BY ISHAAN SAI
The moment we come across the term “global economy“, we begin to imagine graphs, currency symbols, and ships transporting goods across oceans from one vast continent to the other. The global economy is not merely a system of economic activities conducted across nations. It is a complex amalgamation of opportunities, innovation, and dreams.
Modern economists often talk about various pillars of the global economy, such as stock markets, infrastructure, and globalization. In my view, the two fundamental pillars that sustain our world are Forex and International trade.
Forex, or foreign exchange, refers to the global exchange of currencies between countries for trading and investment purposes.
The foreign exchange market is a vast network that determines rates for every currency. Most countries have their own national currency, while some groups of countries may also have a common currency for strategic purposes.
The US Dollar is circulated by the United States of America, but it is also a globally accepted medium of foreign exchange due to its stability and strength.
International trade is the exchange of capital, goods, and services across international borders or territories. For many countries, trade is a primary source of economic power and represents a significant share of GDP.
Historically, maritime powers like Britain and France led global trade and colonized several Asian and African nations for raw material supply. Over centuries, trade has been a cause of development, conflict, colonization, and globalization.
In recent years, it has even transformed into a domestic political issue, with several leaders blaming international trade for domestic economic issues such as unemployment and slowing growth. After the 2008 global financial crisis, many developed countries in the Western world have regulated the supply of goods and even imposed tariffs on imports from other nations. China’s rise as the “factory of the world” in the last three decades has transformed the way the world looks at this pillar of global economic growth.
The World Trade Organization is an intergovernmental organization that regulates and facilitates international trade between nations. Governments use it to establish, revise, and enforce the rules that govern international trade.
Yet, the last two years have upended all processes and functions that are related to foreign exchange and global trade.
The corona virus pandemic has had a devastating impact on the global economy. Since the beginning of this crisis in January 2020, the economy has been the first to take a hit, ranging from factors like the imposition of lock downs, stock market crashes, mounting government debt, and recession across both developed and developing countries. Two years into this pandemic, the world is yet to fully realize the economic consequences of a “health” crisis.
For starters, emerging market currencies have experienced a lot of volatility. Large swings in the values of several asset classes, such as currency, bonds, equities, and credit, have been observed as a result of the increased uncertainty. It began with enormous risk-off outflows in March 2020, putting massive devaluation pressure on currencies around the world, particularly the Indian Rupee (INR). The greatest sell-off in equity markets since the GFC and record lows in long-term bond yields in several advanced countries.
When the movement of people and capital across countries has taken such a major hit, how could global trade escape the shock? Restrictions were imposed on imports and exports immediately. 2020 saw some of the largest reductions in output volumes for both industrial production and goods trade since World War II.
Yet, a silver lining was that initial expectations for a double-digit decline in world merchandise trade in 2020 did not materialize, and global trade recovered from the shock at an extraordinarily fast pace from around mid-2020.
It is pertinent to reflect on the title I chose for this article. These two foundational pillars are not convoluted merely due to the impact of the pandemic. They have always been so since the conceptualization of the Bretton Woods system in 1944, which set up global financial institutions that we see in action today, like the IMF and World Bank.
If we look at the history of Forex and trade, it has always undergone gargantuan changes. The main participants in the foreign exchange market are large international banks. Financial centers around the world, such as London and New York, serve as hubs for currency exchange.
Since currencies are always traded in pairs, the foreign exchange market does not set a currency’s absolute value but rather determines its relative value by setting the market price of one currency if paid for with another.
In developed nations, state control of foreign exchange trading ended in 1973 when complete floating and relatively free market conditions of modern times began. In India, there was extensive government control until the debt payment crisis of 1991, after which reforms were enacted. After the 2008 global financial crisis, more reforms were enacted in almost all countries.
As of 2020, JP Morgan, UBS, XTX Markets, and Deutsche Bank are the top currency traders. The top five countries by trade volume are the United States of America, China, Germany, Japan, and France.
Carrying out trade at an international level is typically a more complex process than domestic trade. The main difference is that international trade is typically more costly than domestic trade. This is due to the fact that a border typically imposes additional costs such as tariffs, time costs due to border delays, and costs associated with country differences such as language, the legal system, or culture (non-tariff barriers).
Another distinction between domestic and international trade is that production inputs like capital and labor are frequently more mobile within a country than across borders. As a result, international trade is primarily limited to the exchange of products and services, with capital, labor, and other means of production being traded at a lesser level. In recent years, immigration has also become a contentious subject.
In conclusion, we should think about ways in which this system can be made more resilient and sustainable. We should ponder the importance of global trade while protecting domestic workers. We must resolve to further strengthen the global financial system so it can be better prepared to handle forthcoming challenges.
ABOUT THE AUTHOR
Ishaan Sai is a second year student at Kirori Mal College, Delhi University. His areas of interest are diverse, ranging from politics and international relations to economics and finance. He is extremely passionate about spreading financial awareness across all sections of society. In his free time, you can find him watching an interesting documentary or playing badminton.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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