Constraints when selling to a International Market
Although international transport costs have fallen in relation to production costs, the extra distance normally involded in international transactions is still likely to add to your total costs
It still takes around 6 weeks for consignments of chinese manufactured goods to reach Europe unless they are air-freighted (More expensive). There can be a delay before the seller recieves payment and/ or the buyer recieves the goods.
- Trading partners often do not know each other and they are likely to come from a different cultural backgrounds.
- Confidence that each party to an agreement understands in the same way, and will reliably meet their responsibilities, is often reduced.
- Long-distance transport probably entails a slightly increased risk of loss or damage in transit.
- The possibility of exchange rate changes adds another risk.
Reasons to trade Internationally
The first and most obvious reason to sell internationally is that selling more can bring you more revenue and profit. Where there is high costs of research (e.g pharmaceuticals) and development (e.g vehicles), selling in multiple markets would speed up the progress towards breakeven point.
Secondly selling in multiple markets spreads risks: difficulties in a single market become less threatening when it is one of several alternatvies; the supplier is no longer dependant on a single market.
Thirdly the risk in exporting can be reduced by governemnt schemes designed to encourage export activity. The UK government for example have Export Credits Guarantee Department (ECGD). This provides insurance for businesses within the UK that are involved in high capital projects such as pipelines, hospitals etc.
Finally businesses are also able to source materials, components and services from beyond their own national boundaries.
Rulers and Governments have long taken an interest in imports to their countries. They seek to restrict the availability of items seen as harmful or dangerous (e.g drugs and weapons).
They may also wish to stop imports which will compete with state monoplies or industries with political influence. They would do this buy placing a tariff (Import tax) on products coming into the country. For governments, tariffs are now a relatively minor source of income.
Protection is mainly used to help home producers. Embargoes would be implemented by the government that would put a total ban on a certain product. For example after the Cuban Revoltion, the US government imposed embargoes on the Castro regime.
Another technique the government use would be placing a limit on how many of a certain product would be allowed into their country (also know as a quota). They would mainly do this for economic or political reasons.
Why Do Businesses Seek International Markets?
- International trade has grown faster than GDP (Gross Domestic Product)
- Trading internationally involves overcoming contraints such as extra costs, extra risks, time delays, protection and ignorance. However the trend is for the extent of these constraints to decrease over time.
Revenue and profit can be increased by trade in a number of ways:
- Extra sales in new markets spread fixed costs and so reduce average costs.
- Home market saturation or falling sales at the decline phase of the product life cycle can be offset by growing new markets.
- Spreading risk between markets.
- Trade can also involve offshoring to source materials and components from overseas suppliers.
- Trade Liberalistion has reduced protective barriers: - Many trade agreements and trade blocs make trade easier between two or more countries. - The WTO (World Trade Organization) encourages global reductions in protection by 'rounds' of negotiations and by policing trade desputes.