Domestic markets offer many possibilities of growth but in today’s highly globalised world, companies have extended their borders across nations. There are several types of international trade (including inter-firm trade, intra-industry trade, intra-firm trade, inter-industry trade) and they all involve importing and exporting. From commodities to manufactured goods, and intangible goods[1] like telecommunication, financial services, and tourism, trade happens every day. Since the 1970s the global export value of trade in goods has grown exponentially, reaching 19 trillion dollars in 2019[2]. While predictions are hard to make with the current COVID-19 situation and despite a setback in 2020, world merchandise exports set to increase[3].
Trading internationally can be a game changer, providing immense opportunities for expansion and growth. The task can, however, be daunting and trading on the international stage is not an easy feat. When it comes to international trade, there are many things to consider including export strategies, supply chain risks, international payments, not to mention managing legal and transport aspects.
What is there to consider when importing and exporting goods and services internationally? How can companies optimise their process to sharpen their competitive edge? This guide to international trade aims to offer a comprehensive overview of what pitfalls to look out for when trading internationally.
The challenges of importing and exporting
In today’s globalised economy, virtually all countries engage in international trade. Exporting and importing activities influence a country’s economy in many ways. Exchange rates, inflation and interest rates are all impacted by the balance between a country’s imports and exports. While high levels of importing indicate a healthy domestic demand and a growing economy, high levels of exports stimulate employment and a flow of funds into the country that lead to higher consumer spending. Maintaining a good balance between imports and exports helps to ensure a sound and stable economy.
Countries tend to import goods that they simply cannot produce and goods that can be produced more cheaply elsewhere. This allows them to focus their skills on goods and services they are better at producing, a concept called comparative advantage. In 2020, the USA was the world’s leading importing country[4] in value, importing goods ranging from machinery, commodities, medical equipment, and consumer goods. By delegating those productions and importing them from foreign countries, the USA is able to focus its efforts on other domains, and leads the way in exports like financial services, cutting-edge technologies, intellectual property and entertainment products.
Expanding internationally offers a company the prospect of reaching new markets, registering higher profits and generating greater visibility. Exports contribute to building a reliable and reputable company image, promoting a country’s industry to the importing audience, and participating in a country’s economic growth. There are several ways of approaching exporting including directly (the company sells its products or services) and indirectly (the company relies on an intermediary who is responsible for selling the goods or services in the foreign market). The selected methods and channels need to fall within a clear strategy to be successful which is why the first step towards going international is to develop a strong export strategy.
While the expansion of trade, coupled with globalisation and digitalisation, may bring about many new opportunities for large and small companies, the import and export business is also strewn with challenges. Small and mid-sized businesses in particular tend to have less capacity to face such obstacles. Whether it’s knowing how to connect with foreign partners and developing strong relationships, or managing international payments and having the time and resources to understand other countries’ laws and regulations, SMEs face a range of challenges that fall within three main categories:
Because every SME is different and unique, there is no one-size-fits-all model when it comes to tackling these challenges. A good place to start is by understanding the most common problems faced while importing and exporting. Resorting to specialised assistance can help companies assess their needs as well as the areas of improvement specific to their business and industry in order to reach new heights and thrive.
Laws and regulations
While small and medium-sized enterprises may all be different and unique, they must nonetheless all comply with a set of laws and regulations common to all. Companies engaging in global trade must be aware of the legal and regulatory framework that exists for imports and exports. International trade has become a complex matter and today, about 70% involves global value chains (GVCs) meaning that raw materials, parts, components and services cross borders multiple times before being incorporated into final products.[5]
International trade rules and restrictions
To set principles and guidelines, trade agreements are concluded and trickle down on three levels: multilateral, bilateral and unilateral. As the dedicated organisation in charge of regulating international trade, the World Trade Organisation (WTO) governs international trade. Through multilateral agreements, the organisation sets the guiding principles to adhere to when it comes to trading goods, services and intellectual property, as well as the procedures to follow for settling disputes.
On a second level, regional arrangements are signed by groups of countries usually organised by geographical area to govern trade between them. Intended to facilitate the growth and development of trade between countries, trade agreements at this level can be either multilateral or bilateral and provide security for importers, exporters and investors in all countries involved. Regional arrangements come in all shapes and size. While most seem to easily satisfy all parties, others can prove to be more complicated to put into force. One such agreement is the Trans-Pacific Partnership. It has seen a major member state go (the USA) and is in talks to accept a new one: the UK. Speaking of the UK, history has shown that agreements can also be broken. Following Brexit, the UK officially withdrew from the European Union and the trade agreements that govern the 27 member states only to sign a fresh new bilateral agreement: EU-UK Trade and Cooperation Agreement (TCA).
Lastly, on a third level, countries can impose unilateral trade agreements. These one-sided trade preferences imposed by a country on others generally come in the form of trade barriers. Trade barriers, which mainly aim to protect national industries by using various means to make imported products less attractive than domestic products, can take various forms:
- Currency devaluation
- Embargo
- Export licences
- Import licences
- Import quotas
- Local content requirements
- Non-tariff barriers to trade
- Subsidies
- Tariffs
- Trade restriction
- Voluntary export restraints
Complying with trade regulations
Trade barriers, in all their various forms, can have positive and negative impacts on businesses, making it more or less difficult to trade across borders. Governments have worked towards reducing barriers over the past decades, but the complexity of regulatory procedures still brings complications. For SMEs that have fewer resources than multinational companies, screening the regulatory environment and dealing with norms can be particularly time-consuming. In fact, 38% of SMEs with a digital presence mentioned that different regulations in other countries was a major challenge to export[6].
Companies interested in engaging in international trade must take the time to address key regulatory issues before they even get started. What are the specific compliance requirements of a given country for importing and exporting? Are there customs duties to pay or additional intellectual property protection to pursue? Are there registration and identification numbers to apply for like Europe’s VAT or EORI numbers or the ECCN number in the United States? When is it necessary to have an export licence? These are some of the questions that companies planning to broaden their perspectives should ask themselves.
Once they’ve established an international presence, businesses should not overlook the importance of keeping abreast with national economic policies and international politics. Governments adjust their economic policies regularly and these adjustments directly impact businesses through taxes, interest rates, currency exchange rates and public spending. Likewise, agreements between countries can be suspended or even terminated in the case of disputes which can lead to complications and expensive readjustments for companies. Resorting to specialised assistance may help stay one step ahead of the game and avoid cumbersome administrative procedures that impact net profits and demand time and efforts which could be otherwise spent.
Beyond trade regulations, there are other regulatory risks and compliance measures that expanding companies should address. Corruption, environmental, social and corporate governance, financial fraud, and cybersecurity are key concerns for all companies, especially those relying on foreign partners. After all, companies may strive to follow regulations and play by the rules but are their partners and suppliers doing so too? Finding the right supplier in today’s sea of options can be overwhelming but the choice of a supplier should be an important strategic decision. A good trade partner can go a long way in helping a company meet regulatory standards, drive customer demand and build a strong brand reputation.
The supply chain
Delivering goods and services from point A to point B (and sometimes points C, D and E) relies upon a wide network of stakeholders. The supply chain effectively links the supplier’s supplier to the client’s client and consists of the various stages and logistics flows involved directly or indirectly in getting products and services to their clients. Sourcing, scheduling and distribution are the three major components in the chain.
In today’s highly global economy, importing and exporting goods can be a tricky affair. Some companies have dedicated import/export professionals skilled at navigating around the complex ins and outs of a supply chain while others outsource the task to third-party logistics providers. Adopting a clear supply chain management strategy is essential to streamline the process as efficiently as possible. It relies on correctly handling the major flows in the chain. At its best, a sound supply chain management strategy can help businesses save money, guarantee client satisfaction, and cement their position in the market. In fact, 57% of companies believe that good supply chain management can give them a competitive edge[7]. At its worst, supply chain mismanagement can seriously harm a business and even spell the end of it. As every stakeholder is intricately related to another, a broken cog in the wheel can quickly have a domino effect. In fact, according to a 2018 survey, the biggest challenge in the supply chain is ensuring its transparency and visibility[8]. That is why being able to identify and mitigate the various risks of a supply chain is essential for all businesses operating internationally who do not want to be caught off-guard.
Today’s highly complex and international supply chains provide many benefits to a wide variety of stakeholders. Yet their complexity also makes them vulnerable and prone to business interruption. Sometimes even with all the preparation and experience in the world, some disruptions simply cannot be forewarned. After all, it is not always possible to anticipate the full extent of natural disasters, political upheavals and other instances of force majeure. The COVID-19 pandemic is a perfect example of this. Supply chain operations around the world have been disrupted by the pandemic like never before and the effects have pushed companies to adapt. By making their supply chains more resilient, collaborative and networked, businesses are shaping the supply chain of the future. As possible disruptions can occur at any stage of the supply chain, risks related to transport and logistics activities must be factored in on the road to developing and growing a successful international business. Planning properly and knowing how to identify the big risks in international trade are crucial for international companies. After all, the first step in risk management is risk identification. Establishing a strategic risk management plan can help to find the right transport partners and ensure goods transit to their destination hassle-free.
Between language and culture barriers, and trade restrictions and requirements, working with foreign suppliers can be a tricky affair. Following a few best practices to foster a strong supplier relationship can help companies mitigate purchasing risks, rely on an undisrupted supply chain and meet their KPIs. In the quest to a successful international expansion, finding the right supplier is essential to enable the whole supply chain to function smoothly. With every cog in the supplier chain journey linked by a distributor, choosing the right distribution method is the next challenge.
Distribution
Delivering goods at the right place and the right time is a challenge all international companies face. Regardless of what is being transported and which borders are being crossed, establishing a strong distribution network is vital to remain profitable and create a predictable shipping experience for all parties involved, from the manufacturer right to the end buyer. Accessing new markets and aiming to provide the best customer experience there while ensuring predictable transactions requires know-how. Simply identifying a transport partner is not sufficient to ensure good product positioning and return on investment. While there are many ready-to-use global distribution options, choosing the distribution channel that corresponds to the business starts with understanding the customer base. Finding the right distribution model, whether centralised or decentralised, will help strengthen brand image and impact the long-term success of a company.
Shipping
In the world of logistics, there are 4 different categories of freight shipping services and countless freight shipping service providers. Identifying the right one that best fits a company’s needs is a key driver in establishing the distribution model. Some 11 billion tons of goods are shipped around the world every year,[9] making ocean freight one of the most used modes of transport[10]. Yet with a global demand that has never been stronger, the sector is under significant strain. There are many challenges related to ocean freight and those most affected tend to be small and medium-sized companies. SMEs that understand how to anticipate and overcome these challenges will improve their chances of maintaining healthy profit margins and running successful import/export operations. Global shipping costs are increasing every year. While they’ve grown dramatically since the start of the COVID-19 pandemic, there are several reasons why they will continue to rise further still. Struggling to keep pace with these costs might have consequences on a finished product’s price and the profit margins of a company. Keeping track of developments, staying one-step ahead of trends and seeking out alternatives can make all the difference. Optimising transport costs, which tend to represent a large share of the final price of a product, is often overlooked by companies but whether a company’s supply chain is simple or complex finding the best freight shipping rate can help drive these costs down.
Warehousing
In some cases, resorting to international warehouse space can be an efficient way to cut shipping costs and shipping times while maintaining a competitive edge. Having full control of inventory and shipping can mean more available working capital and higher cash flow. In fact, there are three common inventory control models most companies adopt to make sure they have a clear vision of how to handle stock smoothly to reduce operational expenses, lower storage costs and ultimately, save money. Small and medium enterprises can draw considerable benefits from using inventory management systems to stay organised and avoid headaches. Knowing how to adopt the right warehousing solution in a foreign country requires skill and time. Choosing the right location, tackling language and culture barriers, managing costs and local regulations as well as having basic knowledge of warehouse procedures, can deter companies from opting for international warehousing solutions. As a result, some prefer to partner with a third-party logistics (3PL) company to optimise their supply chain.
From transport options to distribution channels and storage solutions, the possibilities when it comes to finding the best way to move goods from point A to point B quickly, efficiently and safely can be overwhelming. At the end of the day, there is no one-size-fits-all distribution model and with changing trends and expanding businesses, it is important to regularly reassess key drivers to adjust the distribution model for long-term optimisation. Among the various other aspects to consider, cross-border payments can also be an issue for businesses operating internationally. A strong payment strategy can contribute to ensuring good relationships with the various partners of the supply chain ecosystem. Knowing about how to pay international suppliers is a good start to tackling supplier payments.
Handling international payments
Between paying overseas suppliers, employee salaries, warehousing services and more, SMEs with an international footprint need to send and receive money to international accounts on a regular basis. International payments, also known as cross-border payments, involve at least two different countries and more than one bank. While business activity and trade environment influence the choice of service providers and payment methods best suited to a given company, all companies must consider several factors when transferring funds across countries.
As international trade has skyrocketed, international payments have become easier, faster and more secure. That said, there is still room for improvement. Above all, international payments remain expensive. From hidden costs like currency conversion fees, unfavourable exchange rates, and transfer fees, international payments can come at a steep price for anyone who is not prepared. Implementing best practices for paying overseas can help import and export businesses be more cost-effective and efficient.
Many businesses complain about long transaction times and lack of visibility when it comes to international payments. After all, international payments are by definition more complex than domestic ones. Currency conversions and intermediary banks come into play and as a result, the end-to-end journey of an international payment is not always a straight line. Understanding the process can help businesses develop more efficient payment strategies, such as adopting local currency payments.
With B2B cross-border transactions expected to represent up to 150 trillion dollars by 2022,[11] the issue of international payments represents a significant avenue of growth in the import and export business. Multinational corporations are generally well catered for by big banks, but SMEs and midmarket companies are not always so lucky. They may represent 95% of the global economy, but SMEs traditionally tend to have limited access to financial services and risk mitigation strategies. Given the growth prospects of the market, the need for financing solutions and payment options specifically tailored to the SME sector cannot be overlooked. In fact, some players have seen this opportunity and many SMEs are now turning away from traditional banks to find new and innovative solutions.
In recent years, an increasing number of fintechs have stepped in, disrupting the hegemony of traditional banks, and offering smart solutions to problems that banks have not been able to resolve. In an effort to encourage financial inclusion and to improve the use and delivery of financial services, fintechs rely heavily on technology-driven innovation. By bringing together finance and technology, fintechs aim to drive business performance and offer a more convenient alternative to traditional financial products. Until now, they have focused on serving the needs of the P2P and C2B payment markets, largely leaving the B2B payment market in the lurch. With stakeholders in the sector catching on to the value of digital adoption and the exponential growth expected in the coming years, the trillion-dollar cross-border payments sector is particularly ripe for innovation. This window of opportunity makes the B2B cross-border payment sector a particularly appealing playing field for digital disruptors.
There are many reasons why a company would benefit from turning to a fintech solution to curb a few headaches. Improving cash flow, lowering expenses and enhancing overall operations are the three key areas business owners focus on to optimise performance and gain in competitiveness. Fintechs can help both from a financial perspective as well as an operational perspective. Accessing payment, financing and investing options, enhancing payment security and improving processing time are among the top benefits of fintech solutions to optimise the financial performance and payment strategy of a company. Beyond this, fintechs are accelerating the digitisation of processes. In fact, workflow automation tools are among the latest innovations in fintech.
A study by U.S. Bank revealed that poor cash flow management is part of the top challenges small businesses face and one of the main reasons small businesses fail. Depending on the industry and lifecycle stage of a company, the range of factors to consider differs but for all, the bottom line is always the same: making sure the bottom line is in the black. With cash flow management being all about timing inflows and outflows, delayed and missing payments can have serious consequences for an international business. According to a Deloitte study,[12] 47% of suppliers report being paid late and the problem has been exacerbated since the start of the COVID-19 pandemic. Delayed payments are often a source of financial stress for small companies, impeding growth perspectives and the ability to prepare an accurate cash flow forecast.
Learning how to make cash flow forecasts and protect profit margins is key to avoiding cash flow issues. Sometimes overlooked, safeguarding against exchange rate fluctuations both on sales and purchases can have a big effect on profit margins. There may not be a way to predict flexible exchange rates and eliminate a possible exchange rate risk, but there are ways to minimise the impact of fluctuations of exchange rates. Tracking real-time exchange rates is one of them. Traditionally reserved for larger companies who benefit from a range of financial services, technological innovations that offer real-time exchange rates are becoming available to SMEs. Enabling SMEs to gain access to real-time exchange rates and allowing them to carry out their transactions at the right time contributes directly to improving their profit margins. In fact, there are 4 advantages to real-time exchange rates for SMEs and mid-caps. The world of payments and processing, just like all other aspects that contribute to making international businesses grow and flourish, evolves to keep up with changing times. By following specialised media and staying abreast of leading developments and innovations in this sector, business owners can be better prepared for the unexpected.
What’s next?
In a constantly changing world, companies must have the reflex to reassess their situations regularly. Adopting an efficient import/export strategy takes time and experience. Well-informed decisions, and above all specialised expertise and assistance contribute to setting strong foundations, steering faulty decisions back in the right direction and optimising existing strategies.
Given how complex supply chains can be, it is essential to stay on top of the process. Supply chain networks keep growing in size and scale and to stay competitive it is necessary to ensure that the supply chain continues to run smoothly. From supply chain management software (SCMS) to the various tools and techniques available, there are many ways to optimise a supply chain. An end-to-end supply chain optimisation seeks to maximise value and minimise costs which is why being aware of all the options and understanding what’s best for your company is crucial.
Objectives, business models and geographical locations all influence a company’s payment strategy which is why there is no one-size-fits-all model. Defining a payment strategy and establishing the key steps to make it competitive are critical to a business’ success. To help optimise your financial strategy and to benefit from specialised assistance, contact us and our experts will walk you through our services and advantages.
