3/11/2022

What is risk?

• The
Th lik
likelihood
lih d or chance
h off meeting
i some form
f off harm,
h
International Trade Risks loss or damage

• Risk has two components

– The likelihood or probability of an event occurring

– The likely consequences

and their magnitude or seriousness

What is risk analysis? 4 components of Import risk

analysis (IRA)
• A structured process designed to determine:

– what can go wrong ?

Hazard Risk Risk
– how likely is it to go wrong ? Identification Assessment Management

– what would the consequences be ?

– what can be done to reduce the likelihood and/or

the consequences ?
Risk Communication
• It is a way of addressing uncertainty

1
 3/11/2022

International Trade Risks and how

to avoid them Economic Risks

Risks in international trade can be divided under Risk of non-acceptance

p
several types, such as Risk of protracted default i.e. the failure of the
• Economic Risks
buyer to pay off the due amount after six months
• Political Risks
of the due date
• Buyer
B country
t Risks
Ri k
Risk of Exchange rate
• Commercial Risks
• Other Risks

Political Risks Political Risks examples

A risk that business, investors and governments may face
 Some specific political risks includes:
when there is a change in policies and political outcomes. And
when
h those
h changes
h affect
ff your business
b i goals
l we call
ll it
i  High
Hi h level
l l off crime
i and
d violence
i l
political risk.  Terrorism
Political risk arises due to changes in government policy or  Armed conflict
political instability. It is important for an exporter to be aware  Weak political institution
of the policies of foreign governments. This will allow your
 High level of corruption
company to take the necessary steps to prevent loss of business
 Large and unpredictable changes governmental
and investment.
policy

2
 3/11/2022

Cont…. Buyer country Risks

 Risk of non- renewal of import and exports
 Changes in the policies of the government
licenses
 Exchange control regulations
 Risks due to war
 Lack of foreign currency
 Risk of the imposition of an import ban after the
 Trade embargoes (A government order imposing a
delivery of the goods
trade barrier)
 Surrendering of political sovereignty

Commercial Risks Other Risks

 A bank's lack of ability to honor its responsibilities  Cultural differences e.g., some cultures consider the

 A buyer's failure pertaining to payment due to financial payment of an incentive to help trading is absolutely

limitations lawful

 A seller's inability to provide the required quantity or  Lack of knowledge of overseas markets

quality of goods  Language barriers

 Inclination to corrupt business associates

3
 3/11/2022

How to Manage Risks in

 Legal protection for breach of contract or non-payment is
low
 Effects of unpredictable business environment and
fluctuating exchange rates
 Natural risk – due to the various kinds natural
catastrophes, which cannot be controlled
International Business
1. Study the country you want to get involved with:
 Do your homework before entering a foreign market.
market Do
not enter any nation without being fully aware of the
unique risks and issues presented by that nation.
 Assess political risks and the legal environment as well
as the business and competitive environment, and
develop strategies to minimize or circumvent these risks.

 Study the histories of local and international companies

2. Partner with local organizations:
in the specific country and industry to gain deeper
Much of the risk of uncertainty can be curtailed by
insight into what your own experience may be like.
p g with local organizations
cooperating g to take advantage
g of
 Pay careful
f l attention
i to exchange
h rates, including
i l di their
h i
their market-specific expertise and local reputation. Effective
histories and expected future actions. Utilize the services
cooperation strategies include,
of local consulting firms specializing in international
•Joint ventures
investment.
•Licensing agreements
 These firms will have thorough knowledge of the
•Contracts with local suppliers or customers
challenges and opportunities presented to international
businesses in their specific country.

4
 3/11/2022

4. Do not place all of your foreign investment in

3. Patience: one country.

Don’t be patience if environmental risk factors are currently

If the business environment in a specific country turns
unfavorable, and consider pulling out of a market if
sour, your business can benefit from having an established
conditions become extremely adverse. If the business
presence in one or more additional countries. Factory
environment becomes unfavorable, do not hesitate to move
output from a given nation, for example, can be shifted to
your operations to a friendlier climate.
a factory in a different country, or spread among several
factories, if you decide to pull out of the given nation.

5. International business insurance

policy: 6. Safe mode of payment: 
Purchase an international business insurance policy.
p y
A
Accept
t only
l letters
l tt off credit
dit from
f t t d banks.
trusted b k Deal
D l with
ith
Insurance policies covering political risk, terrorism risk,
banks with which your own bank has had positive dealings
global property damage and liability, and international
in the past, if at all possible.
credit transactions are available to companies with
If your customer is only willing to use a foreign bank that is
exposure to
t international
i t ti l markets.
k t
unknown to your own, consider requiring a significant initial
International coverage for additional issues such as auto
payment when offering a credit arrangement, or declining
insurance, medical expenses, and workers‘ compensation
the transaction.
can be included as well.

5
 3/11/2022

Global Trade in Textiles and Garments

Chapter - 2
• The global textiles and garments industry forms an important
component of world trade flows, particularly for some developing
and least developed countries where clothing accounts for a large
proportion of total exports. In 2004, world exports of textiles were
INTERNATIONAL AND valued at $195bn and of clothing at $258bn, representing 2.2% and
2.9% respectively
p y of total world merchandise trade ((WTO,, 2005).
)
REGIONAL TRADE Developing countries produce half the world’s textile exports and
nearly three-quarters of the world’s clothing exports.
AGREEMENTS

International Trade Agreements

The textile industry in Ethiopia and • General Agreement on Trade and Tariffs (GATT) and
Ethiopian garment production World Trade Organization (WTO)

R i
Regional
l Trade
T d A Agreements
t
 Based on Ethiopian country data, in the last 5 to 6
– North American Free Trade Agreement
years, the textile, and apparel industry have grown
at an average of 51% and more than 65 – Association of Southeast Asian Nations

i
international
i l textile
il investment
i projects
j h
have b
been – Common Market of the South (MERCOSUR)

licensed for foreign investors, during this period. – European Union

– African growth opportunity act (AGOA)

6
 3/11/2022

General Agreement on Tariffs

and Trade (GATT)

GATT
1. GATT created as an agency to serve as watchdog over world
trade and provide a process to reduce tariffs
 “Provisional” agreement (1948 – 1994) 2. GATT also provided a mechanism to resolve trade disputes
bilaterally
 Dramatic tariff reductions were negotiated in a
GATT covers three basic areas:
1. trade shall be conducted on a nondiscriminatory basis;
series of trade rounds 2. protection shall be afforded domestic industries
through customs tariffs, not through such commercial
measures as import quotas; and
 Grew from 23 to 123 countries 3 consultation
3. lt ti shall
h ll be
b the
th primary
i method
th d usedd to
t solve
l
global trade problems.

3. GATT now replaced by the World Trade Organization

WTO
World Trade Organization (WTO)

 WTO created in the Uruguay trade round Unlike GATT, is an institution, not an agreement

 Established in Geneva in 1995

 153 member countries 1. It sets many rules governing trade between its 132
members
 A negotiating forum

 A set of rules (international agreements)
 GATT was updated and still forms the legal framework
for WTO negotiations on the goods trade
 A place to settle trade disputes
2. WTO provides a panel of experts to hear and rule on
trade disputes between members, and, unlike GATT,
issues binding decisions

7
 3/11/2022

• Cornerstone of the U.S. Government’s trade and

What is AGOA? investment policy toward Sub-Saharan Africa, which
is:
 AGOA was signed into U.S. law May 18,
– promoting free markets
2000 as partt off th
the T d
Trade and
d
– AGOA offers tangible incentives for African
Development Act of 2000
countries to continue their efforts to open their
 Duty-free, quota free entry to the United
economies and build free markets
States for most goods
– expanding
di U.S.-African
U S Af i ttrade
d andd investment
i t t
 Allowing duty-free entry of 4,650
– stimulating economic growth
products until 2015 for AGOA-eligible
– facilitating Sub-Saharan Africa’s integration into the
countries
global economy

Cont.….
• Ethiopia’s garment manufacturing sector is the largest
AGOA beneficiary in the country. Between 2000 and
2020, Ethiopia exported $722 million worth of garments
to the US duty-free under AGOA, with three quarters of
that in the past three years alone. Ethiopia benefits from
very favorable rules of origin under AGOA,
AGOA which allow
the utilization of third country fabrics as qualifying input
materials.

8
 3/11/2022

Common Market for Eastern and

Southern Africa (COMESA)
 COMESA was initially established in 1981 as the Preferential
Trade Area (PTA) for Eastern and Southern Africa (PTA). The
PTA was transformed into COMESA in 1994. It is the largest
Economic Regional Organisation in Africa.
 An international inter-governmental organization established
through a Treaty by Governments of the Member States (MS)
 Its headquarters
q is Lusaka, Zambia
 Gets finances from contributions by Member States &
international donors

There are currently 19 active Member States in COMESA.

34

Objectives of COMESA COMESA Member

1. Create and maintain a full free trade with free movement of States
goods and services produced within COMESA and the
removal of all barriers. • Burundi
uu d • Malawi
• Mauritius
• Comoros
2. Establish a Customs Union where goods and services • D R Congo
• Rwanda
• Seychelles
• Djibouti
imported from non-COMESA countries will attract an agreed • Somalia
• Egypt • Sudan
single tariff. • Eritrea • Tunisia
• Ethiopia • Eswatini
3. Free movement of capital and investments. • Kenya • Uganda
• Zambia
• Libya
4. Gradual establishment of a payment union and the eventual • Zimbabwe
• Madagascar
establishment of a common currency.
5. Adoption of a common visa including the right of
establishment leading eventually to free movement persons. 35 36

9
 3/11/2022

North American Free Trade The European Union (EU)

Agreement (NAFTA)
 An agreement between the United States, Canada,
and Mexico to make trade among them easier and
freer.
 NAFTA came into effect in 1994 and since then
trade among these three countries has grown rapidly.
• Major objectives of the EU: To create free trade and a
common external tariff between members, to abolish
restrictions on the free movement of all factors of
production, to establish common policies in the area
transport, agriculture, competition, etc.

 All American countries, except Cuba, have entered • Institutions

i i off the
h EU: The
h European Council,
il the
h

into a Free Trade of the Americas process, which European Commission, the European Parliament, the
Court of Justice.
aims for free trade among all American nations by
2005.

Asia-Pacific Economic Other Regional Trade Agreements

Cooperation (APEC) The
 APEC is a group of 21 nations that border the
Pacific Ocean.  European Free Trade Area (EFTA)

 APEC was established in 1989 and has  The Central American Common Market (CACM)

developed into an organization that promotes  The Andean Pact, The Association of Southeast Asian

freer trade and cooperation among its Nations (ASEAN)

members.
b  The Caribbean Common Market (CARICOM),
(CARICOM)

 In 1999, APEC nations conducted 44 percent  The Southern African Customs Union (SACU),

of world international trade.  The Economic Community of West African States

(ECOWAS)

10
 3/11/2022

Tariff
Barriers to Trade • Tax on imported goods or services
• Reasons for tariffs
– Raise tax revenues
– Reduce consumption of the imported good or service
• Effect – Price of import rises, “cheaper” domestic
goods become more attractive
 EXAMPLE: The European Union removes tariffs between
member nations, and imposes tariffs on nonmembers.
 NAFTA, the North American Free Trade Agreement,
allows free trade (no tariffs or quotas) between Mexico,
Canada, and the United States.

Quota
Export Subsidy
• Limits the amount of an imported good allowed into the
• Government financial assistance to a firm that allows a firm to
country
sell its product at a reduced price
• Supply is decreased and price increases. This encourages
people to buy domestic products, rather than foreign goods. • Benefits and harms

• Voluntary Export Restrictions (VER’s) are similar – Consumers (both at home and abroad) benefit from lower
• EXAMPLE: Brazil could pput a qquota on foreign
g made shoes to prices
10,000,000 pairs a year. If Brazilians buy 200,000,000 pairs of
– Foreign producers are harmed because of lower world
shoes each year, this would leave most of the market to
Brazilian producers. prices

– Taxpayers in the producing country pay the subsidy

11
 3/11/2022

Embargos
Product Standards
 Embargos are government orders which completely
• A type of “hidden” trade barrier prohibits trade with another country.
 The embargo is the harshest type of trade barrier and is
• Types of standards
usually enacted for political purposes to hurt a country
– Product safety economically and thus undermine the political leaders
– Content in charge.

– Packaging EXAMPLE: The United States placed an embargo

on Cuba after the Cuban Missile Crisis. We do not
trade with Cuba—this is still in effect today.

Benefits of Trade Barriers

 Most barriers to trade are designed to
prevent imports from entering a country.
 Trade barriers provide many benefits:
protect homeland industries from competition
 t t jobs
protect j b
help provide extra income for the government.
Costs of Trade Barriers
 Tariffs increase the price of imported goods.
 Less competition from world markets means there is
an increase in the price.
 The tax on imported goods is passed along to the
consumer so the price of imported goods is higher.

12