International Commerce Test 1.1 Review
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What is a Japanese trading company?
(Sogo Shosha) They are general trading companies involved with importing and exporting. They are among the world's largest MNCs in terms of sales. Ex. Mitsubishi, Itochu, and Sumitomo
What are some U.S. firms that have been purchased by foreign MNCs?
Amoco, Standard Oil of Ohio, Anheuser-Busch, Miller Beer, Firestone Tires, and Columbia Pictures.
The theory of comparative advantage?
The idea is that trade should occur even though a nation can produce all products cheaper than it can purchase them from abroad. Nations should concentrate on goods where they have a large comparative and competitive advantage in order to maximize profits. David Ricardo proposed this theory in 1819.
What is the spot rate, forward rate, and cross rate of foreign exchange rates.
- The spot rate is the immediate exchange rate for buying or selling foreign currency.
- The forward rate offered by banks determines the future rates for buying or selling currency.
- The cross rates portrayed in tables allows the instant comparison of exchange rates among multiple currencies.
What are the main components of the trade theory of mercantilism?
High tariffs, emphasis on gold and silver, government support of overseas trading companies and trading monopolies, emphasis on a trade surplus, and import substitution which means if you can make something don't buy it.
What is a common market?
The three basic characteristics are an emphasis on eliminating internal tariffs and quotas, creation of common external tariffs, and establishing common socio-economic policies to promote trade. Started in 1950 (free flow)
International Monetary Fund
- Created in Washington in 1946 to help nations with short-term balance of payments problems.
- It has established exchange rate systems for its members, requires MFN status, and has helped rescue the economies of many countries.
- South Korea, Mexico, Brazil, Thailand, and Greece
What is a free trade area?
The purpose of a free trade area is to eliminate all trade barriers between members. FTAs have increased in importance since the creation of the European Free Trade Association of EFTA in 1960. The U.S. has free trade areas with Canada, Mexico, Israel, and Chile. Also Eliminate's tariffs and quotas.
- Began in Sienna and Florence Italy in the 12th century to help the Roman Catholic Church manage its foreign finances.
- Large international loans are made through banking consortiums or groups of banks, and international financial transfers are made through correspondent banks, which maintain credit and debit balances with each other.
- Representative banking offices are established for a variety of reasons and cannot accept direct deposits or make direct loans in the host country, however they can solicit business for the parent bank.
- The annual sales of multinational corporations are larger than the gross national products of many nations.
- They began in the 17th century in Great Britain and the Netherlands with the British East India Company and the Dutch East Indies Company.
- Today, some developing countries, such as Mexico, South Korea, and Brazil, have important MNCs.
- The overseas sales of U.S. MNCs are usually twice the value of U.S. exports.
Special Drawing Rights
- They were created by the IMF (International Monetary Fund) in 1970 to increase the world's financial reserves.
- They are sometimes used in international bond offerings.
- The value of an SDR is determined by a weighted basket of currencies, such as the dollar, yen, pound, and Euro.
- SDRs are not used by the World Bank.
Official National Reserves
Hard currency, SDRs, and gold are the main components of a nation's official reserve assets. They are used primarily to defend the value of a nation's currency. Hard currency is the major currency used for international trade and investment, such as Euros, Swiss francs, Japanese Yen, and British pounds.
International Development Association (IDA)
The IDA was created in 1960 in Washington to lend money for infrastructure projects in the world's poorest countries. Gives interest free loans for as long as 50 years. Although the IDA is part of the World Bank family, its funding is voluntary.
- All nations have a central bank to manage the nation's supply and interest rates.
- The Federal Reserve is America's central bank. The Federal Reserve bank of New York manages the nation's policy toward the strength and weakness of the dollar abroad.
- The heads of the world's central banks meet at the Bank for International Settlements in Basel, Switzerland each year to discuss the world economy.
International Gold Standard
- Operated primarily between 1850-1914. It was never reestablished after WW1.
- It required a fixed relationship between gold and a nation's currency and willingness to exchange gold for national currency.
- An international gold standard contributes to international financial stability in trade and investment and makes fixed exchange rates possible.
U.S. balance of payments deficit
- U.S. foreign investment, unilateral transfers (such as foreign aid and overseas military commitments), and oil imports are all large contributors to the U.S. balance of payments deficit.
- U.S. foreign investment abroad is a debit, and foreign investment in the U.S. is a credit
1944 Bretton Woods Economic Conference in New Hampshire
- One of the most important economic conferences in history.
- Its purpose was to design an economic system to revitalize the world economy after WW2. The World bank and IMF were major components of this economic conference and system.
- Nations were unable to establish the World Trade Organization after WW2.
- The World Bank was established.
Determinants of global trade patternes
Trade arrangements such as common markets or free trade areas, geographical proximity, and level of economic development help determine the direction of world trade. Developed nations account for about 70% of global trade.
Evolution of International Commerce
- The Phoenicians who lived in modern day Lebanon, dominated Mediterranean trade around 1000 B.C.
- The Romans were the first people in the European area to trade with the Chinese along the Silk Road.
- The Spanish and Portuguese dominated world trade in the 15th and 16th centuries, while the English were the main traders in the 19th century.
Balance of Payments
- The reason nations and businesses are interested in the direction of the balance of payments is to understand the international strength and weaknesses of a nation's currency.
- The current account balance looks at the balance of trade in goods and services as well as income.
- The financial balance follows the direction of direct (buying a plant) and portfolio (stocks and bonds) investment.
- Foreign investment by an American firm is considered a debit, while FDI in the U.S. is considered a credit.
The ability of a U.S. firm to retaliate against unfair foreign competition
If a U.S. firm believes that it is damaged by unfair foreign competition, such as dumping, it can petition the U.S. International Trade Commission. However, to obtain government relief, it must prove that it has been substantially damaged. Because of this strict requirement, most claims by U.S. firms presented to the ITC are not upheld. If the claim is upheld, the U.S. government can impose countervailing or punitive tariffs against the offending nation.
Advantages of Free Trade
Some of the national and global advantages of free trade include higher living standards, reduction of unemployment, growth of the labor force, reduced inflation, economic efficiency, higher quality products, and promotion of peace. All of the worlds economists support the concept of free trade.
Recent theories of International Trade
- In trade theory, the product cycle theory explains how a nation can invent and develop a product, such as television, and end up losing this industry and importing the product from other nations.
- Micheal Porter believes that the key for a nation's success in trade is through innovation and upgrading products.
- The existence of similar consumers around the world with similar preferences explains why a nation that makes automobiles or electronic products will import these products from other countries.
Foreign acquisition of U.S. firms
All of the following U.S. companies have been overtaken by foreign MNCs: Lipton, Carnation, Dr. Pepper, Columbia Pictures, Anheuser-Beer, and Miller Beer
Foreign trade patterns and investment
U.S. exports exceed 1.2 trillion. The U.S. is usually among the world's top two exporting nations. World trade exceeds 11 trillion. Foreign portfolio investment in the U.S. exceeds 4.3 trillion. The U.S. is the world's largest foreign investor and is the largest recipient of foreign investment. Europe receives more U.S. investment than any other geographical region.
Bank of International Settlements
- This bank is in Basel and is a bank for central banks.
- The heads of the world's central banks meet here at least once a year to discuss the world's financial problems. It can perform some banking functions for central banks.
- There are 3 basic types of tariffs.
- The ad valorem tariff is based on a percentage of the invoice, such as 5%. This is the most common type.
- The specific tariff is based on some unit, such as $2.00 per barrel of oil of $30 per ton of coal.
- A compound tariff combines both of the above.
- An absolute quota allows a set amount of product into a country, such as a million pounds of beef.
- A tariff quota allows a set amount in and then charges a tariff surcharge on additional amounts. For example, a million pounds of beef can come in with a 4% tariff and then the tariff rises to 40% for additional amounts.
- In a voluntary quota, a nation agrees to limit its exports to another country, such as steel or automobiles.
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