As human beings have developed self-defence mechanisms that help them make safe choices, businesses must also protect themselves during expected (and not so expected) times of political challenges. To ensure successful operation overseas, business managers should take time to understand potential and plan for risks.

What exactly is a political risk for business?

International political risks for businesses are first and foremost economic threats caused by events like terrorism, war, sanctions, and other disagreements between heads of two or more states.

In other words, it is a risk of losing money due to unstable governments, economies or threatened nations.

This concept looks covers a broad spectrum of diverse problems. Some of the risks that international politics poses to businesses are ongoing, others only happen under the pressure of certain events and occur on an occasional basis.

Whatever the situation is, almost all political events entail two major consequences for international business players. These consequences are currency fluctuations and tightened/weakened international trade laws.

How to identify potential political risks

Identification is the first step to successfully managing consequences of any political climate change.

The easiest thing you can do as a business owner is to get a set of easy and helpful habits.

Read the news! Despite the biased and conflict-oriented nature of modern media, it is still a valuable source of information that can help you determine potential risks for your business. In a situation of a worrisome event or political conflict occurring in the zone of your business operation, you will be able to start taking preventive measures before it escalates.

Analyze carefully! Not all political events are potentially harmful to your business. The truth is, not even 50% of them are. Some events would have a serious social effect but only a few minor business implications. In order to filter out the meaningful events – from the perspective of your business – determine actors and conditions that could affect your priority goals. Create an inventory of a wide range of political risk types. From capital controls to increased taxation, labor strikes and protests, which could impact your company.

Political risks can be divided into macro and micro risks. While micro risks impact certain industries and are relatively easy to prepare for, macro risks can become a real trouble for an international business. At the same time, they normally result from series of political events and can be detected in advance. Macro risks include events such as a civil war or a major international confrontation between two or more governments. These typically exist where a country is forced to close borders or run into a huge devaluation of its currency.

Work with numbers and stats! In order to categorize an event as a risk, measure the vulnerability of your assets against it. The more assets you will find to be vulnerable under a certain political threat, the more invested and prepared you should be to balance out its negative consequences or to completely pull your investment out of the politically unstable area.

How to mitigate political risks in business?

There is no universal solution to situations when political risks start interfering with your business plans. Risk management in general is a very sensitive and complex concept that requires a unique approach in every single case. However, there exist principle rules of action for those involved in international business.

Following these rules helps mitigate political risks of almost any nature.

1. Insure your business.

Political risk insurance protects investors, financial institutions and international companies in case of events promoting financial loss. Such as acts of expropriation, domestic or international political unrest and violence (including war and terrorism), capital repatriation, and sovereign debt default.

Insurance as a tool of political risk mitigation is particularly important for those businesses that operate within developing economies. Although these areas offer a lot of opportunities for business growth, they are more susceptible to political turbulence.

As a business or a supply chain manager, you might have a long-term agenda which takes years to be realized within a certain foreign market. With fully customized insurance that covers your interests on chosen territories for a defined period of time, you can enter new markets with much more confidence. The cost of this method of political risk management is totally worth it.

2. Have a plan B for your supply chain.

Any business operating in foreign markets should protect their supply chain and logistics operations from political risk. Political events often affect operations performed by your business suppliers. Such interruptions include increased tariffs, trade bans, and delays in delivery. In order to protect your business from these types of unforeseen disruptions always have a plan B – have a list of backup suppliers located in other regions. By building relationships with multiple vendors of the same product, you ensure your companies stability in terms of production schedule and budget.

3. Practice politically savvy banking.

An important method of mitigating political risk and avoiding financial loss is politically savvy banking. In the recent years, the world has been nervously observing how the U.S. dollar is becoming more and more reactive to international political events. As the global reserve currency is becoming slightly more unstable, it could be time for international businesses to update their strategies in moving funds around the globe.

One option is to keep money in a bank with branches in the region where you conduct foreign business operations. Another option is an institution that is partnered with a local commercial bank. In many cases, financial operations conducted within one banking system allow better conversion and transfer rates.

Alternatively, while choosing the right regional bank, go for the one that can manage ForEx trading and conversions for you. Finding the right way of moving your money is an important task that requires some thorough research. Your findings may contradict your routine banking strategies, but they could also save you from a huge loss during a time of political crisis.

In order to successfully mitigate a certain political risk, your methods must be tailored to the nature of your business, the nature of the risk, and specifics of your market.

Hence, the last rule:

4. Get advice from locals

Never limit your perspective by avoiding consultation with those players that have experience and knowledge within the region.

Ask questions and learn what works and what doesn’t in a given area. Here we are talking about other businesses and professional trade organizations that spend a huge amount of time and money on research. Before taking radical measures, consider working with institutions like The Finance, Credit & International Business Association, Globe Risk International, Multilateral Investment Guarantee Agency, and Export Development Canada.

An ongoing war in Syria, uncertain Brexit situation, conflicts in the Middle East, rapid Chinese economic development, a growing trend towards economic nationalism – these and many other events promote political uncertainty and instability and they cannot be neglected if you are engaged in international business. Monitoring these events and planning ahead is the best thing you can do to mitigate the political risks of conducting business abroad.

The post Political risks in business: 4 ways to identify and mitigate appeared first on Trade Ready.

Blockchain is on everyone’s lips these days – nowhere more so than in the trade finance world. This technology has the potential to clamp down on fraud, streamline supply chains, and enhance companies’ liquidity. As the prime facilitators of trade, banks are as eager as any to bring the benefits to their corporate clients.

Making blockchain a reality, however, will take time and require a practical approach. Banks will have to identify targeted “use cases” – determining exactly how and where blockchain can bring improvements.

Strong collaboration between financial institutions and technology firms will be needed to bridge technical gaps, while success will depend on agreeing common standards and frameworks.

Back to basics: how blockchain works

Blockchain technology relies on a “distributed ledger” – a cache of digital information to which all users of a certain computer network have shared access.

As stages 1 & 2 of the diagram show, any addition to this record – created by a new trade or transaction – is logged as a “block” of data. All members of the network are notified of this action (stage 3), and at least one of the members must accept the change as valid (stage 4).  Once verified, this new block is “chained” to the previous blocks of data (stage 5).

Bulking up security in trade

This authenticated data chain results in high degrees of transparency and security most welcome in the trade industry. The ledger is visible and accessible (i.e. “distributed”) to all counterparties involved in trade – whether banks, buyers, sellers, shipping companies, insurers, forwarders, customs officers, inspection bureaus or regulators. Should a new transaction be attempted, this entire network must first accept any modification to the chain as legitimate.

Blockchain could thus form a key ally for banks in their fight against fraud. Banks must always be on the lookout for the risk of “double-financing”, for example – the chance that another bank has already been allocated the trade’s receivable, or that another transaction is already using the invoice presented for financing as collateral. The permanent and essentially tamper-proof record offered by blockchain would mitigate this threat.

Blockchain facilitates automation and risk mitigation

Yet the advantages do not stop there.

The distributed ledger would offer a bank comprehensive and real-time insights into its corporate customer’s entire supply chain – from the initial order of purchase, to assembly, inventory, payment and final delivery.

Without having to spend time and resources on manually processing and matching data, the bank could more efficiently identify positions in the supply chain where risk mitigation and financing are needed. Funds could be released in a timelier manner, and the risk of non-payment would be eliminated, enhancing  with the company’s liquidity as a result.

“Smart contracts” represent another exciting prospect of blockchain. These contracts are designed to carry out pre-defined actions automatically when set off by a particular event in the supply chain. For example, once the delivery of goods to an importer has been effected, a smart contract would ensure that funds are automatically released to the exporter.

At Commerzbank, we’ve already used the underlying concept of the smart contract when facilitating trade with the Bank Payment Obligation (BPO). The BPO is a new trade finance instrument positioned between open account and the letter of credit. It provides payment assurance on the automatic exchange and matching of digital trade data – without presentation of paper documents – to complete a transaction.

The journey to blockchain is far from straightforward

The application of the smart contract idea is certainly an important step towards realising the full potential of blockchain in trade. But a range of challenges will be met along the way.

For a start, banks must establish exactly how distributed ledgers can enhance their corporate customers’ trade. Whether they want to speed up provision of financing, improve a customer’s working capital, or mitigate payment risk, banks will need to identify the right use cases for blockchain, and find exactly where new solutions are needed. This will be much more productive than merely attempting to replace tried-and-tested trade solutions, such as the letter of credit or guarantee, with an alternative based on the distributed ledger.

There will also be technical challenges to overcome. Banks and companies will need to invest resources into developing blockchain’s digital interfaces, spend time getting to grips with the technology, and ensure that data security in their blockchain systems is up to scratch. They will also have to agree to standards that can ensure that the software underpinning new blockchain processes will work with legacy systems.

Meanwhile, the trade finance industry will require crucial harmonisation when it comes to offering and using blockchain platforms.

The standout advantage of blockchain is its interconnectivity. This would be wasted if different trade finance parties used various distributed ledger technologies, underpinned by incompatible systems.

Collaboration will be the key to integration

Progress, therefore, will rely on the banks, technology providers and all other stakeholders in the complex trade finance ecosystem being able to work together. They must not only agree to set standards, but also to share insights and useful experiences.

It is for this reason that the R3 consortium, a group of more than 70 financial institutions including Commerzbank, are committed to the research and development of distributed ledger technology. The Euro Banking Authority Working Group for Cryptotechnology for Trade Finance is another group which seeks to explore use cases for blockchain for corporate customers.

Blockchain has the true potential to enrich companies’ trade – but success will take time, collaboration, and hard work from the banks.

The post Can the banks come together to bring the benefits of blockchain to their clients? appeared first on Trade Ready.

I think just about everyone’s had that feeling at some point. But it’s easier to deal with when the conversation turns to a subject you know nothing about – maybe open heart surgery, theoretical astrophysics, or fantasy football stats.

The panic you feel when it’s a conversation in your own field, however, is so much worse. We want to help you get up to speed, and have an easy way to explain these global business acronyms to others.

If there are any acronyms that aren’t covered here, just let us know in the comments below and you may see them featured in a future article.

1. FTZ (Foreign/free trade zones)

FTZs are special areas created by countries, usually encompassing ports, where goods can be shipped, processed and stored duty-free, and then re-exported without additional charges. Duties must only be paid if the goods are moved from the FTZ into the rest of the country.

It is most commonly referred to as a foreign trade zone within the U.S., and a free trade zone in the rest of the world.

2. HS (Harmonized System, or Harmonized Commodity Coding and Description System)

HS is a system used to classify goods to determine what customs tariffs apply to it when exported or imported, as well as to gather statistics on international trade, monitor controlled goods and determine taxes. There are about 5,000 commodity groups, each of which has its own 6-digit code to identify and classify it. This system is used by over 200 countries and is applied to over 98% of merchandise shipped around the world.

3. IMF (International Monetary Fund)

Originally created in 1945, this global organization is headquartered in Washington DC and currently has 189 member countries. Each member contributes funds on an annual basis. Any country experiencing problems with their balance of payment is able to receive a loan from the IMF to resolve their issues, rather than having to reduce imports or drastically cut government spending. The organization also collects detailed statistics on the global economy to evaluate future economic changes.

The main difference between it and the World Bank is that while the IMF gives interest-free loans to many developing countries during crisis, aiding developing countries is not its primary mission. The World Bank, in contrast, is set up to provide loans to developing countries for programs intended to reduce poverty or help the poorest sections of their populations.

4. JIT (Just in time)

JIT is a methodology for inventory and manufacturing where materials or products are ordered as needed based on customer demand, rather than having stores of inventory ready in advance. Many have advocated for it because it reduces waste, and reduces storage and real estate needs for many companies, though it does require greater coordination between suppliers and businesses. While it runs the risk of shortages due to delayed shipments or errors, it is generally applauded for its efficiency.

5. L/C (letter of credit)

A letter of credit is a document that a person or company buying goods or services can ask a bank to create. It promises to whoever is selling the goods or services that a specified amount of money will be paid to them once the bank receives the requested documents – and within a certain time frame. It is also known as a documentary letter of credit or a documentary credit.

The bank has to pay the seller as long as all documents are presented according to specifications, so it’s one of the most common ways to guarantee payment in international trade transactions.

6. MOU (memorandum of understanding)

An MOU is a signed agreement between at least two parties detailing points of agreement which can be used to move forward with future partnerships, contracts or other forms of closer business relationship. MOUs are often not legally binding unless they meet specific criteria, which vary between countries, but can be used as the first step in creating a binding contract or agreement.

7. OECD (Organization for Economic Cooperation and Development)

The OECD is an organization of 35 countries, including many of the world’s most developed and prosperous economies. Its members are supporters of democracy and market economies, and work through the organization to promote economic prosperity and trade growth, among other issues. Along with providing economic data and predictions, the organization has played major roles in anti-bribery and anti-spam efforts, as well as advocating for greater openness in sharing financial data.

8. SWIFT (Society for Worldwide Interbank Financial Transactions)

SWIFT is the network through which banks transmit and receive financial transactions from one another. As a secure method used by over 9,000 different banks worldwide, it is the most common way for transactions to be sent to other banks. It does not, however, serve as a way to transfer money, but acts as a facilitator, communicating between banks.

9. TEUs (Twenty foot equivalent units)

TEUs are the standard unit of measure used to determine the capacity of cargo containers, or the ships and terminals which store or transport them. A standard cargo container is 20 feet long, or 1 TEU, and eight feet wide. Though the height of a container can vary, a 1 TEU container is usually about eight and a half feet tall.

Along with twenty foot containers, the other popular size is forty foot long (2 TEUs) containers. Forty foot containers are often used to ship goods by sea, and are the standard sized container shipped by semi-trailer (transport) trucks.

Forty five foot long containers are also used by some shipping companies, and confusingly are often measured as being 2 TEUs, rather than 2.25 TEUs.

10. USTR (U.S. Trade Representative)

This position within the U.S. government is the highest related to international trade. Along with overseeing around 200 employees in the Trade Representative Office, the USTR develops and recommends trade policies for the President, works to negotiate trade agreements and coordinates trade policies with other government departments.

The post Your guide to 10 global business acronyms you need to know appeared first on Trade Ready.

Exports are a hot topic these days, but generally when people talk about exports, they are referring to product exports. Did you know, though, that the fastest growing type of exports is services?  

More and more companies are finding profit in exporting services, and several trends ensure that these exports will grow rapidly.

Service exports are an important emerging trend in global trade. Many traditional manufactured product exports increasingly contain technology that requires installation, troubleshooting, maintenance, and repairs.

The increase in service exports is a natural outcome of the continued growth of the services economy in North America.

And the pervasiveness of the Internet and the explosion of cloud-based communication has enabled information and related services to flow freely across country boundaries.

In this new article series, our goal is to help companies learn more about them and their role in the global trade industry.  We’ll also look at some of the many benefits, issues and challenges of exporting services. As well as explore some tips on how to export services successfully.

What counts as a service export?

The natural place to start is to clearly define what exactly a service export is, and is not.

If people think of anything when they hear the term “service export,” they might think of construction services on large foreign infrastructure projects. Or maybe oil rig workers, or film stars and production crews on foreign sets.

These are definitely some examples, but there’s a whole lot more where that came from.

A service export is, very simply, any service provided by a resident in one country to people or companies from another.

Here are some broad categories of services that are exported from the North America every week:

Financial

• Rents paid by a North American resident for property owned outside their home country
• Converting British pounds to Canadian dollars for a British bank, or arranging the purchase of U.S. stocks for a foreigner
• License and royalty fees paid to tax havens where large companies like Apple and many others have “parked” their intellectual property

Know-How

• Franchise support and know-how supplied to a foreign franchisee (think of McDonald’s providing its operating template to a franchise in China)
• Architects and engineers designing a project in Abu Dhabi (even if they never physically leave their offices in North America)
• Call center support provided to users from outside the country
• Tax advisors in North America providing advice to foreign companies
• A translation company in North America providing its services to clients in Europe
• Medical personnel based in the U.S. or Canada who read test results or compile medical reports about patients located in another country
• Financial, benefit, HR, IT and management support provided by a company’s North American headquarters for the company’s foreign subsidiaries

Internet & Cloud-Based Software

• Cloud service providers whose platform is used by companies based outside their home country
• Remotely accessing IT systems located outside North America

People-Based Service Delivery

• A team of consultants traveling to a foreign destination to assist with an installation or trouble-shooting equipment
• Geologists traveling to a foreign oil production site

The breadth of service exports is enormous.  But there’s still more. Many services are “exported” but never cross any physical boundaries.   This may sound confusing, but here are some examples:

• A local tailor creates a suit for a foreign visitor
• A foreign visitor books hotels, tours, and a rental car while visiting the U.S. or Canada
• A local dry cleaner launders and presses a foreigner’s shirt

All of these are considered exports because they are provided by a service provider in one country to an individual or company in another country.

Many companies are already exporting services without realizing it!

If you’ve shared your computer screen with someone outside your country via Skype, for example, to solve a problem together, you have exported services.

So, let’s say you’ve presented an informational webinar and some of the participants were located outside your home country, service was being exported during the webinar.

If you are exporting services, you may wonder if there is anything you need to worry about.  Some of the challenges associated with service exports include export compliance, VAT and income tax, work visas and immigration, tariffs and duties, and data privacy considerations.

Whether these issues will be a major concern or not  depends on the service you’re exporting and how you provide it.  We’ll cover some of these issues later in our series.

Watch for our next article on this topic, where we’ll look at the growth of service exports.  We’ll examine some of the services trends between the U.S. and Canada, from North America to the rest of the world, and worldwide.

Is your company looking to add service exports to its offerings? What are some of the challenges and opportunities you see in this exciting, growing industry?

The post What are service exports, and why are they suddenly so important? appeared first on Trade Ready.