Risk Mitigation

Trades Risk Mitigation

How Hop2it Manages International Risk

“Exporting means more opportunities, but also entails greater risks. Although the environment for international trade has changed substantially over the years, the risks that we as importers and exporters face when selling our products and services in other countries remain essentially the same.”

Hop2it’s initial step in managing export risks is an obvious one – but one which sometimes needs to be spelled out: first we attempt to identify the source of any risks, and then we try to manage and lower those risks to a minimum.

Our choice of the right import and export partners and the right professional advisers is a major step in mitigating our trading risk. Our bankers, lawyers, insurers, and accountants are engaged to provide Hop2it with knowledgeable advice about the risks we may face in overseas trading markets.

Types of Risk We Face in International Trade

Doing our business internationally we can experience different risks from those encountered domestically and will be influenced by the country we intend to export to or import from. Some of the major risks Hop2it faces in doing business internationally are summarized as follows.

Political Risk

We experienced significant political unrest in Hong Kong since 2016 which affected our ability to bank and our management’s safety. Major political instability at our export destination can either disrupt or in some cases prevent the completion of our export or import contracts. This type of sovereign risk might include defaults on payments, exchange transfer blockages, nationalization of foreign assets, confiscation of property, changes in government policies, or, in extreme instances, revolution and civil war. Some factors we also consider are:

  • Trade embargos enforced by governments and the international community affect the flow of goods and services and could affect your delivery of goods and getting paid.
  • The civil disorder may affect the personal security of company staff and contractors.
  • Political upheaval may occur due to economic factors, natural disasters, civil disorder or revolution
  • Whether the local country complies with international law requirements, for example, human rights, trade sanctions, recognition of personal property rights etc.
  • Some types of exports may be prohibited under local laws or due to trade embargoes or other international resolutions
  • There may be no legal recourse for default in the local country or it becomes uneconomic to pursue your legal rights.

Legal Risk

There can be major differences in the laws of the country we export from to the local laws of the country we import into to.  We always need to understand what these differences are and how they could affect our ability to successfully export our products or services. It is important for Hop2it not to assume that legal processes will be the same as our export country, particularly when entering into contractual arrangements with end-user Buyers.

Some examples of situations where legal issues create problems for Hop2it include:

  • The differences between legal systems – for example, common law systems as compared to civil law systems.
  • Differences in contract law between countries mean tailored advice on contract terms is important to ensure they are binding and enforceable. As discussed further below, the use of internationally recognized contracts may alleviate some of these problems.
  • The question of which laws will apply in disputes.
  • Patent registration and other Intellectual Property issues.
  • Product liability laws and any implied consumer warranties.
  • Access to courts and dispute resolution mechanisms. Some countries may not permit local litigation or place restrictions on the types of claims which can be made.
  • Taxation and revenue laws
  • Negligence and misrepresentation laws.

Bribery, Graft and Corruption Risk

Bribery, graft, and corruption are illegal in most countries around the world. In more recent times, Hop2it has been the potential victim of fraud from scammers and other issues put into place in the fast-developing Personal Protection Industry.

Generally, under most western criminal law, as a guideline,  it is a criminal offense to offer a benefit that is not legitimately due with the intention of influencing a foreign public official. A benefit is not restricted solely to monetary payments and can take other forms. Further, it is not necessary to prove any direct benefit to the foreign official – the use of an intermediary is sufficient to make out the offense. The law applies extraterritorially which means conduct engaged in wholly outside of the country of export and may still be punishable under that law.

Many countries also have extraterritorial laws outlawing bribery, including the USA, UK, Australia, Canada, and other EU nations. Therefore, the risk for anyone engaging in bribery or corruption arises not only under local law but also the law of the host country and potentially laws of other nations. It also places Hop2it as an exporter at risk of litigation by those who are affected by the illegal conduct, as demonstrated by recent successful class actions in the USA and Europe for PPE-related fraudulent deals.

Quarantine Compliance Risk

Most countries have strict quarantine requirements, even more so since 2019 when the Corvid 19 virus hit global economies. Before engaging in any Export Trade,  Hop2it needs to be aware of what is and what is not allowed under the relevant quarantine laws of our export destination.

There may also be import restrictions on certain goods and services and we need to ensure that any proposed exports are permitted under the laws of the local country. Our failure to do so may result in forfeiture or destruction of goods, fines, and restrictions on Hop2it as we experienced in our early days of exporting Infant Formula and other high-quality food products to China and the Pacific Islands.

Exchange Rate Risk

Exchange rate risk occurs in every Export Trade because of fluctuations in the value of a local currency where we contract manufacture or obtain our products and the USD$ currency we use internationally to sell to international buyers.

Unfortunately, Hop2it experienced some years ago, our profit margins eroded and occasionally we even lost money due to exchange rate fluctuations.

There are a number of ways in which we now protect ourselves against this risk, including quoting our sell prices in USD$ dollars only (when many of our manufacturers only deal in their local currency such as Baht, etc) so we try and hedge against currency fluctuations.

Non-payment Risk

The risk of not being paid for our goods or services is a very serious one for Hop2it, regardless of the country we are trading with.

In order to mitigate this risk, we ensure that our payment options are not negotiable with Buyers and match the level of the risk in that country. Generally, we have to pay for all products before they leave the factory, so Hop2it either funds that purchase and then ensure that the Buyer has committed to a deposit prior to transport or full payment upon delivery to the Port in logistic terms that apply to these transactions, FOB, CIF DDP etc etc.

To protect ourselves against payment default we use payment methods that provide us with some security such as pre-payment or an Irrevocable Letter of Credit – even for customers in wealthy markets such as the United States.  Some other ways we minimize the risk of non–payment are:

By considering the Buyers risk carefully before we ever offer Credit Terms, if ever.

When considering bank credit terms using BLC or SBLC’s with our customers, we consider:

  • Does our cash flow or funding permit us to offer credit terms?
  • What do we know about our Buyer’s credit history?
  • Should we deal directly with the Buyer or should we make use of an intermediary bank or escrow agent?
  • How easy or difficult will it be to resolve potential disputes or problems with this Buyer?
  • How difficult will it be to take action for recoveries, such as legal remedies or official representations, etc against this Buyer?

Credit Insurance

Sometimes Credit insurance offers Hop2it  protection against a wide range of both commercial and country risks when we sell our products on credit terms, which is rare. Most credit insurance covers the risks of trading on short credit terms – up to six months.

Managing Our Export Risks

Managing export risks is a process of thinking systematically about all possible undesirable outcomes before they happen and then setting up procedures that will either avoid or minimize these risks, or help us to cope with their impact. Basically, “what if” situation planning.

There are six basic elements we consider the risk management process:

  • Establish the context of the risks
  • Identify the potential risks
  • Assess probability and possible consequences of these  risks
  • Develop strategies to mitigate these risks
  • Monitor and review the outcomes
  • Communicate and consult with all parties involved.

Of course in a purely commercial world, these processes sound strong and they are, but in many cases Hop2it has a large number of unknown variables and elements to investigate and consider, time always being of the essence in trade deals.

Hop2it’s Risk Management Matrix

Over our years since our first export trade, Hop2it has tried to develop a Risk Management Matrix to clarify our thinking on the risks we may face but also give us a guideline to work from in managing or mitigating risks in our importing or exporting endeavors.

This document is designed to provide you are a Trading Member with some insight into how in-depth Hop2it has studied risk through our hands-on experience in dealing in international trading of commodities.