Glossary: Trade and Emerging Market Terms
Introduction
This glossary provides clear definitions for key terms related to global trade and emerging market investing. Terms are organized alphabetically within four categories: Trade Mechanics, Emerging Market Investing, Policy Terms, and Risk Concepts.
Trade Mechanics
Ad Valorem Tariff: A tariff calculated as a percentage of the imported good's value. If a $100 product faces a 10% ad valorem tariff, the duty owed is $10. Most US tariffs are ad valorem. See also: Specific Tariff.
Balance of Payments (BoP): A record of all economic transactions between residents of a country and the rest of the world over a specified period. Comprises the current account, capital account, and financial account. See also: Current Account.
Bill of Lading (B/L): A document issued by a carrier to acknowledge receipt of goods for shipment. Serves as a receipt, a contract for carriage, and a document of title that allows the holder to claim the goods. Essential in letter of credit transactions.
Current Account: The portion of the balance of payments that records trade in goods and services, primary income (investment returns), and secondary income (transfers). A current account deficit means a country imports more than it exports, financed by capital inflows.
Customs Valuation: The method used to determine the value of imported goods for calculating duties. The WTO Agreement on Customs Valuation generally requires using the transaction value (price paid).
Free on Board (FOB): A shipping term indicating that the seller delivers goods on board a vessel at a named port. Risk transfers to the buyer once goods pass the ship's rail. FOB value is commonly used for export statistics.
Free Trade Agreement (FTA): A treaty between two or more countries eliminating tariffs and other trade barriers on most goods traded between them. The US has FTAs with 20 countries, including Mexico, Canada, South Korea, and Australia. See also: USMCA.
Harmonized System (HS) Code: An international nomenclature for classifying traded products. The first six digits are internationally standardized; additional digits vary by country. Used for customs clearance and trade statistics. Example: 8471.30 covers portable computers.
Letter of Credit (LC): A bank guarantee of payment to an exporter, conditioned on presentation of documents proving goods were shipped as specified. Reduces payment risk in international trade. See article: Trade Financing and Letters of Credit.
Most Favored Nation (MFN): A WTO principle requiring each member to grant the same favorable trade terms to all other members as it grants to its most favored trading partner. Exceptions exist for free trade agreements and developing country preferences.
Rules of Origin: Criteria determining the "nationality" of a product for customs purposes. Important for determining whether goods qualify for preferential tariff treatment under free trade agreements. USMCA requires 75% North American content for duty-free auto treatment.
Specific Tariff: A fixed duty per unit of quantity (e.g., $0.50 per kilogram) regardless of value. Less common than ad valorem tariffs in the US. Often used for agricultural products and standardized commodities.
Trade Balance: The difference between a country's exports and imports over a period. A positive balance (surplus) means exports exceed imports; a negative balance (deficit) means imports exceed exports. The US goods trade deficit exceeded $1 trillion in 2022.
Trade-Weighted Dollar Index: An index measuring the value of the US dollar against a basket of foreign currencies weighted by trade volumes. The Federal Reserve publishes several versions (broad, advanced economies, emerging markets).
Emerging Market Investing
Brady Bonds: Bonds issued by emerging market governments in the 1980s-1990s to restructure defaulted commercial bank debt. Named after Treasury Secretary Nicholas Brady. Largely retired but established the modern EM sovereign debt market.
Carry Trade: A strategy of borrowing in a low-interest-rate currency to invest in a higher-yielding currency or asset. Popular with EM currencies but vulnerable to sudden reversals when risk appetite declines.
Emerging Market (EM): A country transitioning from developing to developed status, typically characterized by rapid economic growth, increasing industrialization, and maturing financial markets. Common index classifications include MSCI Emerging Markets Index countries like China, India, Brazil, and South Korea.
External Debt: Debt owed to creditors outside the borrowing country. For EM sovereigns, external debt creates currency risk since obligations must typically be serviced in foreign currency (usually USD).
Foreign Direct Investment (FDI): Investment establishing lasting interest in an enterprise in another country, typically defined as acquiring 10% or more of voting shares. Distinguished from portfolio investment by the investor's intent to exercise management influence.
Frontier Market: A country with less developed capital markets than emerging markets, offering higher growth potential but greater liquidity and institutional risks. Examples include Vietnam, Nigeria, and Bangladesh.
Hard Currency Debt: EM government or corporate bonds denominated in major currencies (typically USD or EUR) rather than local currency. Eliminates currency risk for foreign investors but creates currency mismatch risk for issuers.
JPMorgan EMBI (Emerging Markets Bond Index): The benchmark index for hard currency EM sovereign debt. The EMBI Global Diversified includes over 70 countries. Widely used for performance comparison and as a basis for EM debt ETFs.
Local Currency Debt: EM bonds denominated in the issuing country's currency. Offers higher yields but exposes foreign investors to currency depreciation risk. The JPMorgan GBI-EM index tracks local currency EM government bonds.
MSCI Emerging Markets Index: The most widely followed EM equity benchmark, covering approximately 1,400 companies across 24 countries. Used as the basis for EM equity ETFs and mutual funds. China represents approximately 30% of the index.
Policy Terms
Anti-Dumping Duty (ADD): A tariff imposed on imports sold at less than "normal value" (typically the home market price) to offset the margin of dumping. The US Department of Commerce investigates dumping allegations; the USITC determines injury to domestic industry.
Countervailing Duty (CVD): A tariff imposed to offset foreign government subsidies that allow exporters to sell at artificially low prices. Must demonstrate both subsidization and injury to domestic producers.
Export Controls: Government restrictions on exporting specific goods, technologies, or services. The US Bureau of Industry and Security (BIS) administers export control regulations. Critical for semiconductor and defense-related technology trade.
Section 201: A provision of US trade law (Trade Act of 1974) allowing the President to impose temporary tariffs or quotas on imports causing serious injury to domestic industry, regardless of unfair trade practices. Used for steel safeguard tariffs in 2002 and solar panel tariffs in 2018.
Section 232: A provision (Trade Expansion Act of 1962) allowing the President to restrict imports on national security grounds. Used to impose steel and aluminum tariffs in 2018, affecting imports from most countries.
Section 301: A provision (Trade Act of 1974) authorizing retaliation against foreign unfair trade practices. Used extensively against China from 2018 onward, resulting in tariffs covering over $350 billion in annual imports.
USMCA (United States-Mexico-Canada Agreement): The trade agreement that replaced NAFTA on July 1, 2020. Key changes include stricter auto content rules (75% regional content), labor value content requirements, and digital trade provisions. See article: Case Studies: NAFTA and USMCA Impacts.
World Trade Organization (WTO): The international organization governing trade rules among 164 member countries. Administers trade agreements, provides dispute settlement, and monitors trade policies. Headquartered in Geneva, Switzerland.
Risk Concepts
Capital Controls: Government restrictions on the movement of capital into or out of a country. May include taxes on capital flows, quantity limits, or outright prohibitions. Malaysia imposed controls during the 1998 Asian crisis; China maintains extensive controls on outflows.
Convertibility Risk: The risk that a government will restrict the conversion of local currency to foreign currency, preventing investors from repatriating funds. A concern in countries with weak external positions or capital controls.
Country Risk: The aggregate risk associated with investing in a particular country, encompassing political, economic, and transfer/convertibility risks. Typically measured through sovereign credit ratings and country risk scores.
Currency Peg: A fixed exchange rate policy where a central bank commits to maintaining a specific exchange rate against another currency. Reduces currency volatility but requires adequate foreign reserves and can create adjustment pressures. The Hong Kong dollar is pegged to the USD at approximately 7.80.
Devaluation: A deliberate reduction in the official exchange rate by a government that maintains a fixed or managed currency. Mexico devalued the peso in December 1994, triggering the "Tequila Crisis." Distinguished from depreciation, which occurs under floating exchange rates.
Political Risk: The risk that government actions, instability, or policy changes will adversely affect investment returns. Includes expropriation, nationalization, contract repudiation, and regulatory changes.
Sanctions: Government-imposed restrictions on economic activity with targeted countries, entities, or individuals. US sanctions programs (administered by OFAC) prohibit transactions with designated parties and can freeze assets.
Sovereign Default: Failure of a government to meet debt obligations. Argentina defaulted in 2001 ($82 billion) and 2020 ($65 billion). Defaults typically result in lengthy restructuring negotiations and partial recovery for bondholders.
Terms of Trade: The ratio of export prices to import prices for a country. Improvement in terms of trade (export prices rising faster than import prices) benefits an economy; deterioration has the opposite effect. Commodity exporters face volatile terms of trade.
Transfer Risk: The risk that a government will impose restrictions preventing the transfer of funds out of the country, even if the obligor is willing and able to pay. Distinct from credit risk of the underlying borrower.
Cross-References
For detailed coverage of related topics, see these articles in the Global Trade and Emerging Markets subcategory:
- Using Trade Data Dashboards - Practical guidance on monitoring trade statistics
- Case Studies: NAFTA and USMCA Impacts - Historical analysis of trade agreement effects
- Trade Financing and Letters of Credit - Detailed explanation of trade finance mechanics
- Tracking WTO and Geopolitical Developments - Systematic approach to policy monitoring
- Balance of Payments and Current Account Basics - Foundation concepts for trade analysis
- Country Risk Assessment Framework - Structured approach to evaluating EM risks
- Capital Controls and Repatriation Rules - Understanding restrictions on capital movement
- Currency Pegs vs. Floating Regimes - Exchange rate system analysis
Updates
This glossary is updated periodically to incorporate new terminology and refine definitions based on evolving market practices. Suggested additions or corrections can be submitted through the site feedback mechanism.