Credit and Finance, Management
An introduction to International Trade
Posted on by Cindy Yip
Estimated read time: 4 mins
A recent survey has revealed that six out of every ten SME’s in the UK expect to be trading internationally by 2016. A 20 per cent increase on the number of companies trading internationally now.
The increase in export activity is contributed by the advancement in technology and global logistics networks reducing the barriers for companies to trade abroad. More managers are able to use social media and online communication channels to build and maintain relationships with overseas business partners. This highlights the increasing importance of the role of international networks enabling SME’s to engage with more business partners. Companies in the technology and marketing sectors are most confident about the potential to grow overseas than others.
Why should you trade internationally?
By trading internationally, you expand your pool of potential customers and suppliers. Expanding into new markets could potentially be easier than trying to expand in an existing market which may have become saturated. With a potential for increase in sales, this means more revenue and profits allowing you to gain market share globally leading to even more potential for long term growth.
It’s always risky to deploy all your resources and effort into one market, if that market fails then your company operations will come to a halt. It may not seem obvious at first, but by investing in an overseas market these risks are distributed evenly between two or several countries. Your market in the UK could have declined majorly or even become obsolete, but your company will still be up and running by the revenue it generates overseas.
Depending on the strength of the pound sterling, you may be able to gain an advantage such as exporting when the Pound is weak, or even focusing your interests in your overseas operation depending on the fluctuations of their currency. There will be less pressure in pricing and seasonal market fluctuations when balanced with operations overseas. Additionally, much attention has been bought to the production costs overseas becoming more and more affordable which means the costs of production per unit should decrease.
And what are the risks?
Political and Legal
Political risk is when a Government will unexpectedly change their policy which could negatively affect your company. This could be in the form of trade barriers, quotas or tariffs to protect their local trade from international competition. This would have a large effect on your revenues due to either an increase in tax or a restriction on the amount of revenue you can earn. Although many trade barriers have been removed due to free trade agreements, unexpected policies in foreign countries could influence the success of your overall trade.
Exchange rates fluctuate on a day to day basis and will affect the value of your overseas investment. When the pound sterling appreciates against a foreign currency, profits or revenue earned overseas will decrease after being exchanged back to Pound Sterling. Due to the unpredictability of exchange rates, it’s quite hard to protect yourself against the constant changing rates.