International trade is the exchange of goods between countries. International trade enables consumers all over the world to buy French wines, Columbian coffee, Korean television sets and German automobiles. International trade between nations creates the global economy where prices are influenced by a variety of factors such as global events, exchange rates, politics and protectionism. Political shifts in one country can impact manufacturing costs and employee wages in another country. The result of such shifts could raise or lower the prices of imported goods for local shoppers on everyday products.
The Influence of Tariffs and Trade Barriers
Ideally, trade with other nations increases the number of goods consumers can choose from, and multinational competition will lower the cost of those goods. Dumping is one international trade practice that is discouraged through the strategic use of tariffs. Dumping is when a trade partner exports a high volume of cheaper goods than what is available from domestic production in order to gain a competitive advantage in foreign markets. To slow or stop the dumping of lower priced international goods, a government may impose tariffs or taxes on those imported goods.
A frequent complaint about international trade is the low cost of foreign labor and lack of overseas regulation regarding safety and quality. Tariffs can be imposed to protect consumers from potentially dangerous products such as tainted foods which may include imported meats or inferior products such as defective airbags. Quality standards and regulations can vary greatly from one country to another. International trade should stimulate mutual benefit and positive relationships between countries, but sometimes the opposite is true. Countries may also set tariffs to retaliate against a trading partner they believe is breaking the rules or going against its foreign policy objectives.
Influence of Politics and Protectionism
In some cases, a government will impose tariffs on imported goods for political reasons. It may want to fulfill a campaign promise, boost growth in a specific industry or make a strong statement to members of the international community. A government may adopt a policy of protectionism and restrict trade through tariffs because it is concerned that international trade threatens the domestic economy by harming particular industries. While this type of protectionism has been known to work in the short-term, it’s often detrimental in the long-term because it makes the country raising the tariffs less competitive internationally.
Trade protectionism can eventually weaken the industries it was implemented to protect. If a domestic industry has no competition, manufacturers may not work as hard to remain competitive in the marketplace. The result is the domestic product could decline in quality compared to similar international products. Continued protectionist policies can eventually cause industry slowdowns and domestic jobs will be lost to global suppliers. Protectionism is an expensive proposition because governments will often choose to subsidize industries and it can drive up the price of lesser quality goods.
Impact of Foreign Currency Exchange Rates
Exchange rates from one nation's currency to another currency depend on market conditions and the overall health of the global economy. The currency exchange rate also influences international trade. If a company in one nation wants to import goods from another nation, they will pay for those goods in their trade partner's currency or with the currency of a stable economy such as the U.S. dollar, British pound, Japanese Yen or the Euro. It’s preferred to pay for goods in one of these so-called hard currencies because they are stable and less susceptible to economic shocks.
Countries can further influence exchange rates through fiscal and monetary policies. Policies that impact currency rates can lead to disagreements. One country may argue that the other is deliberately manipulating their currency to gain a trading advantage. When two or more countries, such as the United States and China, have disagreements or conflicts, it affects international trade and will, in turn, impact each country’s exchange rate. Economists disagree as to how to address currency fluctuations that determine the price of imported goods. Many experts believe efforts to restrict trade to favor domestic imports is more harmful than it is helpful.
- Investopedia: The Basics of Tariffs and Trade Barriers
- Daily Fix: Why International Trade News Matters for Foreign Exchange Rates
- We Forum: Do Exchange Rates Still Matter for Trade
- Washington Post: Why Trump’s Tariffs Could Weaken U.S. Influence in the World
- The Balance: Trade Protectionism and Its Methods with Examples, Pros, and Cons
- Investopedia: What is International Trade
- Globalization 101: Currencies and Exchange Rates