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
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
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
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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