Over the course of the last two centuries, there’s absolutely no doubt that global trade has grown exponentially amid a complete and comprehensive transformation.
Make no mistake; this has been inspired by two waves of globalisation, which have gradually minimised the impact of protectionism and triggered the growth of vast trading blocks across the globe. The first of this came in the 19th century, and came to an end with the advent of the Second World War.
However, the second wave commenced at the end of this war in 1944, and arguably continues to this day. We’ll explore this further below, while asking how currency fluctuations also impact on global trade.
The Bretton Woods Agreement – Interlinking Trade and Currency
The new wave of globalization and international trade commenced with the so-called Bretton Woods agreement in 1944, with this established to regulate currency fluctuations and restore international monetary order once World War II was over.
At the heart of this agreement was development of an adjustable pegged foreign exchange market rate system, which essentially fixed international currency values to gold.
This meant that each country had to have a consistent monetary policy that kept all major exchange rates within a predetermined limit, which usually mirrored the real-time value of gold (give or take a single percentage point).
Not only this, but the agreement also required members to make their currencies convertible for trade-related and current account transactions that crossed international borders. Of course, this didn’t actually happen until 1958, but this made it far easier and more affordable to conduct international trade on a large scale.
While this agreement was incredibly important and laid the foundation for the type of global trade that we see today, however, it had been abandoned by March 1973.
Firstly, the US decided to suspend gold convertibility, while the adjustable peg disappeared completely less than two years later. Much of this had to do with a shift towards inflationary monetary policy in the States and the UK, which was completely inappropriate for the system and threatened the stability of global trading volumes.
Global Trade in the Digital Age
Since the demise of the Bretton Woods system, there have been very few attempts to peg currencies to gold or even the USD, primarily because of the impact of sustained globalisation and the growth of even emerging economies across the globe.
This has organically minimised foreign exchange risk, while ensuring that domestic firms can access broader markets with far less risk and trepidation.
Of course, some exceptions remain, with the Hong Kong Dollar having been pegged to the USD since 1983 as a way of creating stability between trading partners. Some frontier economies are also pegged to the greenback, while similar markets in Africa often choose to peg themselves to the Euro.
However, currency fluctuations can still disrupt and undermine global trade, although in the digital age it’s actually investors that are more likely to destabilise the forex market.
Make no mistake; forex trading volumes have rocketed in an age of online and mobile trading platforms, with many of the historical barriers to entry having been removed over time. This has created a shift in power in favour of individual traders, while concepts such as automated and high-frequency trading have also created sustained volatility in the marketplace.
This can have a detrimental impact on global trade, with price movements undermining currency values (including both imports and exports) on a mass scale.