International trade is an economy’s connection to the global marketplace. A country’s ability to participate actively in trade can help it achieve long-term growth and improve the wellbeing of its citizens.
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How do trade and economies interact with each other?
Trade flows generate important sources of income and allows access to productive inputs
Trading for Future Growth
Why is international borrowing & lending so important?
The free flows of goods and services between countries provide several key benefits to trade participants:
Our understanding of trade informs how policymakers drive growth
International trade is facilitated through imports and exports of goods and services
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The record of all trade between a country and the world is captured in a country’s Balance of Payments
Balance of Payments consist of three primary components:
Current Account (CA)
The current account includes all exports which are counted as credits (+) and all imports which are counted as debits (-). These include goods and services, as well as monetary gifts (transfers).
Capital Account (KA)
The capital account includes the accumulation (+) or disposal (-) of:
Financial Account (FA)
The financial account tracks the sales and purchases of financial assets and liabilities between foreign and domestic entities.
Domestic purchases of foreign financial assets generate payment outflows (-), while foreign purchases of domestic assets generate payment inflows (+).
How do countries interact with trade and can trade power growth?
A country’s current account balance indicates whether a country is borrowing or lending
Borrowing – A country is borrowing when it is buying more imports than it is selling in exports. Borrowers must be able to generate enough hard currency reserves to repay their creditors. Crises can occur if foreign investors sell their holdings of domestic assets, which can cause a loss of liquidity in the domestic economy and push the value of the domestic currency down.
Lending – A country is lending when it is selling more exports than it is buying in imports. Lenders might see inflation as reserve inflows increase. They may also lack good domestic investment opportunities, so money flows abroad, seeking better returns.
Trade Deficits: Good or Bad?
Trade deficits are a natural result of the modern global economy, with trade balances fluctuating from year-to-year. However, long-term trade deficits can be unsustainable in some cases.
How much do you owe?
A nation’s balance of payment can vary widely over time due to national, regional, and global economic factors. A nation may have a negative BoP one year and positive the next.
Why would a country engage in borrowing or lending?
Why do countries restrict trade and what tools do they use to restrict trade?
Although trade is mutually beneficial, governments sometimes choose to restrict trade.
Why do governments restrict trade?
For some countries, the income and property tax base is relatively small due to underdevelopment and the existence of a large informal economy. A government may rely on domestic sales taxes and trade taxes to generate most of its revenues.
Firms may lobby for protection from competition abroad in exchange for political support. Certain firms may have political influence over policy decisions.
An industrial policy strategy to boost domestic manufacturing growth by protecting nascent domestic industries with tariffs on import-competing goods.
Countries have two main policy approaches to restricting international trade:
Import tariffs are a tax on a specific imported good or service.
Import quantities from the tariff-affected country shrink, domestic sales rise, and consumers pay the full cost of the tariff.
Non-tariff barriers include a variety of tools designed to restrict trade:
How trade accessible is your country?
Each country may use a combination of tariff and non-tariff barriers to restrict international trade.
Each type of trade barrier affects different stakeholders differently
Who wins and who loses?
Depending on the design of a trade barrier, different stake holders will benefit from the policy and others will suffer.
Learn how better economic governance is key to economic development
Deep Dive: Trade Barriers
Cory Krupp is an economist and a Professor of the Practice of Public Policy in the Sanford School. She has taught courses on International Trade and Policy, Economic Foundations of Development, Microeconomic Policy Tools, European Union Trade and Finance Issues, and Macroeconomic Policy and International Finance. Prof. Krupp also serves as the Associate Dean of Academic Programs at the Sanford School, with responsibility for curriculum development for the school’s main programs.
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