International trade allows everyone to have more access to the goods and services that are created or performed around the world. It develops a global economy where buying and selling are encouraged, but so are things like cultural awareness, ethnic diversity, and other non-business related benefits. Before breaking into a new market, however, it is important for businesses and nations to consider these international trade pros and cons.
What Are the Pros of International Trade?
1 It allows businesses to expand their markets without expanding their key demographics.
Every population group has certain key demographics that are attracted to specific goods or services. Eventually a business may fully saturate their local demographics. International trade allows a business to continue cloning their best customers from a global perspective instead of just a domestic one.
2. It helps businesses spread their risks of doing business.
As the Great Recession showed businesses around the world, there are numerous risks in domestic and foreign markets that are always faced. The recession began early in the United States, but it ended early as well. Thanks to international trade, businesses that had a global presence were able to lessen their risks during this down time so that the areas which weren’t experiencing declines could still provide that company with growth.
3. It gives companies access to different forms of monetary units.
If a company does business in the United States and in Europe, then they have an advantage in the fact that they can accept different currencies to help their bottom line. The British pound, for example, routinely trades 50% or more higher than the US dollar. By trading in both currencies, the company benefits from an even lower level of risk because the exchange rates can help to spread risks even further.
4. It is a way to avoid heavy domestic competition.
There might be numerous products or services within a domestic market that can make it difficult for an organization to compete. International trade allows that business to target their goods or services to other markets where there may not be any competition whatsoever. This allows for a company to become more competitive and establish their niche expertise, which may even allow for a better domestic performance over time as well.
What Are the Cons of International Trade?
1. Political changes are a unique risk that can be multiplied with every foreign presence.
Political changes are nothing new to the business world. Domestic policy changes can affect the way organizations do business. International trade expands this risk every time a new foreign market is entered. Income streams can be protected, but there is no protection when political change happens and that could create a detrimental business arrangement.
2. There are cultural risks that must be considered.
Not taking into account the changes in culture that occur in foreign markets can be a very costly mistake. Marketing beef in India, for example, could be a fatal mistake for an organization. Even the way marketing is approached for a product can be very different in the West compared to the East. Without an awareness of cultural habits and needs, international trade can do more harm than good.
3. Exchange risks will always exist.
Foreign currency fluctuations happen every day. This means the value of existing goods change every day. SO does the value of an existing liability. If enough changes occur, a business can immediately become non-competitive because there is less value or more debt involved with their presence in international trade. The end result is a loss of sales, loss of revenue, or a loss of value and it all falls outside of the control of the business.
4. There is a higher risk of not receiving payment for services rendered.
The risks of not being paid for goods or services is often higher in an international trade arrangement than in domestic arrangements. It is necessary for organizations to perform their due diligence before entering a foreign market with other organizations or countries so this risk is mitigated. Having insurance in place or a letter of credit issued may also be necessary.
The international trade pros and cons show that this policy can be very lucrative. It also presents a unique set of challenges which must be appropriately managed to receive those lucrative benefits. By evaluating all of these key points, it becomes easier to make the best decision possible when companies are thinking about expanding their presence in international trade.