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.
Looking to determine if your new trade opportunities are viable? Check out the FITTskills Feasibility of International Trade online course!
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.