The act of buying, selling or exchanging goods and services across national borders is called international trade. International trade is different from domestic trade, because domestic trade only takes place between regions, territories and cities within the same country. Therefore, it can be affirmed that foreign trade carries more risks than domestic trade.
The risks that domestic trade often encounters, for example, insolvency, fraud… are also hidden in foreign trade, but with a more dangerous scale and level. On the other hand, in foreign trade there are also some specific risks that do not exist in domestic trade, thus making foreign trade activities even more risky.
1. Reasons why foreign trade is riskier than domestic trade
Reasons that make foreign trade riskier than domestic trade include:
– The geographical distance between the parties participating in the contract is further, limiting mutual understanding, limiting the partner’s understanding of the market situation, and increasing the risk of transporting goods.
– The laws governing foreign trade are not uniform, because there is no unified set of international commercial laws, so foreign trade contracts are governed by national laws and commercial practices of the country. exporting as well as importing countries. Domestic arbitration decisions are difficult to enforce abroad, moreover, enforcing court decisions abroad can be much more expensive than the value of the lawsuit itself.
– Language disagreement increases the risk of mutual incomprehension. Each party understands the sales contract in its own way, leading to unpredictable consequences. Knowledge of technical and commercial terminology required in the language of the contract.
– Psychology and business practices are different between peoples, countries and regions, requiring import-export traders to be knowledgeable and have the art of negotiation and contract signing skills. fit.
– Foreign trade is also subject to risks due to different political systems, country risks and regulatory risks.
2. Risks arising in foreign trade
Risks arising in foreign trade are often classified into three groups, which are:
2.1. Commercial risk group
The commercial risk group includes: For exporters, it is: market risk, risk of not receiving goods, risk of non-payment; For importers, it is the risk of non-delivery, risk of goods, risk of transporting goods…
2.2. Political risk group
Political risk group, including: War, uprising, civil uprising, strike, embargo, payment ban…
2.3. Specific risk group
Specific risk group includes: Language risk, legal risk and exchange rate risk.
Today, the majority of risks in foreign trade are limited by modern prevention techniques. For example, for political risk groups, exporters can buy export insurance; For the commercial risk group, these are the terms stipulated in international sales contracts, such as payment terms (by documentary credit, for example), goods terms (requiring documents). quantity and quality inspection), provisions on delivery facilities (Incoterms), standby letters of credit… In general, provisions to ensure safety in international sales are expressed in foreign trade sales contracts. . Foreign trade contracts are an effective tool that helps participating parties significantly limit risks arising in business.
Risks arising in international trade can be limited by strict regulations in contracts such as: Goods purchase and sale contracts, transportation contracts, insurance contracts, payment contracts; In which, the goods sale contract is the basic contract, while other contracts are derived from the goods sale contract .
