International Trade and its Importance
International trade is the foundation of a commercial and modern economy that operates in the business sector. Producers benefit more from a larger market than if they only operate within their own borders. The US exports more consumer goods, agricultural, chemical, and aircraft items than it imports. It exports more than 8% of global products, accounting for less than 20% of its GDP (McConnell, Brue, & Flynn, 2012). China and Thailand are the United States' most major trading partners. Some countries have comparative advantages such as cheap labor and low production costs. Furthermore, because these countries are growing at a rapid pace, most nations are interested in how successfully they manage their operations.
The Impact of Current Account Deficit on the Economy
Current trade deficit arises when the amount of imports exceed the amount of exports. Most of the current account deficits arise from the high prices of oil. It is highly likely that the current account deficit of the United States arises from China. Other factors that encourage this current account deficit are the relatively high growth rate of the U.S. economy, the global oil prices, and a poor saving culture among U.S. residents. A current account deficit affects the performance of the economy by increasing the current consumption patterns and increases the country’s indebtedness.
Effects of Currency Exchange Rates on Trade
A decline in the currency of one country to another affects the exchange rates and trade between the two countries. The currency of one country appreciates while that of the other depreciates. It would be expensive for wine sellers to operate in the United States than if it were the converse. The wine stores would record high profits when operating in the United States but when the currency is converted to the domestic currency would be expensive. Depreciation of the euro to the dollar would raise the cost of the trip to Paris.
Government Protectionist Policies and their Impact on Trade
Governments often place protectionist measures like import quotas and tariffs to discourage imports and encourage exports. This is done to safeguard the local businesses. It can also impose high import quotas to increase the prices of their commodities in the market. These businesses end up operating at high costs and so do the organizations that depend on their input. To encourage exports, the government enters into trade agreements with other countries to support trade relations. This could include bilateral trade agreements to encourage businesses to set up and operate freely in that country. The net outcome for the society is to promote domestic industries. Imports are sold at cheaper prices than commodities from domestic markets thus creating stiff competition in the market. With such protectionist policies, the local companies can create local competition in response to the market forces.
Role of Free Trade Zones in Promoting Business
Free trade zones like the EU and NAFTA are established with the intention of promoting business among its member states. Nonmembers often face obstacles when trying to set up in these free zones. The EU established a single currency to ease the process of doing business among member states (McConnell, Brue, & Flynn, 2012). It also established a common tariff with nonmember nations. NAFTA has increased trade among its member states and enhanced the living standards of its citizens. They eliminate import quotas, reduce tariffs, and promote equal, non-discriminatory trade policies among member states. As much as they encourage trade among member states, they tend to disrupt the world trade. Nonmembers are not willing to incur huge amounts when trying to operate in these regions. Their products may be rejected in the market. The world trade organization (WTO) oversees trade rules and agreements on any disputes among nations. Most nations are against the involvement of the WTO in their operations as it may allow some countries to evade the worker-protection and environmental laws.
References
McConnell, C., Brue, S., & Flynn, S. (2012). Microeconomics Brief Edition (McGraw-Hill Economics Series). New York: McGraw Hill Education.
