Final answer:
Trade financing often begins with engagement with a bank, where foreign exchange transactions occur within the interbank market. The flow of trade and financial payments are interconnected, with trade deficits and surpluses paralleling the flows of international financial capital. Countries need to balance trade and investment activities to maintain economic health.
Step-by-step explanation:
Trade financing, whether it's for the local market or the international market, typically involves a relationship with banks from the earliest stages. Most individuals and firms who exchange a large amount of currency start by going to a bank. These banks, which offer foreign exchange services to their customers, subsequently engage in trades of the foreign currency with other banks or financial institutions in what is known as the interbank market. Financial payments and investments flow internationally, paralleling the trade of goods and services, and are thus integral to global trade. Having a sustained trade deficit and relying on international financial capital inflows can be beneficial but also may come with risks, as exemplified by the Asian Financial Crisis in the late 1990s, which revealed the dangers of rapid capital outflows.
The dynamic of trade deficits or surpluses in an economy raises the question of how dependent a nation should be on international financial capital flows. Conventional views might suggest self-reliance, but economically, participating in financial markets and sometimes incurring debt can be beneficial for a country's economic growth and stability. It is essential for economies to judiciously manage their levels of borrowing and investment.