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Politics Complicate the Financial Life of Your Company

Governments and politicians seem to have an uncanny way of knowing exactly how to make your life as complicated as possible. When you’re dealing with international finance, you have to be aware of not only your own nation’s international policies but also the policies of at least one other nation, plus how each nation involved interacts with the others.

(It’s all really quite annoying sometimes, except when you make your living in international finance or by writing finance books.)

Compared to companies that operate on a purely domestic level, companies that operate internationally tend to be the target of more government concern as politicians attempt to cater to the needs of individual industries or adhere to some form of national idealism.

This concern may come in any number of forms, including regulations or requirements placed on foreign companies and protectionist policies put in place to restrict or hinder trade. Here are a few examples:

  • Tariffs are taxes on goods being imported into a nation, which makes them more expensive to foreign customers. Who bears the burden of the tax will depend on whether any of the companies in the supply chain are willing and able to drop price or forfeit profitability; otherwise, the end consumer will see the higher prices.

  • Quotas limit the quantity of a particular product that can be legally imported into a country.

  • Embargoes outright prohibit any goods from being imported at all, usually from a specific nation, but can be broadly applied for specific industries. For example, industries such as defense, energy, telecommunications, and others that are critical to national infrastructure or safety, are often restricted to local companies or those organizations that have close ties to government officials.

These are all relatively common concerns for international companies, and each one limits the potential financial performance that a company can achieve within a nation. But some governments enforce more unusual requirements, as well:

  • In developing nations and those nations with more restrictive government control, governments may require a minimum value of investment in order to operate within the nation. For example, a nation may require an investor or company to spend at least $1 million in order to start a company or purchase equity in a company.

  • Government regulations may require a company to hire a minimum number of local nationals or maintain a minimum proportion of local nationals within the workforce. These regulations can impact workforce efficiency if meeting them requires the company to choose local nationals over those workers who might have more merit.

  • Government regulations may require a company to source raw materials from local companies, which can also result in cost inefficiencies.

Note: Countries often make exceptions for companies that want to work in particular industries that are intended to contribute to the development of the nation or that will focus exclusively on hiring locals to produce exports. Plus, international agreements have helped pave the way for more international integration.

The North American Free Trade Agreement (NAFTA), an agreement between the U.S., Canada, and Mexico, has strongly reduced the limitations to trade between these three nations. Similarly, members of the European Union have severely limited economic and political restrictions between them, while Association of Southeast Asian Nations (ASEAN) has done the same for many Southeast Asian nations and Mercado Común del Sur (MERCOSUR) has done so for South American nations.

The world of international politics is very dynamic and not always completely transparent, so international companies have to keep up with relevant regulations and maintain a level of flexibility in all their international relations.

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