International trade is the exchange of goods and services across national boundaries, which is the most traditional form of international business activity. It enables labor division and specialization among economies and increases the global productivity as a whole.
On the one hand, it allows buyers to seek out products, services, and components produced in foreign countries to enrich and diversify their offerings to consumers; on the other hand, it helps sellers expand overseas footprint and market share to grow incomes and employment.
Because international trade can significantly influence national economy, environment, and security, it is closely monitored and strictly regulated by governments. Doing international trade does incur extra risks and regulatory requirements in comparison with pure domestic transactions. For instance, given a product, importing or exporting it will face the following challenges:
- Verify if the product is free from any import/export restrictions, subject to certain import/export restrictions, or prohibited from importation/exportation;
- Apply for the required licenses or permits and use them properly;
- Implement pre-shipment inspection, compulsory certification, and other industrial standards;
- Meet packing and labeling regulations;
- Classify the product in terms of HS number and ECCN number;
- Calculate the transaction value of the product and figure out its Customs value accordingly;
- Determine the origin of the product;
- Assess the import (sometimes export) duties and other taxes imposed on the product;
- Review the product's eligibility for preferential duties and taxes under different FTAs;
- Identify the Importer of Record (IOR) and the Export of Record (EOR) to arrange transactions and documents;
- Engage and manage Customs brokers and freight forwarders;
- Fulfill import/export Customs formalities, which may take other regulatory formalities as preconditions;
- Utilize Free Trade Zone, Bonded Warehouse, special trade patterns, and other relevant Customs programs;
- Deal with cross-border payment and foreign exchange control;
- Recordkeeping for post-clearance audit.
Failure to address these challenges can result in supply chain interruption and delay, reputational and financial damage, and administrative or even criminal penalties.
Besides international trade, another vehicle that is frequently used for going abroad is foreign direct investment (FDI), which usually goes beyond mere capital investment and include the provision of management, technology, and equipment as well.
The reasons for FDI’s popularity include:
- Proximity to foreign domestic market;
- Lower cost of production with local labor and materials;
- Incentives provided by host country to attract FDI;
- Being able to avoid directly or indirectly most trade barriers that make international trade more difficult and expensive such as tariffs, quotas, and licenses imposed by governments on imports and exports.
However, FDI is not flawless but with its own intrinsic risks. Strategically, many countries restrict FDI through foreign equity limits and screening measures, which means there are some industries that are closed to foreign investors, and some industries that have limited extend of ownership defined for foreign investors. Down to the operational level, there are even more risks calling for FDI due diligence, which include but not limited to:
- How is the political and regulatory environment with respect to the host country in general and the target region in particular? And the trend in foreseeable future?
- Are there any commercial risks that deserve a second look?
- What are the main operational bottlenecks? And mitigation plans?
- Are there any special legal and financial requirements with local characteristics?
- What are the prominent compliance issues pertaining to your industry? How to manage them?
- Are there any environmental, health, safety and social responsibilities to borne in mind?
Ignorance of the risks can result in significant loss of your investment or the collapse of the entire FDI project in vain.
That is why we are here, ready to support you in handling the aforementioned challenges and risks. Please let us know if you need any help in these areas.
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