Greetings, from the Desk of The Digital Diplomat. I have an exciting topic to discuss with you today and I hope you’re ready.
Today we will be discussing free trade. If you want to sell your products and services around the world, you must know how other countries operate. Do not try to sell your products and services in other countries if you are ignorant of important terminologies and how free trade works. Luckily, The Digital Diplomat, W.E. DaCruz, is here to give you a play by play, so let’s get started.
Free trade is simply a system where companies can trade goods and services without interference from the government. Under a free trade system, prices of goods and services are determined by supply and demand. Supply is the availability of a product or service that people want or need to buy, and demand is the quantity of people who want this product or service but cannot afford to buy it.
So how does this relate to imports and exports?
Imports are goods produced elsewhere and brought into a country for sale. Exports are goods produced in one’s own country and shipped out to other countries for sale elsewhere. In this way, one country’s imports become another country’s exports, and vice versa. If a country has more of something than it needs, it might be a good idea to export that good and sell it elsewhere. Likewise, if a country needs something it does not have enough of, or cannot make, then perhaps that good should be imported. Thus, countries are able to meet their supply and demand through trade.
On the flip side, a country that exports more than it imports has a trade surplus, meaning the demand is high in other countries – which is good. A country that imports more than it exports has a trade deficit, or an oversupply. Trade deficits are bad because that means that a country has more imports in its inventory than it can sell to its people.
Imports don’t make you money, but exporting does. That’s why at the VGC group, we really support the exporting of products and services. We understand that 1. Exporting helps to increase the Gross Domestic Product (GDP) of the country in which we are exporting from, and 2. Our goal is to drive economic development and help facilitate the growth of an economy. And we believe in doing it through the exporting.
The GDP is the total value of goods and services produced within a country during a certain amount of time, which is usually measured each year. Countries measure the strength and health of their economy via the balance between supply and demand. A country’s own unique resources determine this delicate balance. For instance, the United States and Argentina have a lot of farmland, and as a result, can produce a lot of corn. On the other side of the globe, Japan and South Korea have a limited amount of farmland, which means that the United States and Argentina can export corn to Japan and South Korea, making corn an import for these countries in the Far East. This is why it is essential to understand the make-up of a country and its available natural resources because it can help you to better identify what and where to sell your product and service.
We call this relationship – meaning how the imports and exports affect countries’ GDPs – the balance of trade. How a country allows you to export your goods into their country as an import for them is where marketing, and possibly free trade, comes in handy.
So what does this have to do with free trade?
Basically, if a country’s government decides to forego free trade, this means that they are putting a tax, or a tariff, on imported goods, which increases a country’s trade deficit. A country that has a healthy economy should not be spending more than it is selling, and taxes make you – the entrepreneur – increase the price of your products, possibly past the demand it is valued at if you don’t have your marketing strategy in order. This limits the demand for your product and services in other countries and can prevent a trade surplus.
The reason countries do this is because they want its countrymen to buy homegrown products. Placing a tax on items that are imported encourages consumers to buy items from their own country. Oftentimes, even here in the U.S., you’ll hear “Buy Made in the USA” and the government’s leaders are pushing for that because they understand that the purchasing of more in-house products – “Made in USA” products – will help grow the economy and the GDP.
The policy of a country interfering with free trade by placing a tax on imported goods in this is called protectionism. There are different categories within each tariff, which are called the HS codes. The HS codes regulate what category or what bracket of tariff you’re in, thus determining the tax of your product in addition to the original price that you plan to market to the consumer when it’s imported.
That’s why it is important to understand this concept of free trade versus protectionism. If you’re selling into other countries, then you must be aware of your tax requirement, and therefore plan for the supply while also market your product as possessing a higher demand to make sure you’re turning a profit.
Again, we teach all this at the VGC University. We teach it in a way that helps you to truly understand how to navigate this terrain of international trade, as well as selling your products and services around the world digitally. So if you’re looking to really just get your hands wet, I encourage you to visit us at VGC University. We’re teaching it weekly and we can’t wait to see you in class.