Montana Tech Foreign Direct Investment and Regional Trade Groups Paper Topic: Investing in another country – After you have read the literature posted unde

Montana Tech Foreign Direct Investment and Regional Trade Groups Paper Topic: Investing in another country – After you have read the literature posted under unit four, the assignment is to write a two (2) page paper discussing foreign direct investment and regional trade groups. Multinational firms view the world as a single entity and all people as customers, employees, and suppliers. Why do companies invest outside their home borders? Why do countries encourage investment? Why do countries form regional trade groups? What is the benefit of countries trading amongst each other? How are these regional trade groups agreements different from global trade agreements such as those agreed upon through the WTO? In writing this paper, choose two countries for your example (one should be the country you are doing for your country report) and how the investment in that country benefits both the country receiving the investment, and the company making the investment. How does the investment help its people? Is the investment simply one of seeking lower labor costs or are there other benefits? What are the risks of investing in another country? Give examples. You will have to show you have read the readings and some additional sources. This does not mean to just quote from all the material, but go beyond that in presenting/discussing the arguments made in each reading. I would like your informed opinions included in the paper.Specifications:Additional Research – Demonstrate that you have done additional Internet research on this topic by including three additional cited sources in your paper. By this, I mean three sources beyond the readings I listed in the Course Documents link. Proper citing of these sources in the narrative of your paper is required. Two pages, double spaced, not including Title or Works Cited Page. This means the paper should be 600-750 words. As with all papers prepared for this course, content in individual papers is expected to be supported by globally acknowledged, peer-reviewed, refereed research citations and sources. All written submissions should adhere to APA standards for writing, formatting, and citations/references. GLOBAL CURRENCY WAR
REUTERS/Yuriko Nakao
The global currency story is heating up. The Bank of Japan goes hell for
leather back to zero rates; emerging markets protest as their currencies
surge; the IMF warns against currency wars. Policy disarray? Where
does it all end? The answer is look for more dollar weakness and
currency controls. Reuters gives an in-depth look at the options.
OCTOBER 2010
CURRENCY WAR
OCTOBER 2010
ANALYSIS
G20 talks needed to
avert ForeX war
• G20 needs framework for orderly
dollar devaluation
• Emerging FX revaluation hard to
avoid given flows, US QE
• Hot money, portfolio flows risky,
but FDI surging too
U.S. DOLLAR WEAKENS
CURRENCY EXCHANGE RATES
Daily close
EURO TO DOLLAR
1.6
YEN TO DOLLAR
HIGH – Apr. 6: 100.98
105
HIGH – Nov. 25: 1.514
1.5
100
Oct. 6 1.384
LOW – Sep. 14: 83.05
1.4
95
1.3
By Mike Dolan
LONDON, Oct 6
C
areful calibration of a U.S. dollar devaluation looks to be the only way to avert
the sort of currency war flagged by Brazil
and others, leaving G20 powers the unenviable
task of agreeing some control of the process.
1.2
1.1
As G20 finance chiefs prepare to meet on Oct.
22, they are no closer to resolution of the decade-old bugbear of global imbalances between
export-driven economies – mostly developing nations such as China, but also Japan and
Germany – and the big global consumers, the
United States, Britain and elsewhere.
2
Faced with fiscal exhaustion, hostile electorates
and booming China’s refusal to allow a rapid rise
of the yuan, the U.S., Japan and possibly Britain
seem set on another bout of money printing to
reboot their ailing economies and weaken their
currencies.
Oct. 6 83.12
J
F M A M J
J
2009
Canada
5
(BoC overnight rate)
A S O N D
(Fed funds
rate)
Japan
(Overnight
call rate)
Australia
J F M A M J
2010
J
80
A S
GOLD PRICES
Daily close in dollars per ounce
Oct. 6 1,347.05
Dec. 2: 1,214.55
1,400
1,300
1,200
(RBA cash rate)
3
0
U.S.
4.5
4
1
85
LOW – June 7: 1.191
WORLD INTEREST RATES
The top world economies, shaken by three years
of financial turmoil, are scrambling to cap or
weaken their currencies in a fight over fragile
global demand for exports – prompting retaliatory capital curbs and damaging trade rows.
While there have been loose agreements on
rebalancing over time – where emerging powers
allow currencies to rise gradually – the lack of
an agreed blueprint to manage the transition is
already prompting unilateral actions and tit-fortat reactions in a febrile economic and political
environment.
90
1,100
1,000
Eurozone (Refi rate)
2009
Source: Thomson-Reuters
2010
1.0
0.75
0-0.25
0.1
900
LOW – Jan. 14: 810.35
2009
2010
800
Note: Rates and prices as of Wednesday 0600 GMT
Fast-growing developing countries with flexible
exchange rates are caught in the crossfire and
are reacting fast, leading to Brazil on Monday
to double taxes on foreign inflows and South
Korea on Tuesday to threaten curbs on currency
trading.
France, which takes G20’s rotating chair next
month, has denied weekend reports of “secret
negotiations” with China. But it’s clear that patience in the status quo is running out.
“To avoid the damaging consequences of
continued unilateral action … a core group of
2
CURRENCY WAR
major economies needs to agree urgently on a
multilateral and coordinated package of policy
measures,” Charles Dallara, director of banking
group the Institute for International Finance,
said on Monday.
OCTOBER 2010
CLICK FOR
INTERACTIVITY
U.S. trade threats against China over the yuan
showed the “counterproductive nature of unilateral policy,” Dallara said in an open letter to the
International Monetary Fund’s annual meeting.
ALL HANDS TO THE PUMP
bets to exploit rising pressures.
The main problem for emerging economies
is much of the freshly minted “core” liquidity, chased away by depressed western interest rates, is flowing to higher overseas returns
rather than strapped firms and households in
America or Japan.
EMERGING FX RUSH
Their bind is a choice between standing back
and accepting export-stunting currency surges
and asset bubbles or to resume heavy intervention or capital controls that lead to inflation
headaches or further trade distortions.
Robert Johnson, director of the Soros-funded
Institute for New Economic Thinking, said G20
needs agreement on the size and pace of the
currency shifts between three main groups – the
United States and major consumers; the big
exporters of China, Japan and Germany; and a
grouping of emerging exporters.
“There is competitive devaluation going on,”
said Johnson, a former director at billionaire
George Soros’ fund management firm and
former economist at the U.S. Senate Banking
Committee.
“What is called for here is a realignment of
emerging countries’ exchange rates vis-a-vis the
developed countries – maybe 20-25 percent appreciation over the next year or two.”
What emerging economies lose on export competitiveness, he reckons, they can recapture at
least partially in cheaper imports for their growing middle class of consumers.
The tricky bit is how to get everyone to move
together and prevent market prices snowballing
or governments overreacting.
Left to their own devices markets are unlikely to
deliver the gradualism desired by most governments and faith in efficient pricing is at a low
ebb after the credit crisis.
And, reading the runes well, money managers
already see the opportunity and are stacking
David Shairp, strategist at JPMorgan Asset
Management, reckons the move to emerging
currencies could now accelerate.
“One of the implicit aims of liquidity injections
by the core G4 is surely to facilitate a weakening
of their currencies,” he told clients this week.
Portfolio flows to emerging market equities are
booming and emerging market debt denominated in local currency is currently one of the
hottest fixed-income plays.
According to fund tracker EPFR, emerging
market bond fund inflows, with local currency
mandates taking more than half, have soared to
almost $40 billion so far this year from less than
$700 million in the first nine months of 2009.
Reuters terminal
users can click
through for the
latest on global
currency tensions >>
Net flows to emerging market equities in the
third quarter, at more than $30 billion, were
some 50 percent up on the first six months of
the year. And year-to-date inflows of almost $50
billion compare to a net exit from developed equity funds of almost $79 billion and an outflow
of half a trillion from western cash funds.
The speed and stability of these portfolio
streams may be a legitimate concern, but
longer-term flows play the same tune.
ThomsonReuters data shows emerging market
mergers and acquisitions this year, at $480 billion, were up 63 percent on the same period of
2009.
Crucially, this is not “hot” money.
“No one is sleeping on the job,” Brazil’s finance
minister, Guido Mantega, said on Monday. “We
risk having a trade war and that’s the worry.
(But) it is preferable that we take coordinated
measures instead of isolated measures.”
(Editing by Susan Fenton)
3
CURRENCY WAR
OCTOBER 2010
Currency war fears
tinge IMF meetings
By Emily Kaiser and Lesley Wroughton
WASHINGTON, Oct 4
I
F there’s one thing the world’s economic powers can agree on, it’s that none of them wants
a strong currency right now.
Most advanced economies expect lukewarm
domestic growth at least through next year,
leaving them unusually export-dependent. The
major emerging economies, including China
and Brazil, rely on exports too. They all know a
weaker currency gives their goods a competitive
advantage.
GLOBAL CURRENCY TENSIONS
U.S.A.
The House of
Representatives passed
a measure
that would
treat the yuan
as an unfair
subsidy,
opening the
door to U.S.
tariffs
Switzerland
The central
bank has
stayed out of
the market since
June but traders
speculate it
may resume
intervening
following
JapanÕs move
China
Steers the
yuan with
reference to
a basket of
currencies.
Central bank
sets a daily
mid-point
from which
the yuan can
rise or fall
0.5%
South
Korea
Warned it
may impose
further limits
on forward
trading as
the won
continues
its uptrend
despite
intervention
Japan
Intervened in
September
for the first
time since
2004 and
has signaled
it is ready
to keep
stepping into
the market
Fears that a currency war may be brewing will
likely dominate talks when financial leaders
gather at the twice-yearly International Monetary Fund and World Bank meetings in Washington beginning on Friday.
In the past month, Japan has intervened to
drive down the value of the yen, and a couple of
emerging markets have followed.
The U.S. dollar has tumbled as investors brace
for the Federal Reserve to print as much as $1
trillion to fund debt purchases in the hope of
propping up the recovery.
Brazilian Finance Minister Guido Mantega said
last month the world was in an “international
currency war” that put emerging markets like
Brazil at a disadvantage. .
U.S. employment figures due on Friday are likely
to serve as yet another reminder of the sluggish
pace of recovery. Economists polled by Reuters
think the data will show virtually no job growth
in September, with the unemployment rate ticking up to 9.7 percent.
That is likely to provide encouragement for the
Fed to flood the economy with even more easy
money, perhaps as early as its November policysetting meeting, which would put still more
downward pressure on the dollar.
Nobel-prize winning economist Joseph Stiglitz
said weakening the dollar may be the Fed’s most
powerful economic weapon because interest
Chile
The president
said the
central bank
should do
more to tame
the strong
peso. The
central bank
has warned
about the
strong peso
but has not
intervened
so far
Brazil
Doubled a
tax on foreign
investors
buying local
bonds to curb
a strong real
Colombia
Central bank
in September
began buying
dollars to
curb a rise in
its currency.
It has said it
would buy at
least $20
million daily
Thailand
A senior
central bank
official says
the strength
of the baht is
worrying and
the bank is
studying ways
to control
fund flows
Indonesia
The central
bank
introduced
in June a
one-month
minimum
holding
period for
its bills
rates are already rock bottom, and this has not
spurred sufficient lending or spending.
“One of the main ways that our monetary policy
is working is through competitive devaluation,”
he said in a Reuters Insider interview.
“Brazil, China, India are probably robust enough
that they can withstand that, but I certainly
understand their annoyance.”
MUSICAL CHAIRS
In addition to the currency debate, the IMF faces
its own internal battle. Fast-growing China
and other big emerging markets want greater
representation in the financing institution, which
means some of the developed countries will
have to yield some of their power.
4
CURRENCY WAR
European countries currently control one-third
of the 24 seats on the IMF’s executive board, and
the United States wants them to give up some of
those spots.
European countries have proposed giving up two
seats to emerging economies on a rotating basis
as part of a power-sharing scheme.
Simply rotating seats may not be enough of a
change to satisfy Washington and other critics
who feel the arrangement is unfair.
Development groups said the Europeans’ proposal was little more than a symbolic gesture
to poorer countries that deserve representation
commensurate with their growing power.
Germany, France and Britain now have their own
seats on the board, while smaller European nations Belgium, the Netherlands, Spain, Italy and
Denmark represent groups of countries.
OCTOBER 2010
U.S. Treasury Secretary Timothy Geithner has
complained that this setup gives Europe far
greater decision-making power than the United
States even though the two have similar-sized
economies.
Ultimately, some sort of compromise will have to
be reached — the IMF needs to resolve this issue
by October, when the board’s mandate expires
— but the Europeans’ “non-proposal” does not
amount to substantial change, said Domenico
Lombardi, a senior fellow at the Brookings
Institution think tank and a former IMF board
member.
“I don’t think it is going to fly at all with the U.S.
and the rest of the membership,” Lombardi said.
(Editing by Padraic Cassidy)
5
CURRENCY WAR
OCTOBER 2010
Sarkozy gambles on China
in G20 forex drive
By Paul Taylor
PARIS, Oct 4
F
RENCH President Nicolas Sarkozy is gambling on drawing China into a multilateral dialogue on currency stability as the
centrepiece of his forthcoming presidency of the
G20 economic leadership forum.
Whether Beijing will agree is unclear. Western
officials will be parsing the statements of Chinese Prime Minister Wen Jiabao on a European
tour this week for clues.
Sarkozy has put reforming the international
monetary system at the top of his agenda at a
time when all the world’s major economies are
tempted to let their currencies depreciate in an
attempt to rekindle export-led economic growth.
The United States accuses China of keeping its
currency, the yuan, artificially low, hurting U.S.
jobs and competitiveness.
If Sarkozy can persuade Beijing to engage in
foreign exchange policy coordination in a G20
setting, he would pocket a political success
that could boost his expected 2012 re-election
bid and upstage his most dangerous potential
challenger, IMF Managing Director Dominique
Strauss-Kahn.
“Sarkozy always wants a big headline. With
France taking over the G20, he wants something
big on the agenda,” said Joost Beaumont, European economist at ABN Amro.
“This also has a bit to do with smoothing
Sarkozy’s domestic political problems. His handling of the EU presidency at the peak of the (financial) crisis earned him a lot of credit at home,
and now he hopes he can pull off the same trick
on the global currency issues.”
French diplomats say Paris has been holding
preparatory talks with major partners, including
China, for months on its G20 agenda.
Sarkozy suggested in August holding a conference of experts in China on a new international
monetary order.
CONTACT GROUP
Some G20 diplomats say the fact that the
president went public with the idea suggests he
already has an indication of Chinese acceptance,
which might be announced when President Hu
Jintao visits Paris in November.
Officials in Sarkozy’s office deny any secret
agreement.
“Intuitively, I would be very surprised if the Chinese would have done a deal with the French,”
said analyst Carsten Brzeski at ING Financial
markets.
G20 nations
should pay
more attention
to what China
has to say on
foreign
exchange
issues Christine
Lagarde,
French finance
minister
“Sure, France will have done consultations
ahead of the G20 but earlier experience — just
think of the climate conference — has shown
that China only considers the United States a
partner at its own eye level, but the same is not
yet the case for the Europeans,” he said. “A deal
is very unlikely but it is obvious that pressure on
China is increasing.”
France has reassured suspicious Western partners that it is not seeking fixed exchange rates of
the type established by the 1944 Bretton Woods
conference which created the International Monetary Fund at the end of World War Two.
Nor is it proposing to replace the dollar as the
main international reserve currency, although a
G20 monetary forum could discuss longer-term
Chinese ideas for making more use of the IMF’s
Special Drawing Right as a virtual global currency.
6
CURRENCY WAR
Diplomats involved in the preparations say the
French aim is more modestly to establish a G20
forum for regular dialogue about currency developments which could give guidance to markets
on the major powers’ thinking.
Finance ministers and central bankers of the
Group of Seven major industrialised economies
— the United States, Japan, Germany, France,
Britain, Italy and Canada — have played this role
since the 1970s, meeting regularly to discuss
foreign exchange issues and issuing joint statements.
French officials contend that the G7 — which
meets later this week — is no longer the right
place since it does not include China, India,
Brazil, Russia or Saudi Arabia. A G20 currency
forum could fulfil that function.
“If he can get agreement to a contact group on
exchange rates, that would be an achievement.
He can say that no one wanted to touch this issue before,” one G20 diplomat said.
WHAT’S IN IT FOR CHINA?
The United States may well be supportive since
Treasury Secretary Timothy Geithner seems
keen to find a more effective and less vitriolic
approach to coaxing China to allow the yuan to
appreciate than their current bilateral megaphone dialogue.
A high-level U.S. team led by Under Secretary
of State for Economic Affairs Robert Hormats
was in Paris on Monday to discover more about
French thinking on the G20 agenda.
The U.S. Congress, in the build-up to mid-term
elections, is applying ever more shrill pressure
on the Obama administration to brand Beijing a
currency manipulator and take retaliatory trade
restrictions if it does not let the yuan rise.
Geithner said in Senate testimony on Sept. 16 he
expected “a significant focus of attention … on
China’s exchange rate policy” at the next G20
summit in Seoul in November.
The Europeans are less outspoken, partly because their terms of trade with Beijing improved
as the euro fell from $1.60 in mid-2008 to below
$1.20 in July, while the yuan remained pegged
to the dollar, although that trend has since re-
OCTOBER 2010
versed, with the euro back up around $1.37.
Fragmented Europeans are also less practised
at wielding economic power by linking trade to
foreign exchange policy.
On the first leg of his European tour in Athens,
Wen said on Sunday that Beijing supported a
stable euro and will not reduce its holdings of
European bonds. He also promised to support
debt-stricken Greece’s economy but made no
comment on the yuan.
His emollient speech to the Greek parliament
appeared aimed at deflecting criticism of China’s
currency policy in talks with euro zone officials in
Brussels on Monday night and Tuesday.
A euro zone policymaker said Beijing was skilled
at making gestures just ahead of major deadlines such as the announcement of a more flexible yuan exchange rate just before the June G20
summit in Toronto, only to revert to its old ways
afterwards.
“They play us for fools,” the official said. “That
may work once or twice, but if there is no reciprocity, we will have to start drawing a line.”
Some Western G20 diplomats are sceptical of
Chinese willingness to be drawn into a G20
dialogue on currencies given the ruling Communist Party’s insistence on monetary sovereignty.
Any such talks could be seen as the thin end of
a wedge.
They recall that Beijing refused to allow the G20
to praise its decision to make the yuan exchange
rate more flexible in June to avoid creating a
precedent of the issue being a legitimate subject
for multilateral discussion.
“What’s in it for China?” one European monetary diplomat asked. “A way of deflecting the
U.S. Congress? But would that work? Enhanced
status? But doesn’t China already have that by
making the world come to its door to beg for
currency relief?
“A bigger say in global monetary affairs? But
won’t China get that anyway as its economy
expands?”
(Additional reporting by Daniel Flynn and Brian
Love in Paris and Brian Rohan in Berlin, editing
by Mike Peacock)
7
CURRENCY WAR
OCTOBER 2010
Asia’s intervention
bandwagon
By Eric Burroughs, Asia Financial Markets Editor
HONG KONG, Oct 6
F
or all the talk about currency wars and
competitive devaluations, the only currency really being devalued is the U.S.
dollar.
Asian interventions to block the dolla…
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