DESCUENTO POR PRONTO PAGO

Because international trade can significantly affect a country‘s economy, it is important to identify and monitor the factors that influence it. The most influential factors are: • Inflation

• National income • Government policies • Exchange rates

1) Impact of Inflation

If a country‘s inflation rate increases relative to the countries with which it trades, its current account will be expected to decrease, other things being equal. Consumers and corporations in that country will most likely purchase more goods overseas (due to high local inflation), while the country‘s exports to other countries will decline.

2) Impact of National Income

If a country‘s income level (national income) increases by a higher percentage than those of other countries, its current account is expected to decrease, other things being equal. As the real income level (adjusted for inflation) rises, so does consumption of goods. A percentage of that increase in consumption will most likely reflect an increased demand for foreign goods.

Impact of the Credit Crisis on Trade. The credit crisis weakened the economies (and national

incomes) of many different countries. Consequently, the amount of spending, including spending for imported products, declined. MNCs cut back on their plans to boost exports as they lowered their estimates for economic growth in their foreign markets. As they reduced their expansion plans, they also reduced their demand for imported supplies. Thus, international trade flows were reduced in response to the credit crisis.

A related reason for the decline in international trade is that some MNCs could not obtain financing. International trade is commonly facilitated by letters of credit, which are issued by commercial banks on behalf of importers promising to make payment upon delivery. Exporters tend to trust that commercial banks would follow through on their obligation even if they did not

Department of MBA, SJBIT Page 34 trust the importers. However, because many banks experienced financial problems during the credit crisis, exporters were less willing to accept letters of credit.

3) Impact of Government Policies

A country‘s government can have a major effect on its balance of trade by its policies on subsidizing exporters, restrictions on imports, or lack of enforcement on piracy.

Subsidies for Exporters. Some governments offer subsidies to their domestic firms so that those

firms can produce products at a lower cost than their global competitors. Thus, the demand for the exports produced by those firms is higher as a result of subsidies.

EXAMPLE

Many firms in China commonly receive free loans or free land from the government. They thus incur a lower cost of operations and are able to price their products lower as a result. Lower prices enable them to capture a larger share of the global market. _

Some subsidies are more obvious than others. It could be argued that every government provides subsidies in some form.

Restrictions on Imports. A country‘s government can also prevent or discourage imports from

other countries. By imposing such restrictions, the government disrupts trade flows. Among the most commonly used trade restrictions are tariffs and quotas.

If a country‘s government imposes a tax on imported goods (often referred to as a tariff), the prices of foreign goods to consumers are effectively increased. Tariffs imposed by the U.S. government are on average lower than those imposed by other governments.

Some industries, however, are more highly protected by tariffs than others. American apparel products and farm products have historically received more protection against foreign competition through high tariffs on related imports.

In addition to tariffs, a government can reduce its country‘s imports by enforcing a quota, or a maximum limit that can be imported. Quotas have been commonly applied to a variety of goods imported by the United States and other countries.

Lack of Restrictions on Piracy. In some cases, a government can affect international trade

flows by its lack of restrictions on piracy. EXAMPLE

In China, piracy is very common. Individuals (called pirates) manufacture CDs and DVDs that look almost exactly like the original product produced in the United States and other countries. They sell the CDs and DVDs on the street at a price that is lower than the original product. They even sell the CDs and DVDs to retail stores. Consequently, local consumers obtain copies of imports rather than actual imports. According to the U.S. film industry 90 percent of the DVDs that were the intellectual property of U.S. firms and purchased in China may be pirated. It has been estimated that U.S. producers of film, music, and software lose $2 billion in sales per year due to piracy in China. The Chinese government has periodically stated that it would attempt to crack down, but piracy is still prevalent.

Department of MBA, SJBIT Page 35 As a result of piracy, China‘s demand for imports is lower. Piracy is one reason why the United States has a large balance-of-trade deficit with China. However, even if piracy were eliminated, the U.S. trade deficit with China would still be large.

4) Impact of Exchange Rates

Each country‘s currency is valued in terms of other currencies through the use of exchange rates. Currencies can then be exchanged to facilitate international transactions. The values of most currencies fluctuate over time because of market and government forces . If a country‘s currency begins to rise in value against other currencies, its current account balance should decrease, other things being equal. As the currency strengthens, goods exported by that country will become more expensive to the importing countries. As a consequence, the demand for such goods will decrease.

EXAMPLE

A tennis racket that sells in the United States for $100 will require a payment of C$125 by the Canadian importer if the Canadian dollar is valued at C$1 = $.80. If C$1 = $.70, it would require a payment of C$143, which might discourage the Canadian demand for U.S. tennis rackets. A strong local currency is expected to reduce the current account balance if the traded goods are price-elastic (sensitive to price changes).

Using the tennis racket example above, consider the possible effects if currencies of several countries depreciate simultaneously against the dollar (the dollar strengthens). The U.S. balance of trade can decline substantially.

EXAMPLE

In the fall of 2008, exchange rates of the European currencies such as the euro, British pound, Hungarian forint, and Swiss franc declined substantially against the dollar, which caused the prices of European products to decline from the perspective of consumers in the United States. In addition, the prices of American products increased from the perspective of consumers in Europe. This trend was a reversal of the exchange rate movements in 2006–2007.

Interaction of Factors

While exchange rate movements can have a significant impact on prices paid for U.S. exports or imports, the effects can be offset by other factors. For example, as a high U.S. inflation rate reduces the current account, it places downward pressure on the value of the dollar (as discussed in detail in Chapter 4). Because a weaker dollar can improve the current account, it may partially offset the impact of inflation on the current account.