International Trade and Finance - Assignment Example

International Trade & Finance Answer 30marks) In my own argument I would go against the proponents that the East Asian financial crisis was caused by US loans to Mexico. This is basically because the two economies are quite extreme and hence the uniqueness in the causes that have led to both currency and financial crises within the regions. In terms of similarity, the crisis that happened in the East Asia can be compared to that which took place in Mexico in 1994 through to 1995. This was clearly shown during the overvaluation of the Thai baht. The other two linking points were based on the fact that either crisis was anticipated given that in both situations investors flooded the regions with funds (Mishkin 2001). This means that in both the two scenarios there was suddenness and a large magnitude of financial reversal. During the crisis the net capital flows in the worst hit countries of Indonesia, Korea, Malaysia, Philippines and was Thailand was enormous. Private net inflows in these five countries went enormously high from $40.5 billion in the year 1994 to $ 93.0 billion in 1996. This ratio of inflows suddenly reversed in the year 1997 with a recorded net outflow of $12.1 billion. This represented a shift of about 11% of pre-crisis dollar to GDP (Nehru 1996). Any form of financial crisis depicts a self-fulfilling case scenario. Generally, in any of the forms capital withdrawals by creditors causes financial panic that causes an unnecessary deep contraction. Rationally, a crisis is caused as each creditor tries to flee ahead of the other causing a disastrous collective result due to a lapse in the fundamentals. This only means that the East Asian crisis is as much as the crisis of the western as of Asian capitalism given the intrinsic instability of the international financial markets (Park 1996). The crisis in the East Asia may have originated from the several international macroeconomic shocks that hit the region in 1994-1996. This included the dramatic bubbling of the regions competitive economies Mexico included. In addition, the abrupt reversal in the long term trend of the yen as compared to the dollar played a part (Mishkin 2001). Such occurrences may have been seen to have less severe impact on the performance of the Asia economy, but this together with the interaction of the growing weakness of the East Asian financial system was a provocation of the East Asian Crisis (Nehru 1996). This is as opposed to the claims by others that US funding to Mexico caused this crisis. The other cause may have been the incomplete state that each of the economies left their financial sectors liberation and reforms which firmed an extremely fragile financial systems (Perkins 1994). A weak financial system is normally evidenced by growth in short term foreign debts, fast expanding bank credits, laxity and inadequate supervision and regulation of financial sector given its sensitive nature. And all these were a characteristic of each of the five economies that forms the East Asia given such conditions made the regions vulnerable to rapid reversals of capital outflows (Nehru 1996). The main act came into action when the already evident causes were coupled by the mistakes that were later committed by the Asian governments and the IMF and the crisis became even deeper. The governments failed to take the necessary actions at the required time periods, IMF on the other hand came in with the hope of fixing the East Asian problem without finding the exact underlying cause. This raised even further the costs of such crisis on the East Asian countries (Park 1996). In any emerging economy like those in the East Asia, a financial is majorly caused when a country has been relying on large scale capital inflows and then something happens that they stop receiving such inflows abruptly. There will be a demand though for such countries to repay their outstanding loans. Such countries as a result face severe embarrassment as they would default in their loan repayment, rescheduling of the debt repayments or seek the rescue of new lenders who may offer to repay their existing loans at higher rates (Park 1996). This caused a crisis in 1929 when bond financing from America to Latin America dried up and the same reasons made Mexico default and reschedule its debts in 1982. The same case of sudden reversals made Mexico face the same scenario again in 1994 and the East Asian countries in 1997. With the recent cases the marvelous international were planned to forestall defaults on debt servicing (Krugman 1998). These occurrences had some characteristics in common such as: - sudden shift in financial flows, their anticipation made the countries experience sudden economic contractions, they lost foreign investors. Broadly speaking, the happenings can mainly be explained in two categories: - First, is the case where a shift in the international market conditions makes it impossible for the debtors to repay outstanding loans because of either an increase in interest rates, change in prices, or poor trade restrictions. Secondly, the changes in a debtor country can as well make creditors think twice after reassessing the ability of such countries to service foreign debt. This is coupled by change in political regime or economic policy (Mishkin 2001). For example all the other conditions in Mexico in 1994 were stable and the crisis that resulted was linked mainly to the poor management of macroeconomic situation in the country by overvaluing the exchange rate (Perkins 1994). He case in East Asia was on the other hand as a result of self-fulfilling crises despite the individual creditors acting rationally, the market outcomes cause sharp, costly, and basically unnecessary reversals in capital flows (Krugman 1998). This fundamentally explains what caused the crisis experienced in East Asia. Answer 2(70 marks) Brazil and US have for a long time enjoyed cooperative and active relations both in political and economic spheres. The two countries are reported to be in intense negotiations to formulate policies to serve their common interest. Their relationship is as well strengthened through their citizen to citizen relations and trilateral plus multilateral corporations. US provide support to Brazil in through USAID in a bid to combat disease such as TB and HIV/AIDS, promote clean energy technology. The economic relationship between the two countries is on a steady rise through mechanisms that are put in place to support the aid in movement of both goods and people. Brazil is the seventh largest economy in the world with US being its largest export market. The US s currently the biggest foreign investor in Brazil in terms of FDI and biofuels technology has been fueled through the collaboration between the US and Brazil given they are the world’s largest producers of the same product. The two countries belong to a number of the same international organizations (U.S. Relations With Brazil (2013, October 3). The rebirth of Chile in 1973 saw it being ruled by the military for a better duration but US saw it go through a transition of democracy and economic sustainability. There is constant consultation in terms of trade, diplomacy, security, culture, science and technology between US and Chile. The collaboration and relationships between Chile and the US on environmental issues is as well at top gears with most of US environmental agencies having base in Chile. The two countries work hand in hand to support education initiatives and as well collaborate to support development in other countries on various aspects that support life such as security, agriculture and export promotion. The two countries have a bilateral free trade agreement which eliminates tariffs and opens markets. In addition, barriers to trade in services are as well reduced, intellectual property is protected, and discrimination in tradeoff digital products is eliminated, formulated laws that prohibit unethical competition activities. The relationship between the two countries is thus positive and they are even together working on a pact to form a regional trade agreement given nether country depends on the other for assistance of any form (U.S. Relations With Chile (2013, November 21). The relationship between these two states is vital and at the same time quite complex given the fact that they share a 2000 mile border. Another reason is their relationship has in one way or the other an impact on citizens of either side of both countries. The relationship between the two countries is therefore far and wide and brings in issues as culture, economic ties, education and goes beyond diplomatic and official contacts (Nelson 2009). The US and Mexico as well as Canada are partners in NAFTA hence the scope of trade between the three states is long and expansive. Mexico is the second largest US export market after Canada and the third largest trading partner after Canada and China included. Mexico as well supplies US heavily apart from supplying other markets. Mexico as well receives a lot of remittances from their citizens in America and such funds are used for consumptions and on development projects. Through HLED the US-Mexico bilateral commercial and economic ties are further strengthened (U.S. Relations With Mexico (2013, September 5). As it stands and according to the UN reports Brazil remains to be the most open to Foreign Investment as the largest FDI recipient in the Latin America. This is also evidenced given the US is as well the largest investor in Brazil. Investment in Brazil cuts across all sectors although some sectors experience a limitation. The other reason it is a good destination is the fact that it applies its burdens of taxation and regulations equally irrespective of whether the firm is local or foreign (Agosin 2005). In terms of manufacturing concerns, Brazil takes the top spot as compared to Mexico and Chile. The country is also praised for its rapid economic development. According to the Brazilian government law there is very little distinction between foreign and national capital if any at all. Going by its fast recovery from the global financial crunch, it’s a good indicator that this is a very strong economy. These are supported by its very strong local demand of its produce and its rapidly growing middle class. Its government policies such as reduced taxation and the general conservative policies are healthy for business growth (Nelson 2009). There are quite limited restrictions when it comes to transfer of funds associated with foreign investments. This is coupled by the free conversion of currencies with the determination of buy and sells rates solely left to the forces of demand and supply. The systems that support transactions in Brazil are mostly automated hence quite fast and less lengthy. There is also minimal risk of one losing their investments through fraud as all incoming resources into Brazil passes through the central bank with the current accounts being fully liberalized (Agosin 2005). In the recent past Brazilian government has never enacted any expropriation actions against the foreign investor with no likely sign of the same happening in the near future. The Brazilian government supports investors both local and foreign through a variety of tax incentives and attractive financing methods with the bid to encourage investments in areas that have lagged behind inn terms of development. These are in form of tax benefits and tax breaks to investors in disadvantaged regions and exporters respectively. The second most attractive country in terms of FDI is Chile which is after Brazil and this is driven by the fact that the country has been seen seeking FDI as a development strategy (Nelson 2009). The country has hence forth striven to take the outward policy as opposed to many taking the inward policy. Mexico on the other hand has attractive attributes such as large population, cheap labor, stable political environment as well as its proximity to the US. The major demerit that it has is its favorability in terms of its stringent laws and regulations. This makes the country still lag behind Brazil in terms of potential to attract FDI. The ability of Mexico to attract FDI has been further fueled by the fact that it is a progressively developing country. In this case therefore I would advise the management in their pursuit for a location to establish a manufacturing venture to locate the firm in Brazil (Agosin 2005). This is because it is the only country that possesses all the most favorable conditions to flourish the growth of a foreign entity. References Agosin, M, 2005, Foreign direct investment in Latin America, Inter-American Development Bank: Washington, D.C. Krugman, Paul, 1998, "What Happened to Asia?" Unpublished paper, Massachusetts Institute of Technology (January). Mishkin, Frederic S, 2001, "Asymmetric Information and Financial Crises: A Historical Perspective." In Financial Markets and Financial Crises, edited by R. Glenn Hubbard. University of Chicago Press. Nehru, Jawaharlal, 1996, The Discovery of India. New York: John Day. Nelson, RC, 2009, Harnessing globalization: the promotion of nontraditional foreign direct investment in Latin America, Pennsylvania State University Press: University Park, Pa. Park, Yung Chul, 1996, "East Asian Liberalization, Bubbles, and the Challenge from China." BPEA, 2:1996, 357-71. Perkins, Dwight H, 1994, "There Are at Least Three Models of East Asian Development." World Development 22(4): 655-61. U.S. Relations With Brazil, (2013, October 3), U.S. Department of State. Retrieved April 9, 2014, from http://www.state.gov/r/pa/ei/bgn/35640.htm U.S. Relations With Chile, (2013, November 21), U.S. Department of State. Retrieved April 10, 2014, from http://www.state.gov/r/pa/ei/bgn/1981.htm U.S. Relations With Mexico, (2013, September 5), U.S. Department of State. Retrieved April 8, 2014, from http://www.state.gov/r/pa/ei/bgn/35749.htm Read More