The 8 Biggest Factors Affecting International Trade

What do trade policies, factor endowments and demand have in common? They're all factors affecting international trade.

One of the biggest and most exciting hallmarks of business growth is when your business gets to a place where it can expand into foreign markets. This doesn’t just mean making deals with international businesses as customers, but also looking to them to supply our inventory too.

Technology has made it easier to connect to businesses all over the world, but doing business internationally comes with risks and is influenced by a number of factors. But which factors have the biggest impact on foreign trade? Let’s look at 8 of the most influential.

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1: Factor endowments

Factor endowments include things like capital, labor, and land. Capital resources encompass production capacity and infrastructure, land resources refer to natural resources like oil or timber, and labor illustrates what the nation’s workforce looks like.

The Heckscher-Ohlin international trade focuses on a country’s capital, labor, and land resources to make sense of trade patterns. So a country that has a large unskilled labor force manufactures goods that necessitates low-cost labor, but a country that has lots of natural resources is more likely to export these resources.

How productive these factors are is also important. For instance, two nations may have the same amount of land and labor endowments, but one country might have a more skilled workforce and very productive resources, while the second country may have a largely unskilled workforce and rather low-productivity resources.

The unskilled labor force will produce relatively less per person than the skilled force, and this will impact the areas in which both labor forces can have a comparative advantage. The nation with skilled labor may manufacture complicated technology, but the unskilled workforce may focus on basic manufacturing. This also applies to efficiently using natural resources.

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2: Demand

Demand for certain goods or services is a vital part of international trade. For instance, the demand for oil affects its price, and the trade balance of countries that import oil or export oil. So if the oil prices fall for a small oil importer, then its overall imports may decline too. Meanwhile, the oil-exporting company may experience a decrease in its exports.

Depending on how crucial a certain good is for a nation, these shifts in demand can affect the overall BOT.

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3: Trade policies

Barriers to trade also influence a country’s balance of imports and exports. Restrictive policies on imports, or policies that subsidizes exports can have an effect on the prices of goods and services, and how attractive it is to export or import these goods.

For instance, agricultural subsidies may lower farming costs, which encourages export production. Meanwhile, quotas for imports increase their price which lowers the demand.

Countries that use high import tariffs and duties to restrict trade might have larger trade deficits when compared to countries that have more relaxed trade policies. This is due to the fact that restrictions on free trade may exclude them from export markets.

However, there are also non-tariffs obstacles to trade. For instance, scarce infrastructure can make getting goods to market more expensive. In turn, this makes these products more expensive and makes a country less competitive on the global trade and reduces its exports.

Good investment can help to break down these barriers. Investments in infrastructure, for example, can boost a country’s capital base and make getting goods to market cheaper.

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4: Trade liberalization

One of the biggest drivers of international trade has been making barriers to trading goods and services more liberal. The biggest reason for this is normally correlated to market access, as more governments implement each other’s liberalization policies, allowing countries to make use of market access provided for its export industries.

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5: Different costs between countries

Development and demographics vary between countries, and the production costs of goods and services are no different. These differences also boost international trade and investment.

These different production costs encourage business to outsource manufacturing work to different economies, where goods can be made at a lower cost.

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6: Exchange rates

A domestic currency that has experienced significant appreciation boosts the cost of exported goods and can price exporters out of global markets, which may add pressure to a country’s trade balance.

Foreign currency reserves are also a subcategory of this factor. To really be competitive in global markets, a country needs to have access to imported technology that boosts its productivity, which might be hard if foreign currency reserves are lacking.

It’s also important to consider inflation too. If inflation is massive in a country, the cost to produce a unit of a product may be higher than what it costs in a country with low inflation. This would have an effect on exports and subsequently its trade balance.

Of course, a country’s exchange rates and inflation rates can be affected by political movements, and if you have custom from an international business or rely on an international business for supplies, you may be concerned about your cash flow if their economy experiences a crash. What impact will it have on their business, and in turn yours?

This is where Creditsafe’s international business credit reports can help. Our credit reports provide you with accurate and reliable information on 365 million private and public companies all over the world. You can assess how creditworthy an international business is, and assess the likelihood of a company becoming insolvent in the next 12 months. Plus, as international credit reports have different scoring models, we provide a standardized international credit score to make understanding a company’s creditworthiness easier.

Over 200,000 users around the world use our international business credit reports to make 450,000 confident credit decisions every day.

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7: Technology advancements

Technological advancements in the last few years have made it easier to connect with companies all over the world and do business with them, which helps to drive and facilitate international trade.

More and more businesses have made themselves more competitive on the global stage with enhanced process technology. The development of IT (Information Technology) has allowed countries all over the world to connect to each other and made it so different companies can relocate abroad with little difficulty.

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8: Increasing competition

Foreign trade naturally brings with it more competition, and so businesses have needed to up their game. Businesses are now opting to source intermediate goods and raw materials from lower-cost countries and establish their units abroad, which reduces operational costs and lowers financial risks.

As more and more companies adopt cost minimization and risk reduction strategies to thrive in an increasingly competitive business environment, the internationalization process continues to rapidly grow.

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The 8 Biggest Factors Affecting International Trade

What do trade policies, factor endowments and demand have in common? They're all factors affecting international trade.

1: Factor endowments

2: Demand

3: Trade policies

4: Trade liberalization

5: Different costs between countries

6: Exchange rates

7: Technology advancements

8: Increasing competition

Get your free trial of Creditsafe

See how Creditsafe can help your business expand overseas whilst managing your exposure to credit risk

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