How Markets and Trade Relations Affect Business

What effect can foreign affairs have on an SME?

By Carl Stanford

How does trade policy affect my business?

The government’s trade policy can affect your business by making it easier or more difficult to trade across international borders.

Trade policy can include the imposition of import tariffs, quotas on imports and exports of certain goods, and subsidies for local producers to support them against international competition. Governments often enter into bilateral trade agreements with other countries, with the aim of reducing tariffs and barriers to business and establishing a free trade area or common market. This can be helpful to some businesses, but can also lead to increased competition from abroad.

Barriers may also be increased in the form of trade sanctions or an embargo against another country.

How will the government’s economic policy affect my business?

The government’s economic policies have a number of implications for your business. The government’s economic policy will affect your business directly via taxes and interest rates, and indirectly via public spending.

Tax laws can increase or decrease the amount of tax you have to pay, and therefore will change your net profit. Special rules or exemptions may affect certain business sectors. Tax regulations can become very complex, causing you to hire a specialist tax adviser. Higher interest rates will increase what you’ll have to pay to borrow money. Both tax and borrowing policies will also affect the income of your customers, which could have an indirect impact on your sales.

Government spending on infrastructure such as roads could help your business on a practical level, and investments in education could improve the quality of the available labour force.

How can foreign affairs affect trade abroad?

Foreign affairs encompass the different ways in which a country seeks to promote and protect its own interests internationally. It’s often directly focused on facilitating trade across international borders, including cutting import and export tariffs and promoting investment in international trade. In the case of disputes with countries, these agreements may be suspended, or in extreme cases embargoes may be imposed, which restrict trade altogether.

Foreign affairs can also target other areas of international cooperation, such as climate change, human rights and armed conflicts. However, these will almost always have consequences for international trade too, because trade agreements are so often used as a bargaining tool when securing international agreements on these issues.

How does politics change business markets?

Business markets, where businesses trade in raw materials, resources and components, can be subject to significant changes as a result of both domestic and international politics. This can be due to both the direct consequences of political decisions and the effects of uncertainty or speculation about political issues.

Changes in trade policies, for example, can alter the costs of raw materials and the import and export tariffs to which they’re subject. This will change their price and profitability on business markets, and could lead to attempts to find alternative sources or materials.

Political uncertainty can also cause instability for business markets. A major example is the impact on the price of oil due to political instability in the Middle East.

How do diplomatic events in surrounding countries affect my business?

Diplomatic events are more likely to affect your business if you trade internationally.

Diplomatic disputes can trigger the suspension of trade agreements and the imposition of trade embargoes, which could result in your exports being blocked or subject to high tariffs. Even if you don’t trade directly with the country subject to the embargo, you might be forced to ship your goods via a different route.

The suspension of trade into the UK can have an impact on all businesses, as it could make it difficult to obtain certain raw materials or wholesale products. Diplomatic events can also have an impact on the stock markets, meaning that your investments or share price could be hit.