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A declining dollar has various effects on the international trade depending on the factors one is looking at. For along time it has continued exerting a very important influence on international trade. Market stability in the international trade depends to a larger extent on the stability of the exchange rates. Thus it can be argued that volatility in the dollar rates will have an adverse effect on the international trade. The value of dollar has been declining constantly over the last decade. In this paper I seek to examine the impact of the declining dollar on the international trade.
Effects on the business financial performance
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A decline on the exchange rate of the dollar has an adverse effect on the business profitability. This is especially the case with foreign based businesses where they find that their selling price for the dollar results to small amounts of foreign currency (Staff, 2008 Para 4). To counter this effect they are forced either to take the lower profits which could have a negative effect on the stock prices or opt to adjust the dollar prices upwards which could reduce their sales. In addition, prices in the foreign countries move along with their local currencies and so a decline in dollar rate has an effect of making foreign purchase more expensive.
Effects on country’s exports
On the US side a falling dollar helps boost the volume of sales of the domestic goods abroad. The falling dollar becomes more affordable hence more acceptable to the exporters who accept to exchange the foreign exchange for their export commodity. This has the ultimate effect of increasing the volume of sales in the international market. To increase their profits, exporters result to maintaining their prices constant in terms of foreign currency. Owing to the fact that international trade is usually biased in favor of imports, the cost on import dependant businesses outweighs the accruing benefits.
There is evidence to the effect that the international trade is not demand elastic to the decline in dollar rates. Decline in dollar increases trade imbalances. It has been observed that even with high rates of inflation, foreign exporters continues to export goods to the United States indicate willingness to forgo increases in prices and undergo the decrease in profitability. These trends go against the principles which dictate that import and trade deficits will fall with fall in dollar.
Effect on the purchasing power
The decline in dollar rates leads to the decline in the purchasing power of domestic buyers in the international trade. This is because the price decline causes a decrease in the competitiveness of the currency which makes commodities to be relatively expensive compared to the previous period. However, with the declining dollar, international stocks appreciate in value bringing better returns to investors (Motley Fool Staff, 2008 Para 12).
The declining dollar has increased the trade deficits in the United States. For example, in 2008 the value of trade deficit in United States amounted to $695.9 billion. This was due to increased imports relative to the volume of exports. This was mainly contributed by the rise in petroleum imports to the United States. During the same year petroleum imports rose to $453 billion as compared to imports which recorded $67 billion. These imports were 37% higher as compared to the $331 billon that was imported in 2007 which was a marked increase. Consumer products also registered the same trend with $481 billion imports as compared to exports of $162 billion (Amadeo, 2009, Para 3).
An increase in trade deficit could pose potential damage to the domestic economy. This is due to the fact that the country’s imports are mainly funded by debts. This is because the country can result to buying more because it is being lend the money by the exporting country. Excessive deficit spending can be detrimental to a country’s economy.
To illustrate the effect of declining dollar on the trade deficit, for the last 6 years, the dollar has declined sharply against the Euro. This has made the US exports 40% cheaper in the European market. On the positive note, this has made the US companies more competitive leading to an increase in export volumes. As a result in 2008 export volumes have increased by 12% from $1.6 trillion to $1 trillion.
The resultant increase in trade deficit as a result of the decline in dollar value has an adverse effect on the competitiveness of the country’s economy. Continuous importation of goods reduces the country’s ability to produce the same goods. Companies also become incompetent relative to the exporting country’s companies. For example, United States ability to produce quality leather and textile products has been declining due to dependence on the imports from other countries especially China.
Stability of the economy
The declining dollar and the subsequent relative increase in the price of imports have a negative impact on the economy. The domestic companies are unable to compete effectively with imports from abroad. For example in Chile, Ceramicas Cordillera Company was forced to close down following poor performance in sales. This led to a rampant loss in job opportunities totaling to 517 sinking the country into $30 million debt. Several other companies are said to be going through tough times leading to threats of bankruptcies and collapse (Wharton University, n.d., Para 1). Import during such times fair more competitively than local products. For example, United States as a result of decline in dollar rates has been importing heavily from china and India while its exports continue on a downward trend which has sunk the country into a difficult position (Sud, 2009, Para 1). This market imbalance in trade has worsened the domestic currency in the recent times.
Effect on small businesses
Small businesses are the most affected by volatility in dollar values. Larger companies in the export market are more likely to shield themselves from the effects of fluctuations in dollar prices in the international trade. Small companies have limited potential to absorb losses as a result of foreign exchange rates. This increases their risk of winding up businesses to competition from the imports.
The decline in US dollar rates has an adverse effect on the international trade. The effect is manifested in trade deficits, competitiveness of the economy, and the low purchasing power of the local currency among other areas. The decline further caused an escalation of trade imbalances which further complicates the position of the economy making it less competitive in the international market. Small businesses are affected negatively as they are unable to cope efficiently with the effect of declining dollar. However, returns in the international stock market improve leading to better returns.