Countries, states, brands, and corporations can buy and sell in foreign markets through international trade. This commerce broadens the range of items and services available to domestic clients. It has the possibility for growth and expansion but without the risks associated with internal research and development.
Trade is not without its difficulties. One country can make a lot of money by exporting but not importing goods and services. It can also be utilized to undercut domestic markets by providing less expensive but equally valuable items.
When home markets reach carrying capacity, many businesses explore for chances in foreign markets. Profit and market dominance are often the results of the effort and expenditure required to complete a worldwide expansion project. However, several issues come into play, the majority of which business owners are unprepared to deal with.
You’re experiencing the effects of international trade if you can stroll into a supermarket and find Costa Rican bananas, Brazilian coffee, and a bottle of South African wine.
International trade is the buying and selling of goods and services between businesses in various nations. The international marketplace buys and sells consumer products, raw materials, food, and machinery.
International commerce enables countries to expand their markets and gain access to commodities and services that might otherwise be unavailable locally. The market has become more competitive as a result of international trade. This ultimately leads to more competitive pricing and a lower-cost product for the consumer.
International trade was key to the rise of the global economy. In the global economy, supply and demand—and thus prices—both impact and are impacted by global events.
Political change in Asia, for example, could result in an increase in the cost of labor. This could increase the manufacturing costs for an American sneaker company that is based in Malaysia, which would then result in an increase in the price charged for a pair of sneakers that an American consumer might purchase at their local mall.
Before considering extending your business to another country, assess your current position in domestic trade and whether the benefits to your company will outweigh the challenges of getting there. Some of the implications, whether positive or negative, are heavily influenced by the company’s condition and ability to maximize or minimize the effects.
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There are several advantages and limitations to international trade in all of its forms. Here are some crucial topics to think about.
1. It provides a foundation for international growth.
Companies that are involved in exporting can achieve levels of growth that may not be possible if they only focus on their domestic markets. This allows brands and businesses an opportunity to achieve sustained revenues from a diversified portfolio of customers in several markets instead of a limited customer base in a single home market.
2. International trade improves financial performance.
Brands and businesses which assert themselves in foreign trade work can increase their financial performance. This allows them to augment the returns they achieve on their investments into research and development. By rotating the products or services through the global market, the commercial lifespan of each opportunity can be amplified, expanding what existing products and services can provide. This benefit can even be achieved if a domestic market is no longer interested.
3. It spreads out the risk a brand and business must assume.
Organizations can better protect themselves from risk thanks to international trade because of the amount of diversification that can be achieved. Whether it is a financial disaster, like the Great Recession of 2007-2009, or a natural disaster like Hurricane Katrina, a company with an international presence can survive and even maintain profitability without domestic customer support. A home market may be unstable, but international trade can still let the brand and business be stable.
4. International trade encourages market competitiveness.
When a brand and business compete in several markets simultaneously, then it must focus on its competitiveness for it to be able to thrive. By observing a larger range of trends because of their greater level of global market access, brands and businesses can focus on quality, design, and product development improvements so that they can continuously improve and diversify.
5. International exchange rates can be beneficial to a business.
Brands and businesses involved with international trade can further reduce their risk by taking advantage of monetary exchange rates. If a company does most of its trading in US dollars, then trading with Japan to spread the risk of the exchange rate between the yen and the dollar can potentially add to the profits of the company. The same could be said of the euro or the pound to the dollar.
6. Revenue streams have some protection.
Although all risk cannot be eliminated from international trade, a series of contracts, insurance, and financial instrument trading can help to protect the revenue streams a brand and business is able to develop.
7. It can be used as a way to get around high levels of domestic competition.
A domestic market can have several products or services that are like what a new brand and business is trying to offer. Instead of competing for a small sliver of that domestic market, going through international trade can help an organization target similar foreign markets where competition may be much lower. Over time, the experiences gained in the foreign market can help an organization be able to establish a stronger domestic presence as well.
1. There is always a political risk involved with international trade.
If you were a brand and business that was counting on the TPP, then the words of Donald Trump represent a high political risk. Different countries provide their own political risks at varying levels, while domestic politics changes over time and presents an ongoing challenge. A government can change laws in a discriminatory fashion or create regulations that directly impact a specific organization.
2. There can be severe exchange rate risks.
Many businesses focus on emerging markets for their products or services because it can greatly extend the lifespan of the businesses. This also means the exchange rates in those emerging markets may fluctuate wildly, making it difficult to forecast finances for budgeting purposes. The value of assets and liabilities that are in foreign currencies creates the potential of a brand and business becoming immediately less competitive overnight, resulting in steep revenue losses.
3. International trade also presents cultural complications.
Different cultures have different attitudes, standards, and expectations that can create problems for a brand and business. Failing to consider the expectation a different culture may have can lead to mistakes that damage the reputation of the brand and can be very costly to the bottom line. Any step of the sales process could create an offense. Something as simple as inappropriate packaging can be enough to permanently damage a brand’s reputation.
4. It has a credit risk that must be specifically managed.
Many brands and businesses tend to overlook the risk of non-payment when they begin to operate in the world of international trade. Credit risks can be managed by obtaining insurance or a letter of credit, but customer finances and credit can still impact the number of potential sales that can be received within a market. Without an understanding of the B2B and B2C credit potential of an international market, the success a brand and business can receive will be hit or miss at best.
5. International trade increases the risk of proprietary information theft.
Going into an international market with a product or service increases the risk of another brand or business stealing proprietary information, marketing concepts, or even a personal identity. China has a reputation for doing this, even if there isn’t a business presence in the local market. Do you remember the Obama Fried Chicken billboard from 2011?
Below are some other points you might need to put into consideration.
Specialization of Resource Allocation
Countries can maximize resources that are abundant, and can subsidize what is lacking. This leads to a maximization for specialization across industries, fostering a higher level of innovation and quality of product development.
As companies expand their market share across multiple countries, they naturally grow their manufacturing capabilities. This has advantages for both business and the overall economy, as more jobs are available for the working class.
Economic Dependence of Underdeveloped Countries
When underdeveloped countries account for their sustainability on foreign imports, they fall quickly when supplies drop or prices increase. This can also occur in affluent nations, which nourish economies of information and skilled labor rather than commodity trade.
Competitive Pricing Leads to Stabilization
When businesses must compete internationally, typically the price of goods drops and stabilizes. This works for the benefit of business owners, who can purchase company assets and hire labor at lower costs. Most work can be outsourced, and foreign manufacturers can create products to sell at higher margins.
Distribution and Telecommunications Innovation
International trade requires high levels of communication availability and security. Channels of distribution become more complex, creating a need for sophisticated methods to communication and quality assurance. Business owners in technology and telecommunications fill that need with product development, and companies in other industries benefit by having more options.
Extending Product Life Cycles
If a product has reached a decline in the domestic market, you can transfer it to an underdeveloped region, where the need is left unfilled or inadequately filled. This helps maximize profit and product sustainability, benefiting consumers with competitive pricing or technological innovation.
Import of Harmful Products and Unfair Trade Practices
When communication and distribution channels become more sophisticated, illegal product enter a country more efficiently against controlling forces. Also, nations dependent on foreign trade will sacrifice the livelihood of their producers to maintain international relations.
Region-Specific Resources Do Not Limit Production
When countries can import foreign raw materials, the dependence on local abundance is eliminated. Resources are free-flowing from market to market, and competition pushes all players in the industry to improve or expand.
Outsourcing and distributions worldwide allow you to increase profit margins, as foreign market capacities will differ from your domestic market potential. Price differentiation across regions and lower manufacturing costs couple to augment profit margins.
Currency and Legal Discrepancy
Business law does not transfer from nation to nation, and while globalization of commerce has increased political effort to regulate trade, the laws and practices are not uniform. Traders must research currency exchanges and plan strategies for labor and manufacturing outsourcing.
Increase of Commodity Access
Consumer definitions of what is considered commodity versus luxury can be manipulated when they have increased access to goods and services. The greatest potential for this shift towards a consumer culture occurs in developing countries with increasing growth, when they adopt Western lifestyles and desire more options for purchase.
Because foreign labor is typically cheaper due to exchange rates and political differentiation, it is beneficial for companies to allocate their human resources outside the country. This hurts the domestic economy and purchasing power of consumers in your primary market; if your company outsources, so does your competition.
With proper market research and a grasp of foreign cultures, the benefits and drawbacks of international trade can be managed effectively. In any trade arrangement, certain brands and enterprises will always outperform others. The goal must be to examine these essential areas in order to acquire a complete grasp of what to expect and to appropriately gauge involvement levels.