Australian businesses that do business with companies based overseas should be cautious and aware of changing economic and political conditions. The international trade landscape has evolved over the years and the risks facing exporters have expanded; many ongoing risks remain while new ones have emerged.
As always, businesses considering exporting can incur hefty costs if they aren’t aware of the political and regulatory systems of their export destinations. For example, if a new government comes into power in an overseas market, policies around exporting and importing can change, leaving Australian exporters high and dry.
In the past, companies did business across international borders using letters of credit. Today, creditworthy customers increasingly expect to do business with overseas suppliers through open accounts. This can streamline transactions but also leaves Australian exporters open to losses.
The latest elections in Europe illustrated why Australian businesses need to be aware of changing political situations, with the European political stage looking like it may continue to change significantly. With the recent UK election returning a hung parliament, the incumbent party formed government but the result was nonetheless shocking and demonstrated a loss of faith in the Conservative Party. This shows that even our oldest trading partner’s political future isn’t necessarily certain.
The Brexit effect
This was the second surprising political result in Britain, following the country’s surprise decision to exit the European Union. Global political situations like Brexit can trigger currencies to plummet and there is still a lot of uncertainty when it comes to Brexit: cracks are starting to show in the economy.
The UK economy has been remarkably resilient since the vote to leave the EU but, one year on, growth is being increasingly challenged. Inflation is the main culprit, as real wage growth has turned negative, squeezing household purchasing power.
UK insolvencies have been rising since Q3 of 2016 and are forecast to increase 6% this year and 8% next year. Business failures are expected to be concentrated in consumer-facing sectors like retail and accommodation, and those that depend on imported materials, like construction.
Effects on the rest of Europe have been limited so far, especially as domestic politics have thus far bucked the trend towards populism, easing uncertainty. But Atradius still forecasts insolvencies in 2017–18 to be higher in Europe than if there had been no Brexit, particularly in those countries with close economic ties to the UK like Ireland, the Netherlands, and Belgium.
Europe in general, and particularly France, Germany, Italy, the Netherlands and England, remain key markets for Australia. Businesses must be aware of the changing political and economic conditions of each country they conduct business in or with.
Top 5 risks exporters need to watch out for in today’s international trade environment:
Political instability at an export destination can disrupt or even entirely prevent the completion of export contracts. Political risks can lead to payment defaults or confiscation of property, which would quickly end an export trade agreement.
Legal risks can often arise in regions with political instability, but they can just as easily become a problem in stable markets that happen to undergo legal changes to its international trade regulations. Even static differences in trade laws between markets can lead to risks.
Exchange rate risk
Currency exchange fluctuations affect every market, every day, some more than others. It is almost inevitable that an exporter will have to weather risks occurring from exchange rate variations in any given period of trade. Many exporters have had their profit margins eroded, or have even lost money, due to exchange rate fluctuations.
Transfer risks are closely tied with political, legal, and exchange rate risks. While goods are in transit, regulatory conditions can change, as can currency exchange rates. These factors have the power to immediately affect the status and value of goods in transit, causing potentially big problems for local exporters.
Non-payment by customers is a risk that applies to just about every business, anywhere. For exporters, however, the problem is compounded by distance and a different legal landscape for potential recourse.
Finding the right credit insurance policy
These are just some of the risks exporters need to be aware of. It is vital that export businesses identify all the risks presented by export trade, assess them, and plan carefully to protect themselves against them. To do this, exporters need to think systematically about all possible outcomes before they happen, and invest in credit insurance, which can step in to protect a business when all else fails.
Credit insurance provides protection against a wide range of commercial and country-related risks for exporters selling on credit. It protects exporters from losing money, regardless of whether the customer simply refuses to pay or can’t pay. It also protects businesses from unforeseen events, foreign credit risks, and changing international market conditions.
There are a number of useful steps exporters can take to protect themselves when trading with international customers. Knowing the risks is a vital first step to assessing and planning for the worst, and will help to determine the most appropriate credit insurance policy with which to cover potential losses.