International Trade

Jenna Doucet (2010).

International Trade

International trade influences global and national economies most directly by contributing to the gross domestic product and the budget surplus or deficit of a country. One of the advantages of international trade is the stability and interdependence it creates amongst countries, while one of the significant disadvantages is that “the more globally connected a country is the less flexibility it has with its monetary and fiscal policy” (Uhlhaas, 2001, p.1). The country’s exchange rate is important to international trade as higher domestic dollars make foreign investments more expensive and imports cheaper and vice versa. The policies that facilitate international trade directly impact the investment industry by influencing which countries an organization chooses to invest its capital in. International trade also influences the investment industry indirectly with complementary monetary policies such as the exchange rate.

Many industrial economies are dependent on international trade. For example in 2005, Canada’s exports of goods and services totaled 38% of GDP (CSI, 2008) A country’s GDP is made up of consumption + investments + government spending + (exports – imports). If net exports are positive, the countries GDP will increase. A negative net export number results in a trade deficit in the current account, which must be financed by the government either by borrowing funds internationally or by selling more capital assets than it purchases (Gorman, 2003). Furthermore, the growth of the Canadian economy is not only dependant on it’s domestic performance but on the growth and performance of international countries that import Canada’s goods and services (CSI, 2008). “A number of factors influence the performance of Canada’s trade. The most important is the relative pace of demand in foreign and Canadian economies. Strong growth in U.S. demand for automobiles, raw materials and other products made in Canada boosts exports”(CSI, 2008, p.17). This was obvious during the 2008-2009 recession in the U.S, one of Canada’s most important trading partners. As the U.S economy worsened, there was less demand for Canadian imports, which affected Canada’s economy. The interdependence between foreign countries trading with one another leads to cooperation between countries and is helps support stability, prosperity and peace (Uhlhaas, 2001). Some countries are better at producing certain goods and services more efficiently than others. Cooperating with other countries allows a country to focus its resources on producing the goods it is most efficient at producing. In this way the country does not have to sacrifice resources that are better utilized for one product on other products the economy needs, as these products are easily imported into the country. Furthermore, a country can maximize the production of products their economy is best suited to produce and export a portion of those products for a profit. The country can then use this revenue to fund the purchase of importing goods its economy cannot produce efficiently. This interdependence between countries motivates foreign governments to promote political stability in their countries’ to attract investors and to create a demand in imports of their goods. The prosperity of many countries is correlated with the amount of products and services they are able to export. Furthermore, countries that are rich in scare resources attract the aid of stronger more economically and politically sound countries. In the past the U.S. and Canada have been more prone to send peace troops in countries that they had scare resources their countries were dependant on. For example, U.S and Canadian troops were sent to Iraq, where there is an abundance of oil, however, little help was offered to promote peach in Rwanda during the genocide. Unsurprisingly, Rwanda is not an important source of goods and services for North America.

On the flip side one of the disadvantages of being so connected to other countries is the impact it has on a country’s ability to effectively implement fiscal and monetary policy (Uhlhaas, 2001). For example, if a country’s exchange rate regime is fixed for international trade purposes that country’s monetary and fiscal policies will be more restricted than countries with flexible exchange rates. Generally, a country’s foreign exchange reserve is limited and in order to keep this exchange rate fixed it must do so by adjusting the economy to the desired rate. Much of the country’s monetary policies will be adjusted to meet international trade goals potentially at the expense of other economic goals. According to Uhlhaas (2001) “ This means that if monetary and fiscal policies are being used to achieve exchange rate goals, they cannot also be used to achieve domestic goals” (p.1).
Exchange rates politics are of great importance for domestic policy-makers because they affect the demand of exports from foreign countries. “ In an economy as dependent on trade and open to international capital flows as Canada’s, the behavior of the exchange rate is vitally important. The value of the Canadian dollar relative to other currencies influences the economy in a number of ways. The most important influence is through trade” (CSI, 2008 p. 16). Higher dollars in a country, make that country’s exports more expensive in foreign markets, and make imports in foreign markets cheaper. A country with a higher number of exports than imports, such as Canada benefits from a lower exchange rate, while country’s that are more dependant on imports such as the U.S benefit from a higher exchange rate.

International trade policies directly affect organizations that invest in foreign countries. For example, prior to the Investment Canada Act (ICA), the Foreign Investment Review Act (FIRA) regulated foreign domestic investments (FDI) in Canada. FIRA exerted more control over FDI’s and investments were subject to a longer process of approval. After ICA, foreign investments in particular sectors were no longer reviewed. The loosening of international trade policies resulted in a bigger demand for FDI’s in Canada (Wallace, 2002). Similarly, the relative ease with which an investor can purchase a foreign government bond from a particular country is important in determining if he or she will invest in that country. Some countries impose taxes on foreign investments, which impact the return on investment and discourage investors from purchasing foreign bonds. Governments normally issue taxes on investments as a protectionist measure to prevent too much investment in the country, which could lead to a potentially unwanted appreciating dollar. International trade indirectly affects the investment industry as complementing monetary policies influence the price of and return of investments. For example, the exchange rate is an important to many bond investors purchasing foreign bonds.

International trade is an important economic factor in many countries as it is a large contributor of GDP. Today, many countries are interdependent on one another for the specialization of products, and production efficiency globalization gives them. However, the more globally interdependent the country the more restraint is placed on the country’s ability to implement domestic monetary and fiscal policies. The exchange rate plays an important role in attracting foreign exports and dictates the price at which a country can import goods. International trade is also a big player in the investment industry as direct trade policies and complementing policies dictate which countries attract an investors’ capital.

References

Canadian Securities Course Volume 1 (2008). Economic policies. Toronto: The Canadian Securities Institute.

Gorman, T. (2003) The complete idiot’s guide to economics. Penguin Publishing.

Wallace, C. (2002). The multinational enterprise and legal control: host state sovereignty in an era of economic globalization. Springer.

Uhlhass, A. (2001). What are the main advantages and disadvantages of global free trade? Does it exist in practice? University of Leeds. Retrieved on February 22, 2010 from: http://www.grin.com/e-book/11518/what-are-the-main-advantages-and-disadvantages-of-global-free-trade-does