INTERNATIONAL BANKING BNFN 304

THE WORLD OF INTERNATIONAL BANKING CHAPTER ONE THE WORLD OF INTERNATIONAL BANKING

1.1 Overview No nation can prosper relying solely on its own resources or capital. Trade with other nations therefore is a necessity. Adam Smith , in 1776 “The Wealth of Nations” with the Comparative advantage theory encourages nations to export and import from each other. Michael Porter (1990) says: No nation can be competitive in everything. A nation’s resources are limited. A nation, therefore should specialize in those industries in which its firms are relatively more productive and import those products where its firms are less productive. A nation’s international economic activities are broadly grouped in three categories: * The movement of goods * The movement of services * The movement of capital

Because customers are engaged in such activities the banker is asked to provide the skills and products that those customers need in order to do their business Today you don’t need to have overseas branches in order to do business internationally. You can do this type of businesses through local bankers and correspondent banks.

1.2 Background Long distance trade started 9000 years ago in the Middle East with trading pottery. Spread of trade lead to growth of nations and exploration (Columbus, Magellan, Vasco de Gamma). In the 16th and 17th centuries the Portuguese, Dutch and British went to Asia to trade for spices, textile, silk, elephant, tea, etc…London, Venice and Amsterdam became great trading and financial centers. Trade with Asia demanded Gold and Silver for payment. The Silver and Gold mines in America became crucial for Europe’s ability to buy from Asia. Europe paid for these metals and for tobacco by selling processed goods such as furniture, foods, tea, etc…

The expansion of world trade continued with great speed. It reached $3 The expansion of world trade continued with great speed. It reached $3.1trillion in 1989,$5.5 trillion in 1996 and more than $10 trillion in 2005. 1.3 Visible Trade These are physical goods, whether raw materials or manufactured goods. It covers exports as well as imports. The principal reasons for trade are as follows: A nation does not have a particular item. For example, the USA does not grow tea; Turkey does not grow coffee beans or manufacture commercial aircrafts. Some countries specialized in producing and manufacturing certain products, such as Brazil in coffee, Switzerland in watches and Germany in luxury cars. No modern nation can completely eliminate foreign trade. In fact, nations that actively export and imports have higher standards of living than those who do not. Complete self–sufficiency has few benefits: Compare China and Sub-Saharan Countries in 1960’s and 2000’s.

A nation does not have enough of a particular item A nation does not have enough of a particular item. For example, the USA and Turkey do not produce enough oil (petrol). Saudi Arabia produces more petrol than it needs. A nation can produce an item at a lower cost than other nations. Economic theory suggest that foreign trade should take place because one nation has a comparative advantage and absolute advantage in producing an item. Thus, each nation should produce what it most efficiently can and trade the surplus for another nation’s product. A nation produces items with a desirable style or innovation. For example, German automobiles, French perfumes, French brandy and Scotch whisky. 1.3.1 Features of Trade The difference between imports and exports is balance of trade. When a nation buys more than it sells, it is said to have a “deficit’’ balance of trade; when it sells more than it buys it has a “surplus” balance of trade. A surplus of trade brings with it net international income. The direction of trade can be determined by availability (e.g. oil-Saudi Arabia and France), comparative cost from each source of supply, political factors (e.g. Great Britain old colonies) or proximity (e.g. USA and Mexico).

1.3.2 Trade Protectionism When a country wishes to reduce imports it imposes a “tariff’’ or a “quota” on its imports. Tariff: is a tax put on imported goods. Quota: is a limit put on the amount of imported goods. Both quota and tariffs are put on imported goods to protect domestic industries. Governments have other measures to discourage imports. Trade protectionism is done for: -Protecting infant industries (questions are, which industries and how long protection? Industries which have comparative advantages!) -Against Dumping (compare dumping and efficiency) Protectionism in the long run encourages high costs and inefficiencies and has a cost to consumers. Different tariff for different countries (most favored nation status) Some goods are imported to be used for raw materials in the process of producing other goods for export.

1.3.3 Effect on Trade Imports and Exports have both benefits and costs. Export creates jobs, earn foreign currency and reduce costs (economies of scale). EXPORTS USA 8% of GNP UK 25% of GNP GERMANY 30% of GNP TURKEY 25% of GNP Imports reduce costs but employment suffers. 1.3.4 Liberalizing Trade Over the past 50 years the expansion of world trade has been encouraged through the reduction of tariffs, quotas and restrictions. In this respect GATT-WTO,EU,NAFTA and MERCOSUR (Latin American Common Market) are important organizations. 1.4 Invisible Trade These are; transportation, insurance, tourism, remittances (from immigrants), foreign construction projects, banks providing financial advisory services, computer programming legal services, accounting services etc. (some of these services are becoming very important for some countries such as India and Ireland). 1.5. Investments International investment represents the transfer of savings from one country to another. These are: Direct investments (establishing new plants) Indirect or portfolio investment (buying bonds and stocks)

1.6 Classifying Countries Countries can be classified as developed and developing countries. Other expressions that are used for developing countries are underdeveloped countries, less developed countries, third world countries and south. IMF classified countries as advance economies (28 countries,18% of the world population,55% of world GDP and 77% of the world exports), Countries in transition (28 countries7 % of the world population, 5% of the world GDP and 4 % of the world exports) and developing countries(128 countries,77% of the world poplulation,40%of the world GDP,19% of the world total export). Developing countries tend to export more agricultural goods and raw materials. Development is a very complex issue.

1. 7 Balance of Payment Table 1 1.7 Balance of Payment Table 1.1 Activities Represented in a Balance of Payments Income Received for: Exports Services we do for others Foreign tourists visiting us Money send by people in other countries Others investments in our country Interest and dividends on our investments in other countries Payments Made for: Imports Services others do for us Our tourists in other countries Money sent to people in other countries Our investments in other countries Interests and dividends on others’ investments in our country

1.7.1 Balance of Payments Categories Current account-visible and invisible trade Capital and Financial Account – Investments Net errors and omissions Change in reserves Balance of Payment is always in balance

1.7.2.Connections to the Domestic Economy DEVELOPMENTS IN Balance of Payments effect domestic economy and events in domestic economy will be reflected in the Balance of Payments. For example, foreign investments in a country will effect the Balance of Payments, jobs ,tax revenue, exports of that country. Likewise a country running large budget deficit will have a high rate of inflation, high interest rate etc. Capital flight and protection of agricultural sector can have many implications on the Balance of Payment and domestic economy. Globalization of Industry American factories in China exporting back to USA Japanese auto factories in USA Online services in India and Ireland