Whether your business is selling goods and services in foreign markets or importing products for use in your domestic operations, there will be a number of additional costs incurred – from shipping and insurance to regulatory compliance and legal advice.
Understanding the costs that you can expect to face at every stage of your export or import journey is crucial if you’re to make a success of international trade. Only by accounting for any initial investments – whether it’s in staff training, market research, or new product design – as well as ongoing costs such as logistics, insurance, and agents’ commission will your business establish whether a particular international venture is likely to be viable.
This information is also crucial to ensure that you’re selling at a price point that’s both acceptable in the new market and sufficient to generate a profit. You may discover that in certain territories – such as those that are particularly distant or that have especially onerous regulatory requirements – you have no option but to charge customers at a level that means you’re effectively priced out of the market. In such circumstances, the only option may be to set up a local business and look at using a local, and more cost-effective, supply chain.
Your business also needs to be aware of which ongoing costs have the potential to change – and how likely they are to do so. While the scale of the pandemic was unforeseeable, it's important to plan for occasional disruption, and to expect costs to fluctuate based on events around the world, as well as locally. International shipping costs rocketed during COVID-19, for example, eroding many firms’ profit margins as well as playing a major role in driving global inflation. Foreign exchange is another area where volatility is common, so your business should consider whether some form of hedging strategy is appropriate and cost-effective.
Make your plan future-proof
Your business should also have strategies in place to deal with issues such as sudden spikes in transportation charges. For example, it may become more cost-effective to manufacture your products in-market rather than have them shipped halfway around the world. Equally, what impact would shipping delays have on your trade finance and how could this impact be mitigated?
Getting goods to or from a foreign country is often the most expensive element of international trade, and the costs your business need to pay will depend not just on the distances involved but also on the shipping method and whether your goods have any special requirements, such as cold-chain storage for food or medicines.
Shipping should be an essential part of any commercial agreement you strike with a supplier, agent, or customer – it’s vital to understand the incoterms (the terms of sale which define the responsibilities of buyers and sellers), which set out who is responsible for the cost of each stage of a product’s journey. In some cases, you’ll also have to pay for empty shipping containers to be returned to the originating country, and the cost of cargo insurance may also need to be factored in to cover any losses from goods that are damaged in transit.
The costs associated with regulatory compliance are many and varied, ranging from making customs declarations and paying tariffs/taxes to applying for product licenses and meeting labeling or packaging requirements in a new market. Again, your agreements should set out who’s responsible for things like import documentation. Your business should also take into account the costs of paying for legal or regulatory advice if it’s required.
At every stage of the process, having clear visibility of costs – and potential increases ahead – is crucial. By working with partners who are experienced in international trade, you’ll be able to gain insights into possible changes.
Key action points:
- Identify what costs your business will face in each part of its international trade journey, from shipping and red tape to foreign exchange. Is your export or import opportunity still viable given the expected price?
- Ensure that your incoterms set out clearly who’s responsible for which expenses.
- Keep track of all expenses and liaise with partners to anticipate any increases. Prepare strategies to mitigate the impact of rising costs.