Causes of Commercial Risks: Commercial risks are caused due to the factors:
- Lack of knowledge about the foreign markets:
- Inadaptability of the export product to change to the conditions of the foreign market requirements
- Longer transit time and
- Varying situations to be handled, not anticipated before export.
Nature of Risk different in International Trade
Commercial risks exist in domestic market too. But, their impact in international market: is greater, in comparison to domestic market. The changes in international market are hazardous and difficult to anticipate. Suitability and acceptability of the product international market is rather difficult to gauge. Variations in demand and supply conditions are more unpredictable.
Most of the commercial risks are to be borne by the exporters. Exporters cannot shift these risks to the professional risk bearers, paying insurance premium. The exporter is not, aware of the conditions in the foreign market as the way he is aware of domestic market. Long distances to travel along with cost and time implications distinguish international trade from domestic trade. If goods are not sold or price realization is lower than anticipated, due to changes in demand or supply, exporter has to bring back the goods, incurring additional freight cost or opt to sell the goods at a loss.
In international market, as in domestic market, presence of competitors influences the demand and supply conditions and entry of new competitors depresses the market more. Further, local production may bring down the prices. Introduction of substitutes to capture the market may take away the exporter’s share in the market.
The price realization of the product in export market is influenced by:
- Changes in Exchange Rates: Changes in home currency or foreign currency affects the price realization. If the home currency is devalued, the competitive capacity’ of the exporter is enhanced. If the foreign currency is depreciated, there is; considerable reduction in the exporter’s competitive strength.
- Changes in import Duties or Tariff Barriers: Changes in import duties and creation of tariff barriers disturb even an established market. In this field, through the efforts of GATT, import duties have been fairly reduced and market has become stable. On account of these impediments, exporters open manufacturing facilities in the importing countries to overcome these problems.
- Changes in Transport costs: Transport costs constitute, generally, a major part the invoice value and so any change in transport costs affects the competitive edge of the exporter. Change in transport costs does not affect FOB price, There, is no problem even in CIF contracts, which have escalating clause in respect of transport costs. Exporters have to worry in CIF contracts, which lack an escalating clause in respect of transport costs.
- Change in Foreign Market Characteristics: A classic example is change in styles soon after shipment of goods in particular, when the shipment is made without a letter of credit; readymade garments suffer, greatly from this problem.
Minimization of Commercial risks.
Commercial risks can be minimized by using forecasting techniques and keeping a careful watch on the changing business conditions in the concerned country, in particular, and also keeping a track of the changes in the world economy. Exporters have to be prepared to face any eventuality and wisdom lies in forecasting, and anticipating, of course, finally, quick responding, at the earliest hour.
Political Risks change in these risks arise due to change in political situations in the concerned importing and exporting countries. Following are the factors, affecting the political situation:
- Changes in the party in power in the concerned countries, followed by 1 head of the Government;
- Coups, civil wars and rebellions:
- Wars between the countries or among- many countries and
- Capture of cargo by enemies during war.
Political Asks can be avoided, to a certain extent, by judicious selection of the countries to which goods are exported. Insurance companies may agree to provide cover for some of these risks, by collecting additional premium. Export Credit. Guarantee Corporation (ECGC.) also ‘covers seine of the risks.