Tiểu luận môn thanh toán quốc tế trade risks in international payments

There is the main risk structure in international trade: PRODUCT, PRODUCTION AND TRANSPORT RISKS MAIN TRADE RISKS ADVERSE BUSINESS RISK CURRENCY RISKS FINANCIAL RISKS POLITICAL RISKS COM

BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN

- -INTERNATIONAL PAYMENT

Topic: Trade risks in International payments

Ha Noi, 4/2017

All forms of business contain elements of risk, but when it comes to international trade, the risk profile enters a new dimension The seller will always try to get terms that will maximize the outcome and minimize the risk However, they must also be prepared to accommodate reasonable demands from the buyer in order to match other competitors and reach a deal that is acceptable to both parties

There are always potential drawbacks in trying to categorize such a general concept as trade risks which could have so many different forms and shapes, but it also has great illustrational advantages, particularly when they also coincide with commonly used business expressions There is the main risk structure in international trade:

PRODUCT, PRODUCTION AND TRANSPORT RISKS

MAIN TRADE RISKS

ADVERSE BUSINESS RISK CURRENCY RISKS

FINANCIAL RISKS

POLITICAL RISKS COMMERCIAL RISKS

A Product, production and transport risks:

1 Product risk+ manufacturing risk

a Product risks:

- Product risk are risks that the seller automatically has to acccept as an

integral part of their commitment

- It is a matter of the product itself, or the agreed delivery

- Matters of this nature may well lead to disputes between the parties after the contract has been signed and to increased cost for the delivery as a whole It is important for the seller to have the contract, and specifically the terms of payment, worded in such a way that any such changes, which are directly or indirectly due to the actions of the buyer or originating within their country, will automatically include compensation

or corresponding changes in the seller’s commitments This can be either

in economic terms or in originally agreed time limits, or both

- It goes without saying that these risks become even more complicated when it comes to whole projects or larger and more complex contracts These are often completed over longer periods and involve many more possible combinations of interrelated commitments between the commercial parties, not only between the seller and the buyer, but also often involving other parties in the buyer’s country, both commercial and political

b Manufacturing risks:

- The concept of product risk could also include some elements of the manufacturing process itself, even if in priciple that subject falls beyond the scope of this handbook This risk appears all too frequently when the product is tailor-made or has unique specifications In these cases there is often no readily available buyer if the transaction cannot be completed, in which case the seller has to carry the cost of any necessarry readjustment, if that is even an option

- Risks of this nature occur as the product planning phase but many often

be difficult to cover from that time owing to the special nature of these products But they also involve specific risks for the buyer, who often has

to enter into payment obligations at an early stage but without the security of the product itself until it has been delivered and installed In

oder to safeguard the interests of both parties, the terms of payment are often divided into part-payments related to the production and delivery phases, in combination with separate guarantees, to cover the risks as they occur in the diffirent phases of the transaction

2 Transport risks and cargo insurance.

From a general risk perspective it is not only the product but also the physical movement of the goods from the seller to the buyer that has to be evaluated, based

on aspects such as the nature of the product, size of delivery, the buyer and their country, and the actual transportation route

Most of goods in international trade, apart from smaller and non-expensive deliveries, are covered by cargo insuarance, providing cover against physical loss

or damage whilst in trasnsit, either by land, sea or air, or by a combination of these modes of transport

 Responsible of transporter:

- Transporters will be responsible for transporting cargo to the import’s port in time, and the cargo have to be unbroken

- However, this responsibility is limited by the international regulations and law of each country as well

 The owner of cargo usually think that if cargo is broken or loss, it’s responsibility of trasporters So sometimes they send cargo without buying insurance for their cargo However, inreality, it’s different

Clauses in sale contract will indicate that who bears the responsible for broken cargo If buyer and seller agree some specific clauses (about transporting cargo) in Incoterms; these clauses also indicate that who bear transport risk, and bear which parts of risks

 The cover under a cargo or marine cargo policy is almost defined by standard policy wordings issued by the Institute of London Underwriters These are called Institute Cargo Clauses (ICC) While there are numerous clauses that will apply to different cargos: Clauses types A , B and C

- The widest cover is provided under ICC A (Institute cargo clause [Air] for transport by air)

- ICC B are more restrictive

- The most narrow cover under ICC C

The new A-clause are intended to replace the previous ICC All Risks Cargo insurance if therefore normally provided through one of these ICC

A, B or C, plus separate war clauses and strike clause

 The question of who should arrange the insurance is determined by the agreed terms of delivery, as defined by the Incoterms 2000 and described earlier These terms also define the critical point during transport, where the risk is transferred from the seller to the buyer That can be any given point between a named place at the seller’s location (EXW) and a named place at the buyer’s location (DDP)

 Cargo insurance according to Incoterms CIP and CIF

Like Incoterms 2000, in Incoterm 2010, only 2 terms cover insurance : CIF and CIP

According to CIF and CIP, seller has obligation to buy insurance because of buyer’s right With other terms, 2 parties decide themselves that whether buy cargo insurance or not

- The seller bears cost of buying insurance, at least equal to ICC C Insuarance contract, which needs to be signed with insurer or insurance company, defines that buyer or someone else can directly get compensation from insurer

- The insurance contract hasto insure at least 110% value of contract

 From the seller’s perspective, there are basically 3 different ways to insure the cargo:

- Open insurance policy : covers most or all shipments wwithin the seller’s basic trade as agreed in advance with the insurer

- Specific insurance policy: cover specific shipments on an basis which is outside the set criteria of the open policy

- Seller’s interest contingency insurance: normally only offered as a complement to the open policy or as integral part of a specific policy

B Commercial risks

- Definition : Commercial risk,also called purchaser risk, is often defined as the

risk of the buyer going into bankruptcy or being in any other way incapable of fulfilling the contractual obligation

- In Organization for Economic Co-operation and Development (OECD() areas , it

is easy to obtain a fair picture of potential buyers

- With buyer from non-OECD countries the matter becomes even more complicated.The information, if available, will be much more difficult to evaluate and it will be harder to assess how it has been produced and how it should be analysed

- The importance of credit information :

+ In the commercial environment, the global suppliers of credit information have become a vital source of knowledge and expertise,based on the great wealth of information that they maintain about consumers and how they behave, about businesses and how they perform, and about different markets and how they are changing

+ The more the seller understands their customers, the more they are able to respond to their individual needs and circumstances.Credit information suppliers help the seller use information to reach new customers and to build, nurture and maximize lasting customer relationships Therefore, credit information forms a

vital part of establishing the structure of a potential export transaction and, in particular, the terms of payment to be used

- Solution to reduce commercial risk for the seller :

+ Engaging a trustworthy credit agency or credit insurer to reduce buyer’s indebtedness or credit risk;

+ Engaging on additional secured techniques of payment such as documentary credit or advance payment;

+ Guarantee that the sales contract or documentary credit does not contain unclear

or inaccurate expressions and circumstances that are subject to future disagreements;

+ Obtaining adequate information in document preparation to mitigate against documentation risk

C Political risks

1 Definition

Political risks is the risk of a separate commercial transaction not being realized

in a contractual way due to measures emanating from government or authority

of the buyer’s own or any other foreign country

2 Causes

The political risk could be divided into different underlying causes, such as Political stability; Social stability; Economic stability

a Political stability

What are the Political and Legal Risks?

Political/Sovereign Risk

Political/sovereign risk refers to the complications that buyer or seller may expose due to unfavorable political decisions or political changes that may vary the expected outcome of an outstanding contract Examples of political/sovereign risk are changes in fiscal/monetary policy, war, riots, terrorism, trade embargoes, etc

The political environment in both the country of export and the country of import can have disastrous effects on international business transactions Political instability can lead to changes in trade policy, restrictions on foreign transfers,

restrictions on the importation or exportation of certain goods, changes in monetary policy leading to devaluation of the local currency, and riots or civil unrest causing loss or damage to merchandise potentially not covered by insurance, among other problems Although political risks are generally outside the direct control of either trader, they can sometimes be predicted in the short term and managed to a degree

Legal Risk

Legal risk is the potential for financial loss arising from uncertainty of legal proceeding or change in legislation, such as a foreign exchange control policy A sales contract could be frustrated due to changes in laws and regulations

Legal risks can also affect an international transaction and can only be managed through extreme diligence Lack of comprehensive knowledge of legal issues can precipitate problems unimaginable in the local marketplace These include unknown procedural restrictions, import regulations, and more

EXAMPLE: A contract signed in a foreign country was ruled invalid because the trader was improperly in the country on a tourist visa

 BUYER/IMPORTER: Considers political risk to be minimal in part because

he lives with it every day and understands it

 SELLER/EXPORTER: May consider political and legal risks to be significant, especially if the country appears to be unstable by his own standards

b Social stability

Cultural Risk

Different countries have their unique language and culture The inability to appreciate/accept cultural differences and/or language barrier may result in conflicts and non-completion of the sales contract

c Economic stability

Economic Risk

Economic risk refers to unfavorable economic conditions in buyer or seller's country which may affect both parties in fulfilling their obligations On the buyer side, economic risk may result in buyer’s insolvency or inability to accept the

goods or services On the other hand, the seller may experience difficulty in producing or shipping the goods per se

D Adverse business risks:

 Definition:

Adverse business risks include all business practices of a negative nature, which are not many common also andemic in some part of the world This could have serious consequences for the individual transaction, but also for the general business and financial standing of the seller ,as well as their moral reputation

- In many countries , particularly in connection with larger contracts or projects : bribery, money laundering and a variety of facilitation payments + In UK government ,if bribery is generally a technique to press the seller for undue rewards,money laudering often has the opposite purpose, which is

to invite the seller to do a deal that may on the face of it seem very advantageous

+ Crimnal and terrorist organizations generate large sums of cash,which they need to channel into the banking ,corporate and trade financial systems,and both banks and traders can innocently fall victim of such activitiy if not exercising due diligence

- Influence : Bribery ,money laundering and any other form of corrupt behavior is bad for business

+ It is also extremely harmful for the countries themselves ,owing to the damage it causes to the often fragile social fabric

+ It destroy yhe economy and is strongly counterproductive for trade and all forms of foreign investments into the coutry

+ In the long run, such practices also prevent social and economic stability and developments, and it has an especially impact on the most disadvantaged parts of the population

- Solution is the need for a strong policy

+ The world bank and the OECD have put a great deal of resources into cobating corruption worldwide, and in most coutries corruption is now illegal even when committed overseas

+ Every company involved in overseas trade or investment should have a clear anti- corruption policy that is implemented and clearly understood by all its employees

E Currency risks:

I Definition :

Currency risk is a form of risk that originates from changes in the relative valuation of currencies, which can influence the overall returns on an investment

For example :

Suppose that a U.S.-based investor purchases a German stock for 100 euros

While holding this bond, the euro exchange rate falls from 1.5 to 1.3 euros per U.S dollar If the investor sells the bonds for 100 euros, he or she will realize a 13% loss upon conversion of the profits from euros to U.S dollars However, if that investor hedged his or her position by simultaneously short-selling the euro, then the profit from the euro's decline would offset the 13% loss upon conversion

II. How to manage Currency Risk :

International investors have several options when it comes to managing currency risk, including the use of tools like currency futures, forwards and options But, these instruments are often expensive and complicated

to use for individual investors

One simple, flexible, and liquid alternative to hedge against currency risk are currency-focused exchange-traded funds (ETFs)

There are several large financial institutions that offer various types of currency-focused ETFs

The two most popular providers are CurrencyShares and WisdomTree, which both offer a wide variety of ETFs covering a number of different currencies around the world These currencies include popular

international investment destinations ranging from Canada to emerging markets like China and Brazil