A trading house is a business that specializes in facilitating transactions between a home country and foreign nations. These firms act as exporters, importers, and traders, purchasing and selling products for other businesses. Trading houses offer vital services for businesses seeking international trade expertise to manage the receipt and delivery of goods or services.
A trading house can also refer to a firm that deals in both commodity futures and physical commodities on behalf of customers and for its own accounts. Key players in the commodity trading house industry include Cargill, Vitol, and Glencore.
Key Takeaways
- Trading houses function as intermediaries for manufacturers aiming to facilitate trade in foreign markets.
- They offer diverse services, from acting as agents for manufacturers in international markets to streamlining the import-export process via local connections.
- Despite a marked-up price from trading houses, retailers benefit from bypassing the hassles of importing, while leveraging the expertise, discounted rates, and lower currency exchange complications offered by trading houses.
Understanding Trading Houses
A trading house acts as an intermediary – for instance, purchasing t-shirts wholesale from China, then selling them to a U.S. retailer. The U.S. retailer still enjoys wholesale pricing, albeit slightly higher due to the trading house’s markup for covering costs and making profit. This markup relieves the retailer from the complexities of importing, enabling simplified operations by dealing with fewer trading houses rather than numerous wholesalers.
Small businesses that use trading houses benefit from their insights and expertise in international markets, and may also access vendor financing available via direct loans and trade credits.
Advantages of Trading Houses
Economies of Scale
Trading houses usually have a broad client portfolio, enabling significant economies of scale. With sizeable buying power, trading houses can secure discounts from suppliers and manufacturers and economize on transportation costs by shipping products in bulk.
International Foothold
Trading houses cultivate extensive international networks, enabling them to secure advantageous deals and attract new customers. They often maintain foreign office staff to address customs, legal issues, and ensure seamless business operations.
Currency Management
Regularly importing and exporting products, trading houses excel in managing currency risk. Employing risk management techniques like hedging, trading houses mitigate adverse currency fluctuation exposure. For example, by utilizing a currency forward contract, a trading house can lock in the current exchange rate for a future payment in foreign currency.
Example of Trading Houses
In Japan, limited natural and food resources necessitate that most imports are managed through five major trading houses, known as sōgō shōsha. Originating during the Meiji Restoration to rejuvenate Japan’s economy, these trading houses significantly contributed to economic rebuilding post-World War II. Integral across various sectors of Japan’s economy, from automotive to infrastructure to clothing industries, the five major sōgō shōshas include Mitsubishi Corp, Mitsui & Co. Ltd., Sumitomo Corp., Itochu Corp., and Marubeni Corp.
Related Terms: Manufacturers, Exporters, Importers, International Markets, Currency Hedging.
