Running head: TRADE AND FOREIGN EXCHANGE

Assignment 2: International Trade and Foreign-Exchange Markets. Professor Emmanuel Obi, Ph.D., MBA Kan Nguessan ECO 305 November 27, 2011

TRADE AND FOREIGN EXCHANGE International Trade and Foreign-Exchange Markets

This paper will explain how countries and major multinational firms use the trading system to develop powerful return on investment. There are different models of trade throughout the world. However, trade would is inefficient in the absence of international organs regulators. These financial institutions have largely contributed to the reinforcement of trade policy. Another factor which affects trade is the exchange rates between nations. Therefore, how trade is coordinated between nations? Four major points will be analyzed in this paper: the regional trade agreement, the role of international trade and financial institutions in nurturing trade, the major issues in managing multinational firms, and the foreign-exchange markets. Impact of regional trading arrangement on international trade The FTA (Free Trade Area) is one the most import composite of trade between countries. Regional trade suggests that countries find profitable to interact between each other by forming a coalition based on a specific zone. For instance, the European Union which is comprised of twenty seven members facilitates trade among the different countries members. The first important economic impact of such alliance is trade creation; according to Koo, Kennedy, & Skripnitchenko (2006) RPTA creates free-trade area by eliminating trade barriers on goods member countries (p. 409). Trading partners largely benefit from the free-trade zone. Evidences suggest that many countries have difficulties in dealing with international trade because of transportation duties. Developing countries have major problems with managing international trade. For instance, a small country such as Mexico has benefited from (NAFTA) because of the ability to trade with larger nations such as Canada and the United States. In their research , Koo, Kennedy, & Skripnitchenko, (2006) reiterate the idea that NAFTA eliminated

TRADE AND FOREIGN EXCHANGE the U.S. import duties on textiles products importaed from Mexico (p. 409). When a nation

spends less on international trade duties such as barriers to entry, tarriffs on exports and imports, it will experience faster growth rate. Countries members of NAFTA ( North American Free Trade Area) have experienced sustainable growth rate within a short period . Those countries are willing to work together with their factor endowments. For instanc, the United States is a capital-and-technological abundant country compared to Mexico, while Mexico is labor-abundant (Koo, Kennedy, & Skripnitchenko, 2006, p. 409). Both countries have their own field of specialization and comparative advantge. Developing a Free Trade Area will simply increase their trading capacity in the long-run. This trade agreement constitutes an advantage for the adhering nations, but it is also a trading barrier to international competitors. Recall that the United States reduces the transportation duties by altering from China to Mexico, one can argue that the benefit is unilateral. Like the EU, ASEAN has reinforced the ability to trade between each nation. AFTA is confined mainly to tariff reduction and intra-ASEAN trade already enjoys low tariifs (Krumm & Kharas, 2004). Every regional trade promotes liberalization which increases the commodities traded among nations. The role of major international financial trade and institutions in promoting trade WTO (World Trade Organization) works closer with other major institutions to promote trade. The major role of WTO is to facilitat trade among the different nations. For instance, when a nation put irregulated barrier to trade to another nation, the WTO plays an organ regulator between this nation and the rest of the world. China and the United States are two nations which

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impliment trade barrier and tariffs to some specific nation. WTO, regulates international trade so that none of these nations member will discriminate against a particular one. That is, favoritism is prohibited in the chart of WTO. According to Sampson , ( 2001) the vey close linkage between trade and finance in the unstoppable process of globalization makes it essential that the WTO coordinate more closely with the IMF and the World Bank to ensure that their policies are cohesive (p. 35). The Bretton Woods institutions have been created to enable development and help low income countries develop their economies vis--vis largest nations. The WTO works with the IMF to accompany lower countries in facing the great challenge imposed by international trade. In fact, the IMFs primary responsibility in low-income countries (LICs) is to provide a macroeconomic framework aimed at promoting stability and high-quality growth (Boughton & Lombardi, 2009, p. 158). Working closely to promote fairness among nation require the collaboration of the major important financial institutions in managing trade and tansaction. Recall that a financial institution such as World Bank facilitates the transaction between each countries by loweriing the cost. According to Sampson , (2001) the IMF, the World Bank and WTO all have to devise every possible means to share in the monumental task of making trade and finance work for development (p. 37). Without those major institutions, trading among nations would be difficult, these institutions are type of bank, which coordinate actions among international trade. The major economic issues affecting the strategic management of multinational firms multinational firms are dealing with foreign assets managements. An example of a such firm is Google, microsoft and other major firm such as banks which also operate abroad. Host

TRADE AND FOREIGN EXCHANGE countries are willing to develop a policy to directly harm the foreign firms installed in such

countries. This action is coordinated to protect the infant industry in the host industry. According to Ajami & Goddard, (2006) these problems includes translation, tax, economic and transaction issues. An example of tax problem can be the imposition of extra cost from the host country. Thus, companies negociate joint venture to minimized the lost. Accounting transactions are very difficult to manage because of the fluctuation of exchange rates. A lower dollars affects the operations of company abroad. Exchange rates plays a major part in reconciliating the transactions accounts. The politic situation in a host country can dramatically affects the multinational business. According to Mason, (1974) conflict arises when the goals of the host country differ from those of the investing firm (p. 7). By collaborating with local businesses, firms are willing to develop a frame to contour the problems they face. Consider the situation of google in China where the Chinese government imposed barrier to Google. In the Google case, the company was obliged to backup some major services because of barrier to entry. According to Pete , (2010) Google was obliged to leave and maintain its Android services which constitue a lower share in the companys profit. Exchange rate mechanism, determination and the role of Foreign-exchange markets Exchange rate mechanism (ERM) is a system by which central banks regulate the rate of exchange given the value of their currency. In such system central banks such as the Federal Reserve in the United States maintain the flux of dollars within the economy. According to Winthrop, Grossman, & Rogoff,( 1995) in the European exchange mechanism, an individual central bank in a group of central banks may peg its currency to weighted average of the values

TRADE AND FOREIGN EXCHANGE of groups currencies (p. 4); every central bank participate in the regulation of the countrys

currency. It is also a system by which all countries are agreed to maintain their relative value of their currency. The foreign exchange market plays an important role in regulating the international transaction. The (FOREX) allows businesses in a United States to purchase currencies in another countries in which they want to invest. Investors are able to buy securities or sell stocks on the foreign exchange-market. The foreign exchange rates are determined by the value of the relative currencies. For instance, if a country such as Greece is in recession, the value of its currency will drop; the foreign exchange-market will determine the value of such currency both in contraction and expansion. If a country experiences inflation, the value of its currency will decrease. Government policies regarding the macroeconomics structure affect the exchange rates of countries. Investors can use the moving average data in both short-term and long term to determine the value of a currency. The depreciation and appreciation of currency usually creates fluctuation of a currency value. Regional trade arrangement creates trade, members of such free-trade area benefit from liberalization and openness to other countries. Smaller nations have benefited from such system. With WTO, trading will be unregulated. However, multinational firms need foreign-exchange markets to conduct their business abroad.

TRADE AND FOREIGN EXCHANGE References Ajami, R. A., & Goddard, J. G. (2006). International business: theory and practice. M.E. Sharpe. Retrieved from

<http://books.google.com/books?id=xbm8BUKGu7MC&dq=problems+faced+by+multin ational&source=gbs_navlinks_s> Boughton, J. M., & Lombardi, D. (2009). Finance, Development, and the IMF. Oxford University Press Premium. Koo, W. W., Kennedy, P., & Skripnitchenko, A. (2006). Regional Preferential Trade Agreements: Trade Creation and Diversion Effects. Review Of Agricultural Economics, . Review Of Agricultural Economics, 28(3), 408-415. Retrieved from https://webebscohost-com.libdatab.strayer.edu/ehost/pdfviewer/pdfviewer?sid=b406f73d-9e99-4f7690c2-5e4d2bf3da48%40sessionmgr114&vid=5&hid=119> Krumm, K. L., & Kharas, H. J. (2004). East Asia Integrates : A Trade Policy Agenda for Shared Growth. World Bank. Retrieved from https://web-ebscohost-com.libdatab.strayer.edu/ehost/detail?sid=212ac168-104b-4497aefb2a3b16113106%40sessionmgr114&vid=8&bk=1&hid=119&bdata=JnNpdGU9ZWhvc3 QtbGl2ZSZzY29wZT1zaXRl#db=nlebk&AN=104191> Mason, R. (1974). Conflicts between host countries and the multinational enterprise. California Management Review, 17(1), 5-14. Pete , B. (2010). Google's China exit angers shareholders. Investors Business Daily, p. A01. Sampson , G. (2001). Role Of The World Trade Organization In Global Governance [e-book]. United Nations University.

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Winthrop, R. J., Grossman, G. M., & Rogoff, K. (1995). Handbook of international economics, Volume 3. Elsevie. Retrieved from <http://books.google.com/books?id=kHq07PEur_YC&dq=what+is+an+exchange+rate+ mechanism&source=gbs_navlinks_s