6 Types of Political Risk
John Spacey, updated on March 25, 2021
Political risk is the probability that political decisions, events or conditions will result in losses. Politics affect everything from taxes to interest rates and political events can dramatically impact the price of assets or cost of doing business. The following are a few types of political risk.
1. Trade BarriersTrade barriers such as tariffs can decrease margins or make it impossible to compete in a foreign market. In many cases, trade barriers are the result of local politics or trade wars between nations.
2. TaxesChanges in taxes can reduce the profitability of a business and affect the price of assets such as stocks. Complex tax rules can also be a burden on small businesses who may need to invest limited resources in understanding and complying with new rules.
3. LegislationNew legislation can result in compliance costs as businesses may need to make changes to operations, products or business processes.
4. AdministrationPolitical turmoil can result in administrative delays. For example, a government may start to delay business critical approvals such as building permits.
5. Political InstabilityPolitical instability such as terrorism, riots, coups, civil war, and insurrection can completely disrupt business operations in a country for long periods of time.
6. EconomicsIn many cases, politics can influence economic management such as the interest rate decisions that impact asset prices and business costs.
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