What is a Multi-National Company

A 'Multi-national company' is a company which generates at least 25% of its sales from activities in countries
other than its own country

Practical reasons for international trading

•
Choice - The diversity of goods available in a domestic economy is increased through the import of goods that c
be uneconomic or impossible to produce at home.

Competition - International trade will increase competition in domestic markets, which is likely to lead to both a
in price, together with increasing pressure for new products and innovation.

Economies of scale - By producing both for the home and international markets companies can produce at a larg
and therefore take advantage of economies of scale.

Specialisation - If a country specialises in producing the goods and services at which it is most efficient, it can m
its economic output.

Trade barriers
There are a number of ways that a country can seek to restrict imports. Trade barriers include:

Quotas - imposition of a maximum number of units that can be imported e.g. quotas on the number of cars manu
outside of Europe that can be imported into the EU.( European Union)

Tariffs - imposition of an import tax on goods being imported into the country to make them uncompetitive on p

Exchange controls - domestic companies wishing to buy foreign goods will have to pay in the currency of the e
To do this they will need to buy the currency involved by selling their domestic currency. If the government con
the domestic currency, it can control the level of imports purchased.

Administrative controls - a domestic government can subject imports to excessive levels of administration, pap
to slow down and increase the cost of importing goods into the home economy.

Embargoes - the prohibition of commerce and trade with a certain country.

activities in countries

e import of goods that could

s likely to lead to both a reduction

ies can produce at a larger scale

s most efficient, it can maximise

the number of cars manufactured

them uncompetitive on price.

y in the currency of the exporter's country.

y. If the government controls the sale of

ls of administration, paperwork and red tapề

Trade agreements and common markets

In many parts of the world, governments have created trade agreements a common markets to encourage free tra
However, the World Trade Organisation (WTO) is opposed to these trading blocs and customs unions (e.g. the
European Union) because they encourage trade between membe but often have high trade barriers for non-memb

Bi-lateral trade agreements

These are agreements between two countries to eliminate quotas and tariffs on the trade of most (if not all) good

Multi-lateral trade agreements

These are similar to bi-lateral agreements except more than two countries are involved.

Free trade areas

If the members of a multi-lateral free trade agreement are all in the same geographical area then it is sometimes
as a free trade area.
e.g. The ASEAN Free Trade Area (AFTA) is an agreement by the Association of Southeast Asian Nations (Brun
Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia).

Customs unions
A customs union is a free trade area with a common external tariff.
The participant countries set up common external trade policy, but in some cases they use different import quota
e.g. Mercosur is a customs union between Brazil, Argentina, Uruguay and Paraguay in South America

Single markets (economic communities)

A single market is a customs union with common policies on product regulation, and freedom of movement of a
factors of production (goods, services, capital and labour).
e.g. The Economic Community of West African States (ECOWAS).

Economic unions
An economic and monetary union is a single market with a common currency.
e.g. The largest economic and monetary union at present is the Eurozone. The Eurozone consists of the European
member states that have adopted the Euro.
mon markets to encourage free trade.
ocs and customs unions (e.g. the
e high trade barriers for non-members.

the trade of most (if not all) goods between them.

aphical area then it is sometimes described

of Southeast Asian Nations (Brunei, Indonesia,

es they use different import quotas.

aguay in South America

n, and freedom of movement of all the four

Eurozone consists of the European Union

World Trade Organization [ WTO ]

The World Trade Organisation (WTO) was set up to continue to implement the General Agreement on Tariffs an
and its main aims are to reduce the barriers to international trade. It does this by seeking to prevent protectionist
tariffs, quotas and other import restrictions. It also acts as a forum for negotiation and offering settlement proces
disputes between countries.

The WTO encourages free trade by applying the most favoured nation principle between its members, where red
offered to one country by another should be offered to all members.

Whereas the WTO has had notable success, some protectionist measures between groups of countries are neverth
some protectionist measures, especially non-tariff based ones, have been harder to identify and control.

Advantages of reducing protectionist measures

- A country (say X) can benefit from reducing protectionist measures because its actions would make other natio
protectionist measures against it.

- Normally countries retaliate against each other when they impose protectionist measures. A reduction in these
benefit from increased trade and economic growth. Such a policy may also allow X to specialise and gain compe
in certain products and services, and compete more effectively globally. Its actions may also gain political capita
influence worldwide.

Disadvantages of reducing protectionist measures

- 'Possible drawbacks of reducing protectionist policies mainly revolve around the need to protect certain indust

- It may be that these industries are developing and in time would be competitive on a global scale. However, in
now would damage their development irreparably. Protection could also be given to old, declining industries, wh
would fail too quickly due to international competition, and would create large scale unemployment making such
unacceptable.

- Certain protectionist policies are designed to prevent 'dumping' of goods at a very cheap price, which hurt loca
e General Agreement on Tariffs and Trade (GATT),
y seeking to prevent protectionist measures such as
on and offering settlement processes to resolve

e between its members, where reduction in tariffs

een groups of countries are nevertheless allowed and

r to identify and control.

its actions would make other nations reduce their

ist measures. A reduction in these may allow X to

ow X to specialise and gain competitive advantage
ions may also gain political capital and more

d the need to protect certain industries.

ive on a global scale. However, inaction to protect them

ven to old, declining industries, which, if not protected,
scale unemployment making such inaction politically

very cheap price, which hurt local producers.

International Monetary Fund (MF)

- The IMF was founded in 1944 at an international conference at Bretton Woods in the USA but did not really
begin to fully function until the 1950s.

The so-called Bretton Woods System that the IMF was to supervise was to have two main characteristics: stable
exchange rates and a multilateral system of international payments and credit.

IMF objectives and functions:

- Promoting international financial cooperation and establishing a system of stable exchange rates and freely con
- Providing a source of credit for members with balance of payments deficits while corrective policies were ado
- Managing the growth of international liquidity.
ods in the USA but did not really

ve two main characteristics: stable

stable exchange rates and freely convertible currencies.

while corrective policies were adopted.
World Bank
The International Bank for Reconstruction and Development (IBRD), also known as the World Bank, was the se
created at the Bretton Woods meeting in 1944. Its membership and decision making processes are similar to thos
The original purpose of the IBRD was to help finance the reconstruction of economies damaged by the war. How
shifted the focus of its lending to countries of the developing world. The bank now comprises three principal con

- The IBRD proper whose function is to lend long-term funds for capital projects in developing economies at a c
of interest. The main source of there funds is borrowing by the IBRD

The International Development Association (IDA), which was established in 1960 to provide 'soft' loans to the p
(a) is mainly financed by 20 donor countries providing funds every three years; funding therefore depends on the
(b) provides loans on concessionary terms, normally interest free loans repayable over 50 years.

The International Finance Corporation, which promotes the private sector in developing countries by lending or
The World Bank is clearly an important source of capital funds for the developing countries. However, it has bee
of its lending conditions. For example, criticisms have been levelled about conditions that tie farmers into growi
that have a historical propensity for famine (e.g. parts of Eastern Africa).

Principal Central Banks

The Fed
The Federal Reserve System, also known as 'The Fed,' is the central bank of the United States.
Functions and objectives:
- In its role as a central bank, the Fed is a bank for other banks and a bank for the federal government.
- It was created to provide the US with a safer, more flexible, and more stable monetary and financial system
- Over the years, its role in banking and the economy has expanded.
- The Federal Reserve System is a network of 12 Federal Reserve Banks and a number of branches under the ge
- The Reserve Banks are the operating arms of the central bank.

ECB
The European Central Bank (ECB) is one of the world's most important central banks, responsible for monetary
countries of the Eurozone.
The ECB was established on June 1, 1998 and its headquarters are located in Frankfurt, Germany.
Objectives of the ECB:
The primary objective of the ECB, and the wider ESCB, is 'to maintain price stability within the euro area, i.e. to
In addition, and without prejudice to the objective of price stability, the bank has to support the economic policie
designed to foster a high level of employment and sustainable and non-inflationary economic growth.

Bank of Japan
The Bank of Japan is based in Tokyo.
Objectives and functions:
According to its charter, the missions of the Bank of Japan are
• issuance and management of banknotes
• implementation of monetary policy
providing settlement services and ensuring the stability of the financial system
treasury and government securities-related operations international activities
• compilation of data, economic analyses and research activities.

The Bank of England

The Bank of England's Monetary Policy Committee sets interest rates in the UK.
Another of the Bank's main roles is to act as 'lender of last resort' to other
 own as the World Bank, was the second institution
making processes are similar to those of the IMF.
conomies damaged by the war. However, it soon
k now comprises three principal constituent elements:

ects in developing economies at a commercial rate

1960 to provide 'soft' loans to the poorest of the developing countries. The IDA:
s; funding therefore depends on the generosity or otherwise of these countries
able over 50 years.

developing countries by lending or by taking equity.

ping countries. However, it has been criticised in recent years over the nature
nditions that tie farmers into growing cash crops (eg. oil seed, cotton) in countries

the United States.

r the federal government.

e monetary and financial system

a number of branches under the general oversight of the Board of Governors.

al banks, responsible for monetary policy covering the member

Frankfurt, Germany.

stability within the euro area, i.e. to keep inflation low.

has to support the economic policies of the European Union. These are
onary economic growth.
Credit Crunch

During the 'Credit Crunch' of 2008, the phrase 'toxic assets' was used by the international media to describe the r
financial products traded by banks and other financial institutions in order to earn income and lay off risk.

To understand the problem of toxic assets it is first necessary to understand how banks have traditionally moved
through a process of securitisation using 'Collateralised Debt Obligations' (CDOs).

Securitisation through CDOs

When banks lend money to borrowers (for mortgages, car loans etc), they Invariably try to lay off their risk by a
securitisation. This involves selling the asset from the bank's statement of financial position to a company called
Purpose Vehicle' (SPV). This sale generates cash for the bank in the short term which can then be lent again, in a
cycle of credit formation.

CDOs are 'packages' of many securitised loans, which are put together by an SPV and sold to investors. The inve
what level of risk they are prepared to tolerate and invest in an appropriate grade of CDO accordingly. The CDO
traded between investors (usually banks).

The Credit Crunch

During the late 2000s, it became apparent that the banks had pursued borrowers so aggressively that many of the
SPVs in the securitisation process were likely not to be repaid (so called 'sub-prime' loans). This in turn meant th
very difficult to trace which CDOs represented loans which were sound, and which were likely to be defaulted. E
which were sold as AAA grade investments were found to be unexpectedly risky.

Consequently, suspicion grew in the financial markets that some banks' statements of financial position were car
of CDOs which were not worth what they appeared to be.

This meant that inter-bank lending reduced dramatically, as banks viewed each other with suspicion.

These CDOs are known as toxic assets.

The main problem is the uncertainty about which loans (and CDOs) are sound and which aren't. In practice, unti
of the loans are repaid, it will be impossible to tell which banks' statements of financial position are most badly a

The impact on business in general

As a consequence of the credit crunch, the banks have been more reluctant to lend and have set more stringent le
This has meant that many businesses have struggled to refinance their debts.

Various financial stimulus packages introduced by governments in 2009 - 2011 helped to encourage banks to len
enabled businesses to source finance to fund growth.
nternational media to describe the range of
earn income and lay off risk.

ow banks have traditionally moved to lay off risk

ariably try to lay off their risk by a process of

ancial position to a company called a Special
m which can then be lent again, in an expanding

SPV and sold to investors. The investors decide

ade of CDO accordingly. The CDOs are then

ers so aggressively that many of the loans sold to

prime' loans). This in turn meant that it had become
which were likely to be defaulted. Even some CDOs

ments of financial position were carrying large amounts

h other with suspicion.

d and which aren't. In practice, until time passes and some

financial position are most badly afferted.

lend and have set more stringent lending criteria.

11 helped to encourage banks to lend, and therefore