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Interactions within the Global Economy

Interactions within the Global Economy

Author: James Howard

This lesson is an overview of trade restrictions and global markets.

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Interactions Within the Global Economy

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Hello, and welcome to this tutorial on Interactions within the Global Economy. As always, with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you're going to spend here.

We've already established that the world is becoming globalized. And in a globalized world, it's important for businesses to know what the rules of the road are. Well, what are they? In this lesson, what we're going to be covering are international trade, trade restrictions, trade agreements, and sourcing. The key terms for this lesson are going to be trade restrictions, tariff, trade agreement, quota, and embargo, lastly, sourcing.

International Trade-- now international trade-- one of the rules of the road here is a tariff. Now a tariff is defined as any import or export tax that's placed on a group of products. Now international trade has increased in importance. And a lot of other nations are getting involved. As a matter of fact, you're seeing a globalized effort on the part of countries to get involved in international trade.

Now tariffs are put in place to protect certain industries within a country. And they could be revenue tariffs or they can be a protective tariff. An example would be the tariff or the tax on sugar imports in the United States to help protect the sugar industry here. It also helps prevent things like dumping. Now dumping is when a country will offload a lot of product onto another country or onto the International market for less than it costs to actually manufacture that product at home.

For instance, the US Department of Commerce ruled that, in 2009, steel from China was an example of dumping. They were producing really cheap steel, and they were selling it in the United States for less than it cost them to manufacture it at home. Well, what this did is it had a destabilizing effect on the economy-- the steel industry-- here in the United States.

Another concept we want to make sure we cover are quotas. Now quotas in the international trade are limiting the amount of a good that can be traded to a specific amount or specific value. And an embargo is a trade restriction that stops trade with a specific country. So with a quota, let's say I'm only allowed to import 100 million tons of sugar every year into the US. That would be an example of a quota. Or an embargo would be, I'm not going to trade with Iran at all.

Now another method that nation's can use to help limit trade or create embargoes or quotas would be foreign exchange controls. Now foreign exchange controls are restricting the use or import of currency within a nation. And the way this is done is they can fix a particular exchange rate within a country. They can ban the currency altogether from entering the country, or they can restrict the amount that can be used or the amount that can be possessed by its citizens. So let's say the United States suddenly didn't want to accept pesos anymore, so they would ban the use and import of that particular currency completely.

Now trade restrictions are put in place to equalize the nation's balance sheet-- that balance of trade we talked about in an earlier tutorial. It can also help protect new or weak industries-- the sugar industry like I mentioned before. It can be done for national security reasons or to protect the health of citizens. If we know that a certain food product coming from a particular country is contaminated, we can pose trade restriction to keep that particular food product out.

It's also used politically as a means of retaliation between nations. I'm going to embargo and restrict the flow of material that can be used to produce nuclear power plants in Iran, for instance. And lastly, because we're protecting new jobs or new industries-- new or weak industries-- we're helping to protect jobs within a particular country that sets up the trade restriction.

Trade agreements are a trade treaty between nations which sets rates of tax and limit on any limit on restrictions. So what is that? Basically, it's an agreement between two countries that helps to encourage trade between those two nations. And there are several trade agreements and trade alliances that are out there. And before you enter into a particular international market, you would have to consider these particular trade alliances.

Now trade agreements-- some examples of these would be NAFTA, the North American Free Trade Agreement, between the United States, Mexico, and Canada. The European Union, which includes all of the countries within Europe-- France, Germany, Belgium, Italy, Spain, for instance. Also the Association of Southeast Asian Nations, which covers nations around the South Pacific. And lastly, the World Trade Organization, which is represented by countries worldwide to discuss trade policy. Now there are more out there, but this is just an introduction to get you started.

Lastly, we want to talk about sourcing. Now sourcing is determining the product location of goods based on external and internal variables. And companies will source different products around the world depending on these factors. In fact, businesses often have whole departments, or they'll use consultants that will focus just on where to manufacture different products and where to source the resources I need to manufacture them. And it can change from year to year.

So for instance, if someone puts up a tariff or trade restriction in place between the US and another country, or I'm sourcing the materials that I need, for instance, Bangladesh with clothing, I may need to look in another place, so I get the best deal and the best quality for my customers for that particular item. Or if one of the trade alliances, say the European Union, decided to embargo, restrict, or open trade between that nation and ours, again, that would be something I would have to consider to make sure every year I was keeping up, and I didn't get caught not looking. And the source of my products, so that I can manufacture, isn't interrupted.

So what did we learn during this lesson? Well, we looked at international trade. We also looked at certain trade restrictions. Such as embargoes or tariffs, and why those things are put into place. We also looked at trade agreements and trade alliances-- things like NAFTA or the European Union. And lastly, we looked at sourcing and how important it is to keep up with the different international trade variables around the world, as well as trade restrictions and trade agreements to make sure that the products I need to produce or sell in my business are sourced correctly, and I don't have an interruption in that resource. I want to thank you for spending some time with me again as always and have a great day.

  • Trade Restrictions

    Artificially limiting the business conducted between nations.

  • Tariff

    Any imports and exports tax that is placed on a group of products.

  • Trade Agreement

    A trade treaty between nations which sets rates of tax and any limit on restrictions.

  • Quota

    Limiting the amount of a good being traded to a specific amount or value.

  • Embargo

    A trade restriction that stop trade with a specific country.

  • Sourcing

    Determining the production location of goods based on external and internal variables of the business.