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Types of risks involved in international trade and how to avoid them

International trade can involve various risks that impact sales, profits and pricing. In this blog, learn about the risks in international trade, their causes and solutions to avoid.

International trade is an important part of any economy, which not only contributes to the country’s growth but also enables local sellers to establish global brands. India’s export growth has been steady over the last few years. In 2021-22, India achieved $417.8 billion in exports¹. While the government and other e-commerce platforms are making export processes easy, there are still a few risks and challenges involved. Although risks are a fundamental part of any business, it is important to understand these risks and plan accordingly.

Types of risks in international trade

International trade consists of multiple stakeholders that have the potential to impact smooth operations. Here are some of the different global trade risks that every exporter must be aware of²:

Foreign exchange risk

Foreign exchange risk, also known as exchange-rate risk, FX risk, and currency risk, is the most common risk in foreign trade that can impact profit margins of the exporter. If local currency appreciates in value against a foreign currency, profits earned by international trade can get low when exchanged for native currency.

Causes

Changes in exchange rates

Changes in import duties

Ways to mitigate risks

The foreign exchange risk can be avoided if invoices are made in local currency (Indian Rupee). However, in this case, the importer may be subjected to foreign exchange fluctuation risk.

Political risks

Political risks are beyond the control of an individual. This could be in the importing and exporting countries.

Causes

Changes in people or parties in power

Civil wars or rebellions

Wars between countries

Ways to mitigate risks

Exporters can avoid political risks by doing enough research before selecting the countries they want to export to. However, in most cases, political crisis and risks are unpredictable.

Government organizations that help avoid risks in international trade

The Government of India, along with various trade organizations, takes many initiatives to support and accelerate international trade in India. Directorate General of Foreign Trade (DGFT), Export Promotion Councils, Export Inspection Council of India and other similar bodies support Indian exporters through guidance, training and trade fairs that help reduce risks. The government has launched many incentive schemes like RoDTEP, RoSTCL, DEPB and EPCG, which help exporters. With the increasing awareness of e-commerce, Indian sellers are tapping into the growing potential of online exports, which has opened up many opportunities for local businesses³.

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Frequently Asked Questions

What are the benefits of international trade?

International trade allows domestic markets to provide a variety of goods and services to their citizens that they would have otherwise been unavailable or restricted. Some of the key reasons why international trade is practiced widely are:
• Utilization of resources
• More variety for customers
• Competitive pricing
• Economy growth

Which type of risk is the most vital risk in international trade?

The foreign exchange fluctuation risk is the most vital one as it can impact profit margins of exporters and lead to losses of local currency depreciating in value against foreign currency.

Is international trade beneficial?

Yes, international trade can help Indian exporters expand their businesses to new global markets. By exporting products internationally, Indian exporters can boost their revenue, while also building a global brand.

What are the risks of commodities?

The risks involved in commodity trade can impact commodity prices. Following are some of the major risks involved:
• Operational risks
• Counterparty risks
• Liquidity risks
• Credit risks
• Market risks
• Compliance risks
• IT risks

Published on December 29, 2022.

Sources:
1. https://pib.gov.in/PressReleasePage.aspx?PRID=1812990
2. https://howtoexportimport.com/Types-of-risks-in-International-Trade-4433.aspx
3. https://commerce.gov.in/about-us/public-sector-undertakings/export-credit-guarantee-corporation-of-india-limited
4. https://www.investopedia.com/insights/what-is-international-trade/
5. https://www.investopedia.com/ask/answers/06/internationalfinancerisks.asp
6. https://www.commoditypro.net/blog/top-7-types-of-risks-to-manage-and-control-in-commodity-trading

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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.