Trading House Definition Benefits Example
A trading house is a business that facilitates transactions between a home country and foreign countries. It acts as an exporter, importer, and trader, purchasing and selling products for other businesses. Trading houses provide a service for businesses that want international trade experts to receive or deliver goods or services.
A trading house can also refer to a firm that buys and sells commodity futures and physical commodities on behalf of customers and for their own accounts. Prominent commodity trading houses include Cargill, Vitol, and Glencore.
Key Takeaways:
– Trading houses are intermediaries used by manufacturers to facilitate trade in foreign locations.
– Trading houses offer various services, from acting as agents for manufacturers in foreign markets to simplifying the import-export process through connections with local liaisons.
– Although a retailer pays a marked-up price for products imported or sold through a trading house, it can avoid importing hassles and benefit from trading houses’ expertise, discounted rates, and currency exchange complications.
Understanding Trading Houses:
A trading house serves as an intermediary, purchasing wholesale t-shirts from China and selling them to retailers in the United States. The U.S. retailer still receives wholesale pricing, but slightly higher than if they purchased directly from the Chinese company. The trading house marks up the price of the goods to cover costs and earn a profit, while the retailer avoids importing hassles. Dealing with one or two trading houses simplifies the retailer’s operations compared to dealing with numerous wholesalers.
Small businesses using a trading house benefit from expertise, insights into international markets, and access to vendor financing through direct loans and trade credits.
Advantages of Trading Houses:
Economies of Scale:
A trading house’s large portfolio of clients enables economies of scale benefits. For example, it can use its buying power to receive discounts from manufacturers and suppliers. Additionally, shipping in large quantities helps minimize transportation costs.
International Foothold:
Trading houses have an extensive network of contacts in international markets, facilitating favorable deals and finding new customers. They may also have staff working in foreign offices to handle customs officials and manage legal issues, ensuring smooth business operations.
Currency Management:
As trading houses continuously import and export products, they possess expertise in managing currency risk. They use risk management techniques, such as hedging, to avoid exposure to adverse currency fluctuations. For instance, a trading house with a future payment in euros may use a currency forward contract to lock in the current EUR/USD exchange rate.
Example of Trading Houses:
Japan, scarce in resources, imports most of them through five trading houses known as sōgō shōsha. These trading houses were developed during the Meiji Restoration period to bolster Japan’s economy after a period of rebuilding. They also helped prop up the country’s economy after its defeat and devastation in the Second World War. Their role extends across multiple industries vital to Japan’s economy, including automobiles, infrastructure, and clothing. The five largest sōgō shōshas are Mitsubishi Corp, Mitsui & Co. Ltd., Sumitomo Corp., Itochu Corp., and Marubeni Corp.
