1.What possible risk management strategies can an exporter/importer follow? Explain each strategy’s advantages and disadvantages from the perspective of a small exporter.
1.The adoption of risk management strategy provides organized and rational approach to recognize, evaluate and manage risk (DIY Committee Guide, 2018). The companies that participate in the international trade can effectively manage risk through the adoption of appropriate risk management strategy. The risk management strategies followed by importer/exporter are in three forms-
- Retention of risks
- Transferring the risk altogether to the insurance company
- Adoption of mixed approach that combines retention and transfer of risks
Risk Retention- It is a strategy for risk management in which decision is made regarding the retention of risk and not insuring against it. Risk retention is often chosen by the small exporter as they have very little exposure. Their shipments involve goods of lower value which, if results in loss, will have only few financial consequences. Moreover, the international transactions constitute only a minor percentage of their business. Therefore, the adoption of risk retention is beneficial from the perspective of a small exporter. On the other hand, it contains the relative disadvantages for a small exporter too. For small exporters, risk retention can often result in huge losses due to underestimation of risk which may ultimately result in ending up of their businesses.
Risk Transfer- Risk transfer is a risk management strategy which is adopted by various firms in order to transfer the risks associated with international transportation to an insurance company. The protection against the losses is provided by the insurance companies in exchange of a premium. Risk transfer proof to be advantageous for a small exporter as small exporters are uncomfortable with the risks associated with the international trade. The proper assessment for the exposure of such risks is a difficult task for small exporters since they lack understanding in international trade. The transfer of risks to the insurance company therefore protects their goods against different kinds of losses. On the other hand, risk transfer requires the payment of premium which may become a heavy burden for the small exporters for whom the premium may exceed the value of goods being exported. The risk cover may not result in beneficial project.
Mixed Approach- Mixed approach is a risk management strategy in which some part of the risk is retained while the remaining is transferred. There are two different ways for the achievement of the strategy-
- The maximum amount of risk is decided which a firm is willing to take
- Decision is made regarding types of risks that a firm is willing to bear and the other risks that would be transferred to the insurance company.
For small exporters, mixed approach provides the benefit of evaluating the exposure of risks that they are willing to bear themselves and provides them a chance to spit the risk between the insurance company and the firm. However, the incorrect identification and evaluation of risks on part of the small exporter may lead to negative consequences for them as the risk taken by them may not have proper cover and result in huge losses.
2.Marine insurance shields the damage or loss of cargo, ships, or any terminal with the help of which the property is acquired or transported or detained between the points of origin and the destination. It provides assurance to the ship owners and transporters that they can claim the damages in a case where any loss occurs as a result of circumstances stated in the policy. The clauses in the marine insurance include sue and labor, inchmaree clause, warehouse to warehouse coverage etc.
Sue and Labor- Sue and labor clause requires the insured to protect the cargo from resulting in further damage in cases a loss occurs, as it is not insured such that the loss can be minimized. The costs incurred in the protection of cargo will be paid by the insurer. The cost is paid even in cases where the attempts made to save the ship altogether fails. This clause is useful in protecting the subject matter from all the kinds of losses and allows the insured for the recovery of all the justifiable expenses incurred by him for the purpose of minimizing the loss to the property insured (Greene, 2018).
Inchmaree Clause- Inchamaree clause is useful as it ensures that the goods are protected in the event of a broken propeller shaft, burst boiler along with errors in seamanship and navigation. In other words, this clause covers the loss that occurs as a result of any negligence on part of the crew member or master. Any damage caused to the cargo as a result of the operations related to loading and unloading is also recoverable.
Warehouse to Warehouse Coverage- Warehouse to warehouse coverage clause in the policy provides full coverage for goods starting from the moment the goods leave the warehouse of the exporter till the time they reach the importer’s warehouse or 15 days after their arrival at the port of destination, whichever is earlier. This clause is useful as it saves the shipper from troubles and ensures the arrival of subject matter at the warehouse
3.Country of origin (COO) can be defined as the country where a product or article is produced, manufactured or grown i.e. the country where a product comes from. The rules of origin differ in accordance with the international treaties and national laws. Country of origin labelling can often be regarded as the place- based branding.
Country of location is currently determined by the place (country) where the finished product is manufactured or closest to be finished. It is also determined by the country where the HS Classification took its last change.
Determination of the country of origin is a simple process in cases where the production of the product is done in the country from where the raw materials are obtained. But the global trade environment has resulted in the production of goods using components from more than one country and performing the assembling of goods in another country which has made the process of determining the country of origin a complex process. Moreover, specific rules from various trade agreements further increase the complexity of the process. The determination is necessary so that the different duty rates applicable on different countries can be applied. Also, the existence of numerical quotas is for some countries and not for other countries. An importer is liable to be fined in cases where the country of origin is hidden.
The concept of origin is important as it helps in the regulation of preferential trade agreements, import quotas, duty rates and trade sanctions. Country of Origin gains enough attention of the Customs due to the involvement of revenue and admissibility issues. Also, it is important for the purpose of marking. The imported articles are required to bear the country of origin in order to inform the end user as required by the import regulations
4.Non- tariff barriers can be regarded as trade barriers which result in the restriction of the importation of goods and services with the help of mechanisms rather than simply imposing tariffs. The number of imported items are restricted in a specific country with the help of non- tariff barriers. Non- tariff barriers arise from various steps taken by the authorities and governments in the form of restrictions, prohibitions for the protection of domestic industries from foreign competition, conditions, laws and regulations, private sector business practices. These barriers are in the form of subsidies, import quotas, technical barriers or custom delays. The use of non- tariff barriers is made due to a variety of reasons. Some of them are as follows.
- Protecting Domestic Employment- Domestic industries suffer from serious competition from the imported goods as a result of which they are unable to sell their produce. This further leads towards unemployment in the domestic industries. Therefore, in order to protect employment in domestic industries, non- tariff barriers are imposed.
- Protecting Consumers- Non- tariff barriers are often imposed on the import and export of the goods which could endanger its population.
- Infant Industries- Non- tariff barriers are imposed by the developing countries for fostering growth such that the prices of the imported goods are increased and therefore the infant industries get a chance to flourish in the market.
Other reasons for the use of non- tariff barriers include retaliation, national security and protection from cheap labor. For example- a country may impose high duties on the imported goods in order to discourage importation with the aim to promote the consumption of domestic goods over the imported goods. Also, government of a country can manage the exchange rate by intervening in the currency market for affecting the relative prices of exports and imports.
DIY Committee Guide. (2018). What is a Risk Management Strategy. Retrieved January 11, 2018 from https://www.diycommitteeguide.org/resource/what-a-risk-management-strategy
Greene, M. R. (2018). Insurance. Retrieved January 11, 2018 from https://www.britannica.com/topic/insurance#ref86281