What it means
Trade across borders lets businesses reach more customers, buy cheaper inputs and use specialised skills that may not exist locally. A company that sells only at home is limited by the size of that market, whereas an exporter can grow into dozens of them.
Every cross-border sale adds layers of cost and complexity. There are transport and insurance charges, customs duties and taxes, paperwork such as invoices and shipping documents, and the need to agree how and in which currency the buyer will pay.
Finance teams manage several risks that domestic businesses rarely see. Exchange rates can move between the date of the quote and the date of payment, the buyer may be in a country where legal enforcement is slow, and political events can interrupt shipments or block payments.
Tools exist to reduce these risks. Businesses use letters of credit, trade credit insurance, forward contracts to fix an exchange rate in advance, and standard trade terms to make clear who pays for what and when the risk passes to the buyer.
International commerce also includes services and investment, not just physical goods. A consulting firm advising a client abroad, a software company licensing its product in another country or an investor buying a factory overseas are all engaged in it.
Many firms begin by selling through a distributor and set up their own foreign subsidiary only once volumes justify the fixed costs. The nuance is that rules change.
Tariffs, sanctions, export controls and trade agreements are altered by governments, so a trade route that is profitable this year may become expensive or even closed later.
In practice
Real-world examples.
Example
A Vietnamese furniture maker sells chairs to a retail chain in Germany. The parties agree the price in dollars, use a standard trade term for shipping, and the buyer pays through a letter of credit. The maker's finance team tracks the exchange rate between the dollar and its local currency, because wages and materials are paid in the local currency while revenue arrives in dollars. A stronger local currency would shrink its margin.
Example
A US software company opens a sales subsidiary in Singapore. It charges local customers in local currency and pays staff there, which exposes it to currency swings. The finance director sets up monthly forward contracts to protect margins.
Example
A Kenyan flower grower ships fresh roses by air to supermarkets in Europe each week. Speed and temperature control matter more than price, so the grower budgets a large share of revenue for freight and cold storage. Late payment is a risk, so it insures its trade receivables.
Formula
Calculation
Landed cost = Goods price + Freight + Insurance + Import duty
Import duty = (Goods price + Freight + Insurance) x Duty rate
Suppose a retailer imports goods priced at $50,000, with freight of $3,000 and insurance of $500. The duty base is 50,000 + 3,000 + 500 = $53,500. At a duty rate of 5%, the duty is 53,500 x 0.05 = $2,675. Landed cost is 53,500 + 2,675 = $56,175, which is 12.35% higher than the headline goods price of $50,000. The duty rate in practice is set by the importing country's tariff schedule, and the way the duty base is calculated varies between countries.Case study
Seen in the real world.
This is an illustrative story about a fictional company, Redwood Outdoor Gear, which sold camping equipment only in its home market. Growth had stalled, so the owners decided to sell through an online marketplace to customers in three neighbouring countries.
Sales rose quickly, but profit did not. Shipping costs were higher than expected, some customers were charged duty on delivery and refused to accept parcels, and returns crossed borders at the company's expense.
The CFO rebuilt the pricing with landed cost in mind, adding duty and delivery to the price shown at checkout and using a local warehouse in the largest market. The illustrative result was lower sales volume at first, but a healthier margin and far fewer returns. Within a year the company regained its growth, now with a clear view of what each export order really cost.
Watch out
Common mistakes.
- Pricing exports at the home-market price. Freight, duty, insurance and currency risk all need to be built in, or the sale may lose money.
- Ignoring payment terms. A long credit period to a distant buyer raises both the cost of funding and the chance of non-payment.
- Leaving currency risk unmanaged. A swing of a few percentage points can wipe out the margin on a thin-margin product.
Questions
People also ask.
What is the difference between international commerce and international trade?
The two are used almost interchangeably, though commerce can sound broader and include services, investment and the supporting activities.
How do exporters get paid safely?
Common tools are advance payment, letters of credit, documentary collections and trade credit insurance, chosen according to buyer risk.
Do small businesses need to worry about customs rules?
Yes. Even small parcels may face duties, taxes and documentation requirements, and errors can cause delays or penalties.
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