The 11 political risks that could sink your imports and exports


Sinking Cargo Container

Sinking Cargo Container

Even when conditions indicate that a potential market might be suitable, certain political and legal issues—such as import restrictions or lack of copyright protection—could make the market less attractive. When trading with another country, organizations are directly influenced by the political, legal and business conditions of that country. A crucial step in deciding whether a new international market is a feasible one for your business to enter is to identify and analyze any possible political risks. The first step in analyzing political risk is to collect and review as much of the relevant data related to this target market.

Review historic and current data related to political risks

The following 11 potential political risks can be identified and evaluated through research:

1. Political instability: A country’s level of political instability is determined by the likelihood that its government will be destabilized or overthrown by violent or unconstitutional means, such as terrorism and civil war. This instability can include a rise in nationalism, civil unrest and labour issues. It can result in frequent changes to the legal requirements, destruction or appropriation of property or goods, inflation volatility, rapid price rises and a decrease in the quality of life for the country’s inhabitants.

2. Political cycle:  The timing of the election cycle may have a bearing on the launch of a new international trade initiative, especially if there is the potential of a change in the type of political leadership, such as from dictatorship to democracy.

3. Hostility to foreigners, foreign trade or foreign investment: Some countries openly welcome foreign trade and investment by offering incentives or beneficial tax reductions. However, in other markets, discriminatory legislation, trade barriers, “buy-national” procurement policies, quotas and tariffs are applied to foreign organizations.

4. Corruption and control over commerce: In some countries, control over commerce can lead to situations in which organizations feel pressured to befriend, persuade or even bribe officials in order to secure the permits required to conduct trade. However, gift giving and bribery can result in severe criminal and civil penalties.

International trade research helps identify markets in which organizations are likely to face trade barriers unless they or their representatives act in an illegal manner.

5. Weak legal protection for property and Intellectual Property rights: In countries with weak protection for property rights, there is an increase in black market activities (e.g. where illegal copies of products are being manufactured, distributed and sold in a foreign market with the consent of the intellectual property owner). Organizations are wary about investing in such countries because of the possibility of large property losses when property is stolen or misappropriated without recourse or when contracts are not honoured. Intellectual Property rights are also important. The degree to which Intellectual Property is protected influences the flow of innovative ideas and creation of new products in a  country, which impacts creative and economic wealth. Intellectual Property includes inventions, literary and artistic works and symbols, images, names and designs used in commerce.

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6. Legal restrictions on trade: These restrictions can apply to both the import and export of goods and services.

In 2021, Pacific Gateway Holdings,  a  seafood  importer  in  British  Columbia,  was  fined  CDN  163,776  for  importing  endangered  eel  species  products  from  a  supplier  in  Xiamen,  China.  The  company  had  declared  that  the  shipping  containers  contained  American  eel,  but  five  of  seven  containers  that  were  inspected  were  found  to  also  contain  a  percentage  of  European  eel  meat  (which  is  not  legal for importation). The shipment, which was valued at roughly CDN  400,000,  was  also  seized  by  the  Crown  at  the  border  and  ultimately scheduled for destruction.

7. Legal requirements for business registrations, incorporation, local partnering or other types of  performance: Because a company’s legal structure has an effect on liabilities and taxes, it is important to consult with a tax accountant and legal expert to investigate each form of legal structure before making a decision. Organizations must also ensure that they adhere to all legal requirements and payments.

8. Tax regimes: Tax rates on identical items vary from country to country and sometimes even between regions within the same country. A country’s tax practices might be unusual or complex. If tax treaties between a foreign country and a company’s home country are not established, a foreign company might have to pay tax twice (i.e. they may have to report, and be taxed on, earnings in both countries).

9. Relationships with other countries: It is important that an organization is aware of the relationships the target market has with other countries, including alliances and conflicts. For instance, if an exporter sells a product to a country that is known to then trade that product to a country with international sanctions against trade in that product, the exporter may face legal consequences.

In 2021, Biomin America, a company based in Kansas, U.S., agreed to  pay  a  penalty  of  USD  257,862  to  the  Government  after  being  found  to  be  in  violation  of  the  U.S.  Department  of  the  Treasury’s  Office  of  Foreign  Assets  Control  (OFAC)  regulations.  Although  U.S.-based  companies  can  sell  food  to  importers  in  Cuba,  the  United  States  carefully  regulates  and  monitors  all  shipments  to  the  country  so  a  permit  is  required.  In  this  case,  the  shipments  to  Cuba  were  actually  made  by  subsidiaries  that  Biomin  America  owned  in  other  countries  and  the  goods  were  not  produced  in  the  United  States.  However,  since  the  companies  involved  were  owned  by  the  U.S.  parent  company,  a  permit  was  still  required,  and since it had not been obtained, the company was penalized.

10. Infrastructure failure: It is important to consider the potential of infrastructure failure for government-owned assets such as electric power and transportation.

11. Cultural misunderstanding: Organizations must always be aware of the potential for cultural misunderstanding in business dealings.

This information will have been collected in the research phase. An excellent source for this type of information are country reports, many of which are free or available at low cost.

Organizations, especially larger companies involved in complex trade deals, may also hire specialists in the political risk analysis to complete the research and target market analysis. These specialists provide reports and recommendations that inform business planning decisions.

It is critical that organizations identify the requirements of the target market and their own countries. Misinterpreting these requirements can lead to difficult situations – for example, you could be required to remove a product, such as veterinary products and live animals, from a foreign country that cannot be re-admitted to your own. Once  the  information  is  collected,  you can identify  the  key  areas  of  concern and measure the probability of occurrence of each risk and the potential impact your  business  activities.

This article is an excerpt from the FITTskills Feasibility of International Trade course. Find the best potential import and/or export ventures for your business with effective market research using the right types of data

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About the author

Author: FITT Team

The Forum for International Trade Training (FITT) is the standards, certification and training body dedicated to providing international business training, resources and professional certification to individuals and businesses. Created by business for business, FITT’s international business training solutions are the standard of excellence for global trade professionals around the world.

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