles to be aware of when engaging in foreign trade, and what can help you mitigate risk.
An overvalued currency
The United Nations recognizes approximately 180 different currencies, and their relative values are rarely in alignment with one another. Nowhere is this more evident than when exchange rates become overvalued. When this occurs, the purchasing power of the money used in transactions weakens, making exporting a costlier option because it doesn't buy as much as it used to. This incentivizes the purchasing of domestic goods - or those from a country where there's greater currency parity - because exports become more expensive.
While overvalued currency can't be avoided - often influenced by market dynamics and political upheaval, among other contributors - you can mitigate the effects by doing your homework on the exchange rate and taking a preemptive, precautionary approach to international trade transactions. These steps may include obtaining letters of credit that are structured for various business applications. How they're composed depends on the risk factor(s) in question. Financial institutions, where these letters are traditionally available, also frequently work in consultation with the federal government to assist with risk mitigation depending on the risk factor. These government exports programs and affiliations can be found at the International Trade Administration's website devoted to export education and global trade information.
You may also want to consult with a financial manager who specializes in foreign exchange and international business transactions. A professional can give you a rundown of the current and historic political environment and the economic system of governance.
Different legal structures
From banking regulations to determining what constitutes the proper transferal of funds, you can easily run into legal complications with international trade because laws aren't universal. How are contracts handled in China? What compliance protocols must be adhered to in Mexico, and how do they compare and contrast with those in the U.S.? Wading into foreign exchange transactions, without having an understanding of the laws that exist, can be a recipe for disaster, leading to reputational consequences that harm your bottom line and your future trade opportunities, whether with a specific company or country overall. That's why it's important to choose a global transactions partner whose expertise and familiarity with the processes involved can serve as your guide.
From the analysis of currency risk exposure to financing solutions in foreign currencies, Comerica Bank offers business solutions, not just banking products. Our dedicated team of advisors will help you navigate international business practice waters.
Comerica Bank is the Leading Bank for Business1, and our global solutions savvy can take you places that you never thought possible. Find out first hand by requesting a free consultation with us today.
1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.
This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.