Trade 101

With tariff and trade talk at the front of the news, let’s take a minute to refamiliarize yourself with your high school economics coursework. This quick three-minute Trade 101 may help you avoid embarrassment at your next social gathering or small talk interaction. Best of luck!

Trade: Swapping of goods or services.

Global Trade: Swapping of goods or services across domestic borders.

Exports: Domestic country “selling” goods or services to a foreign country.

Imports: Foreign country “buying” goods or services from Domestic country.

Let’s start with supply (what you have) and demand (what you want). If a country’s supply of a certain good is larger than the domestic demand, exporting can open access to additional buyers of the excess supply. If a larger demand exists than domestic supply, a country may import goods or services to meet the demand. Limited resources and competition may cause a country to specialize in certain industries, creating the need to import other goods and export their own goods.

Pricing and competition also influence what goods are exported to and imported from another country. If a foreign country has the same good as a domestic country but for a cheaper price, consumers may buy foreign products over domestic products. To try to support Domestic production, industries, and workers from global competition, governments can implement a variety of restrictive trade practices. One common type of trade restriction is through a Tariff Tax on goods or services being imported into a county. The tariff doesn’t ban global imports but raises foreign sellers’ costs to sell to the taxing country. This levels the playing field for domestic prices and slows the number of imports.

Unfortunately, not everyone can win. Global trade creates both winners and losers impacting industries, workers, and consumers differently. The price of products is a factor of supply and demand. Trading restrictions can influence winners and losers from trade.

Last bit, decoding the acronyms. The World Trade Organization (WTO), formerly the General Agreement on Tariffs and Trade (GATT), is made of member countries, including the U.S., who agree to abide by rules set by the organization. You can think of WTO as a trade referee for global trading for those who are in the club. Many countries may also be in partnerships with “closer” countries that may share boundaries to benefit them mutually. The U.S. is a participant in the United States-Mexico-Canada Agreement (USMCA) along with Canada and Mexico, which was formerly the North American Free Trade Agreement (NAFTA).

Refresh your knowledge of trade. Understand the inner workings of international trade and how it affects the many aspects of our economy. I hope this gives you a refresher for your next conversation or headline reading.

 

Beth Koonce is a CFP® professional and a lead advisor at Keller Wealth Advisors.

Published in the Victoria Advocate.