Risks and Prevention of International Trade Settlement of Foreign Trade Enterprises

From the perspective of foreign trade companies, the paper analyzes the political risks, credit risks, and currency risks faced in international trade settlement, and points out the consequences. It points out that the use of rational and effective forecasting methods is an effective defense against future risks, accidents and consequences. The necessary prerequisites and conditions of risk, and finally from the aspects of risk control tools and risk financial tools, it is proposed that foreign trade companies should establish timely and effective forecasting systems based on the political and economic development dynamics of trading partner countries, and select D/ based on the real-time status of customer credits. Proper settlement methods such as P collection, letter of credit or bank guarantees make full use of the insurance system and the bank's financing functions to prevent international trade settlement of various risks.

International trade settlement is the settlement of the creditor's rights and debts between countries as a result of international commodity trade. With the deepening of China’s external reform and opening up, after China’s accession to the WTO, more and more companies are engaged in international trade, and the international trade settlement business will continue to expand. How to prevent settlement risks has increasingly become the subject of international trade settlement, especially the serious issues of foreign trade companies.

I. Common types of risks and identification of international trade settlements International trade settlements often involve different countries, different currencies, different settlement methods, and different settlement instruments, due to natural, political, military, and economic Reasons for credit and credit may lead to a series of risks. Common risks include political risk, credit risk and currency risk.

(1) Political risks. The political risks in international trade settlement mainly refer to the overall political situation of a country and the extent to which it may have an impact on its ability to repay debt. The most typical examples are the risks posed by war, civil strife, and nationalization measures. The composition of a country’s government decision makers and the decision-making intentions of senior leaders, the country’s major internal events and social environment, and its external relations will all affect the country’s political risk changes. The direct consequence of political risks to international trade settlement activities is delaying payments, suspending payments, or confiscation. Since political risks are generally not easy to predict, once they occur, they often cause huge losses to both contracted parties.

(2) Credit risk. International trade through international settlement activities, eventually allowing buyers in other places to get the goods needed, the seller gets the money. However, if either party to the transaction does not perform the trade contract, then the other party may be subject to risk. Such risk is credit risk, which is essentially a default risk. It manifests itself in the buyer's unreasonable rejection of the goods, delay in paying the breach of contract for no reason, or refusal to pay the goods, as well as the fact that the seller does not ship the goods on time according to the trade contract, or even if the goods are shipped on time, but the goods are bad goods, fake goods, and the contract is not Conformity, or documentation is forged and so on.

The emergence of credit risk in international trade settlement depends to a large extent on the morality of importers and exporters. Of course, the credit status of importers and exporters is also an important aspect. If both sides of the transaction are rich in capital and abundant in financial resources, the risk of credit risk is generally small. On the contrary, the possibility of credit risk is high.

(3) Currency risk. Currency risk, ie foreign exchange risk, generally refers to the increase or decrease of the value of related currencies caused by changes in exchange rates or interest rates in international economic transactions during a certain period of time, foreign currency denominated or fixed-value debts, assets and liabilities. The risk that any party in an economic transaction may suffer. Among them, transaction risk is a kind of currency risk that easily occurs in international trade settlement activities. Trading risks include transaction settlement risk and trading risk. Among them, the transaction settlement risk, that is, the commercial foreign exchange risk arises from the credit-based, deferred payment as the payment terms, and the import and export companies are responsible for the import and export of goods and services denominated in foreign currencies. If foreign currency exchange rates at export exchanges are received at a lower exchange rate than at the time of closing, exporters will suffer losses and their actual income will decrease. Similarly, if the foreign currency exchange rate of foreign exchange payment at the time of payment is higher than that at the time of closing, the importer will also suffer losses and the actual cost will increase. The risk of trading, that is, financial risk, arises mainly from the activities of borrowing and lending in foreign currencies. When borrowing a foreign currency that needs to be replaced by another foreign currency, or if the source of the debt-relief fund is another foreign currency, the fund-raiser or the borrower will bear the exchange rate between the borrowed foreign currency and the currency of use or repayment source. The risk of change. If the exchange rate of the borrowed currency rises, the cost of financing will increase and the borrower may suffer damage. If borrowing foreign currency loans of a floating interest rate, the currency interest rate will also increase, raising the cost of financing. Or in the multi-currency fundraising, a foreign currency loan with a lower interest rate was selected. As a result, the exchange rate of the borrowed currency rose when the principal and interest was paid, and the loss caused by the exchange rate increase exceeded the benefit of the relatively low interest rate. At the time, this creates a comprehensive risk of exchange rates and interest rates.

The currency risk in international trade settlement will make the operating profit and loss of foreign trade companies unstable and unpredictable, which will affect their financial status and operating results. Changes in a country’s currency exchange rate are mainly affected by factors such as the country’s balance of payments, inflation, balance of foreign exchange supply and demand, economic development, and other countries’ political and economic relations, economic cycles, economic policies, and foreign exchange policies.

Second, risk prediction is an essential prerequisite and condition for effectively preventing risks The most significant characteristic of risk is uncertainty, that is, some kind of result may or may not occur in the future; the loss may be large or small. In order to reduce the uncertainty of risks and losses, try to avoid losses or reduce losses, and ensure the realization of expected goals. It is necessary to adopt various methods to recognize and predict risks and take active and feasible measures to prevent risks. Effective prevention of any risk depends on people's systematic and continuous identification of risks and accurate expectations and predictions. That is to say, forecasting is a necessary precondition and only way for people to effectively prevent risks. Because risk management should be based on scientific reliability, if there is no systematic continuous identification, scientific judgment, and accurate prediction, it is impossible to determine the optimal method for dealing with these uncertain risks, and it is difficult to choose the most appropriate risk management method. Prevention will be blind and invalid, even harmful. Therefore, in the international trade settlement, if we want to avoid or reduce the economic losses caused by various risks, we must first carry out a series of analysis, prediction and judgment on the future risk conditions, so as to facilitate the choice of the risk takers' camera and make proper prevention.

All risks are a comprehensive reflection of various subjective and objective factors. The direct object or specific content of the international trade settlement risk forecast mainly includes: First, the risk influencing factors, ie, there are subjective and objective factors that generate or increase losses, such as national or personal factors, natural, political or economic factors. The second is risk accidents, that is, direct accidents that cause losses, such as political risks, credit risks, currency risks, and other risks. The third is loss, that is, the consequences of the risk, such as direct economic losses and other joint losses.

Accurate prediction depends on rational and effective forecasting methods. From the perspective of the theory and practice of forecasting, we can use probabilistic theory, quantitative statistics and other methods to quantitatively and qualitatively forecast international trade settlement risks, such as the measurement model method, statistical chart method, and subjective analysis method.

III. Measures and Countermeasures for Preventing International Trade Settlement Risks Based on scientific predictions and analysis of future risks, accidents, and consequences, appropriate risk prevention measures should be taken for different specific situations in order to make profits in international trade settlement. Increase to the maximum, the loss is reduced to a minimum.

(I) Precaution against political risks (1) Establish a timely and effective forecasting system [3]. That is, pay close attention to the development of the host country’s political situation, collect information on the evolution of its political situation, keep abreast of trade control and foreign exchange control of trading partner countries, and conduct follow-up testing and monitoring of political and economic changes in the host country so as to discover the exposed political risks as soon as possible. In order to strive for initiative and take appropriate measures to minimize unnecessary losses. Political risks are sudden and some events are not easy to predict in advance. However, most events have a series of precursors. As long as the forecasting work is done well, the loss can be minimized.

(2) Implement risk insurance. This is one of the most effective measures to guard against political risks, that is, beneficiaries are insured against political risks by government insurance agencies. At present, some countries have special political risk insurance institutions. For example, the OPIC in the United States provides insurance against political risks such as damage to creditors due to war and other reasons. The People's Insurance Company of China also operates a political insurance business. After the beneficiary applies for insurance, if there is a political risk, the political insurance company that accepts the insurance can claim compensation for its loss.

(3) seek security. That is, the beneficiary applies to the bank where the importer is located and asks it to issue a letter of guarantee. After the beneficiary obtains the guarantee letter of guarantee, if the policy of the country where the importing party is located changes or the political situation changes, it may claim compensation from the financial institution providing the guarantee, and the financial institution acting as the guarantor must pay.

(4) Avoid risk. When it is predicted and assessed that the possibility of political risk in the country where the importing party is located is greater, it is better to adopt a method of avoiding risk, that is, to suspend trade with the country. However, this will reduce trade income or affect the relationship between traders. At this time, it may consider bartering trade, in which the two parties trade directly and synchronously in exchange for equal value. Combining barter trade with guarantees can minimize political risks. When the host country has a political risk incident, the foreign trade enterprise can choose a reasonable and minimal loss form of retreat within the scope allowed by the host country's laws, such as transferring the price, sending back the product, taking away the technology, etc., to withdraw the funds from the host country. Prefaces and confusions occur, and political risks and other risks arising therefrom are reduced.

(II) Prevention of credit risk (1) Establish a special credit risk management agency. The links involved in international trade are numerous and complex. The clerk's grasp of counterparty credit alone is often one-sided. Establish a credit risk agency within the company, establish a company-level customer information file, and conduct investigations on the registered capital, profit and loss, business scope, business style, and past history of trading counterparts through independent investigation agencies before the transaction. Understand review, conduct close communication and cooperation with salespersons in transactions, use receivables as monitoring methods after transactions to prevent the generation of bad debts, strengthen credit risk management, and avoid credit risks as much as possible.

(2) Choose trading partners carefully. The two parties engaged in international trade have not met each other because they are in a country or on a day-by-day basis, or are aware of deals on the Internet. Some of them even know each other at trade fairs. How do they choose to trade? Partners are particularly important. In general, before the transaction, especially for new trading partners or large businesses, prior investigation of credit information by consulting companies is required to establish a rolling customer credit file. The so-called “know-how, knowledgeable, and unstoppable”. The main content of the credit investigation is generally the company's character, capacity, capital, and condition, and the enterprise's 4C. If the credit rating of the other party is good, you can rest assured to cooperate or trade with the other party. If the creditworthiness of the counterparty is poor, especially for illegal customers, further contacts should be stopped immediately to prevent economic losses due to credit risk.

(3) Entrust the bank to collect security deposits and issue bank guarantees. After careful review of the creditworthiness of the other party, if it is decided to conduct a certain trade activity, for the sake of insurance, the exporting company may, at the appropriate time, collect a certain amount of deposit from the importer through the bank. Margin can be defined as a certain percentage of the trade volume according to the credit status of the importing party, which can prompt the importer to fulfill its obligation of payment at the due date. Importing companies may also require the exporter to issue a bank guarantee to ensure that the goods will be shipped on time, in accordance with the quality and in accordance with the contract.

(4) According to the customer credit status and turnover, choose the appropriate settlement method. The commonly used international trade settlement methods include remittance, collection and letter of credit. For import and export companies, there are differences in credit risk under different settlement methods: remittance methods are extremely risky and should not be used or combined with other measures; under the collection method, export companies should use D/P as much as possible. The D/A method should be avoided on the spot, and importing companies can pre-request and rigorously review the collection documents. Under the letter of credit, export companies should also review the terms of the issuing bank's creditworthiness, business style and letter of credit. In order to ensure safety and timely collection of foreign exchange, and import companies should be required by the terms of the bank's bank opening terms, or increase some of the provisions of protection, but also focus on identification of documents to prevent the other party fraud.

(III) Prevention of currency risks (1) Conduct hedging transactions. In international trade, for importers and exporters, one party will receive a batch of goods and bear debts, and the other party will receive payment and have a foreign exchange asset, in order to prevent foreign exchange assets and foreign exchange liabilities that have already occurred from being subject to exchange rate changes. As a result of the losses incurred, import and export companies can make an opposite transaction with their liabilities and assets equivalents, that is, an import company buys a foreign currency and an export company sells a foreign currency. In this way, if import and export companies suffer damages in import payments or export exchange collections, they will benefit from the hedging transactions they make and the losses and benefits will also be offset. Conversely, due to changes in exchange rates, import and export companies suffer from hedging transactions, and they will benefit from paying foreign exchange or foreign exchange, and losses and gains will naturally be offset. In this way, it can achieve the purpose of maintaining value and preventing currency risks.

(2) Advance or postpone foreign exchange receipts and payments. This is a way for import and export companies to change the foreign exchange fund's receipt and payment date and forecast the foreign exchange risk through forecasting the changes in foreign exchange rates. There are two common methods: 1) When the exchange rate of the settlement and settlement currency depreciates, the exporting company should shorten the payment credit period as much as possible; when the currency exchange rate of the denominated currency tends to increase, the exporter should postpone the collection of foreign exchange as much as possible. The longer the payment term, the more favorable to exporting companies. The practice of importing companies is exactly the opposite of that of exporting companies. 2 When the valuation settlement currency is bullish, the importing company should make a decision before signing the contract and strive to receive the goods in advance; conversely, when the valuation settlement currency is bearish, the importing enterprise should strive to postpone the receipt of the goods. Export companies are trying to delay export sales or sign export contracts early, depending on whether the currency is bullish or bearish.

(3) Enter into foreign exchange protection clauses. That is, in the trade contract, a (or “blanket”) exchange rate between the hedged currency and the payment currency is stipulated. When actual payment is made, if the exchange rate changes by more than a certain range, the total amount of payment will be adjusted according to the exchange rate at that time. To achieve the purpose of preservation. Currently, a basket of currency protection methods is often used. As the value of a basket of hedged currencies and exchange currencies rises and falls, the exchange rate risks are dispersed and foreign exchange risks can be effectively avoided or mitigated. In practice, when using a basket of currency to preserve value, the foreign exchange risk is generally limited to a relatively small range of total commodities.

(4) Utilize the insurance system. In some countries, there is a special insurance agency and foreign exchange insurance system for foreign trade services. The insurance service provided by it is exchange rate fluctuation insurance. At the end of the 1970s, both Japanese and French state-owned insurance companies started this business. Foreign trade companies are insured in accordance with the insurance regulations. If losses result from exchange rate changes, they can claim against the insurance company according to the insurance contract. The insurance company will pay according to the insurance contract. Through this insurance system, foreign trade companies can lift the economic difficulties caused by risk losses to the company.