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What are the main global institutions? And how do they relate to international trade?

Background: international trade and the problem with world currencies

During the 1920s and 1030s, the world’s leading economies went through a major downturn in economic activity. Much, but not all, of this was due to the economic policies of individual nations that were intended to protect home nation manufacturing at the expense of international trade. But the outcome of such policies was a period of major economic difficulty. Countries therefore resolved to find another way to settle their problems and met together at Breton Woods in the USA in 1944.

International Monetry FundThe outcome of Breton Woods was the International Monetary System: this was an institutional arrangement amongst banks that belong to the International Monetary Fund (IMF). A number of leading governments agreed that international trade would be enhanced by promoting a system of fixed exchange rates between their currencies: the Breton Woods Agreement. The same meeting also resulted in the formation of the World Bank.

As national economies strengthened through the 1960s and 70s, it became clear that a system of fixed exchange was no longer appropriate: it was too inflexible and likely to distort Balance of Payments issues in individual countries. Hence, in 1976, the managed float system for exchange rates was introduced: essentially, the value of the currencies around the world changed according to international demand. But some major countries, like China, still maintained a fixed currency – the RMB was fixed to the US dollar.

ChinaBy year 2000, there were still many unresolved issues surrounding the need to provide the twin aims of international liquidity for ease of international trade coupled with the stability in exchange rates that was needed for predictability in results of trade. Companies needed to know the value of the currencies that they were using.
Ten years later, there was an obvious additional problem related to currency: Western governments claimed that the Chinese currency, the RMB, was seriously undervalued in international markets. Essentially, the Chinese government kept its currency linked loosely to the US dollar while investing heavily in low-cost manufacturing factories like those in the picture.

This had two outcomes that were problematic for the West. First, it kept down the prices of Chinese exports thus making them cheaper than western goods in international markets. Second and at the same time, some Western countries developed serious trade imbalances with China. The reason was that such Western countries imported low-priced Chinese goods but were unable to export products to China because their prices were too high for the Chinese market.

The result was a disagreement between China and the USA, plus some other Western countries, on whether the RMB should be revalued. At the present time, this matter is unresolved.

Background: globalization and irresponsible world merchant banks

In 2008/09, there was then a new phenomenon: the collapse of some international individual merchant banks coupled with the impact of such activities on national and regional economies around the world. Many of these banks, particularly in America, had lent heavily and irresponsibly against unsound assets. In addition, such loans were then re-financed with funds from many major European banks. This meant that not only were the original banks irresponsible but their actions were spread to other commercial banks around the world. The outcome was financial chaos from which world economies, particularly those in the West, are still recovering. It is against this background that the main global financial institutions now operate.

In 2010, Western countries met together to impose further regulation on such international banks and related financial institutions. This was called the Basle III Agreement. Essentially, it involved the imposition of tighter monetary controls coupled with such banks holding more cash, rather than difficult-to-value assets.

Cynics will argue that some banks will still find ways around the new restrictions over time. There is still the possibility of another financial crisis after another few years.

Selected institutions associated with world trade

  • International Bank for Reconstruction and Development: Washington
    • Often called the ‘World Bank’: it provides long term capital to aid economic development: around US$ 10 bn per annum
    • Usually provides funds where recipient country agrees to tight monetary policy
    • MNEs: examine whether target countries are receiving aid and why
    • website: www.worldbank.org
  • International Monetary Fund (IMF): Washington
    • Forum for regulation of short-term liquidity in international money  markets
    • Influences government policy but no longer regulates fixed parity between currencies
    • website: www.imf.org
  • World Trade Organisation (WTO): Washington
    • Oversees administration of General Agreement on Tariffs and Trade (GATT).
    • website: www.wto.org
  • International Labour (spelling sic) Organisation: Geneva
    • Specialised agency of the United Nations dealing with labour issues, trade unions, etc. Useful international labour statistics
    • website: www.ilo.org
  • Organisation for Economic Cooperation and Development (OECD): Paris
    • Researches national economies of leading countries: annual assessments that can be useful for MNE evaluation.
    • website: www.oecd.org

     

Relevance of international institutions for both MNEs and smaller companies

The consequences of trade barriers are highly relevant to MNEs and smaller companies: they can restrict growth and profit opportunities.

  • General Agreement on Tariffs and Trade (GATT): set up to avoid the trade protection that was so disastrous during the period 1918 to 1939
  • First agreement 1947, 23 countries signed: now 140 signed
  • Since 1947, GATT has sponsored eight major rounds of tariff and other barriers reductions – now administered by WTO
  • GATT embodies three principles:
    • Non-discrimination: each country gives all others the same import duties
    • Consultation over disputes
    • Sanctions for non-compliance
  • At the October 1999 GATT meeting in Seattle, USA, there were major protests against unrestricted international trade. Similar protests were made at subsequent meetings. Some important and valid points were made but ignored by world governments. While it is beyond the scope of this website to discuss these in depth, they deserve to be addressed in more depth than has so far been achieved by the different nations represented at these meetings.

 

Barriers to trade and trade blocks

Some countries have grouped their economies together into trade blocks. The essence of such a group is that they operate a common trade regulations on goods and services from countries entering from outside the block. For example, the block may set up an external tariff (or tax) on goods from outside countries: there are more examples of trade regulations listed below. In addition, the nations within the block usually operate the same tariff between members of the block – often a zero tariff. Trade blocks can have very rigid trade regulations, e.g. the European Union or rather loose agreements, e.g. ASEAN. It is important to note that trade blocks are often associated with the political views and aspirations of participating nations.

Some examples of trade blocks:

  • NAFTA – North America
  • EU – European Union
  • ASEAN – South East Asia
  • MERCOSUR – some countries in South America

Main types of trade regulations:

  • Tariffs: tax on products imported from outside countries
    • Expressed as a percentage of the value of a product or service
  • Quotas: quantitative restriction to limit imports
    • expressed as an absolute number of units
  • Non-tariff barriers (NTBs): difficult to classify
    • could be customs documentation, legal rules, food laws, etc.
  • Exchange controls: government control of all dealings in foreign exchange
    • e.g. companies importing goods must buy their foreign exchange from the control agency
  • Limits on Foreign Direct Investment (FDI): national governments may limit or otherwise restrict foreign investment

What strategies can companies adopt to overcome trade regulations?

Tariffs are usually easier to fight than quotas because it is often possible to reduce the value of an imported good but it is more difficult to reduce the number without reducing profits.

Strategies include:

  • Stripping down the product to achieve a lower price
  • Obtaining a more favourable product classification, e.g. is a product a timepiece with one tariff or a piece of jewellery with a higher or lower tariff?
  • Stripping down to CKD (Complete Knock Down) with local assembly
  • Even turning high tariffs to competitive advantage: agree a high tariff, then manufacture locally inside the tariff wall and keep out competitors
  • On quotas and NTBs, it is important to negotiate with governments on their application
  • On limits to FDI: only overcome by direct bargaining with the government – see the  C-C-B Paradigm

 

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