With more than 590,000 companies and 760,000 business houses1 registered at Ministry of Economic Affairs on June 20112, Taiwan has been described as “The Island of International Trade” in the past few decades. The mainly reason is that Taiwan does not own extensive territory and abundant natural resources, such as iron, coal, or crude oil as other countries do.
Besides, the location of Taiwan is right on the center of East Asia Island chain surrounded by the Pacific Ocean and the Taiwan Strait. Therefore, subject to scarce resources and small local market, companies in Taiwan have to seek opportunities oversea and try to expand market to the world. Based on global perspectives and adventure business culture, not only the famous multi-national Taiwanese companies, such as Acer, Delta, Mediatek, and HTC, who have been playing important roles on IT industries and marketing their products all over the world, but also many successful small and medium enterprises (SME) who have also been successfully dealing business with their global clients by different industries.
According to the statistics of Central Bank of the Republic of China (Taiwan), the foreign reserve of Taiwan until May 2011 has already attained to US$ 398.68 Billion.3 Taiwan so far ranks the 5th of US foreign reserve in the world, only after China (US$ 2,622,000 Billion), Japan (US$ 1,135,549 Billion), Russia (US$ 502,460 Billion), and Saudi Arabia (US$
456,200 Billion).4 The amazing foreign reserve is accumulated by Taiwanese businessmen who grab every single and tiny opportunity to sell products and services with hard-working
1 The major difference between a company and a business house is the regulated law. A company shall obey Company Law while a business house shall follow Business Registration Law.
http://www.ntpc.gov.tw/web/FAQ?command=showDetail&postId=178108&groupId=12347
2 According to the statistics of Commerce Industrial Service Portal, Ministry of Economic Affairs , R.O.C. http://gcis.nat.gov.tw/pub/simple/alive.jsp
3 The statistics of foreign reserve until May 2011 is US$ 398.68 billion.
http://www.cbc.gov.tw/lp.asp?CtNode=644&CtUnit=307&BaseDSD=32&mp=1
4 The ranking list of global US foreign reserve is referred to the website of Stock Q.org.
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attitude and economical personality. The footprints of Taiwanese businessmen have been remained and noticed all corners of the world, including Asia, Middle East, Europe, North America, Middle and South America, Africa, and Oceania. Until 2010 in these trading areas, there are total US$ 526 billion trading amount of Taiwan and Asia ranks No.1 with trading amount of US$ 328 billion, followed by US$ 73 billion of North, Middle, and South America.
The third trading area is Europe with US$ 56 billion trading amount.5 The huge trading figure is step-by-step accumulated by every single international transaction of Taiwanese exporters. Therefore, we could not deny that international trade plays a very important role of creating Taiwan economic miracle, not to mention that international trade has huge and positive influence on the change of Taiwanese industrial structures from original farming industry to profitable of IT and service industries.
It goes without saying that profits usually come with risk. Although Taiwan businessmen performed well in the past few decades, they still faced a lot of risk. Not to mention when the time goes bad, many companies go bankruptcy without an advance sign. Back to the financial crisis happened on December, 2007, the economy seriously damaged all over the world, including United States, Europe, Japan, and China. Almost every one of us influenced by the crisis more or less. Some people lost their job and were laid off by their employers. The other people even faced the closedown of the company they worked and lose their job. To settle down the social unrest and economic problem, every government tried hard by offering special policy to solve the liquidity problem, including QE 1, QE2, or even QE3 from U.S government, bailout policies from European Central Bank, and other rescue programs offered by IMF as well as regional cross-border organizations, such as EBRD, ADB, Export Credit Agencies, and governments in different countries. There is no doubt that the liquidity
5 The trading figure of different areas is referred to the website of Bureau of Foreign Trade.
http://cus93.trade.gov.tw/FSCI/
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problem was a big issue at that time so that FED would pour money into the financial system and force market back to the track. As for government, there is no trust among banks and other financial institutions. Therefore, government had to regulate banks to keep supporting credits to their clients in this very special disastrous moment. However, banks were still become more and more prudent, or even strict, to any clients by tightening the credit line as well as forcing some clients to repay their loans right away. Some insurance companies even decided to get out of loan and credit market because of the huge loss from insurance claims.
In this situation, not only exporters but also importers were deeply influenced by the strict credit policy of banks. In the view of macro-economy, market demand had already shrunk to a certain extent. Plus, companies could not get the financial support from banking industry.
No wonder the total trading amount decreased in a fast speed since 2008. From the perspectives of companies, they needed the credit more than before. However, the reaction of financial institutions was cruel and brittle and put all enterprises in a huge dangerous situation of financial pressure as well as suffered cash flow risk during this time. Now has been already 3 years after the financial crisis, each economy seemed to be on the track of recovery with the help of bailouts or government policies. The international trading amount also increased by a certain degree. However, did the economy really become better? The answer is maybe or maybe not. Here is an interesting statistics about bankruptcy of U.S financial institutions for the past 10 years as the following table.
Table 1.1: U.S Banks Went into Liquidation for Past 10 Years
Year Number Year Number
The resource is from Federal Deposit Insurance Corporation
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As referred to Table 1.1, we originally assumed that financial crisis would damage the banking system with the worst situation at 2008. However, the truth is U.S banks kept falling down by 140 banks closing down at 2009 to 157 banks failure at 2010. Generally speaking, banks would go to liquidation because of clients’ defaults or bad loans. If the economy really becomes better, banks would have fewer and fewer bad loans with higher chance to make profits and to survive in the end. Nonetheless, facts could speak. The possible explanation of the recovery is the abstract sense of economy or maybe some part of economy has bounced back, instead a real and complete economic recovery. Therefore, this figure could conclude that there is still systematic risk as well as general trade-related risk existing in the market. If the economic situation still suffers, the business and operating situation of individual companies could be worse, especially for those companies dealing with the business of International Trade. They still need time to recover and carefully observe the market situation.
Following the above logic, risk exists all the time. Companies shall be more prudent in recent years, not only paying attention to international politics and economy but also patiently searching better partners and working on the fair contract to protect the right themselves. In the practical world, every competitor has similar ability to compete each other in terms of R&D and marketing strategy. Except the quality and price, trading mode and payment term have become another important issue and the trend of trading competitiveness. Apparently the trend of payment term goes to Non-LC transactions with the majority of O/A payment term. Therefore, once the convenience between seller and buyer becomes more and more important, the extent of risk exposure becomes bigger and bigger. Once companies suffer some unexpected event, such as defaults from major buyer or market failure, they would be seriously damaged and further destroyed in terms of finance structure and general operation.
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In order not to get out of market in one-time and operate continuously, the best way for companies is taking action on risk aversion. Companies have to know the real-time situation of outside environment, including Macro-economy, trading country and market and match with their specialty and condition to completely understand what kind of risk they are facing now. By doing so, they would know how to make good use of financial tools, such as Export Insurance, Export Credit, International Factoring Services, and Stand-by LC, to cover trading risk, funding gap, and exchange rate risk.
Through the financial tools of international trade, companies undoubtedly can lower down the operating risk as well as strengthen financial structure and cash flow control.
Furthermore, applying well of these financial tools can upgrade the power of individual enterprises and finally increase the competitiveness of Taiwan in the field of International Trade, which match the final purpose of this paper.
The topic is related to the payment terms of international trade, especially focus on exports of Taiwan. This does not mean that imports of Taiwan is not important for research, but because Taiwan exports are more directly related to economic growth in the past and still occupy irreplaceable position of government policy and economic target. Therefore, I would like to strengthen for Taiwan exports and try to study deeper to see the improvement or solutions which may benefit Taiwanese exporters and local economy as well.
Historically speaking, Taiwanese exporters did very well in the field of International Trade.
However, they have been facing a lot of risk while doing business with foreign buyers, such as trading risk, cash flow risk, and exchange rate risk. If exporters could not manage the risk well, they might suffer huge loss not just the delivered goods, but also the advanced
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investment-suck cost6 for the preparation of materials and products. Therefore, how to deal with the trading-related risk has been an unavailable and important issue for Taiwanese exporters. In section 2, the recent trend of International Trade will be introduced and analyzed. Also, the most common and useful payment terms in the real world will be introduced and explained, with focus on the most popular payment terms: Document against Payment, Document against Acceptance, and Open Account. Finally, the three major risks will be addressed with detailed explanation.
The remainder of the paper is organized as follows: Section 3 discusses the literature review beginning with an overview of political and credit risk. In addition, relevant studies pertaining to different solutions in the risk aversion, such as Factoring and Export Insurance will be examined and discussed. Regarding the solution for risk aversion, which will be discussed in Section 5 will depend on the based knowledge of real practice. Last but not least, Section 6 presents the difficulty for Taiwanese Exporters when dealing with international trade with conclusion and recommendation of the study.
6 Sunk costs are retrospective costs that have already been incurred and cannot be recovered.
http://en.wikipedia.org/wiki/Sunk_costs