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Why Countries Limit Trading Activity

Trump Dollar

Trump Dollar

Countries like Singapore, Thailand and Malaysia have regulations that limit trading activity in their currencies. What are the effects of such constraints?

The idea of international trade is associated with characteristics like progression and collaboration. It is undeniable that international trade is paramount to global development and mutual benefit. Yet, many countries have put measures in place to limit trading activity in their currency; especially countries from the emerging market economies in Asia like Singapore, Thailand and Malaysia. Like all policies, there are both costs and benefits to implementing such regulatory constraints.

One of the main reasons for these regulations is to empower a country’s government with more control over money supply. Especially after the Asian Financial Crisis of 1997-98 which dealt a significant blow to the “Tiger Economies”, economies have been concerned about large offshore markets in their currencies, which could cause great volatility in capital flows and exchange rates. Singapore, which had already placed limits on offshore trading activity, made a positive case for such policies as the magnitude of its currency’s depreciation was smaller than other affected currencies. Singapore’s adherence to such policies resulted as a benefit; providing protection against speculative blows on the currency.

Other effects of these regulations include protection of infant industries and domestic employment. With restrictions on offshore trading, a country’s government may achieve the creation of a domestic business environment that is conducive for infant industries to flourish to a globally competitive level. For example, tariffs placed on imports in the United States’ steel industry during the 20th century, which allowed the U.S. firms to grow in their domestic markets. Consequently, the increase in aggregate domestic production leads to an increase in economic activity, which then possibly improves unemployment rates through the creation of job opportunities.

However, there are also several possible costs in implementing these regulatory constraints. Such costs include negative impacts on consumer satisfaction and impeding the development of the financial markets. Trade restrictions tend to cause a decrease in consumer satisfaction, as the availability of foreign products decrease in volume and increase in price; overall, affecting a consumer’s ability to choose and spend.

As is the case with Malaysia after implementing regulatory constraints, low market sentiments also caused foreign direct investors to be cautious, thereby causing capital flow in the economy to decrease significantly. Furthermore, such constraints could contribute to decreased liquidity, depth of the foreign exchange derivative markets, and a slowdown in domestic product development.

Whether such regulatory constraints should be continued, is dependent on whether they are effective in delivering what they are meant to. Though imperfect, and always carrying costs along with benefits, these regulations were created to safeguard economies and may be the barrier that prevents another Asian Financial Crisis.

It is therefore my opinion that regulatory constraints should be continued, but pragmatically and evolutionary. They need to be constantly adapted in order for them to effectively address the underlying circumstances, just as how Singapore gradually and progressively liberalized its initial regulations to allow for the development of its capital markets.

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