17 May Paying in USD for your imports means you are paying 10% more than the actual cost of goods
A deep dive into international payments and how you pay atleast 10% more on your COGS(Cost of Goods) for imports and exports
Imports and exports is a tricky business. It has always been complicated and there is no other way to deal with it. Trading has been a mode of business practice where you exchange goods. When the barter system existed, the value of the goods was determined by the demand for the goods or the product. Then came currency. Product value is determined by the value of money. So now, we exchange goods/products with currency. Since USD is a globally accepted currency, the whole world started trading in USD, irrespective of their country and their country’s currency. This is where it all starts getting more complicated and we don’t even give a second thought to it.
Let’s take Australia as an example. Whenever you import goods, you pay the supplier in USD. This means before buying the product, you are buying USD. You are paying your AUD in exchange for USD so that you can pay your supplier the USD. This is because your supplier only accepts USD so you don’t have a choice.
Buying USD: You always transfer money to your supplier via wire transfer for which you use your bank. Banks charge a whopping 3% on top the exchange rate. If the value of your goods is $5000USD and you have to pay today. As per today’s foreign exchange market, let’s say $5000USD is equivalent to $7000AUD. Since your bank charges up to 3% you will have to pay 7210 AUD. Bank will take 3% or AUD 210 as their fee, and then convert your remaining money i.e: $7000AUD to its equivalent USD i.e $5000USD and send the money to your supplier’s bank account via Wire transfer. Some banks charge up to 6% on top of the Foreign exchange market. As if this is not enough, there is also a service fee on top of this which usually ranges from 10 AUD to up-to AUD 32.
Supplier bank rate adjustments:
1:On the other hand, remember that your supplier is sitting overseas and their in-land currency is not USD. It will be Indian Rupee for India or Chinese Yuan in China. So when the USD goes and hits the Indian or Chinese banks, they will have to exchange the USD into their respective currency which means the banks will have to buy Indian Ruppe or Chinese Yuan first, before depositing the money into your supplier’s bank account in their currency. Here, banks will charge a percentage on top of the exchange rate which usually is between 1% to 2%. Wire transfers are a mode of revenue generation for the banks.
2: The forex market is very volatile. It changes every second .If you look at the graph, it’s trend is mostly upwards. Because international transfers take at least 2-5 business days, suppliers often add at least 2% on top of the actual cost to manage the difference in exchange rate by the time money hits their bank.
Factoring the 2 points mentioned above, there is at least a 3% to 4% increase in your cost, which supplier will add to your cost of goods.
USD growing stronger is a curse: Last but deffo not least, usual payment terms in international imports and exports are that you make an initial payment as an advance payment so that your supplier can start the manufacturing process. This varies from 20% to 50%. Once the production is completed, you pay the remaining balance. The production time will be anywhere between 1-3 months. By this time, USD grows stronger than what it was, when you made your intiall payment, and you end up paying the difference. Let’s take an example. 1 USD was 6.37 CYN( Chinese Yuan) on 19/4/2022 and it’s 1USD= 6.80CYN on 13/5/2022 ( ref: www.xe.com). If the cost of goods for the supplier in China was 25 CYN which is USD 3.92 on 19/4/2022, your supplier will quote you $3.92 per product on 19/4/2022 as per the current rate. Lets say you are buying 1000 pieces so your total cost will be USD 3920 and 30% of it is USD 1176 which you paid. After a month, your supplier will complete the production and ask you to pay the remaining balance. You will pay out the balance which is USD 2744 on 13/5/2022. Remember that 1USD=6.37 CYN on 19/4/2022 and 1USD=6.80CYN on 19/5/2022. This means your supplier will get 0.43CYN more per product on your final payment. After all, the cost of goods will not change in their country because they bought all the raw materials needed, immediately after you make the initial payment. The remaining operational cost like labor costs, electricity costs, and rental costs will remain the same. This means your supplier will be at the advantage of getting approx USD 45 more than the actual cost of goods. Adding to this will be your bank charging you 3% in the exchange rate because you are again paying in USD to your supplier by converting your AUD. The rise in USD will also reflect your payable amount in AUD.
Conclusion: When you trade in USD, you pay almost 10% more than the actuall cost. This also impacts the AUD value making it weaker in the market. This is the reason why countries make tie ups so that they can trade in their own currency. Take BRICS as a example. BRICS stands for Brazil, Russia, India, China and South Africa. These 5 countries joined hand together and agreed to trade in their local currency which boosts the currency value of each other. These numbers are complticated and often can be ignored.