Introduction
International trade is increasingly making global financing system a key aspect in the business world. In addition, the involvement of diverse economic systems in the trade in makes exchange rate fluctuation a great concern due to its effect on the value of goods and services as they cross the borders. Therefore, government’s measures that seek to stabilize the exchange rate systems in a bid to harmonize their operations with the global finance operations are of great concern to the global business stakeholders. In that respect, this analysis seeks to demonstrate the operation of tariff and non tariff barriers in their application in the global financing and exchange rate systems. To achieve the objective, the analysis begins with an overview of global financing and exchange rate mechanisms explaining the relation between the two concepts. Further the analysis provides an overview of tariffs and non tariff barriers as well as provides an explanation of their application in global financing and exchange rate mechanisms. Finally, the analysis explains the barriers’ importance in management of the risks involved with global financing and exchange rate mechanisms.
Body
Global financing and exchange rate mechanisms overview
Global financing system is becoming crucial with the continued growth in international trade with the growing linkage between economies as different stakeholders from different countries engage in trades that involve goods and services’ movements across the borders. In that respect, there are inherent risks involved due to the different levels of development as well as economic conditions in different countries which translate to currency value differences hence exchange rate fluctuations. (Szyszka, 2011) In that consideration, the global market is marked by diverse exchange rate mechanisms that are suited to economies’ operations as well as governments’ operations. Exchange rate mechanisms are the methods applied in determining a country’s currency value in respect to other countries’ currencies. Some of the mechanisms are applied in a bid to enhance stability in an economy while others are left subject to the market operations. (Copeland, 2008) In that respect, the two prominent mechanisms applied are the fixed exchange rate regime and the floating exchange rate regime. For fixed exchange rate regime, the value of a country’s currency in respect to the foreign currency is determined by respective government’s authority and fixed at a certain rate that is only changed upon authorization rather than being subject to the market forces. On the other hand, the floating exchange rate regime is the one in which the value of the domestic currency is determined by the market forces of currency demand and supply. In that respect, exchange rate plays a critical role in global financing and has a significant effect on the financing operations with its ability to determine the value of the finances involved in the process of cross border business. (Barron & Lynch, 1989)
Further, the consideration that global financing is significantly affected by exchange rate fluctuations which are in turn determined by market forces of demand and supply of foreign and domestic currency; factors which are highly determined by international trade and business operations; government regulations on the international trade and business operations that include tariff and non tariff barriers becomes a key topic in global financing whose operations and importance in risks management are discussed below. (Bernanke & Frank, 2001)
Tariffs and non tariffs barriers
Overview
Tariffs and non tariff barriers are regulatory tools applied by government regimes in a bid to control international trade flow hence playing the role of increasing trade when needed, reducing trade flow when necessary, protecting local industries, stabilizing the exchange rate as well as raising government revenue. (Barron & Lynch, 1989)
Tariff barriers
Tariffs are taxes on import and are collected by the government in a bid to raise the price of the concerned goods. They are also referred to as import duties and usually aimed at limiting importation of certain goods into a market as well as for revenue raising purposes. Tariffs are also applied by governments with an objective of protecting domestic or local producers from the foreign producers who may be capable of selling the goods in the country at a lower price than the local producers hence destabilizing the local industry. Tariffs raise the commodities price hence decreasing their demand in the local market and eventually reducing the supply of the foreign goods. Further, tariffs can be classified in terms of their levy nature or purpose with the nature of levy having ad valorem tariff that is levied on the basis of a good’s value rather than on quantity and size. The other type is the specific tariff that is in form of a set amount of levy on a certain quantity irrespective of a goods value. (Barron & Lynch, 1989)
On the other hand, the purpose of tariff classification has three types including the scientific tariff, peril point tariff and retaliatory tariff. Scientific tariff is levied on the import goods to equalize their prices with the price of local goods in a bid to protect local producers from foreign competition. Point of peril tariff is levied to save a local industry that is likely to perish. This involves levying a tariff on imported goods that makes them expensive relative to the local producer goods. Finally, a retaliatory tariff is levied as a response to a tariff that has been levied by a country’s trading partner. (Bernanke & Frank, 2001)
Non tariff barriers
Non tariff barriers are the regulatory tools applied by the government in terms of the quality, content as well as other conditions of imported goods. Key non tariff barriers include quotas and standards while others like permits, customs procedures and shipping regulations are also applied as barriers to trade. A quota is a quantity limit that is imposed on importation of a certain commodity hence the ability to control the supply of the good to the local market. On the other hand, the standards and permits tend to place hurdles to be cleared before goods can be imported into the market hence reducing the amount of the good that is imported. The key purpose of non tariff barriers is to protect local industries as well as control trade flow between trading partners. In that respect, the barriers have the capacity to control foreign currency supply and demand hence manage the finance system between the global trade partners. (Barron & Lynch, 1989)
Application in Global financing operations
Global financing involves cross border transactions that are subject to the different currencies fluctuations depending on the respective economic conditions. In that respect, one of the great determiners of economic conditions like the exchange rate is the international trade and business transactions that determines the flow of goods and services across the markets. In that respect, the control of trade flow is key in achieving stability in global financing. (Szyszka, 2011) On the other hand, the trade flow between trading partners and determines an economies status in the global fiancé system hence the ability to access government financing from key finance institutions like the IMF ns the World bank where funding access is dependent on a country’s balance of trade and trading capacity. Therefore, tariff and non-tariff barriers as means of trade flow control are applied by governments as means of achieving the desired status in order to access financing. On the other hand, the barriers ability to determine exchange rate have a great significance in stabilizing an economy’s finance system hence the ability of the local businesses and industries to participate in international trade and finance transactions. (Copeland, 2008)
Importance in risks management
Although the increasing linkage between different markets is usually aimed an providing stability, global financial markets have been experiencing rapid growth and evolution that presents risks to the international trade participants, finance systems, institutions as well as to the involved economies. (Szyszka, 2011) In addition, there is a growing geographic diversification by businesses and international trade partners and the corresponding bilateral holding of assets increases the risk to the businesses with exchange rate fluctuations affecting their finance systems and cross market operations. (Copeland, 2008)
In respect to the effect on the economies; the increasing linkages across the global market through international trade and cross border investments raises the contagion spillover risks across the countries involved. Therefore, countries apply the tariff and non tariff barriers in a bid to control the trade and investments flow hence managing the risks involved. (Bernanke & Frank, 2001) In that consideration, tariffs and non tariff barriers ability to control trade flow between trading partners and the global market is a great tool that is used to control exchange rate fluctuation by determining demand and supply of foreign currencies. Therefore, the application of the barriers in stabilizing exchange rate mostly on the floating regime economies where the determined flow of foreign goods determines foreign currency demand and supply hence stabilizing the finance system between the trading partners creates an ability to manage the global financing risks. (Copeland, 2008)
Conclusion
The analysis has demonstrated the relation between the global financing and exchange rate mechanisms citing the exchanger rate systems applied in different economies as a key factor that affects the financing system. Further, the analysis has clearly demonstrated that various types of tariff and non tariff barriers are crucial tools that governments apply in seeking to stabilize an economic finance system by controlling international trade hence ensuring stability by managing exchange rate fluctuations. It has also been demonstrated that the barriers are used as key tools in managing the risks that are involved in international trade and exchange rate as well as global financing by controlling the trade flow between different economies as deemed necessary.
References
Barron, G. & Lynch, G. (1989). Economics. London: Richard D. Irwin Inc.
Bernanke, B. &n Frank, R. (2001). Principles of Microeconomics. New York: McGraw-
Hill/Irwin.
Copeland, L. (2008). (5th Ed.). Exchange rate and International Finance. New York: Pearson
Education. ISBN10: 0273710273.
Szyszka, A. (2011). 2010 Global Finance Crisis. Global Finance Journal. 22(3), pp. 191-248.
