The effects of growing global influences on domestic economies have been significant. Policymakers have increasingly come to recognize that it is very difficult to isolate domestic economic activity from international market events. Decisions that were once clearly in the domestic purview have to be revised due to influences from abroad. At the same time, the clash between the fixed geography of nations and the non-territorial nature of many of today’s problems and solutions continues to escalate. Consider, too, that some of today’s products would be nearly impossible to build if manufacturers were unable to source supplies from and sell resulting goods into multiple global markets.
At its root, international trade assumes that trade will improve the quality of life for the consumers, both as individuals and as a nation. The WTO identifies ten core benefits of trade:
- The system helps promote peace
- Disputes are handled constructively
- Rule make life easier for all
- Freer trade cuts the cost of living
- It provides more choice of products and qualities
- Trade raises incomes
- Trade stimulates economic growth
- The basic principles make life more efficient
- Governments are shielded from lobbying
- The system encourages good government
To some extent however, the complex links that trade fosters between nations have turned the economic world inside out. For example, trade flows once determined currency flows and exchange rates. Recently, currency flows have taken on a life of their own, increasing from a daily average of $18 billion in 1980 to a record $5.3 trillion in 2013. As a result, currency flows have begun to set the value of exchange rates, independent of trade. These exchange rates, in turn, have now begun to determine the level of trade.
To regain some power to influence policies, some governments have sought to restrict the influence of world trade by erecting barriers, charging tariffs, and implementing some import regulations. However, these measures too have been restrained by the existence of international agreements forged through institutions such as the WTO or by bilateral negotiations. World trade has therefore changed many previously held notions about the sovereignty of nation-states and extraterritoriality. The same interdependence that made us all more affluent has also left us more vulnerable.
This is an excerpt from the book by: Michael R Czinkota, Ilkka A Ronkainen, and Michael H. Moffett. Fundamentals of International Business (New York: Wessex, 2015), 50-53.