As technology continues to grow, trading on a global scale is now a possibility for both independent wholesalers and large corporations. But local trade is also still lucrative and appealing, especially as the process of local trading is a lot smoother than that of international trading.
When you’re considering expansion to the international market, there are a few differences between local trade and international trade you need to be aware of.
Domestic trade is typically characterized as a company trading within a single country. In this type of trading, the market operates in the limits of that country’s borders. That means that every product needs to be bought and sold by those living within the domestic market.
There are a few advantages of domestic trade. For one, you’ll become more familiar with the local market and understand the business culture and the legislation when it comes to receiving payments. Transportation also costs less and goods can go to market a lot quicker.
However, the biggest downside to domestic trade is the limited selection of products available for sale. In a totally domestic trade market, countries that don’t have supplies of certain resources will not have access to these resources.
For example, if you live in a Northern Hemisphere country you wouldn't be able to eat produce from tropical regions if your country only operated on domestic trade. This is also the case for countries that may not have access to the equipment or technology needed to make certain products.
Trade that takes place across international borders is known as international trade. International trade has had a major impact on the global economy.
If you deal with international suppliers that export goods to you and they experience political change, get placed on sanction lists or are hit by natural disasters, then this can have a direct impact on your supply chain. And if your supply chain is impacted, you can bet your cash flow will be too, which means it'll be tougher to import products and services from other countries at the prices, quantities and quality that you need to meet your customers' demands.
Trading internationally can bring a number of benefits to your business. For instance, you can get access to a larger customer base by filling a product/market gap. It's an opportunity to weed out the competition and make sure that the products/services you sell in that market fill that gap well. And that will allow you not only to generate consistent sales in that new market, but also increase your overall business revenue.
International trade also gives countries a chance to participate in the global economy and encourages Foreign Direct Investment (FDI). Theoretically, this gives developing economies a chance to grow efficiently and become competitive on the world stage.
For countries that receive FDI, it's a way for foreign expertise and currency to enter the country. It can boost employment levels and should hopefully lead to growth in their Gross Domestic Product (GDP). For the organizations doing the investing, FDI lets them grow and expand the company.
International trade can be further subcategorized into free trade and protectionism. These two theories describe how international trade is managed between countries.
Free trade is also known as laissez-faire economics, meaning there are no restrictions on trade. The main idea behind free trade is that supply and demand factors that operate on a global scale will be enough to make sure production happens in an orderly fashion.
There's also a lax approach to promoting or protecting growth and trade because market forces will automatically do this.
Protectionism theorizes that regulating international trade is crucial to ensuring that markets function correctly. Supporters of protectionism believe that any inefficiencies in the market may hinder international trade, and believe that regulation can keep the market running smoothly.
Protectionism takes a few different forms, but the most common forms it takes are quotas, subsidies, and tariffs, which attempt to right any inefficiencies that occur in the international market.
International trade makes specialization and more efficient use of resources possible, and can potentially improve a country’s ability to acquire goods and produce them. However, detractors have argued that international trade still doesn’t correct any inefficiencies that prevent developing countries from benefiting from globalization.
However, advocates and detractors of international trade can agree that the global economy is constantly subject to change, and as it develops and grows, every country that participates should benefit from its growth.
Now that we know the differences between free trade and protectionism, you may be wondering which of these principles the US market operates in.
The US is considered the world’s leading free market economy, and its economic output far exceeds that of any other country that also operates a free-market economy. For the US free market to thrive, it relies on capitalism, i.e. the rule of supply and demand that sets prices and distributes goods and services. However, the US being a totally free market economy isn’t the whole truth.
In fact, the US is considered a mixed economy. The idea of a mixed economy is that it combines the advantages of a free market economy with all the benefits of a command economy. In a command economy, the government creates a central plan to oversee prices and distribution.
So why is the US considered a mixed economy, and is this a good thing? Well, co-ordinating a national defense plan in a totally free market economy would not be easy. Plus, a society that receives no government intervention would leave the more vulnerable in society without a safety net. Therefore, the US market needs to achieve a middle ground between a free market economy and a command economy, so makes use of the principles of free trade and protectionism.
Policies that governments introduce to prevent international trade are the biggest barrier to international trade, such as import and export licenses, quotes, standardization, subsidies, and tariffs.
But from an individual business level, one of the biggest downsides of going into business with an international company is that issues like delays in invoice payments or delivery of goods and services are made that much more complicated by the business operating overseas.
While working with international businesses can help you reap great rewards, bureaucratic red tape and local regulations can complicate things and cause delays in the payment process, which can seriously disrupt your cash flow.
The best way to avoid such complications is to make sure you’re going into business with a reliable, creditworthy company. Now, one thing we see a lot is companies being a bit too lax about this or thinking that asking for customer references is good enough. It's not. Just because a company may have a good standing relationship with one customer doesn't mean the same applies for all their customers. And let's not forget, most people don't submit bad references. So, what you'll be getting is a pre-selected list of 'positive' references.
You need to take matters into your own hands and let the data do the talking. So, start by looking at their international business credit report. Check to see what their business credit score - is it lower than what your company's credit policy would allow? Look at how many changes have been made to their business credit report - are there 5+ changes in the last few months? That should be a red flag. Also, dig even deeper to see how well they're paying their bills - and even how many days beyond terms they're making late payments. For example, if you can see that they're making quite a large portion of their payments between 60-90 days, that's another red flag you shouldn't ignore.
Steve Carpenter, Country Director, North America, Creditsafe
Steve Carpenter oversees business operations, sales, P&L, product and data. With an impressive 16-year tenure at Creditsafe, Steve has played an integral role in the company's international expansion efforts, spearheading global data acquisition and fostering global partnerships.