International trade is generally considered a rewarding venture for businesses. As a trader, exporting goods or services to foreign markets allows you to expand your customer base and access new markets, which can help boost business growth.
However, cross-border trade can sometimes be risky, even in the most developed markets. So you must be extra careful when entering emerging foreign markets characterised by political unrest. As an exporter, knowing the different types of political risks that could face your business can help you find the proper protection. First of all, let’s understand political risks.
What Is Political Risk?
Political risk is the probability that a country’s political environment may change in an unanticipated or unfavourable way, leading to economic losses and disruptions. It is one of the most prevalent risks associated with doing business in a particular country due to the instability of its government. The following are the common types of political risks.
1. Regulatory Risk
This risk involves changes in government legal and regulatory policies that could have a negative impact on foreign companies’ operations. The regulatory risk could include changes in trade restrictions, labour laws, tax policies, and environmental regulations.
2. Political Instability
Political instability is the probability that a country’s political environment could change and negatively affect a company’s operations. This could include civil unrest, changes to the government, economic disruptions, and unconstitutional acts, such as civil war, terrorism, riots, and insurrection.
3. Geopolitical Risk
Geopolitical risk is the risk of unexpected political decisions that can negatively impact the performance of a company or the entire market. It can also involve changes in a country’s international relations that could disrupt business operations. This could include changes in trade agreements, social and economic instability, sanctions, military tensions, and other global developments. Geopolitical risks can create uncertainty in markets, businesses, and even entire economies.
4. Trade Barrier Risk
Trade barrier risk is when a country imposes tariffs or restrictions on imports or exports. These trade barriers can lead to increased costs of doing business or create other impediments to cross-border trade, potentially leading to losses for organisations that rely on international trade. Usually, trade barriers occur as a result of trade wars or local politics.
5. Currency Risk
Currency risk is associated with the change in the relative value of two currencies which can impact a business’s returns. It is the risk of changes in a country’s currency exchange rate, which can affect an investment’s value. This type of risk is sometimes referred to as foreign exchange or exchange rate risk.
6. Breaches of Contract
Breaches of contract risk arise when governments fail to honour contracts as outlined in the agreement. Such risks can include politically motivated credit defaults and expropriations. Breaches of contract risks can result in serious financial problems and legal consequences such as penalties and lawsuits.
Protect Your Business Today with Political Risk Insurance
The effect of any of these risks on your business may wreak havoc on your company and even trigger other forms of risks that can worsen things. Knowing how to protect your international trade against political risk is a great way to prepare for unexpected events.
At Niche Trade Credit, we can help protect your cross-border business operations with our comprehensive export and political risk insurance, providing the confidence you need to take your business to the next level. The insurance policy covers a wide range of political risks, including contract repudiation, cancellation of import licence, non-payment or insolvency, government credit defaults, and more.
Ready to protect your business? Purchase political risk insurance from Niche Trade Credit to get started.
Learn more: What is political risk insurance?
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