The currency exchange rates of a country’s national currency affect international trade. In some cases, companies from one nation will pay in the currency of their trade partner. However, in other cases, the companies will pay in the currency of their own nation.
That is if the country’s currency is a stable one. Examples of stable currencies include the U.S. dollar, British pound, and Japanese yen. Another example is the Euro. The Euro is considered a hard currency, and thus more stable than unstable currencies.
How do political institutions affect international trade? The degree to which they are susceptible to special interests lobbying and broader societal coalitions varies significantly. Party structures and electoral rules also influence policy outcomes.
Certain configurations create biases towards greater liberalization or protection. Listed below are the ways that political institutions affect international trade. These factors, along with other factors, affect the international trading system. The following is a discussion of some of the more common examples.
Political risks affect international trade in a variety of ways. Increasing political risk has direct implications for cross-border trade. It has exacerbated the pressures on supply chains and has led to a variety of adverse effects on a country’s economy.
These effects range from a decrease in equity prices to decreased foreign direct investment. Ultimately, such effects can prove destabilizing. For example, if an economy is affected by a political crisis, the impact could be felt throughout the global economy.
Globalization spurs international trade because it allows wealthy countries to better use their natural resources. Because each country has unique natural resources and assets, some are able to produce the same goods more efficiently, faster, and cheaper than others.
This process is called specialization. Globalization, in turn, increases competition and consumer choices. In addition, it facilitates the exchange of goods and services. But some countries cannot enter international markets on their own, as the cost of locating and exploring overseas resources is higher.
Technological changes have impacted every industry. Today’s global marketplace is increasingly technologically advanced, with many new digital technologies poised to disrupt international trade.
Using the World Trade Report 2018, we can examine how these technologies are changing the way international trade is conducted. The report outlines the impact of these technologies on international trade, and it estimates how these changes will impact global trade in the next 15 years.
For example, new technology is transforming the shipping industry and enabling more efficient supply chain and blockchain financing.
Although technological advancement is an important part of global trade, this development is not always reflected in a country’s development levels. Some developing countries’ trade tends to remain at the lower end of the value chain.
This is due to their low-end labor endowments and concentration of comparative advantages in traditional industries. Meanwhile, the weak spillover of technology has made it difficult to promote technological innovation.
It’s important to note that the development level of countries in various economic regions has a great impact on the nature of global trade.
Change in the political structure of the world
International trade can change in a number of ways, from consumer demand to new technological innovations, and from national economic status to changes in political structures. These changes in international trade can have a dramatic effect on national economies.
China, for example, went from being a poor country to one of the world’s leading economies. Today, it is the world’s biggest outbound trader, accounting for 15% of all international goods exports.
A positive political shock has a very small effect on trade but results in improved China-India relations within a few months. However, exports between the two countries remain relatively low for the next two years. A positive political shock also leads to improved relations between China and Japan, though the effect is temporary.
Bilateral trade in China and Korea improve after only one month and falls steadily over the following three months. Improved Chinese-American relations, meanwhile, has a significant impact on trade but is not a permanent effect.
Shocks to economic activity
Shocks to economic activity affecting international trading have various causes, and these causes may be temporary or permanent. A temporary shock can be caused by political events, natural disasters, or by the trade of a risky product.
In these cases, a decrease in exports may result in a rise in the price of imported goods. Shocks to international trade may also result in a reduction in domestic demand.
A major type of shock is a sudden change in private spending patterns. Demand shocks can affect consumer spending or business investment.
For example, a slump in one of the world’s major export markets can have a negative effect on business investment. Financial shocks originate in the financial sector of an economy and can affect every industry. Despite the magnitude of these shocks, they are generally categorized as negative or positive.
The literature offers fragmented answers to important questions about the impact of global linkages and international spillovers. Consequently, it is difficult to know the direct impact of such shocks on global trade.
In addition, studies have emphasized that indirect effects can amplify the direct effects of external shocks. In fact, international linkages are so interdependent that even a small increase in one country can affect the economy of another.
Changing tastes of countries
In the global marketplace, consumers have increasingly standardized their tastes in goods and services from foreign countries. Coca-Cola and Pepsi-Cola cross the taste and preference boundaries of national, regional, and ethnic groups. American-made cigarettes are also making inroads into the global market on a yearly basis.
The trend toward global homogenization is evident across different industries and product categories. The effects of globalization are apparent in everything from the globalization of tobacco to the internationalization of the music industry.
Cost of communications
The increasing use of digital technologies has lowered the cost of international communications. While this directly impacts trade and entrepreneurship, it also has a secondary effect by increasing the incentive for countries to remove their trade barriers and improve their legal systems.
While this is an area of global policy debate, it is critical to consider both the potential and limitations of such technologies. Let’s look at the key factors that impact cost of communications in international trade.
In the last half-century, the cost of transportation and communication has decreased remarkably. With these changes, the costs of transferring goods have fallen dramatically, and economic freedom has risen.
These reductions have increased international trade, and this has resulted in a virtuous cycle. It is now more affordable than ever to move goods across the globe. And thanks to the internet, communication costs have declined even more.
Exports of non-factor services
Many economists who were working post-World War II and prior did not consider the export and import of non-factor services to be important to international trade. Adam Smith and David Ricardo, for example, assumed that services were not tradable.
This view was shared by trade negotiators for nearly three decades following the launch of the GATT. However, as the global economy has grown, so has the export and import of non-factor services.