Posted: March 24th, 2023

International Trade and Finance

Question 1

In a free trade setup, there would be no form of restriction on imports or exports. However, the government uses various forms of free trade restrictions for various political, economic, and cultural reasons. Daniels, Radebaugh, and Sullivan (2006) provide the following barriers that are put in place by the government.

Tariffs. A tariff is a tax imposed on goods entering or leaving a country and, as such, can be divided into export, import, and transit. Governments may use tariffs either to liberate trade or to protect their economies. In fact, to liberate the trade, governments lower the tariffs on imported goods, thus making the market desirable because it makes the cost of trade more profitable. In contrast, an increase in tariffs, otherwise known as protectionism, raises the cost of importing products, thereby helping local firms to compete with imported products. Tariffs may be levied as specific tariffs or ad valorem tariffs. For specific tariffs, a fixed rate is charged for every unit of imported goods. An ad valorem tariff, on the other hand, is levied as a set percentage of the value of the commodity being exported.

Quotas. A quota restricts the quantity of a commodity allowed to enter or leave a country for a given period. Usually, this is administered by giving quota licenses to foreign governments or companies and local producers. Import quotas help the domestic producers compete with foreign organizations. In fact, governments may impose export quotas to maintain the goods and services within the economy or increase the international price, especially in the context of the Organization of Petroleum Exporting Countries (OPEC).

Tariff- quotas. A tariff-quota integrates the logic of tariffs and quotas. There is a lower tariff for a given quantity of products and a higher rate for quantities exceeding the quota.

Embargoes. An embargo is a complete ban on trade in specific products or all products entirely within a given country. It is among the most restrictive types of barriers and is usually fueled by political reasons. Individual governments or international organizations such as United Nations might impose Embargos.

Local content requirements. The government may impose laws on local producers stating that the local market must supply a given amount of products or services. This method is usually designed to force foreign companies to employ local resources in their production processes, especially labor and raw materials. They help domestic producers to cope with prices of companies based in low wage countries.

Administrative delays. These are bureaucratic laws set to reduce the continuous flow of imports into a country. The main reason for administrative delays is protectionism. This can be achieved through various government actions like understaffing custom employees, requiring licenses that may take the time to obtain among other methods.

Currency controls. Currency controls refer to restrictions on the ease of converting a currency to foreign currency. Imports are reduced by setting exchange rates that are unfavorable to importers. The government may also set rates favorable to exporters to encourage exports.

Question 2

It is worth noting that in Africa, wage rates are significantly low compared to the United States. However, big corporations would not choose to relocate given the other challenges that may present themselves.

Political instability. Political instability is a major issue for most African countries. Compared to other continents, African countries have been independent for a significantly less period. As such, a considerable proportion is yet to embrace fully their constitutional requirements, which results in political conflicts. This instability could greatly affect foreign corporations.

Exchange rates. Given the many challenges of the developing African economies, African country currencies are constantly fluctuating. These unstable currencies may negatively affect foreign corporations. Besides, most African currencies are significantly lower in value than the dollar.

Government regulations. Emerging economies, as is the case with most African countries, usually enforce strict government regulations. In most cases, these regulations are enforced in favor of domestic organizations to improve the economy, an initiative that would affect foreign corporations.

Labor market. Despite the advantages of low wages, lack of a competent workforce may prove to be a costly compared to the amount saved in low wages.

Cultural differences. It is evident that every country or working environment has its own cultural setup. The African culture may affect foreign corporations negatively because African employee may not be ready to embrace a new cultural set-up in the new entities.

Industrialization. African countries are in the category of developing economies. The level of industrialization in Africa is miles behind America. Poor infrastructure, low level of technology and other indicators are likely to do more harm than good to foreign corporations.

Question 3

Given the exchange rate market for the Japanese Yen and the dollar, the figures below show the effects of the market occurrences on the demand and supply curves:

Lowered interest rates in Japan                                               

As shown in the figure above, when interest rates in Japan are low, the supply curve shifts to the left from S₀S₀ to S₁S_1, which symbolizes a decrease in the supply of dollars, while the demand curve also shifts to the left due to an increase in the demand for dollars. This represents an appreciation of the dollar. A decrease in interest rates in the Japan’s domestic market enhances an increase in investment funds which will, in turn, cause an increase in the demand for foreign currency and a decrease in the supply of foreign currency, which, in this case, is the dollar (Mishkin, 2004).

Prices are lower in the United States

When prices are lower in the United States, there is an increased demand for dollars, making the dollar appreciate against the Japanese Yen. This is demonstrated by the rightward shift of the demand curve from D₀D₀ to D₁D₁.The increased demand for dollars, on the other hand, results in a decrease in the supply of dollars, shifting the supply curve to the left.

Higher US Interest Rates

Higher interest rates in the United States will lead to an appreciation of the dollar. An increase in the interest rates in the US market will lead to an increase in investment funds. This causes a decrease in the demand for Japanese Yen and an increase in the supply of the same. As such, the supply curve shifts to the right while the demand curve shifts to the right, as shown in the figures below (European Central Bank, 2005).

Question 4

Effect of high exchange rates on imports and exports

Exports positively influence a country’s economy because they bring income to the country. Fluctuations in the market exchange rates may affect the demand for goods and services. Therefore, the exchange rates should be adjusted to incorporate these fluctuations. The real exchange rates are a mechanism developed to counter these fluctuations by reflecting on the reality principle. The real exchange rate adjusts market exchange rates by representing domestic US prices in foreign currency to get a real comparison with foreign prices. In essence, imports increases when there is high real exchange rate, while exports are reduced (Heim, 2009).

 

References

Daniels, J., Radebaugh, L., Sullivan, D. (2006) International Business. New Jersey: Prentice Hall

European Central Bank (2005). The link between interest rates and exchange rates. Retrieved April 15,2016 from http://www.ecb.int

Heim, J. (August, 2009) The real exchange rate and the U.S. Economy. Retrieved April 15,2016 from http://www.rpi.edu/dept/economics

Mishkin, F.(2004) The Economics of Money ,Banking and Financial Markets. Boston: Pearson Wesley