CC01_A4_Lê Nguyễn Minh Trang_1852801

INDIVIDUAL ASSIGNMENT #4

Discussion question

Question 1.
(a) Whose interests should be the paramount concern of government trade
policy: the interests of producers (businesses and their employees) or those of
consumers?

Take an example from the United States

The US has had many policies to protect producers and businesses, especially
the steel industry. And then, there have been some sequences which can be called
mistake:

Consumers Producers

Price Because of government’s regulations, They have gotten benefit

imported goods or services have been limited, and profit for the higher
so price have increased and consumers have price goods since foreign
had to pay more money competition

Tariffs Price have increased Protected from foreign

companies’s competitions

Recommendations
● The interests between producers and consumers should be equal and fair,
because producing goods and services can help to increase the revenue of the
economy, protect businesses from foreign companies.
● However, businesses have to respect the freedom, health of people and the
environment.
● Because of international trade, employees can lose their jobs, therefore
government intervention is still necessary to help them to get jobs.
● If the government just prioritized the interest of only producers or consumers, it
would lead to trade wars. People can be violent; global firms and companies
can move in and take an unfair advantage.
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(b) Given the arguments relating to the new trade theory and strategic trade
policy, what kind of trade policy should business be pressuring the government to
adopt?

In my perspective, the government should provide export subsidies (a

payment made by a government to local producers which enables the latter to sell
their goods more cheaply or more profitably abroad, thus stimulating a country’s
exports) and home market protection. There are a couple of reasons:
● Export expansion: Export subsidies can help stimulate a country’s exports and
diversifie the national economy towards the manufacturing of goods.
● Ensuring the first global step: Give domestic firms more time and conditions
to overcome the first-mover advantages enjoyed by foreign competitors and
emerge as viable competitors in the world market.
● Erecting the domestic economy: Home market protection policy can help to
protect domestic firms against foreign competitors in the country besides
promoting exportation.

Question 2.
A U.S. firm produces personal computers in Thailand and then exports
them to the United States and other countries for sale. The personal computers
were originally produced in Thailand to take advantage of relatively low labor
costs and a skilled workforce. Other possible locations considered at the time
were Malaysia and Hong Kong. The U.S. government decides to impose punitive
100% ad valorem tariffs on imports of computers from Thailand to punish the
country for administrative trade barriers that restrict U.S. exports to Thailand.
How should the firm respond? What does this tell you about the use of targeted
trade barriers?

The firm should settle on manufacturing computers in another country that is

Malaysia or Hong Kong in the given case as long as the US government does not
change the trade barry policy. Because production costs in the US are really high and
the firm may get a loss from this.
Hong Kong and Malaysia are only 966 miles and 808 miles from Thailand,
respectively. Exploring the legalities of importing goods to one of the countries and
forwarding on is another possible avenue to explore. Targeted trade barriers may not
be as effective as intended. Neighboring countries provide safe harbor for industry to
easily relocate.
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Question 3.
You manufacture wine glasses. In mid-January, you receive an order for 10,000
glasses from Japan. Payment of ¥400,000 is due in mid-July. You expect the yen
to rise from its present (January) rate of $1 = ¥115 to $1 = ¥100 by December.
You can borrow yen at 3% a year. What should you do?

Solution 1:
● In mid-July, you will take ¥400,000 and wait until December to convert it to
dollars, which is $4,000 at that time.
● If the current day forward rate is lower than 100 yen/dollar, then a forward
contract might be preferable since it both locks in the rate at a better level and
reduces risk.
● If the rate is above 100 yen/dollar, then whether you choose to lock in the
forward rate or wait and see what the spot does will depend upon your risk
aversion
Solution 2:
● Borrow money from a bank within the pay back of 400,000 yen
=> receive (400,000/1.03 = 388,350 yen borrowed)
● Convert to dollars: (388,350/115 = 3,377 dollars) => invest these dollars in a
US account
● Interest: (4,000 - 3,377 = 623 dollars)
● Annual rate of (623/4,000 = 15.58%)

Question 4.
You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico
manufactures component parts for your U.S. assembly operations. The
subsidiary has been financed by bank borrowings in the United States. One of
your analysts told you that the Mexican peso is expected to depreciate by 30%
against the dollar on the foreign exchange markets over the next year. What
actions, if any, should you take?

In that case, my financing and operating capital are in dollars, yet many of my
costs (labor) must be in peso. My hard assets (fixed assets) are all in peso, and their
value will decline. On the other hand, if the peso depreciates, then my dollars will go
further. With the depreciation of the peso, demand for the currency will rise, and more
people will begin to buy items in peso because the same amount of money spent on a
good would have a lower value. In contrast, demand for items denominated in US
dollars would fall. As a result, the company's Mexican subsidiary's worth in US
dollars will decrease. Therefore I will have some shortly tactics:
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● Before depreciation:
- Try to collect all foreign receivables which can affect on company’s
value
- Prioritize purchasing in US dollars before the depreciation
- Convert important accounts in pesos to dollars
● During depreciation:
- Defer big peso-denominated in order to save money
● After depreciation:
- Observe the status of economy, if the devaluation ends, I will undo the
tactics I made back to the beginning
- In contrast, if the depreciation improves, however peso is still lower
than the initial rate before depreciation, I will consider to keep those
tactics.

Question 5.
What opportunities might current IMF lending policies to developing nations
create for international businesses? What threats might they create?

First, we need to answer the question “What is the IMF?”

| IMF or The international monetary system established the rules by which countries
value and exchange their currencies and provides a mechanism for correcting
imbalances between a country’s international payments and receipts |
Therefore, there are some opportunities creating by IMF for international businesses
which can stabilize monetary policy and encourage economic growth:
● Stable macroeconomic
- Inflation, Changes in measured unemployment / employment
● Lending
- Trade can be done
EX: A country facing a sudden drop in the prices of key exports may
need financial assistance while implementing measures to strengthen the
economy and widen its export base. A country suffering from severe
capital outflows may need to address the problems that led to the loss of
investor confidence—perhaps interest rates are too low; the budget
deficit and debt stock are growing too fast; or the banking system is
inefficient or poorly regulated.
● Technical assistance and training
On the other hand, it also creates some threats:
● An immoral system
● IMF policies promote corporate welfare
● IMF policies hurt the environment
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Question 6.
Debate the relative merits of fixed and floating exchange rate regimes. From the
perspective of an international business, what are the most important criteria in
a choice between the systems? Which system is more desirable for an
international business?

Fixed exchange rate Floating exchange rate

Pros - Provide stability in international price - Floating exchange rate

- Are inherently anti-inflationary, requiring
the country to follow restrictive monetary
and fiscal policies
changes this to happen
gradually and efficiently
when the structure of a
nation’s economy changes.
- A floating exchange rate
regime gives countries
monetary policy autonomy.
- Adjustment mechanism
works much more smoothly

Cons - High unemployment or slow economic - More risks and less stable
growth prices aid in the growth of
- Maintain large quantities of international international trade
reserves which is a significant burden to
many nations.
- Fixed rates must be changed
administratively, which usually happens too
late, becomes too highly publicized, and
has too large a one-time cost to the nation's
economic health when the structure of a
nation’s economy changes.
- A country's ability to expand or contract
its money supply as it sees fit is limited by
the need to maintain exchange rate parity
- If a country developed a permanent deficit
in its balance of trade that could not be
corrected by domestic policy, the IMF
would agree to a currency devaluation.

According to the above comparison table, I think that a floating exchange rate
regime is more desirable for an international business because it can self-correct and
balance the trade balance. The world market is always changing, so adapting to those
changes is an indispensable requirement of any business that wants to survive.
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Research tasks
Question 1.
You work for a pharmaceutical company that hopes to provide products and
services in New Zealand. Yet management’s current knowledge of this country’s
trade policies and barriers is limited. After searching a resource that summarizes
the import and export regulations, outline the most important foreign trade
barriers your firm’s managers must keep in mind while developing a strategy for
entry into New Zealand’s pharmaceutical market.

Trade barriers
● administrative procedures
● quantity restrictions (such as quotas)
● licensing requirements
● data storage requirements
● privacy requirements
● board director requirements
● procurement rules
● price controls
● subsidies
● product labeling requirements.
Import tariffs: Duty on New Zealand imports is typically calculated as a percentage
of the cost of the goods free on board (f.o.b.). Most tariffs range from zero to 10%
Import Requirements and Documentation: The New Zealand Customs Service
website outlines the requirements expected by the importer, or Customs House Broker
acting for the importer. Import declarations must be made electronically.
Labeling/Marking Requirements: New Zealand prohibits the importation of all
goods bearing false or deceptive trademarks. New Zealand also prohibits the entry of
any foreign manufactured goods that bear the name or trademark of a New Zealand
manufacturer or trader, the name of a place in New Zealand, or words that would
associate the goods with New Zealand, unless the names or words are accompanied by
a definite indication of the country of origin.
Prohibited and Restricted Imports: New Zealand Customs lists on its website items
which are prohibited and cannot be imported into New Zealand as well as a list of
products which require approval to import.
Customs Regulations: All goods imported into New Zealand must be classified
within the Tariffs of New Zealand managed by New Zealand Customs. New Zealand
Customs is responsible for collecting any duty on imported goods.
Standards for Trade: New Zealand operates under the metric system of weights and
measures. New Zealand Standards use the identifier NZS. Joint Australian and New
Zealand Standards use the identifier AS/NZS.
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Trade Agreements: By 2030, New Zealand aims to have FTA arrangements to cover
90 percent of NZ goods exports. New Zealand has successfully concluded free trade
agreements with 16 WTO members including:
https://www.trade.gov/country-commercial-guides/new-zealand-trade-agreements
Licensing Requirements for Professional Services: Registration is required by law
for professional services such as accounting, consulting, human resource, and finance.

Question 2.
One of your company’s essential suppliers is located in Japan. Your company
needs to make a 5 million Japanese yen payment in six months. Considering that
your company primarily operates in U.S. dollars, you are assigned the task of
deciding on a strategy to minimize your transaction exposure. Identify the spot
and forward exchange rates between the two currencies. What factors influence
your decision to use each? Which one would you choose? How many dollars must
you spend to acquire the amount of yen required?

A forward rate refers to the price of a forward contract being settled, whereas a
spot rate refers to the rate for a spot contract being settled.
What sort of item or service we're working with will be a determining element
in our selection. A forward exchange rate might make sense if the payment is to be
made over a period of time.

It will cost around $8593 to make a payment of 1 million Japanese Yen.

The current spot exchange rate for 1 Yen is $0.0086.

The six-month forward exchange rate is said to move by 0.1700.

The current spot rate of the US dollar against the Japanese yen (Yen/Dollar) is 122.7.

The rate at which the US dollar and the Canadian dollar will be exchanged in the
future.

The six-month forward exchange rate between the US dollar and the Japanese yen
(Yen/Dollar) is -372.5.

The spot exchange rate is the current market rate, whereas the forward rate is
the rate offered at the time of contract expiration, and is quoted today.
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I will use the spot exchange rate if I need to pay or get a payment today, but I
will use the forward exchange rate if I need to accept payments or receive payment
later. Today, that will be secured.

Because payment is due in six months, I'll go with the forward exchange rate.
In this case, I'll utilize a forwarding contract rate today that must be applied at the time
of payment in six months.

We must take the bid into account when calculating the quantity of US dollars.

Question 3.
The Global Financial Stability Report is a semi-annual report published by the
International Capital Markets division of the International Monetary Fund. The
report includes an assessment of the risks facing the global financial markets.
Locate and download the latest report to get an overview of the most important
issues currently under discussion. Also, download a report from five years ago.
How do issues from five years ago compare with financial issues identified in the
current report?

The Global Financial Stability Report, October 2021:

https://www.imf.org/en/Publications/GFSR/Issues/2021/10/12/global-financial-stabilit
y-report-october-2021

The Global Financial Stability Report, October 2016 (five years ago):
https://www.imf.org/en/Publications/GFSR/Issues/2016/12/31/Fostering-Stability-in-a
-Low-Growth-Low-Rate-Era

In each report there is a table of contents, if you are interested in any subject
you will compare the entries in that table of contents and find out the differences in
that respect between the two reports no matter what time of day. Which point:
Comments on trends, changes in growth, and so on.