One of the most difficult aspects of international trade is managing exchange rates. The constant shifting of exchange rates can considerably affect where and how trade markets develop and change. Parties negotiating international trade deals are not just affected by logistics of how the trading routes will proceed and how to attain letters of credit and guarantees, there is also an issue of how the parties can maximize profits when faced with constant currency shifts.
A common misconception is that Japanese and other foreign automobile manufacturers who have significant United States customer bases build large facilities to manufacture automobiles in the United States to save money. The theory goes that they will save money by producing and selling in the US due to their large market share instead of producing the same product and shipping it overseas.
That is a misconception. In fact, it would more economical to create cars in Japan or other areas and ship them across the ocean and then sell them in the US instead of paying an American workforce to produce automobiles domestically. It is not that expensive to ship cars across the ocean when those are shipped in bulk, especially in comparison to producing the same product in the US. The reason why foreign manufacturers have such facilities to build cars is because this allows them to hedge against currency shifts.
Titans like Toyota, Honda, and the like have the ability to build large North American facilities to manufacture their products. Such a setup affords them the ability to have adequate currency supply from a range of important currencies. As a result, they are hedged against risk.
Midsize and smaller businesses do not have the ability to hedge risk in the same manner. A business may have an expanding market in a different area of the world where the business can be successful but is concerned about currency hedging.
In such a scenario, the business owner should speak to a lawyer who understands both maritime trade and all its implements. The business may be looking to import a product from a third country to the target country. The business needs to figure out logistics of how the shipping process takes place. Next, the business needs to obtain letters of credit from banks in both areas to insure against glitches in the shipping route. It is imperative to obtain legal advice from both jurisdictions as well as a lawyer who represents the business and understands the markets.
Once those agreements are hammered out, the business should decide whether there is a need to hedge against currency shifts. While it cannot hedge the same way multi-national corporations hedge, there are various strategies that can benefit the company. For instance, it may consider a currency swap or a money market hedge. Both are strategies that allow a business to insulate against these shifts. Note that these strategies may be somewhat expensive and an assessment is needed to determine whether these or similar strategies make good business sense.
Involved in maritime shipping? Speak with the Kolodny law firm.
(image courtesy of Erwan Hesry)