Factors Affecting International Trade Flows
Since international trade can significantly affect a country’s economy, it is important to
identify and monitor the factors that influence it. The following factors are the most influential:
1. Cost of labor
The cost of labor varies substantially among countries. Firms in countries where labor costs are
low commonly have an advantage when competing globally, especially in labor intensive
industries.
2. Inflation
Current account decreases if inflation increases relative to trade partners.
3. National income
Current account decreases if national income increases relative to other countries.
4. Credit conditions
When credit conditions become more restrictive, MNCs may reduce their corporate spending and
reduce their demand for imported supplies.
5. Government policies
Impact of Government Policies:
• Restrictions on Imports: Taxes (tariffs) on imported goods increase prices and limit
consumption. Quotas limit the volume of imports.
• Subsidies for Exporters: Government subsidies help firms produce at a lower cost than their
global competitors.
• Restrictions on Piracy: A government can affect international trade flows by its lack of
restrictions on piracy.
• Environmental Restrictions: Environmental restrictions impose higher costs on local firms,
placing them at a global disadvantage compared to firms in other countries that are not
subject to the same restrictions
• Labor Laws: Countries with more restrictive laws will incur higher expenses for labor, other
factors being equal.
• Business Laws: Firms in countries with more restrictive bribery laws may not be able to
compete globally in some situations.
• Tax Breaks: Though not necessarily a subsidy, still a form of government financial support that
might benefit many firms that export products.
• Country Trade Requirements: Requiring various forms or obtaining licenses before countries
can export to the country (Bureaucracy) is a strong trade barrier.
Since international trade can significantly affect a country’s economy, it is important to
identify and monitor the factors that influence it. The following factors are the most influential:
1. Cost of labor
The cost of labor varies substantially among countries. Firms in countries where labor costs are
low commonly have an advantage when competing globally, especially in labor intensive
industries.
2. Inflation
Current account decreases if inflation increases relative to trade partners.
3. National income
Current account decreases if national income increases relative to other countries.
4. Credit conditions
When credit conditions become more restrictive, MNCs may reduce their corporate spending and
reduce their demand for imported supplies.
5. Government policies
Impact of Government Policies:
• Restrictions on Imports: Taxes (tariffs) on imported goods increase prices and limit
consumption. Quotas limit the volume of imports.
• Subsidies for Exporters: Government subsidies help firms produce at a lower cost than their
global competitors.
• Restrictions on Piracy: A government can affect international trade flows by its lack of
restrictions on piracy.
• Environmental Restrictions: Environmental restrictions impose higher costs on local firms,
placing them at a global disadvantage compared to firms in other countries that are not
subject to the same restrictions
• Labor Laws: Countries with more restrictive laws will incur higher expenses for labor, other
factors being equal.
• Business Laws: Firms in countries with more restrictive bribery laws may not be able to
compete globally in some situations.
• Tax Breaks: Though not necessarily a subsidy, still a form of government financial support that
might benefit many firms that export products.
• Country Trade Requirements: Requiring various forms or obtaining licenses before countries
can export to the country (Bureaucracy) is a strong trade barrier.
