For many investors in the United States, the global economy can sound like something far off that doesn’t affect day-to-day concerns. But the truth is that what happens in Germany, China, or even Vietnam can and does have an effect on not only the value of the investments in your portfolio, but also the goods and services you use every day. In today’s global economy, issues like trade, international disputes, and the ins and outs of foreign companies affect everyone.
This means that it’s important for all of us to have at least a basic understanding of global trade and economic issues. Let’s look at some terms that we hear frequently on the financial news and get a quick definition of each.
- Global trade. This refers to the flow of goods, services, and money (capital) between different nations.
- Trade disputes. These happen when two or more countries (for example, the U.S. and China currently) can’t agree on how the countries should conduct commerce with each other. Recently, the U.S. has accused China of unfair trade practices and is using tariffs (see below) and other means to try to force China to change these practices. China has responded by retaliating with tariffs of its own and other measures.
- Dumping. This unfair trade practice occurs when a country sells its products in another market at a price less than it is sold for at home or a price below the actual cost of manufacture.
- Tariff. A tariff is a tax imposed by a country on goods or services coming from another country. Usually, this happens because the importing country believes the exporting country is either pricing goods unfairly or providing excessive government support to its producers and exporters. The tariff is supposed to “even the playing field” by making the imported goods more expensive.
- Currency manipulation. This happens when a country controls the value of its currency to create pricing advantages for its exporters. According to the U.S. Treasury, currency manipulation occurs when the accused nation has a current account surplus of more than 3% of gross domestic product (GDP), when that nation has a significant bilateral trade surplus with the U.S. (they are selling more to us than we are selling to them), or when the nation persistently intervenes unilaterally in the currency markets (buying or selling its own currency to affect the relative value).
Each of these concepts has real-world implications for international trade. For investors, the impact becomes clear when you remember that foreign financial markets and the companies that trade there (including corporations like Nokia, Alibaba, Deutsche Bank, Royal Dutch Shell, Toyota, and many others) contribute trillions of dollars to the global economy, in addition to creating products and services that we use every day. In fact, global financial markets make up about 50% of the world’s total market capitalization.
If you are wondering about how global trade could affect your investments, or if you would like information about how to take advantage of investing in global markets, I would appreciate the opportunity to answer your questions and help you find the answers you need.
Stay Diversified, Stay YOUR Course!
