What Are Some of the Forces That Affect Trading in Global Markets?

Global trade is not a free market system and probably can never hope to be so. This is because free markets cannot exist in a stable equilibrium unless they are also fair markets. Global trade is influenced by a number of factors, such as economic conditions, regulations, resource availability, geopolitical stability, currency valuations and treaty obligations.

The relative valuation of national currencies is a key influence on global trade. Each country gets to set the value of its own currency relative to other currencies. Net importers benefit from strong currencies. Net exporters benefit from weak currencies. One of the reasons that Chinese goods have flooded into the United States and European markets is that the Chinese currency has been held at a very low value relative to the dollar, the euro and the yen. This makes Chinese goods cheaper for consumers than goods from their own countries, and makes goods imported into China unaffordable for most residents compared to locally produced goods.

Trade barriers include domestic subsidies, import quotas and tariffs. Subsidies provide government support to domestic industries that a country may want to protect from more efficient or predatory foreign competitors. For example, Japan subsidizes its rice growing industry so that it will have food security and provide full employment for its rice farmers. Tariffs are essentially import taxes to make them either price competitive or more expensive than domestically produced items. Quotas impose import limits on specific items. They are often used to protect the domestic agricultural industry when it cannot meet a necessary level of output.

War and conflict affect trade in several ways. These include limiting access to critical production resources, consuming disproportionate amounts of resources that would normally be channeled to civilian economies, and disrupting trade routes and transportation. During World War II, the U.S. government rationed petroleum products, rubber, flour, sugar, coffee and most agricultural products. More recently, trade sanctions have been placed on countries such as Iran, Libya and Yemen for violating United Nations and other international covenants.

Many countries in the developing world have dramatically lower production costs than competitors in the developed world. This is due to lower labor costs and lax environmental and worker safety regulation. Industries that are subject to more stringent health and safety regulations in the developed have moved to the developing world where they can reduce their production costs. This is because the operating costs may be lower due to less expensive air quality, water quality, recycling, hazardous waste management and worker safety regulations.