Government Policies and International Trade

Unit III Essay

Every policy enacted by a sovereign government has an intended outcome which it may or may not achieve. Beyond that, every policy initiative has second and third order affects, sometimes acknowledged and sometimes unforeseen. In today’s global economy, even domestic policies can have spillover affects on the domestic economies and trade relationships of other nations. Examples follow of five United States government policy areas that impact not only on the domestic economy but on economies of our trading partners and on the flow of international trade.

Monetary Policy: The US dollar is the dominant currency in international trade, accounting for over 60 percent of world currency reserves (Bernanke, 2015) and showing up on one side or another of over 87% of foreign currency exchanges (Ashiru, 2017). As a result, Federal Reserve policies have an impact on the competitiveness of US exports and foreign imports, with policies that weaken or devalue the dollar against other currencies making exports more competitive. Additionally, aggressive changes, tightening or easing, in Federal Reserve policies can create significant shifts in capital flow, creating problems for financial markets in emerging market economies (Bernanke, 2025).

Tax Policy: For decades Americans have watched as trade barriers were lowered and good paying manufacturing jobs moved to other countries where companies could leverage a competitive advantage of some sort, whether that be in availability of raw materials, cheap labor or any number of other factors. Chief among those factors is US tax policy that taxes corporations at a marginal rate of over 30 percent, more than double most developed nations (Ashiru, 2017). It is no wonder that many companies choose to move operations off-shore and structure foreign investments in such a way as to avoid these taxes while preserving value for their shareholders.

Agriculture Policy: For decades, the US Department of Agriculture has used a variety of tools to artificially support prices of US farm goods. These include programs to purchase and stockpile commodities like grains, paying farmers to idle land formerly planted with certain crops or providing direct subsidies for export goods. Since 2001, many emerging market economies have followed suit. Clay (2013) argues that at their worst these policies, especially subsidies, harm producers in developing nations by unfairly inflating world commodity prices while keeping costs for US producers lower. If done properly, though, and for targeted time periods subsidies can stimulate innovation and growth (Clay, 2017).

Environmental Policies: While environmental policies do not drive overall trade patterns in a significant way, they can have tremendous impact in specific or specialized industries. In general, more restrictive policies move competitive advantage toward cleaner industries and vice versa (OECD, 2016). However, consider the impacts of US environmental policy on the oil and gas industry. By making more difficult to explore and extract fossil fuels within the US, environmental policy results in the US being a net importer of oil and gas in addition to limiting global supply further resulting in higher energy prices.

Diplomatic Policy, Sanctions: Since the end of the Cold War, economic sanctions have been an important tool in international diplomacy. Academics agree the that the effectiveness of sanctions in achieving foreign policy goals is limited. Many times, sanctions are threatened in advance giving target nations time to stockpile or find other sources of trade if there is no international unity. This can have a positive impact on trade, even if temporary. Actual imposition of sanctions can have significant negative effects on trade and on producers by eliminating or limiting markets. It can negatively affect foreign investments of firms such as was seen in South Africa in the 1990s during Apartheid (Cashen, 2017).

Factors of Production: There are three essential factors of production; labor, raw materials and capital. Each is mobile to some extend with capital being the most mobile, especially in the digital age. Factor mobility stimulates trade and keeps consumer prices lower. Migrant farm labor in North America, for instance, provides a ready source of inexpensive labor for producers throughout the continent, keeping producers cost and I turn consumer costs lower. Likewise, absent significant barriers to trade and investment, the mobility of capital and raw materials will move productions to more advantageous countries stimulating trade and resulting in lower prices for consumer goods (Mundell, 1968). In the absence of distortions such as taxes and tariffs, mobility