International Business: The conference at Bretton Woods - Essay Example

International Business The conference at Bretton Woods Immediately after Second World War, around 730 delegates from 44 major industrial states assembled Mount Washington Hotel in Bretton Woods, New Hampshire, United States, during the initial three weeks of July 1944, in order to establish rules for strengthening financial and trade cooperation among industrialized states. Before, the conference at Bretton Woods, there was no formal rules which controls or regulates the international trade activities between countries. The establishment of International Monitory Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), were the major contributions of Bretton Woods conference. IMF and IBRD became operational in 1945 and IBRD is currently the part of World Bank. Bretton Woods conference asked the countries to adopt a monetary policy in accordance with the exchange rates of American dollar in order to connect the temporary imbalances of payments and to conduct international trade in an efficient manner. Since foreign trade affects the standard of life of every people, all countries have a vital interest in the system of exchange of national currencies and the regulations and conditions which govern its working. Because these monetary transactions are international exchanges, the nations must agree on the basic rules which govern the exchanges if the system is to work smoothly. When they do not agree, and when single nations and small groups of nations attempt by special and different regulations of the foreign exchanges to gain trade advantages, the result is instability, a reduced volume of foreign trade, and damage to national economies. This course of action is likely to lead to economic warfare and to endanger the world's peace (CONFERENCE AT BRETTON WOODS) The interests of different nations could be different while they perform international trade activities. Before entering international trade with another country, a state should make sure that their trade policies may not cause any harm to the interests of other nations. The state should consider the interests of the world also while engaging in trade activities with another nation. Thus, the necessity of an international body or IMF was discussed and approved in the Breton Woods conference. Apart from IMF, the Breton Woods conference also agreed to establish another international body called International Bank for Reconstruction and Development (IBRD) in order to regulate the way of doing international business. The major function of IBRD is capital in the form of loans to states at a reasonable rate for longer periods in order to assist the state in stimulating its economic growth. However, it is impossible for the countries which take loans from IBRD to spend it freely. The country which seeks loans from IBRD should spend the loan strictly in accordance with the instructions of the Bank. For example, if a country takes loans for developing drinking water projects from IBRD, it may not have the authority to distribute drinking water freely to the public. In other words, the country should take service tax from the public for providing or establishing public utility services like drinking water projects. In other words, the free public tap system may not be possible if the country takes loans for developing drinking water projects from IBRD. Woods (2006) has argued that World Bank and IMF can encourage sensible public sector development programs. He has cited Mexico as the example to prove his arguments (Woods, 2006, p. 44&56). Mexico is a country which succeeded in stimulating its economic growth with the help of huge loans it received from IMF and World Bank. Mexico has implemented lot of economic reforms in order to get loans from these global financial institutions. Mexico was only an underdeveloped country earlier, whereas it is a rapidly developing country at present. Mexico struggled to mobilize its resources because of the absence of infrastructure developments. However, the strict guidelines of IMF and World Bank helped them to avoid spending in nonproductive sectors and concentrate more on the productive sectors. The systematic and comprehensive planning and implementation of economic reformation strategies finally helped Mexico to write a new chapter in its development history. At the same time, extremely poor countries countries like Nicaragua and Mozambique failed to utilize the loans from these financial institutions in a proper manner. Battaile (2005) has pointed out that at the end of 1999, these financial institutions launched the PRS (Poverty Reduction Strategy) initiatives to help low income countries to develop and implement better strategies to fight poverty (Battaile, 2005, p.1). However, IMF and World Bank have insisted strict norms for providing aids to poor countries. It is difficult for poor countries to follow the IMF and World Bank guidelines strictly. Good governance was the first norm put forward by IMF and World Bank for assisting countries like Nicaragua and Mozambique. It was difficult for these countries to ensure good governance all of a sudden. Moreover, many of the norms put forward by these institutions were intended for the long term benefits of these countries. However, it was difficult for these countries to focus entirely on long term projects while they have critical sectors which needed immediate attention. World Bank and IMF policies are always aimed to implement in two ways. Identification and elimination of the reasons for poverty is the first thing. Mobilization of the idle resources is the second thing. However, in poor countries, it is difficult to implement these norms strictly. Globalization Globalization has brought opportunities and threats to the current world. Some people perceive globalization as a blessing whereas others visualize it as a curse. This is because of the different ways in which globalization affects different people. It is a fact that globalization brought many social, political and economic changes in this world. It succeeded in introducing a new concept of development in this world. It argues for the development of poor countries along with the development of the other countries. It tries to bring the entire global culture under one umbrella. It is also intended for decreasing the gap between; rich and poor, different religious beliefs, different political and social ideologies etc. At the same time critics of globalization argue that the gap between the rich and poor increased a lot as a result of globalization. Moreover, they perceive it as a strategy implemented by the wealthy capitalist countries to loot the resources of poor countries. They also argue that globalization is intended to spread the western culture across the world. In any case, as in the case of many other new concepts, globalization has certain advantages and disadvantages. The major advantage of globalization is the development of international trade and exchange of work workforce between countries. Lauder et al (2006) have pointed out that globalization is the process of transportation of jobs, ethnic and cultural composition of nations etc from one country to another (Lauder et al, p.32). The barriers of international trade and exchange of workforce have been considerably reduced as a result of globalization. Earlier, countries like China watched globalization with a suspicious eye; however, at present they are the number one exploiters of globalization. Many countries have opened up their economies more in order to attract foreign direct investments. It is because of the awareness that internal resources alone may not help a country to stimulate its economic growth. Holst (2007) has pointed out that as a result of globalization at three forms of capital; financial, productive and commercial, have been developed in this world (Holst). In fact globalization has opened many opportunities in the financial, productive and commercial sectors. It is possible for a foreign company to invest in American or British share markets at present because of globalization. It is impossible for China like bulk production oriented countries to sell their products in domestic market alone. Globalization helped them to sell their products in overseas markets. Mexico is one of the best examples to learn how well a country can exploit the globalization opportunities. Mexico was a very weak exporter at the beginning of the 1980s. At the present time, Mexico has become the eighth exporting country in the world and the first in Latin America. Exports have grown steadily; in 1981 there were a mere 6.5%, in 1990 they were already 27%, in 1996 they were an impressive 66%. Manufactured goods represented 33.8% and in 1993, they already represented 71.9% in 1993. Productivity has increased very significantly since the opening of the Mexican economy, while at the beginning of the eighties it was decreasing at a rate of 0.7% and 0.8%, in 1982 and 1983 respectively, in 1987, 88, 89 it started growing at rates of 2.5, 3.2 and 4.1%, and at the end of the nineties it was reaching rates of 9.0, 2.7, 8.7% in 1994, 1995 and 1997 respectively (Bizberg, p.16-17) The second advantage of globalization is the development of new business strategies like outsourcing and offshoring. According to William I Robinson (2003), “one of the distinctive features of globalization is the rise of transnational capital”(Robinson p.12). Bigger companies are facing lot of problems in their mother countries because of the lack of scope for expansion. For example, the famous coffee business company Starbucks has outlets even in every single corner of America. They were facing big problems because of the saturation they were experiencing in America. Globalization opened many opportunities to them in overseas countries and they are currently establishing their subsidiaries in overseas countries. “Starbucks is planning major expansion in China and Japan like countries (SANCHANTA). China and Japan on the other hand are doing everything possible to make the entry of Starbucks smoother in their soils. Apart from offshoring, outsourcing is another new business strategy evolved as a result of globalization. India like heavily populated countries has lot of manpower; but they lack employment opportunities. On the other hand, America like wealthy countries has lot of job opportunities; but they face manpower shortages. Globalization helped both these countries to solve their problems with the help of outsourcing. Because of manpower shortage, American labor market is highly expensive. On the other hand, because of lack of opportunities and excess of manpower, Indian labor market is cheaper. American companies are currently saving billions of dollars through outsourcing their jobs to cheap labor markets like India. Thus globalization or outsourcing helps both America and India in different ways. The increased economic and political co-operation between different regions and countries is the third advantage of globalization. For example, earlier, America was the biggest enemy of China. However, globalization helped these two countries to solve their problems amicably and to increase their economic and political cooperation for mutual benefits. As mentioned earlier, American companies are investing heavily in China at present even though China and America are politically, culturally and economically different countries. Moreover, America is the biggest market for Chinese products at present. Such a cooperation between these two countries was not even in the distant dreams of political thinkers before the introduction of globalization. The increased economic and cultural interconnectedness between countries as a result of globalization brought many new challenges and controversies also. Governments forced to make lot of changes in their internal and external policies in order to introduce globalization policies effectively. One of the major policy changes as a result of globalization is the privatization of public enterprises. Even public organizations running in profits, were privatized by many governments because of globalization. For example, earlier, essential services like transportation, telecommunications, healthcare etc were under the governmental control. However, at present these essential service segments were privatized by many governments. Private companies which took control of these service segments are currently exploiting the public wealth in many ways. Another criticism labeled against globalization is about the failure of underdeveloped countries to use globalization for its advantage. Many people are of the view that poverty is still prevailing not only in underdeveloped countries but even in developed countries as well. Even though globalization is good in principles, poor countries failed to implement it practically. The initial claim of globalization was to help the poor countries in stimulating their economic growth. According to Dreher (2003), “Countries like Rwanda or Zimbabwe insulated themselves from the world economy. They have poor institutions which repress growth and promote poverty”(Dreher p.15). Better infrastructure and other resources are needed to utilize globalization for economic growth. However such things are not there in underdeveloped countries and they failed to develop properly. In short, globalization failed to achieve one of its most important objectives of helping the poor countries in their development. Even though, outsourcing was earlier explained as an advantage of globalization in this paper, it is causing disadvantages to the outsourcer countries. For example, capital flow worth billions is taking place from America like outsourcer countries to India like outsourcee countries. President Obama is currently trying hard to discourage outsourcing. Huge capital outflow is not good for the economic development of a country. Obama has already announced that certain tax cuts prevailing in the country may not be applicable to the organizations which are outsourcing their business to overseas countries. However, American organizations cannot stay away from outsourcing since they are saving more than 18 billion dollars per year because of outsourcing. In short, globalization increases the capital flow from one country to another which will affect the economic development of countries like America. Tariff and non-tariff barriers to trade Tariff is a tax levied upon imports and exports. The purpose of tariff is either to increase import or to reduce imports. All the countries like to increase their exports in order to get more foreign money. Same way countries like to reduce their imports in order to save their domestic capital. In other words, exports will always help a country to attain foreign capital whereas imports will always result in loss of domestic capital. Injudicious exports or imports can affect the domestic economy adversely. For example, India is producing large volumes of coconut oil. However, the domestic production of coconut oil may not be sufficient enough for the entire requirement of the country. In such cases, India may try to import palm oil from other countries. The import of palm oil may adversely affect the coconut farmers in India as the prices of coconut oil may come down in the domestic market. In such cases, India will enforce a reasonable tariff on all imported oil products in order to help the domestic coconut farmers. Let’s take another example; the sugar price in American market is comparatively higher than the sugar price in international markets. In such cases, sugar exporting countries will try to increase their exports to US market in order to exploit the favorable conditions. Under such circumstances, US will enforce higher tariff rates on imported sugar in order to prevent other countries from exploiting US market injudiciously. Apart from regulating imports, tariff and trade barriers are used for protecting domestic employment, protecting consumers, protecting infant industries, protecting national security etc. imported goods always compete with domestic goods and unhealthy or unregulated competition often destroys the domestic industries or infant industries. Any damages caused to the domestic industries may affect the employment sector negatively. Imports often affect the small and medium scale industries more than other industries. Small and medium scale industries are one of the major employment providers in a country. Competition from foreign goods may destroy small and medium scale industries and therefore many of the people become unemployed. It is not necessary that all the imported products are safe to use. For example, many countries import beef from other countries. It is quite possible that sometimes these beef producing countries may utilize diseased animals for increasing their export. In such cases, in order to safeguard the interests of the consumers, beef importing countries can enforce trade barriers on imported beef from the suspected country in order to protect domestic consumers. Sometimes unregulated imports may often cause threats to national security. We are living in a highly technological world at present and cold wars and undeclared wars are taking place between different countries in an indirect manner. For example, iPhone failed to catch Chinese market because of the strong regulations enforced by China on mobile communication equipment. Blackberry manufacturers forced to incorporate additional security features in order to sell their products in India. All these things are happening because of the threats raised by some imported items on national security. Non-tariff barriers such as licenses, import quotas, Voluntary Export Restraints (VER), Local content requirement etc are also enforced by countries in order to regulate imports or international business. Import quota is the restriction imposed upon the volume of a particular item that can be imported. Unregulated imports may destroy domestic industries as mentioned earlier. Voluntary export restraint (VER) is normally enforced by the exporting country rather than the importing country. VER is often enforced on behalf of the importing country even though it is implemented by the exporting country. This is often done on mutual benefit basis. For example, America could place a VER on exportation of military equipment to India based on the request from India. In return, India could enforce VER upon exportation marine products to US based on the request of US. Local content requirement is another non-tariff barrier enforced by different countries to increase domestic production and to decrease imports. In this type of regulation, governments can fix certain percentage of the imported goods or the components of the imported goods should be made domestically. For example, India is an emerging economy and many of the foreign car manufacturers are currently competing heavily to market their cars in India. The domestic car makers in India are suffering from such big competition from the foreign car manufacturers. India can ask the foreign car manufacturers to produce certain parts of their cars in India in order to compensate for allowing them to sell their vehicle in India. To conclude, international trade is growing day by day as a result of globalization, privatization and liberalization. Even though globalization has many benefits, it has certain disadvantages also. Uncontrolled or unregulated international trade may adversely affect the interests of a country. Tariffs and non-tariff trade barriers are usually used by countries to conserve their interests. Works Cited 1. Bizberg, Ilan. “Globalization and Democracy in Mexico”. Web. 13 June 2011. 2. “Conference at Bretton Woods”. Web. 13 June 2011. 3. Dreher, Axel. “Does Globalization Affect Growth?”2003. Web. 13 June 2011. 4. Holst, John D. “The Politics and Economics of Globalization and Social Change in Radical Adult Education: A Critical Review of Recent Literature”. 2007. Journal for Critical Education Policy Studies Volume 5, Number 1 (May 2007) 5. Lauder, Hugh Brown, Phillip, Dillabough, Jo-Anne & Halsey A. H. “Education, Globalization and Social Change” 2006. Publisher: Oxford University Press, USA (September 7, 2006) 6. Robinson, William I. “Transnational Conflicts”. 2003. Publisher: Verso, Meard Street. London 7. SANCHANTA, MARIKO. “Starbucks Plans Major China Expansion”.2010. The Wall Street Journal, APRIL 13, 2010. Web. 13 June 2011. 8. Woods Ngaire. “The Globalizers: The IMF, the World Bank, And Their Borrowers”. 2006. Publisher: Cornell University Press; 1 edition (March 29, 2006) Read More