Table of Contents
International trade is an exchange of goods and services involving two or more countries. Currently, with the rate of globalization, more countries are involved in the exchange of several goods. For countries to survive well they have to source for several items that they do not produce or do not have the capability of producing them. Therefore it is important for countries to be involved in the international trade so that they can satisfy the needs of their citizens’. However, there are major factors currently that affect the international trade and finance which have a repercussion on the economy of different countries depending on their economic level.. Most of these factors are economic and political related factors. For instance, the international trade and fiancé have been affected by the gap created by the poor and the rich countries in the world. The world finances are usually controlled by the rich countries. This makes the poor countries have difficulties times during the international trade. As a result, the paper below is going to look at the how current issues are affecting international trade and finance. It will also explore the economic impact of those issues on countries participating in the international trade.
Major Issues Affecting International Trade and Finance
Foreign Exchange Rates
Foreign exchange is a very important method which is used to determine countries relative economic health. It is so because it provides the link that creates economic stability. The economic stability can be watched through the exchange rate measures. For this reason, the buying power of the country’s currency depends on how it stands up against the other top currencies in the world (Pride, Hughes, & Kapoor, n.d.). It can be noted that the top currencies in the world are Euros, dollars sterling pound, and Japanese yen. The demand of one of these currencies will automatically increase its strength. When the demand for any currency reduces then the strength of that currency will also be reduced. Therefore international trade is determined by those world currencies. The rates of those currencies can fluctuate hence leaving an impact on the international trade. For instance, when an individual who is an American consumer wants to buy items from Japan he or she has to use Yen currency. For example, Let us look at someone buying a Japanese vehicle using the American dollars, it means that the cars would be expensive to the American consumers due to the higher exchange rates. The American consumers would buy few Japanese cars which will lead to decrease in the demand of Japanese yen. Back at home, the economy of Japan will also be affected. It will, in turn, affect the economy negatively.
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The Japanese commodities will be cheaper when they are being purchased by the American consumers in America. The higher the exchange rates of the dollar make Japanese items to be cheaper in America. Therefore this would reduce the profits that the Japan is getting thus having a negative impact on the economy of the Japan. Consequently, the development of such country is affected by the exchange rates. It can be concluded that the foreign exchange rates have both positive and negative impact on the economy of the country depending on the currency power. Countries that have the top currencies in the world usually benefit from it. On the other hand, the countries that have weakest currency end up selling their commodities at a cheap price hence ending up on a losing end.
Global Financial Crisis
Global financial crisis has an impact on international trade and the situation of currency in the world. Following a period of economic boom experienced in the world, most of the global financial institutions have collapsed. The world economy and currency exchange rates have been left at the mercy of the wealthiest nations. The wealthiest nations such as the United States of America France and Britain have decided to rescue the financial institutions from collapsing further. This might be seen as a good move; however, those countries have imposed strict and exploitative measures that will accompany the process of rescuing the financial institutions. Some of the strict and over exploitative measures include socializing the cost while they privatize the profits made from the rescue. For instance, the Plummeting Stock Market was on a verge of collapsing. The American government used about $ 9.7 trillion to bail out it. It implies that the nations which have rescued the financial institutions will benefit in such a way that their currencies will be used by a lot of the financial institutions.
Whenever a nation’s currency is used by the financial institution, it will probably strengthen due to the high demand of the currency. Therefore countries whose currencies are being used will strengthen and improve their economy. They will get a lot of profit from the people buying goods from using their currency.The prices of the commodities at the international markets will again be affected by both the collapse of global financial institutions and the restrictions put by the wealthiest countries as they rescue the financial institutions.On the other hand, the poor countries with low currency strength will, of course, be affected negatively by the move to save the global financial institutions. These countries will have to buy commodities at exorbitant prices while they sell their items at a cheaper price. The international trade would not improve the economy of those countries as they are always on the losing end. Nevertheless, these countries do not bail out poor nations from the economic crisis. Their economy will continue to regress.
Political stability and government performance plays an important role in international trade and also affects the currency strength of the country. The countries that are less likely to plunge into civil turmoil are more attractive to investors thus boosting the international trade with other countries. Such countries will always have a stable currency which will compete with the top currency on a higher and a consistency level. Nevertheless, the influx of investors to a country will create a situation which the currency will improve. It means that the currency will increase the demand. In such countries, the chances of inflation are low thus do not affect the international trade. Increase in foreign capital in a country will lead to an appreciation of the domestic currency. On the other hand, nations which are always on war are negatively affected. The economy of these countries will never grow because there will be high inflation rates. These countries are characterized by a lot of confusion and high prices of goods. It is so unfortunate when political instability hits a country that is a core producer of an item , the prices on the international markets will shoot thus having a negative implication on the international markets. Countries that are always involved In civil war will have a depreciate interest rates. This implies that the economy of the country will reduce. For instance, a country such as Syrian citizens has been involved in the war for about three years.The economy of the country has gone down to about zero percent, the inflation rates are so high and the exchange rate has also been affected. Therefore political stability makes the economy of countries to improve while political instability will reduce the country’s economy and affect the international trade negatively.
The Level of Economic Development
The level of economic development directly affects the country‘s participation in the international trade. Countries such as Japan, the united states of America together European countries will directly affect the price of their commodities in the international market. First is due to the power of their currency. They will sell their commodities to countries which have low economic development thus directly influencing the prices of their commodities(Hooper, & Richardson, n.d.). This part of the international trade will only benefit the economically developed countries as they will continue drawing a lot of profits from selling their commodities. Nevertheless, a number of commodities that are imported by these countries are half the world exports and the imports and their population is a seventh of the world population. This analysis shows that the economically developed countries control the international trade. They also control the Forex market. This will continue improving their economic development. On the other hand, the developing countries in Africa, part of Asia and part of South America are the ones that feel the whole pinch. All the prices of the commodities are controlled by the developed countries. Even when these countries are exporting their commodities, the prices are normally determined by the Developed countries. Therefore the developed countries will continue improving economically as they suppress the economic development of third world countries.
The difference in the legal system.( Tariffs)
Each country has a different legal system which includes the way which the government has imposed taxes on importation and export of the goods(Clayman, Fridson, & Troughton, 2012). The international trade involving different countries will be affected by the policies and structures put in place used to run the business. For instance, the policies are put on the import exports and how the nation is dealing with piracy affects the international trade. Some countries have subsidized their taxes on commodities which are produced locally. This will mean that the imported goods will be very expensive. Therefore it will be hard for the investors to sell their commodities to other countries. If they will sell then the prices will be higher. It affects the prices of different commodities. The country also gets a lot of tax for the importation of goods. The exportation bit also has experienced the countries reducing the tax for exportation. It means that their goods will be sold on the international market hence earning a profit for the exporters. These will, in turn, improve the economic situation of the country.
For example, Chinese government currently offers free land and loans without interest to the owners of the firms. These firms will incur a lower operational cost. At the end, they will sell their items at a lower price which will attract larger market base. Therefore there is a completion evolving between China, United States of America and Japan due to the prices of Chinese products. The Chinese firms are producing quality items and sell it at a lower price, on the other side the Americans and Japanese firms are producing the same product with a lot the same quality but are selling it at higher prices.As a result, there is a confrontation between the two nations with china because they feel that the Chinese firms are denying them markets. This situation makes china to develop with one of the largest economies in the world. On the other side countries such as Japan reduce the number of commodities they sell hence stagnating their economy. As a result, the policies set up by the country will always tend to improve their economy together with the strengthening of the nation’s currency. Sometimes the government can affect the flow of international trade by not restricting pricy. It is commonly known in china whereby people will manufacture fake items and sell them at a lower price. The manufacture items always look like the original ones made in the USA. This will affect the international trade together with the economy of the United States of America.
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Conflicts between Economically Developed Countries
Conflicts are also a source of problems in the international trade. For instance, countries might sell an important and basic commodity to the other country at an extra price as way punishing the others. For instance, at the moment economist in the United States of America claim they should economically suppress North Korea due to the conflicts that are experienced between the countries. The economic sanctioning might happen but the people who will be largely involved are the ones who are around North Korea as they will find the prices at the international market so high. This will also reduce the movement of people around the region. The prices of commodities from the United States will be sold to people at exorbitant prices.Therefore the international market will be negatively affected. Nevertheless, the economy of countries around North Korea will also be affected.
Natural Resources and specialization of industry
Countries that have a lot of natural resources have a chance to directly affect international trade. For instance, a country like Zaire in central Africa can influence the prices of different commodities in the whole world. All the mineral resources in Zaire add up to about 70% of the world total resources. Therefore they can influence the prices of the commodities at the international market. Sometimes they usually do it through imposing a lot of restriction on the taxes. Nevertheless, the countries that have specialized on certain products will always sell their items at a price which they want. Specialization comes in as a result of the difference in resources endowments.Once a country is specialized on certain products they will tend to control the prices of the same commodities but from different countries. is so because they believe that they are the ones who are supposed to produce such product. As a result, the country specialized product will always shape the price of the market.
The International trade comes from people or countries which want exchange goods. Since the world began being a globalized place, international trade has increased all over the place. Technological advancement has also created a smooth transaction between different business people who are in different countries. At the moment a business person can request for commodities through the internet. From such situation, international trade has developed thus developing the economy of countries which are actively participating in the business.However international trade is currently affecting by major issues as discussed above. Despite having a lot of gains from the international trade people have ensured that they create situations which will affect the international trade. Nations that their currencies are in high demand will always control the prices of commodities within the international trade. Countries such as the United States of America and Japan will normally control the prices of commodities because dollar and yen are among the top currencies which are on demand. Tariffs put up by the different government also affect the international trade and finance. For example, the government will put a low tax on the export thus reducing the prices of commodities on the international market. Political stability within the nations that produce basic commodities also affects the international trade. This will generally increase the prices of the commodities from such countries. Such major issues affect the economic development of the world. The developing world is the ones who are feeling it at most. There the international bodies are supposed to come up with a measure of solving these major issues. For instance, they are supposed to ensure that the world deters from both civil and international conflicts.
- Clayman, M., Fridson, M., & Troughton, G. (2012). Corporate finance (1st ed.). Hoboken, N.J.: John Wiley & Sons.
- Hooper, P., & Richardson, J. International economic transactions (1st ed.).
- Pride, W., Hughes, R., & Kapoor, J. Foundations of business (1st ed.).