Home Knowledge Base International Trade International Trade Vs Domestic Trade and the Risk Factors Involved

International Trade Vs Domestic Trade and the Risk Factors Involved

What is Trading

Trading is the buying and selling of goods and services. The concept of trading has a long history passing the bartering system to current buying and selling system which started way back in 6000 BC. With the time, people started to trade between countries to fulfil their needs and wants and to achieve competitive advantage even without knowing the theory behind.

We will further dig into the international trade vs domestic trade and the risk factors involved.

So, what makes domestic trade different from international trade. The trading within the territorial boundary of a country becomes the domestic trade while the trading among/between countries is the so cold international trade. Even both concepts do the buying and selling, international trade is a massive area to be aware unlike in the domestic trade. In general, when you trade in the local market, you know your customer or the seller in most of the time. You have every possibility to track the seller if anything goes wrong. You can easily return the goods and request a refund if the product doesn’t match your tastes.  Also has the easy legal coverage in case of a dispute.

 Does it the same in international trade? Of course, it’s not. The distance between the seller and buyer makes all the differences. International trade is massive and the number of logistics and other activities is involved. From the point of origin to point of destination, shipping lines, airlines, freight forwarders, NVOCC, International payment terms, INCOTERMS, international rules/ regulations/ guidelines, customs and border control bodies will be involved. Yet international trade is essential to keep the world moving.

Some countries have open trade policies and highly depend on imports and exports while some countries prioritise local business interests. Since foreign trade occurs across countries, it has also known as cross border transaction. The Gross Domestic Production (GDP) of a country could decide up to which extend the imports and export should have happened. Higher the imports compare to the exports of a country higher the trade deficit becomes.  This further impact the foreign exchange (Forex) as well as to the value of the country’s currency.

Bilateral Trade Flow: International Trade Vs Domestic Trade and the Risk Factors Involved
Bilateral Trade Flow. Source: UNCTAD

The conept of entreport raised with the foreign trade. The transshipment ports or the hub port facilities further support the international trade. Many countries provide  

Why International Trade

The United Nations Conference on Trade and Development (UNCTAD) was established to support international trade including the investments and developments.

International trade opens the door for different products and provides choices for consumers to fulfil their needs. Further, it helps countries to import what they are unable to and costly to produce locally.  The cross border transactions bring the great advantage of efficient utilisation of scarce resources in the world. The international market provides enough competition to supply competitive products at competitive rates which are fit for use. The competition creates opportunities to go green, be sustainable or socially responsible to differentiate products. The consumer has the opportunity to meet their wants from the varieties of products. Countries enter into bilateral trade and multilateral trade agreements to gain more from the foreign trade

International Trade Pattern: International Trade Vs Domestic Trade and the Risk Factors Involved
International Trade Pattern. Source: UNCTAD

What will International Trade could brings to your Business

Is it worth going internationally with your business?

The born global theory speaks on the companies which started focusing the foreign trading. Uppsala model of internationalisation, the eclectic paradigm and transaction cost analysis, the interactive network approach of the International Marketing and Purchasing Group, competitive advantage and absolute advantage are some theories speak ongoing internationally.

So, how do you know whether you should go international??

Going international is not simple. You should analyse the market properly and identify the ability to compete in the international market. Know your micro and macroeconomy. Do a PESTEL analysis. The cost components involved is massive and your understanding of trade policies is essential. You should know to negotiate with your shipping company, freight broker, the airline for freight rates. You should know the duty and the taxes payable at customs and HS codes to decide the product price. Also know the available insurance and risks at sea. Further, apply the internationalisation theories to support your decision.

International trade risk factors – what could get in your way?

It is very obvious the risk components involved in foreign trade is higher than the domestic trade. Higher the risk, higher the return you get…Don’t forget!

We will find main risk factors involved in cross border transactions

  • Cargo damages/losses are high during the transit
  • Insurance coverage costs much more than the domestic due to the high risk in nature
  • Sending freight which declared as “Prohibited Goods” by a country even due to the lack of knowledge leads to forfeit the goods. You will lose both invested money and goods
  • If the payment is done upon receiving goods as per the agreed payment term, the risk of receiving payment is high with new customers
  • Changes in duties and taxes, government regulations in importing country may lead to losses as the final product price goes up
  • The price of the rejected goods by the buyer:  It will cost for re-shipping

08 Reasons to Engage in International Trade

  1. Expand the market coverage and increase the market share of the business
  2. Ability to enter into markets with low or no competition
  3. Gain from competitive advantage
  4. Increase the ROI (Return On Investment)
  5. Earnings from bulk production
  6. New product demands
  7. Absolute advantage
  8. Learn and Adapt new and worth technologies

So, the above provides you with a clear understanding of international trade vs domestic trade and the risk factors involved. There are risks involved when compare to domestic trade. Yet the return is massive as the risk.

Don’t be afraid to take risks!

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