Have you ever wondered why some nations trade all of the time, while other nations rarely trade with each other? International trade can be very complicated. Many factors affect import and export trade between nations. Some of these factors include exchange rate fluctuation, customs regulations, the use of trade barriers, form of government, and the current political climate. The more stable these factors are, the easier trade between nations is to conduct. The following is a description of an international commercial transaction between the United States and Japan. This transaction did not go smoothly. It is an example of how even a small change in any of the factors of international trade can lead to an economic disaster.

CS Question 1: What are some of the factors that affect international trade?

Recently a shipment of tomatoes was delivered to a dock in Osaka, Japan. The tomatoes were grown and shipped by a cooperative in California. A Japanese grocery retailer had ordered the tomatoes. The retailer intended to sell them in the local supermarkets. Before the tomatoes were shipped, the following actions had taken place:

• An agreement was made between the two parties (the Japanese grocery retailer and the California cooperative).
• Both parties had signed the necessary documents.
• International tax attorneys representing both parties had reviewed and approved the deal.

However, when the tomato shipment arrived at the dock, a local customs inspector held it up.

CS Question #2: What are some possible reasons that the customs inspector would delay the shipment's delivery to the grocery retailer?

The customs inspector determined that the agreement signed by the two parties conflicted with an agreement between the United States and Japan. These two nations had agreed to limit the shipment of fruits to Japan in order to protect native Japanese fruit growers. Any shipments of fruit from the U.S. needed special permission and documentation before it could be shipped to Japan. Many people believe that a tomato is a vegetable, not a fruit. Because of this mistake, the international trade agreement had not been considered before the shipment. Without the necessary documents, the customs inspector could not allow the shipment to leave the dock. After a few days, the tomatoes began to rot.

CS Question #3: Who do you think was responsible for the mistake and the loss that occurred?

International trade agreements and customs regulations are not the only factors that affect trade between nations. Often exchange rate fluctuation can determine the difference between loss and profit. Since exchange rates are constantly fluctuating, a contracted sales price that was agreed upon last month might incur a loss when the shipment arrives this month.

For example, suppose the Japanese grocery retailer and the California cooperative agreed upon the price of 2,000 JPY (Japanese yen) per crate of tomatoes. They both agreed that the cooperative would be paid when the tomatoes arrived in Japan. This agreement occurred three weeks before the shipment. At that time, the exchange rate was 100 JPY for 1 USD (U.S. dollar). This translated into a sales price of 20 USD per crate. (2,000 JPY/100 JPY = 20 USD)

What would happen if the value of the Japanese yen dramatically decreased compared to the value of the U.S. dollar after the contract had been signed? Would it be to the advantage of the farmers in California or to the grocery stores in Japan? The decrease in the value of the yen would hurt the California farmers. The value of yen they would be receiving for the tomatoes would be worth less than they assumed it would be.

Let's look at a math example for clarification. If the yen's value decreases to the dollar, that means it costs more yen to equal 1 U.S. dollar. Suppose the yen was devalued to 200 JPY for 1USD. Remember that the agreement was for 2,000 JPY per crate. After the Japanese grocery retailer pays the cooperative, the co-op must convert the yen into U.S. dollars. At the new conversion rate, the co-op receives only 10 USD per crate. (2,000 JPY/200 JPY = 10 USD)

CS Question #4: What type of currency fluctuation would be to the advantage of the California cooperative?

Further Thought:

1. How could the California cooperative and the Japanese grocery retailer prevent exchange rate fluctuations from interfering with a contract sales price?
2. What is an example of two nations having difficulty trading with each other?
3. In your opinion, what type of political climate prevents one nation from trading with another nation?