Trading House: Definition, Benefits, Example

Trading House

Investopedia / Candra Huff

What Is a Trading House?

A trading house is a business that specializes in facilitating transactions between a home country and foreign countries. A trading house is an exporter, importer and also a trader that purchases and sells 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 may also refer to a firm that buys and sells both 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 a foreign location.
  • Trading houses offer a variety of services, from serving as agents for the manufacturer in the foreign market to easing the import-export process through connections with local liaisons.
  • Although a retailer has to pay a marked-up price for products imported or sold through a trading house, it can avoid the hassles of importing and benefit from trading houses' expertise in foreign markets, discounted rates, and currency exchange complications.

Understanding Trading Houses

A trading house serves as an intermediary. It might purchase t-shirts wholesale from China, then sell them to a retailer in the United States. The U.S. retailer would still receive wholesale pricing, but the price would be slightly higher than if the retailer purchased directly from the Chinese company. The trading house must mark up the price of the goods it sells to cover its costs and earn a profit, however, the t-shirt retailer avoids the hassles of importing. The retailer also may be able to simplify its operations by dealing with one or two trading houses to get its inventory instead of dealing directly with numerous wholesalers.

Small businesses that use a trading house can benefit from its expertise and insight into international markets they operate in, as well as get access to vendor financing through direct loans and trade credits.

Advantages of Trading Houses

Economies of Scale

A trading house typically has a large portfolio of clients that provide economies of scale benefits. For example, a large trading house can use its significant buying power to receive discounts from manufacturers and suppliers. A trading house can also reduce transportation costs if it ships to customers in large quantities.

International Foothold

Trading houses have an extensive network of contacts in international markets that help them secure favorable deals and find new customers. They may also have staff working in foreign offices to work with customs officials and manage legal issues to ensure the smooth operation of the business.

Currency Management

Because a trading house is continually importing and exporting products, they have expertise in managing currency risk. Trading houses use risk management techniques, such as hedging, to avoid getting exposed to adverse currency fluctuations. For example, a trading house that has 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 is scarce in resources, whether it is food or natural resources, and imports most of them through five trading houses known as sōgō shōsha. The trading houses were developed in Japan during the Meiji Restoration period to bolster its economy during a period of rebuilding. They also helped prop up the country's economy after its defeat and devastation in the Second World War. The role of sōgō shōshas is not confined to a specific sector of Japan's economy. They import goods and services across multiple industries vital to the nation's economy, from automobiles to infrastructure to clothing. The five biggest sōgō shōshas are Mitsubishi Corp, Mitsui & Co. Ltd., Sumitomo Corp., Itochu Corp. and Marubeni Corp.