Political risk
Geopolitical risk, also known as political risk, occurs when a country's government unexpectedly changes its policies, which now negatively affects foreign companies. These policy changes may include things like trade barriers that restrict or prevent international trade.
Some governments will demand additional funds or tariffs in exchange for the right to export items into their home countries. Tariffs and quotas are used to protect domestic producers from foreign competition. It can also have a huge impact on an organization's profits, as it either reduces revenue taxed on exports or limits the amount of revenue that can be earned.
Legal Risk
Laws and regulations vary around the world. What is common practice in one country may not be so in another. As a result, exporting companies may face legal issues related to many areas of business, including customs, contracts, currency, and liability and intellectual property rights related to the products they sell.
One of the best ways to mitigate export legal risk is to engage legal counsel located in a particular country jurisdiction or with proven expertise in dealing with local laws. The last thing a company wants to do is get into a protracted legal battle in an unfamiliar country with local legal issues. Relying on trusted legal counsel can largely avoid or even anticipate and proactively handle potential legal issues.
Economic risk
In markets with less stable economies, consider the possibility of economic changes that could affect your export business.
High inflation
High inflation could mean customers can't pay their invoices on time, or potential customers will be interested in extending their credit terms. The worst-case scenario of high inflation could lead to hyperinflation, which in turn could lead to economic collapse. Sold only on safe terms to avoid default.
Exchange rate fluctuations
The exchange rate is the level at which a country's currency can be exchanged for another. It fluctuates continuously throughout the day, with closing prices for buying and selling published at the end of the day. You can eliminate any exchange rate risk by always selling in GBP.
Your customers may insist on paying in foreign currency. Make sure this is a freely convertible major currency. When you invoice in another currency, you can limit your exposure by fixing the exchange rate using forward foreign exchange contracts. This is a process where you basically determine the current exchange rate to use at a future date. You can discuss this with your bank, or read more about export invoice currency.
Foreign exchange control
The government can impose foreign exchange controls on the buying and selling of local currencies. Today, the countries with foreign exchange controls are mostly emerging markets.
The impact on UK exporters could be delayed payments as the country's central bank won't release foreign currency. Often, these controls lead to a black market in currencies, with two exchange rates: an official market rate and an unofficial market rate. The difference from the official exchange rate is known as the black market premium.
A distinction should be made between situations where the country's central bank is only causing delays, and areas where there are local problems leading to export invoicing and widespread smuggling. You should not engage in any conduct that violates the laws of this market or violates bribery, as the penalties can be severe.
Shipping and Logistics Risk
Making an export sale is just the beginning of the process. Goods sold now need to be delivered to customers in a timely and safe manner. This is where exporters may encounter a range of shipping and logistics risks, which may vary depending on the goods being shipped and shipping requirements. Some items require refrigeration, must not be exposed to excessive heat or cold, or have a shelf life. Other items are very fragile and require careful handling or must be assembled before delivery to the customer. All shipments must be tracked. If something goes wrong, the buyer may try to negotiate a price reduction or reject the shipment altogether.
Reducing transport and logistics risks often involves quality control and careful tracking procedures throughout the process. Specialized transportation and logistics companies can also bring expertise to the job, and some insurance companies provide coverage for damages caused by delays and problems in transit.
Language and cultural risk
Doing business with importers and customers in another country requires a certain level of trust. Differences in language, culture, religion and many other aspects of life require careful handling. For example, when exporters and their customers speak different languages, important details and nuances can be lost in translation.
Different cultural practices affect everything from "normal business hours" to ethical behavior to whether customers are willing to buy a product. In many areas, well-meaning exporters can unknowingly create tensions or offend customers, government officials and others important to timely product shipments and other aspects of the business.
The best way to prevent such problems is to have employees who speak the local language or have experience living in a particular culture or region. Additionally, exporters can focus on building local business relationships in the countries where their products are imported to help resolve issues and increase the exporter’s local connections and presence.
Quality risk
Customers may complain about the quality of these products once the goods are shipped. This may be a genuine objection based on the buyer's specific requirements and expectations. It could also be a way for buyers to gain leverage and negotiate discounts on shipped products after the fact.
One way to deal with quality risk is to hire an independent third party to inspect the shipment before it is shipped. If this is not possible, the exporter can send samples to the importer or end customer so that they can inspect the product themselves and determine if the quality is acceptable before any order is shipped.
