Managing Political Risk in International Trade

There are a number of risks for an entrepreneur to consider before taking their business to the global markets. One of the major risks to consider is the political climate of the country. Political instability can lead to a government overthrow, ethnic warfare and terrorist activities aimed at foreign nationals. In volatile times, the business climate in another country can quickly turn disastrously toxic for foreign companies. Multinational businesses devise various contingency plans and strategies to identify, reduce and respond to this type of operational risk.

Due Diligence

Multinationals perform a great deal of research before committing to doing business in a foreign market. Here, the work of expert, such as an international lawyer, is of significant value when conducting due diligence. Legal memorandums for prospective international operations include detailed political and legal risk assessments. Legal counsel often explains how these risks may be offset through lobbying efforts or through building key community-based alliances.

Personnel Security

When political risks pose personal danger, security is increased for both company employees and customers. Private security is often employed to supplement government security through policing services. Reductions in personnel levels may be warranted in areas where risks are particularly high and security can not be guaranteed. It is a good security practice to maintain accurate records for all employees, which may become very valuable in the event of an emergency.

Customer Accommodations

Customers, suppliers and partners may be adversely impacted by a company's inability to continue normal operations. For example, when an airline receives a terrorist threat, risk management acts may include informing the media about threats and providing temporary shelter to both customers and employees. In such a case, business interruption insurance may protect a company from such unexpected costs.

Insurance and Performance Contracts

Financial lost can occur for multinationals when political tensions erupt into interruptions to global supply chains or into violence that results in damages. Costs are frequently mitigated in these worst case scenarios through business insurance that covers production stoppage or damage claims due to political risks. The force majeure clause in a contract also takes on great significance where it seeks to excuse a party from the cost of non-performance of a contractual duty when certain unforeseen events occur beyond the company's control. The comparative differences in contract law between countries can result in varying interpretations of such provisions.