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Trade agreements and protectionist policies implemented by nations to mitigate FX risk.

Trade Agreements and Cross Currency TradeARTICLE

By Gianvito Grieco

Doing business internationally raises a unique set of challenges for businesses. Expanding internationally can be an exciting opportunity for growth, but it certainly isn’t easy. Political and regulatory uncertainty, tougher competition, and currency volatility are among the most frequently cited risks concerning businesses today.1 As the world continues to grow increasingly globalized, the days when cultural and language barriers were the most significant concerns to doing business internationally are long gone.

Trade deals are among the most powerful tools that a government possesses to stimulate commerce. They are also a lightning rod for criticism. The heated debate in the United States regarding the Trans-Pacific Partnership is just the most recent example. Jeffrey J. Schott, a former U.S. Treasury official, said it best: “To say that trade agreements are good for America doesn’t mean that they benefit all Americans.”2

Not all nations and its citizens are enthusiastic about entering into a trade deal. In order to understand why a nation may opt out of joining a trade agreement, it’s important to briefly understand why nations seek to join them in the first place.

Why Seek a Trade Agreement?

Some nations, especially smaller ones, seek to join trade agreements as a way of obtaining “more security for their access to larger country markets.”3 Eliminating tariffs, quotas, and other trade restrictions on products from member nations can provide this access. Governments can allow for foreign firms to sell their products more competitively, ultimately driving costs down for consumers, by eliminating the special taxes applied to imported goods. Businesses also utilize currency transfer services to mitigate foreign exchange risk.

Trade deals can also reduce a wide range of other economic obstacles such as the compliance costs of complying with differing laws and regulations, and can give corporations more confidence that their intellectual property will be protected.4 These are some of the ways in which global economies benefit from trade agreements

Why Opt Out of a Trade Agreement?

Historically, several points have consistently been made against trade agreements. In the United States, discussions about reconsidering the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) have come from both major political parties in the U.S.

A nation may want to return to higher tariffs or taxing exports and imports as a way of protecting domestic companies and boosting domestic manufacturing. For example, the previous administration in Argentina implemented stricter import regulations in order to raise revenue and deter commodity exports in favor of increased domestic consumption.5 The government intended to encourage firms to bring production and jobs to Argentina. Marcelo Elizondo, head of the UCES Business School in Buenos Aires stated that the policy was a message to businesses that importing “will be expensive and complicated, and you’re better off producing here.”

Protectionist policies frequently come with currency controls. Argentina, for example, imposed restrictions on the purchase of foreign currency for its citizens, and imposed a 15 percent tax on credit card use in foreign countries.6 These policies were set in place to encourage citizens to spend at home.

The Takeaway

History has shown how far nations are willing to go to protect and grow their economies. The debate about how exactly trade agreements can work as a vehicle to growth is as strong as ever.

Gianvito Grieco

The Author

Gianvito Grieco

Gianvito Grieco has served in a variety of roles in investment banking, financial services, and law. Gianvito holds a Bachelor of Science in Finance from the University of Florida, and a Juris Doctor

Sources

1. 2016 AFP Risk Survey, Association for Financial Professionals, https://www.mmc.com/content/dam/mmc-web/Global-Risk-Center/Files/2016RiskSurveyReport-FINAL.pdf.
2. Trade Agreements Benefit Consumers and Producers, Jeffrey J. Schott, http://www.nytimes.com/roomfordebate/2016/03/17/are-trade-agreements-good-for-americans.
3. The Regionalization of the World Economy, Jeffrey A. Frankel, https://books.google.com/books?id=RxvLPTCDqVoC&pg=PA63&dq=Regional+trade+agreement#v=onepage&q=Regional%20trade%20agreement&f=false
4. What Do Trade Agreements Do?, BBC, http://www.bbc.com/news/business-35473279.
5. Keep Out, The Economist, http://www.economist.com/node/21530136.
6. The Risks and Rewards of Argentina’s Growing Protectionism, University of Pennsylvania Knowledge @ Wharton, http://knowledge.wharton.upenn.edu/article/the-risks-and-rewards-of-argentinas-growing-protectionism/.

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