Trade knowledge / Import-Export Due Diligence: Measuring Business Regulations—Part 2
Date: 2017-12-02
Import-Export Due Diligence: Measuring Business Regulations—Part 2
Successful exporters and importers know how to measure the risks associated with doing business with potential new suppliers or clients and the countries in which reside.
In my last article I introduced the World Bank project, Doing Business: Measuring Business Regulations, which measures the ease of doing business in each country of the world. My previous article reviewed the first five sets of data included in the report.
In this article I will discuss the remaining five, with data as of June 1, 2016. Remember these data sets are freely available on the web.
Foreign Government Regulation of Business
Here are the last five categories of the report along with a brief description of the importance of each:
Protecting Investors
This category may be useful if you are thinking of investing in a foreign enterprise. The only useful link to trade in goods is probably the structure of companies with directors' liabilities, shareholders' rights and investor protection.
Paying Taxes
I am reminded of the words supposedly said by Benjamin Franklin: "The only things certain in life are death and taxes." Yes, taxes are a necessary part of life and business; it is the system we have.
The interesting thing about taxes is that unlike duties that are an international matter, taxes are a domestic matter. Governments levy taxes primarily to raise revenue so public services that would otherwise not exist can be provided. Examples of these are infrastructure, security and welfare. You cannot tell a government how much to provide its citizens or how. That is part of sovereignty, and the government of the day will decide the standard of the provision of services.
The differences in tax rates are a significant consideration for anyone wanting to do business internationally. Pricing a product is not merely an exercise of cost recovery plus a bit of margin. Determing a sale price is a complex mix of decisions that take into consideration things like invoice currency, freight charges, delivery lead-times and delivery terms (Incoterms 2010), the security of payment, and the length of credit time given for that payment to materialise.
What is also important in this mix is the price competitiveness of your product at the end of the supply chain—that is, at the consumption stage. This may be an end user, such as a retail customer, or a business client that may use the material for further manufacturing processes.
Unless your product is competitive at the end of the cycle, you will not sell it. How can domestic taxes be ignored? They can't.
I can now hear someone saying: "But we sell Ex Works so it is not our problem." Well it may be your problem once you discover that the price is not right, and you either miss out on the business altogether or you fail to realise the maximum revenue because you pricing model is wrong since you ignored the tax factor.
It is important for you to know about taxes and other charges that occur during the distribution channels so you know what you can sell for or what you can buy at. This is very important advance information for successfully negotiating the deal.
If we compare the Value Added Tax (VAT) of the three countries I used as an example in my previous article we find that Madagascar and Estonia have a VAT of 20%, while New Zealand is 15%. (Singapore, which the report ranks as the second best economy, has a VAT of 7%.)
Hopefully, this has convinced you that the application of taxes in international trade is an important consideration.
Trading Across Borders
The data in this set is of vital relevance and importance. As I will be speaking about regulatory issues in greater detail in another article in the series, I will limit discussion to other aspects at this stage.
There is a considerable amount of detail in this data set including the average time to export and import, the number of documents required, and the approximate cost to export or import per container. Additionally, data are provided for domestic related processes such as average times for port and inland transport and handling (in days) and customs clearance and document preparation.
From a logistics and costing perspective this information is excellent. I can now work out ahead of contacting my prospective buyer or seller what the average supply times are, and I have a reasonable idea about some of the border control costs. I can use all of this information to do some preliminary costing to see what parameters of the sell/buy price I can work with. Sure, things will change during the negotiation, but I have a better understanding of my cost drivers and, even more importantly, I also have an insight into the costs incurred in the foreign country.
Forewarned is forearmed!
Enforcing Contracts
Nobody looks forward to a legal wrangle, except perhaps lawyers. Enforcing contracts in foreign countries is notoriously difficult, exceedingly expensive, and requires a lot of patience—nothing is resolved quickly, as it typically takes a few years for full litigation to finish. The best approach is to avoid litigation and perhaps some of the available data will serve to convince the reader of just this.
In New Zealand it takes, on average, about 216 days to resolve a claim at a cost of 27.2% of the value of the claim.
In Estonia it takes, on average, 425 days at a cost of 21.9% of the value of the claim. Legal costs may be less in Estonia than in New Zealand, but the process takes about twice as long. What is the cost of money? And the opportunity cost incurred? Is it really any cheaper? I doubt it; I would say the opposite.
In Madagascar the process takes about 871 days at a cost of 33.6% of the value of the claim. Are comments really required here? It takes about two and half years to resolve a claim! but if you think Madagascar is bad, in India it takes an average of 1,420 days at a cost of 39.6 % of the claim. That's nearly four years!
Resolving Insolvency
The data in this set has a link to getting credit and the ability to recover money from insolvent parties. For New Zealand the recovery rate is 83.4 cents on the dollar; in Estonia it is much lower at 40.3; and in Madagascar it is a lowly 11.4. These data add more paint to the country and customer risk canvas.
I should also point out that the Doing Business data set have comparison values from the previous year's ranking that can be used as quick check to see whether things have improved, remained the same, or deteriorated in the short term based on the parameters of this project.
In my next article I will look at the level of competitiveness that exists in each country.
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