Risk Management in International Trade

Risk Management in International Trade

Various types of risks can arise in international trade. The Vienna Convention on International Trade in Goods, in which the parties represent approximately 75% of the world's international trade, is the main legal framework regulating international sales contracts, but it does not address all the problems that arise in trade. The main risks associated with global trade are non-compliance with imported products, non-payment risks and currency risks. We share with you three different ways to manage such risks.


Non-Compliance Risk


The risk of non-compliance is when an item different from the one ordered is received and is not noticed until after delivery. To avoid this, it is necessary to gather advice and reviews when establishing a new business relationship. You should also include a clause in the contract that allows for quick and easy compensation in the event of product non-compliance. Finally, choosing documentary proof as a means of payment may be an option to consider in certain situations, provided the bank confirms that the shipped goods conform to the order prior to making the payment. If the non-compliance is due to damage to the goods and is detected on arrival, the buyer may refuse delivery.


Non-Payment Risk


This is the risk that international sellers fear most. To avoid this, sellers have several tools at their disposal. The easiest and most effective way is to receive an upfront payment, but it is rarely used in business transactions between regular partners. In most cases, the seller may require retention of ownership in the contract of sale to remain the owner of the goods until full payment is made. Sellers may also require payment against documents approved by a bank. This means that the bank pays the invoice amount to the seller on behalf of the customer when the seller has fulfilled all its contractual obligations and provided the bank with the necessary documents. Finally, sellers can also obtain credit insurance from their bank or insurance company.


Currency risk


For foreign currency payments, the exchange rate of a currency may fluctuate between the date the invoice is issued and the date of payment, causing harm to the seller or buyer. As a solution, the two parties can agree on a fixed exchange rate that will apply when the invoice is due. Buyers can also take out insurance from their bank to ensure they receive the same amount regardless of exchange rate fluctuations.


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