What Are Political Risks In Foreign Trade?
Political risks are risks, which occur because of instabilities in national governments and war, both civil and international. No matter how consistent the buyer is fulfilling his obligations to the seller according to the contract, his obligations are dependent on the current situation in his own country or along the transport route to that country. The underlying causes of political risks include political stability, social stability, and economic stability (Anders 23).
Political stability, which comprises of political structures and ideologies, combined with external relations with other countries forms an vital part of the political risk. Stability in general terms refers to the likelihood of a countries involvement in acts of terror, war or violence from internal groupings or sanctions from other nations. The constant risk of rapid and unexpected change in economic policy due to political instability is extremely damaging for any private or commercial economic activities in the country. In addition, corruption is believed to contribute to political risks in foreign trade (Transparency International)
Social stability of a country is very important on the long-term basis. However, development in many countries reveal how social instability such as uneven income distribution and ethnic and religious hostility can result into violence and terrorism within a very short time.
Economic stability is also crucial in maintaining a countries confidence and its economy. Factors such as a weak infrastructure dependent on single imports or exports commodities, and lack of raw materials are just but a few critical factors that can easily change economic stability within a short time.
How Can Political Risks Be Managed?
Approaches that businesses can use to minimize political risks include proper planning, involving the private sector investments, reducing corruption, use of hedging contracts, fostering healthy relationships between countries and promoting international security.
Undertake proper planning and due thoroughness may help in managing political risks. Many businesses start operations in unfamiliar countries without conducting researching and devoting the necessary resources in ensuring a better than average chance of success. Building solid relations with governing authorities is the right approach.
Invest in projects that the host government implements policies that encourage private sector involvement. This involvement should provide risk mitigation and encourage risk transfer. Implementation of global measures is necessary to reduce international corruption, which has become a disadvantage to companies that operate with integrity (Transparency International).
Enter into hedging contracts to protect themselves against fluctuations in interest rates and currency exchange rates. Usually, these financial devices help to reduce losses in case of future price changes. Establish a good relationship with the workforce by providing a friendly working environment. Usually people observe foreign businesses of having uncaring managers that do not appreciate their work force. This can result in terrible consequences. Having a loyal workforce is the best way to protect business assets.
Provide quality and adequate security on the business premises to guard against terrorist attacks within the business premises. Regular followup on the political, economic, and social scene in your host country by the management. They can easily lose focus on these issues once engrossed in operational issues. Once there is a change in the working environment, it becomes difficult to do anything about it (Chapman 24).
What Risks Does Marine Insurance Cover?
Marine insurance covers loss or damage of ships, the cargo in transit, terminals, and transport means or property by which cargo is transferred. Furthermore, it covers warehouses where the cargo is kept (Marine Insurance Explained).
Works Cited
Chapman, Robert. Simple tools and techniques for enterprise risk management. 2nd Ed.
Chichester, England: Wiley, 2011. Print.
Grath, Anders. The Hand Book of International Trade and Finance. London: Kogan Page, 2011.
Print.
"Marine Insurance Explained - Insurance Compared is demystifying insurance." Insurance
Comparison. N.p., n.d. Web. 25 May 2012.
"Standing still? What the world’s biggest economies are doing about corruption." Transparency
International. N.p., 5 Apr. 2012. Web. 25 May 2012.
