The consequences of global trade risks can have wide-ranging effects for companies, impacting both their commercial operations and overall financial performance. Consider the following six International Trade case studies which illustrate the diverse array of variables that must be taken into account by boards and executives when contemplating international operations or planning to expand overseas:
1 - Shifting production from North America to an overseas facility may be economically attractive and make commercial sense from a standard “due diligence” perspective, but what if the operation is suddenly rendered useless by a natural disaster, and there is no contingency plan in place? That may well seem like a far-fetched “black swan” scenario, one only has to look at what happened in 2011 to the international supply chains of companies that were disrupted for several months by the unforeseen tsunami/nuclear meltdown in Japan, or completely devastated by widespread flooding in Thailand.
2 - A joint-venture of subsidiary in a foreign country involving inter-company transfers of financial resources and production inputs, or the co-mingling of supply chains or inventory, can present unanticipated complications. If taxation and customs valuation implications are not comprehensively assessed before business is consummated, the enterprise could be unintentionally exposed to extensive transfer pricing violations, possibly resulting in significant retroactive adjustments and damaging penalties.
3 - Expansion offshore for contract manufacturing could expose multi-national Canadian or U.S. companies to unanticipated duty assessments and penalties. For example, if it is subsequently determined that the required transformation of materials and/or specific value-added requirements needed to qualify the finished goods for free trade eligibility were not properly adhered to, there can be significant financial consequences long after sales contracts are executed.
4 - Intellectual property and patent protection is an emerging area of risk for North American firms contracting out manufacturing or partnering with foreign companies. But liability can cut both ways: to protect the Canadian or U.S. firm from illicit use of their intellectual property by unauthorized parties, or by exposing the firms to foreign regulators enforcing domestic patents that may not be recognized in North America.
5 - Emerging markets often present unique challenges for Western companies that may naively assume a comparative level of ethical integrity exists, but soon discover a “pay to play” culture of corruption involving bribes of “special payments” to interested parties is involved in any deal-making. While expedient and perhaps even necessary to concluding domestic business arrangements in these countries, engaging in such behaviour runs afoul of stringent anti-corruption legislation in most Western countries. The board and senior executives are ultimately responsible for any financial exposure that results, not to mention the costly harm that may be caused to the company’s reputation should public charges of corrupt business practices come to light.
6 - Global expansion can expose companies to “cultural risk” if the particular sensitivities of the country or region are not properly researched and factored into strategic plans. Tales of hapless cross-cultural insensitivity are legion. For instance, a successful U.S. manufacturer of golf balls look to expand internationally was puzzled by unusually low sales of its product in the Japanese market until it was eventually discovered that the problem derived from selling the balls in packs of four. It turned out that in Japan the number four is traditionally associated with implications of death. Not exactly a great way to build brand integrity or boost your company’s reputation.
Liked the post? Check out other posts in this series:
- The Need for Informed Vigilance
- The Intersection of Globalization and Corporate Leadership
- Corporate Leadership & Compliance: The Board of Directors’ Role (Part II)
- Corporate Leadership & Compliance: The Board of Directors’ Role (Part I)
- The Role of Corporate Leadership in Achieving Compliance Success
And download our white paper: The Role of Corporate Leadership