International Sales Contracts
International sales contracts are the
riskiest contracts, as little is often known about the buyer. Currency, tariff,
insurance, and title risks must be considered, especially concerning bills of
lading, upon which monies are usually borrowed. The buyer invariably requires
possession to release the goods from the port.
Globalising the world’s economy has made
it easier for domestic and international organisations to trade products and
services globally. With the advent of worldwide logistics, e-commerce, and more
accessible language translation, global marketplaces have been opened to
businesses of all sizes.
Global Trade Risks
The disadvantages and commercial risks
of conducting trade on a worldwide basis are:
- Shipping, Customs, and Duties.
- Exchange Rates.
- Language Barriers.
- Cultural Differences.
- Servicing Customers.
- Returning Products.
- Intellectual Property Theft.
Exchange rate risks affect an
organisation’s profitability as their volatility can reduce profitability.
Exposure can occur in three ways:
- Transactional: Time-related in terms of exchange
rate volatility between ordering and payment for goods and services.
- Translational: In terms of financial resources
held in foreign subsidiaries.
- Economic or Operating: In terms of future exchange rates
affecting the valuation of cash flows and capital.
The fundamental types of exchange rate
policy are:
- Fixed: Exchange rates are fixed or
allowed to fluctuate within narrow margins against a nation’s currency
value, either in terms of gold, another currency, or a basket of
currencies.
- Freely Floating: A freely floating exchange rate
is freely determined by market forces without intervention.
- Pegged: Exchange rates are “pegged”
against a nation’s currency value, either in terms of gold, another
currency, or a basket of currencies.
- Managed Float: The nation’s fiscal policy
influences the exchange rate, which is loosely controlled by the nation’s
central bank intervention.
Global Trade Restrictions
Governments have three primary means to
restrict trade:
- Quota: A system imposing restrictions on
the specific number of goods imported into a country allows governments to
control the number of imports to help protect domestic industries.
- Tariffs: These increase the price that
consumers pay for imported goods and services in line with the fees
charged by domestic producers.
- Subsidies: These are given to assist
domestic industries in competing with foreign markets to increase their
competitiveness by influencing the pricing of domestic markets.
The danger of supporting domestic
industries through tariffs and subsidies is that prices can increase, market
choices are reduced, environmental issues are not considered, and the
production of products and services is vested in the least efficient organisations.
Governments must ensure their country’s
wealth by promoting the use of local resources, in which they can be the most
competitive. They must also use training, regional market development, and
research to increase the financial stability of the trading environment, negate
any harmful effects caused to the environment through global warming, and
decrease their carbon footprint. Free Trade Agreements must be encouraged to
harmonise the legal standards of international trade to minimise its inherent
risks and harm to the environment.
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