International trade is the exchange of goods between countries. It’s what enables consumers all over the world to buy French wines, Columbian coffee, Korean television sets and German cars. International trade between nations creates the global economy where prices are influenced by a variety of factors such as world events, exchange rates, politics and protectionism. Political change in one country can impact manufacturing costs and employee wages in another country. The result 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. However, sometimes a country becomes concerned that their trading partners may be a threat to their domestic economy in ways that would harm a particular industry and its workers. To slow or stop the importing of international goods, they’ll impose a tariff or a tax on those imported goods.
Tariffs are most often employed to protect domestic companies and their employees from the potentially harmful effects of increased competition. A frequent complaint about international trade is the low prices of foreign labor and lack of overseas regulation. Tariffs are also imposed to protect consumers from potentially dangerous products such as tainted foods including imported meats or inferior products such as defective airbags. Sometimes countries may 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. 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 trying to protect. If a domestic industry has no competition, they 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.
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 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 currency or currency of a stable economy such as the U.S. dollar, the British pound, the Japanese Yen or the Euro. It’s necessary to pay for goods in one of these so-called hard currencies to participate in international trade. If the country wishing to import products cannot pay in one of these currencies, they will not be able to purchase the imported goods.
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. One country will argue that the other is deliberately working to devalue their currency to gain a trading advantage. However, economists disagree as to how to address currency fluctuations that raise the price of imported goods. Some 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
- A 2-Country, 2-Transaction Example to Understand Trade...
- 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