International - The Value of Money

The first thing that you need to learn about International Trade is the value of money. We are so familiar with money that we rarely give it a second thought, except when it is in short supply. So let us begin there.

When money is in short supply, like anything else, its value goes up. You will all have seen that your own currency goes up and down when compared to other currencies which are internationally traded. Government agencies and financial gurus will offer complex explanations of this movement, the Trade Balance, Inflation, an Election Year, the level of employment and so on. All of these elements can, and do, affect the value of currency, but the underlying explanation is much simpler.

Money is a commodity like any other. If one currency is looking strong, in other words it is issued by a country whose economic status is sound and looks like it will improve, everyone wants it. (They also want to dump any currency holdings in a nation which looks like it is on the way down, but more on that later.) As the demand for a strong currency increases, its price goes up. In macro economic terms this can be a good or a bad thing. The street price of imported goods tends to fall and export prices tend to rise and this affects the Trade Balance, Inflation and (probably) the outcome of the next election. - the economy, stupid! This is perhaps the wisest political comment ever made. (Usually attributed to William Jefferson Clinton.)

If you are trading across currency boundaries, this directly affects you as you will be paid in the currency of the country in which you are operating. (Unless you make special arrangements to be paid in your local currency.)

Either way you will pay a premium for this. Not only does this have an effect on your costs, but it can also gives your client a distorted view of your prices. Inevitably customers will translate your price in US Dollars (say) back into their more familiar local currency - French Francs, UK Pounds, Yen or whatever. As they base this on the exchange rate, your price can look silly to them.

While you may find it hard to believe, there are a large number of countries where it is not possible to find an internationally traded value for the local currency. Many African and Eastern European countries do not trade their currencies internationally. In other words their local currency is worthless outside their national boundaries, indeed it is usually illegal to export it. Why anyone would want to is one of the deeper mysteries of the money market.

If you are sensible you will ask to be paid in some hard currency - US Dollars is the favourite at the moment, but in more exotic climes it may be gold bullion, coffee beans, or some other commodity or service.

It may sound strange, but your client may be unable to obtain US Dollars or have banking facilities that can transfer monetary value between countries. They may have to buy US Dollars, usually through some form of auction where they bid for the dollars that are available at the time. This, naturally, affects the price they have to pay.

Shuffling money (even hard currencies) around the world has been greatly simplified by the computer revolution, the client facing component of which is the ubiquitous Automatic Teller Machine (ATM). I live in Scotland, but my bank account is in The Channel Islands and if I happen to be in Hungary say, I will need some Hungarian Forints. The ATM dutifully spits out my Forints and I can pay the taxi driver.

What happens next is the local bank's computer translates the Forints into US Dollars at whatever the official exchange rate happens to be and transfers that amount (through the VISA system usually) to my Channel Islands bank, where it is again translated from US Dollars to British Pounds and my account debited accordingly, plus all the fees that are charged by everyone else in the link.

If you pay by Credit Card, the same set of transactions takes place. Of course the official exchange rate may not be the street price of US Dollars in Hungary, Romania, Tunisia or Kenya to name but a few. If you happen to live in the US, you are probably better off as the number of transactions is smaller, but it will depend on the official exchange rates operating at the time of the transaction. Explaining all these multi-currency transactions to your tax inspector can be something of a chore.

E-commerce and the Credit Card makes everyone an international currency trader, albeit in a small way, but you need to be aware of the hidden costs which are the premium you and/or your client will pay, the movement of the exchange rates and any charges made by the system that processes the transaction. Your bank will be able to advise you. Money is their business.

Trading with a company in a country whose internal currency is spiralling out of control downwards! - brings its own set of peculiar problems. The street price of hard currencies will be much higher than the official exchange rate whether you are buying or selling. The gap between buying and selling will be wider and the variation across currencies might bear no relation to the international traded value.

US Dollars are much sought after and are often valued higher than UK Pounds when compared to international exchange rates. It is a simple matter of supply and demand. If you are a UK citizen, asking to be paid in US Dollars might not be the best bet.

Your client may wish to pay you in advance! This is to your mutual benefits as next month, next week or even tomorrow those Dollars are going to be more expensive when translated into the local currency. The upside of this is that with those Dollars in your money belt, you can become marginally richer by doing nothing. Of course, local prices go up too, but they lag behind the exchange rate. (It may, however, be illegal to pay you in cash in any currency other than the local one.)

Finally a cautionary note about banks. In most countries it is possible to open a foreign (to them) currency account. This is very useful if you have to transfer money between two countries. It is, for example, perfectly possible for a UK citizen to have a bank account in the USA denominated in Dollars. Handy if you visit regularly and generate income there, but banks in general raise hefty charges for this kind of account.

In Eastern Europe, for example, they will probably charge for each transaction, deposits as well as withdrawals and will they pay you interest on your holdings? Of course not!

They may have sold your Dollars months ago and now when you want your money back one of two things may have happened. The bank may have become bankrupt, or simply disappeared, but even though it hasn't, it now has to buy Dollars at whatever the exchange rate is and, in their view, you have already made a profit on the deal.

None of this should dissuade you from dealing with foreign countries, especially if you are doing this by e-commerce. There is a cost, of course, but the Credit Card companies usually pay up and the losses they incur are added to their global charges. A secure site is beneficial to you and your genuine customers. However, unless you are anticipating a substantial cash flow, the cost is not trivial.

The situation in the emergent economies, where credit cards are less common, is more problematical. One e-commerce company insists that you fax a copy of your Credit Card (front and back) to them before they will accept a transaction. If nothing else this proves that you actually hold a credit card and have not stolen the number from the Internet by devious means. Of course, you might have stolen the Credit Card, but they will be deeply suspicious if you require that the goods are sent to a person with a different name and to a different address than the card holder.

The main thing is to try to avoid an insular mind set. Do not assume that everyone does things just the way they do back home. To be honest I find the average American bank at branch level distinctly clunky compared to European banks, but perhaps it is my Scots accent.

If you are in business, you will have a business account. The business section of your bank are usually wonderfully helpful. You are paying a fee, so get the best value for money you can.

And this is where I came in.

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