MAN 010 International Business and Trade

Trading Internationally
Trading Internationally Top 5 Commodity Exports
Opening Case: Why Are German Exports So Competitive? • Gold – $2 billion
• Until 2009, Germany had been the world’s export champion for a • Bananas – $1.8 billion
long time. Although China snatched the world’s export champion • Coconut Oil – $1.3 billion
title in 2009, • Refined Copper – $1.1 billion
• Germany’s export volume (approximately $1.4 trillion a year) • Copper Ore – $670 million
routinely outperforms other powerhouses such as the United States Philippines as Blue Economy
and Japan. 2.2 Million sq. km
• On the road, BMW and Mercedes cars
• In information technology (IT), SAP is king of the hill for enterprise
resource planning (ERP).
• In sportswear, many of us wear Adidas shoes.
• Nivea touches the skins of many female
What is unique about German exports?
German products and firms are world renowned for their excellent
engineering, superb craftsmanship, and obsession for perfection.
• German government has sought to avoid large scale
deindustrialization (otherwise known as loss of manufacturing jobs)
and encouraged firms to produce at home.
WHY DO NATIONS TRADE?
International trade consists of:
• Exporting - selling abroad
• Importing - buying from abroad WHY DO NATIONS TRADE?
Two main sectors: Trade deficit occurs when a nation imports more than it exports.
• Merchandise Trade surplus occurs when a nation exports more than it imports.
• Services
In services, the United States
WTO Trade Report as of 2019

• The aggregation of such buying (importing) and selling (exporting)

by both sides leads to the country-level balance of trade—namely,
whether a country has a trade surplus or deficit.
• Overall, we need to be aware that when we ask “Why do nations
trade?” we are really asking “Why do firms from different nations
trade?”
why are there economic gains from international trade?
• According to the resource-based view, it is because some firms in
one nation generate exports that are valuable, unique, and hard to
imitate that firms from other nations find it beneficial to import.
• According to the institution-based view, different rules governing
trade are designed to determine how such gains are shared.
Pattern of Trade (Export)
THEORIES OF INTERNATIONAL TRADE
• U.S. exports vehicles - new and used cars (12.1% as of 2019)
• Ghana exports cocoa Theories of international trade provide one of the oldest, richest, and
most influential bodies of economic literature.
• Brazil exports coffee
• Saudi Arabia exports oil
• China exports electrical machinery, crawfish
• Japan export automobiles, consumer electronics, and machine
tools
• Switzerland export chemicals, pharmaceuticals, watches, and
jewelry
• Bangladesh export garments
• South Korea – consumer technology
Classical trade theories:
Economy of the Philippines
(1) Mercantilism
• Comprises of more than 7,641islands (www.gov.ph), The vast (2) Absolute Advantage,
majority of the population lives on only 11 of them. (3) Comparative Advantage
• At present, the country is the 38th largest export economy in the Modern trade theories:
world. Its annual exports total $97.8 billion and imports are $35 (1) Product life cycle
billion, resulting in a negative trade balance. (2) Strategic trade
(3) National competitive advantage of industries.
MAN 010 International Business and Trade
Trading Internationally
Theory of Mercantilism Smith’s two greatest insights are:
• Jean-Baptiste Colbert, French statesman 1) By specializing in the production of goods for which each has an
absolute advantage, both can produce more.
• Widely practiced during the 17th and 18th centuries
(2) Both can benefit more by trading. By specializing, England
• Viewed international trade as a zero-sum game
produces more wool than it can use and Portugal produces more
• Suggested that the wealth of the world measured in gold and silver wine than it can drink.
at that time
Theory of Comparative Advantage
• A theory that suggests that the wealth of the world is fixed and that
a nation that exports more and imports less will be richer. • British economist David Ricardo 1817.
• Comparative advantage
• Although mercantilism is the oldest theory in international trade, it is
defined as the relative (not absolute) advantage in one economic
not an extinct dinosaur. Very much alive, mercantilism is the direct
activity that one nation enjoys in comparison with other nations.
intellectual ancestor of modern-day protectionism
Protectionism • Bangladesh
• The idea that governments should actively protect domestic • Export Textile industry
industries from imports and vigorously promote exports. • Walmart
• Labor cost – 50%
• ¾ of inputs are locally produced
• West are cautious about not becoming too dependent on China.
Product Life Cycle
• Develop by Raymond Vernon
• the first theory to account for the change of trade patterns overtime
• A theory suggesting that patterns of trade change overtime as
Absolute Advantage production shifts and as the product moves from new to maturing
• Adam Smith, British then to standardized stages (Peng,2012)68)
• He is considered the founder of modern economics, theories of Strategic Trade
international trade • Strategic intervention by governments may help domestic firms reap
• He wrote The Wealth of Nations 1776 to challenge an earlier theory: first mover advantages in certain industries.
Mercantilism. • First mover firms, aided by governments, may have better odds at
• He believes on specialization and division of labor. winning internationally.
• Smith argued that, in the aggregate, the “invisible hand” of the • Heavily resisted by scholars who advocate “free trade”
free market, not government, should determine the scale and scope (Peng,2012,p.71)
of economic activities. This is known as laissez faire. National Competitive Advantage of Industries
• The competitive advantage of different industries in a country was
based on this four interacting forces (Peng,2012,p.71).

• Factor endowments (Heckscher-Ohlin Theory) - a nation’s

• With free trade, a nation gains by specializing in economic position in factors of production such as skilled labor or the
activities in which that nation has an absolute advantage. infrastructure necessary to compete in a given industry
• Absolute Advantage • Demand conditions - the nature of home demand for the industry’s
A nation that is more efficient than anyone else in the production of product or service.
any good or service. • Relating and supporting industries - the presence or absence of
For example, Smith argued that Portugal enjoyed an absolute supplier industries and related industries that are internationally
advantage over England in producing grapes and wines because competitive
Portugal had better soil, water, and weather. Likewise, England had • Firm strategy, structure, and rivalry - the conditions governing
an absolute advantage in raising sheep and producing wool how companies are created, organized, and managed and the
compared to Portugal. It cost England more to grow grapes: an acre nature of domestic rivalry.
of land that could raise sheep and produce fine wool would only
produce an inferior grape and a lower quality wine. Has anyone
heard of any world famous English wines? Smith recommended that
England specialize in sheep and wool, that Portugal specialize in
grapes and wines, and that they trade with each other.
MAN 010 International Business and Trade
Trading Internationally
What Is The Political Reality Of International Trade? Tariffs
• Free trade • tax imposed by a government on goods entering at its borders.
- occurs when governments do not attempt to restrict what citizens • may be used as revenue-generating taxes or to discourage the
can buy from another country or what they can sell to another importation of goods, or for both reasons
country • Tariff rates are based on value or quantity or a combination of both.
- many nations are nominally committed to free trade, but intervene Types of customs duties(tariffs) used are classified as follows:
to protect the interests of politically important groups (1) ad valorem duties, which are based on a percentage of the
How Do Governments Intervene In Markets? determined value of the imported goods;
• Governments use various methods to intervene in markets thru the (2) specific duties, a stipulated amount per unit weight or some other
concept of Trade Barriers. measure of quantity;
• There are two main arguments for government intervention in the (3) compound duty, which combines both specific and ad valorem
market taxes on a particular item, that is, a tax per pound plus a percentage
1. Political arguments - concerned with protecting the interests of of value.
certain groups within a nation (normally producers), often at the Effects and Purpose of Tariffs:
expense of other groups (normally consumers) • Increase inflationary pressures.
2. Economic arguments - concerned with boosting the overall wealth • Special interests’ privileges.
of a nation – benefits both producers and consumers • Government control and political considerations in economic
What Are The Political Arguments For Government Intervention? matters.
1. Protecting jobs - the most common political reason for trade • The number of tariffs (they beget other tariffs via reciprocity).
restrictions • Weaken balance-of-payments positions.
2. Protecting industries deemed important for national security - • Supply-and-demand patterns.
industries are often protected because they are deemed important • International relations (they can start trade wars).
for national security • Restrict manufacturers’ supply sources.
3. Retaliation for unfair foreign competition - when governments • Choices were available to consumers.
take, or threaten to take, specific actions, other countries may • Competition.
remove trade barriers
Quotas
4. Protecting consumers from “dangerous” products – limit
“unsafe” products • specific unit or dollar limit applied to a particular type of goods
5. Furthering the goals of foreign policy - preferential trade terms • put an absolute restriction on the quantity of a specific item that can
can be granted to countries that a government wants to build strong be imported
relations with • Example:
6. Protecting the human rights of individuals in exporting Italy restricts Japanese motorcycles;
countries – through trade policy actions United States has quotas on sugar, textiles, and, of all things,
7. Protecting the Environment – international trade is associated peanuts early 2010, as Avatar dominated cinema around the world,
with a decline in environmental quality China ordered its movie houses to limit showings to the 3D version
What Are The Economic Arguments For Government Intervention? only.
1. The infant industry argument - an industry should be protected Voluntary Export Restraints
until it can develop and be viable and competitive internationally • Similar to quotas is the voluntary export restraints (VERs) or orderly
2. Strategic trade policy - first mover advantages can be important to market agreements (OMAs).
success • Common in textiles, clothing, steel, agriculture, and automobiles,
Protectionism • VER is an agreement between the importing country and the
exporting country for a restriction on the volume of exports
• An economic policy of restraining trade to protect the infant market
It will help to protect fair competition between goods and services Boycott
• Tariffs, quotas, and nontariff barriers are designed to protect • is an absolute restriction against the purchase and importation of
markets from intrusions by foreign countries certain goods and/or services from other countries. This restriction
• Nations utilize barriers to restrain entry of unwanted goods can even include travel bans.
Legal • Nestlé products were boycotted by a citizens group that considered
Exchange the way Nestlé promoted baby formula in less developed countries
Psychological misleading to mothers and harmful to their babies.
Private market Embargo
Trade Barriers • is a refusal to sell to a specific country.
• Example: Cuba and Iran still have sanctions imposed by the United
1. Tariffs
States
2. Quotas
3. Voluntary Export Restraints (VER) Monetary Barriers
4. Boycotts and embargoes • A government can effectively regulate its international trade position
5. Monetary barriers by various forms of exchange-control restrictions.
Blocked currency 1. Block Currency – refusing to allow an importer to exchange its
Differential exchange national currency for the sellers currency.
Government approval 2. Differential Exchange Rate – is a particularly ingenious method of
6. Standards controlling imports.
7. Antidumping penalties 3. Government Approval – to secure foreign exchange is often used
by countries experiencing severe shortages of foreign exchange.
MAN 010 International Business and Trade
The Political Economy of International Trade
The political economy of international trade • The agenda includes
➢ cutting tariffs on industrial goods and services
Standards
➢ phasing out subsidies to agricultural producers
• Nontariff barriers of this category include standards to protect the ➢ reducing barriers to cross-border investment
health, safety, and product quality ➢ limiting the use of anti-dumping laws
• In the Netherlands, all imported hen and duck eggs must be marked 10 Largest Political and Economic Bloc in the World
in indelible ink with the country of origin;
• ASEAN – Association of South East Asian Nations.
• In Spain, imported condensed milk must be labeled to show fat
• APEC – Asia Pacific Economic Cooperation.
content if it is less than 8 percent fat;
• BRICS – Brazil, Russia, India, China and South Africa
• In the European Union, strict import controls have been placed on
• EU – European Union.
beef and beef products imported from the United Kingdom because
of mad cow disease. • NAFTA – North America Free Trade Agreement.
Antidumping Penalties • CIS – Commonwealth of Independent States.
• COMESA – Common Market for Eastern and Southern Africa.
• Antidumping laws were designed to prevent foreign producers from
“predatory pricing”. • SAARC –South Asian Association for Regional Cooperation
Predatory Pricing – is a practice whereby a foreign producer • MERCOSUR - Mercado Comun del Cono Sur which means
intentionally sells its product in the United States for less than the cost Southern Common Market
of production to undermine the competition and take control of the • IOR-ARC - Indian Ocean Rim Association for Regional Cooperation
market. What Do Trade Barriers Mean For Managers?
Countervailing duties – prevent the use of foreign government • Managers need to consider how trade barriers affect the strategy of
subsidies to undermine American industry. Many countries have the firm and the implications of government policy on the firm
similar laws, and they are allowed under WTO rules. 1. Trade barriers raise the cost of exporting products to a country
In Philippines, we have R.A.8751 of 1999 – Section 302. 2. Voluntary export restraints (VERs) may limit a firm’s ability to serve
Countervailing Duty. a country from locations outside that country
– Imposing duty if the domestic industry is threaten to cause material 3. To conform to local content requirements, a firm may have to locate
injury. more production activities in a given market than it would otherwise
How Has The Current World Trading System Emerged? ➢ Managers have an incentive to lobby for free trade, and keep
protectionist pressures from causing them to have to change
• Until the Great Depression of the 1930s, most countries had some
strategies
degree of protectionism
• After WWII, the U.S. and other nations realized the value of freer
trade
➢ General Agreement on Tariffs and Trade (GATT) - a
multilateral agreement to liberalize trade
• In the 1980s and early 1990s protectionist trends emerged
• The Uruguay Round of GATT negotiations began in 1986 focusing
on
1. Services and intellectual property
2. The World Trade Organization (WTO)
• The WTO encompassed GATT along with two sisters organizations
➢ the General Agreement on Trade in Services (GATS)
➢ working to extend free trade agreements to services
➢ the Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS)
➢ working to develop common international rules for
intellectual property rights
• The WTO has emerged as an effective advocate and facilitator of
future trade deals, particularly in such areas as services
➢ 164 members in 2016
➢ so far, the WTO’s policing and enforcement mechanisms are
having a positive effect
➢ most countries have adopted WTO recommendations for trade
disputes
➢ a magnet for various groups protesting free trade
What Is The Future Of The World Trade Organization?
• The current agenda of the WTO focuses on
➢ the rise of anti-dumping policies
➢ the high level of protectionism in agriculture
➢ the lack of strong protection for intellectual property rights in
many nations
➢ continued high tariffs on nonagricultural goods and services in
many nations
• The WTO launched a new round of talks at Doha, Qatar in 2011
MAN 010 International Business and Trade
The Global Monetary System
The Global Monetary System International businesses use foreign exchange markets in four main ways.
The Foreign Exchange Market • First, the payments a company receives for its exports, the income
it receives from foreign investments, or the income it receives from
• Foreign exchange market is a market for converting the currency licensing agreements with foreign firms may be in foreign
of one country into that of another country. currencies.
• Exchange rate is simply the rate at which one currency is converted • Second, international businesses use foreign exchange markets
into another. when they must pay a foreign company for its products or services
• Foreign Exchange = Forex in its country’s currency
The Nature of the Foreign Exchange Market • Third, international businesses also use foreign exchange markets
• The foreign exchange market is not located in any one place. when they have spare cash that they wish to invest for short terms
• It is a global network of banks, brokers, and foreign exchange in money markets.
dealers connected by electronic communications systems. • Fourth, Currency speculation is another use of foreign exchange
• When companies wish to convert currencies, they typically go markets. Currency speculation typically involves the short-term
through their own banks rather than entering the market directly. movement of funds from one currency to another in the hopes of
• The foreign exchange market has been growing at a rapid pace, profiting from shifts in exchange rates.
reflecting a general growth in the volume of cross-border trade and A kind of speculation that has become more common in recent years
investment is known as the carry trade.
The Functions of the Foreign Exchange Market Carry Trade
The foreign exchange market serves two main functions. • The carry trade involves borrowing in one currency where interest
• The first is to convert the currency of one country into the currency rates are low, and then using the proceeds to invest in another
of another. currency where interest rates are high.
• The second is to provide some insurance against foreign • For example, if the interest rate on borrowings in Japan is 1%, but
exchange risk, by which we mean the adverse consequences of the interest rate on deposits in American banks is 6%, it can make
unpredictable changes in exchange rates. sense to borrow in Japanese yen, then convert the money into U.S.
Currency Conversion dollars and deposit it in an American bank. The trader can make a
• Each country has a currency in which the prices of goods and 5% margin by doing so, minus the transaction costs associated
services are quoted. In the United States, it is the dollar ($); in Great with changing one currency into another.
Britain, the pound (£); in France, Germany, and other members of Insuring Against Foreign Exchange Risk
the euro zone it is the euro (€); in Japan, the yen (¥); and so on. • A second function of the foreign exchange market is to provide
• Example: Philippines – Peso insurance against foreign exchange risk, which is the possibility that
Foreign Exchange Rates as of March 24, 2023 unpredicted changes in future exchange rates will have
adverse consequences for the firm.
• When a firm insures itself against foreign exchange risk, we say that
is it engaging in hedging(often considered an advanced investing
strategy)
• To explain how the market performs this function, we must first
distinguish among spot exchange rates, forward exchange rates,
and currency swaps.
Spot Exchange Rates
• When two parties agree to exchange currency and execute the deal
immediately, the transaction is referred to as a spot exchange.
Exchange rates governing such “on the spot” trades are referred to
as spot exchange rates.
• The spot exchange rate is the rate at which a foreign exchange
dealer converts one currency into another currency on a particular
day.
• A U.S. tourist cannot walk into a store in Edinburgh, Scotland, and Forward Exchange Rates
use U.S. dollars to buy a bottle of Scotch whisky. Dollars are not • occurs when two parties agree to exchange currency and execute
recognized as legal tender in Scotland; the tourist must use British the deal at some specific date in the future. Exchange rates
pounds. Fortunately, the tourist can go to a bank and exchange her governing such future transactions are referred to as forward
dollars for pounds. Then he/she can buy the whisky. exchange rates.
• Tourists are minor participants in the foreign exchange market • For most major currencies, forward exchange rates are quoted for
• Companies engaged in international trade and investment are 30 days, 90 days, and 180 days into the future. In some cases, it is
major ones. possible to get forward exchange rates for several years into the
• In the Philippine economy is remittances are also part of participants future.
in Forex. Currency Swap
• is the simultaneous purchase and sale of a given amount of foreign
exchange for two different value dates.
• Swaps are transacted between international businesses and their
banks, between banks, and between governments when it is
desirable to move out of one currency into another for a limited
period without incurring foreign exchange risk.
MAN 010 International Business and Trade
The Global Monetary System
Economic Theories of Exchange Rate Determination Interest Rates and Exchange Rates
• Most economic theories of exchange rate movements seem to • This relationship was first formalized by economist Irvin Fisher and
agree that three factors have an important impact on future is referred to as the Fisher Effect. The Fisher Effect states that a
exchange rate movements in a country’s currency: the country’s country’s “nominal” interest rate (i) is the sum of the required “real”
price inflation, its interest rate, and market psychology rate of interest (r) and the expected rate of inflation over the period
Prices and Exchange Rates for which the funds are to be lent (I).
Law of one price • More formally, PPP theory that there is a link (in theory at least)
• Economic proposition known as the law of one price. between inflation and exchange rates, and since interest rates
reflect expectations about inflation, it follows that there must also be
• states that in competitive markets free of transportation costs and
a link between interest rates and exchange rates. This link is known
barriers to trade (such as tariffs), identical products sold in different
as the International Fisher Effect (IFE). The International Fisher
countries must sell for the same price when their price is expressed
Effect states that for any two countries, the spot exchange rate
in terms of the same currency.
should change in an equal amount but in the opposite direction to
1. Purchasing Power Parity (PPP)
the difference in nominal interest rates between the two countries.
• By comparing the prices of identical products in different currencies, • Nominal rate can also refer to the advertised or stated interest rate
it would be possible to determine the “real” or PPP exchange rate on a loan, without taking into account any fees or compounding of
that would exist if markets were efficient. (An efficient market has interest.
no impediments to the free flow of goods and services, such as trade
• The interest rate is the amount a lender charges for the use of
barriers.)
assets expressed as a percentage of the principal. The interest
• Thus, if a basket of goods costs $200 in the United States and rate is typically noted on an annual basis known as the annual
¥20,000 in Japan, PPP theory predicts that the dollar/yen exchange percentage rate (APR).
rate should be $200/¥20,000 or $0.01 per Japanese yen (i.e. $1 =
¥100).
• The Economist has selected McDonald’s Big Mac as a proxy for a
“basket of goods” because it is produced according to more or less
the same recipe in about 120 countries. The Big Mac PPP is the Market Psychology
exchange rate that would have hamburgers costing the same in • Investor Psychology and Bandwagon Effects. Empirical evidence
each country. suggests that neither PPP theory nor the International Fisher Effect
• Big Mac in U.S. 8%, in Philippines 6% = PPP is 2%, therefore in are particularly good at explaining short-term movements in
U.S. it is overvalued by 33% exchange rates.
• Purchasing Power Parity • One reason may be the impact of investor psychology on short-run
• The next step in the PPP theory is to argue that the exchange rate exchange rate movements. Evidence accumulated over the last
will change if relative prices change. decade reveals that various psychological factors play an important
• For example, imagine there is no price inflation in the U.S, while role in determining the expectations of market traders as to likely
prices in Japan are increasing by 10% a year. At the beginning of future exchange rates.
the year, a basket of goods costs $200 in the U.S. and ¥20,000 in Depreciation and Appreciation of Currency
Japan, so the dollar/yen exchange rate, according to PPP theory,
• Capital flight A phenomenon that occurs when residents and
should be $1 = ¥100. At the end of the year, the basket of goods still
nonresidents rush to convert their holdings of domestic currency into
costs $200 in the United States, but it costs ¥22,000 in Japan.
a foreign.
• PPP theory predicts that the exchange rate should change as a
• Countertrade refers to a range of barterlike agreements by which
result. More precisely, by the end of the year:
goods and services can be traded for other goods and services.
• Thus, ¥1 = $0.0091 (or $1 = ¥110). Because of 10% price inflation,
the Japanese yen has depreciated by 10% against the dollar. One Implications for Managers and Business
dollar will buy 10% more yen at the end of the year than at the • International business transactions by changes in exchange rates is
beginning. referred to as foreign exchange risk.
2. Money Supply and Price Inflation • Foreign exchange risk is usually divided into three main categories:
• The growth rate of a country’s money supply determines its likely transaction exposure, translation exposure, and economic
future inflation rate. exposure.
• Inflation is a monetary phenomenon. It occurs when the quantity Foreign Exchange Risk
of money in circulation rises faster than the stock of goods and Three Main Categories
services; that is, when the money supply increases faster than TRANSACTION EXPOSURE
output increases. • is the extent to which the income from individual transactions is
Inflation affected by fluctuations in foreign exchange values.
• Historical example, in the mid-1980s, Bolivia experienced TRANSLATION EXPOSURE
hyperinflation — an explosive and seemingly uncontrollable price • is the impact of currency exchange rate changes on the reported
inflation in which money loses value very rapidly. financial statements of a company.
• The exchange rate is actually the “black market” exchange rate, as ECONOMIC EXPOSURE
the Bolivian government prohibited converting the peso to other
• is the extent to which changes in exchange rates affect a firm’s
currencies during the period. The data show that the growth in
future international earning power.
money supply, the rate of price inflation, and the depreciation of the
peso against the dollar all moved in step with each other.
MAN 010 International Business and Trade
The Global Monetary System
Example: Transaction Exposure
• Suppose in 2004 an American airline agreed to purchase 10 Airbus
330 aircraft for €120 million each for a total price of €1.20 billion,
with delivery scheduled for 2005 and payment due then. When the
contract was signed in 2004 the dollar/euro exchange rate stood at
$1 = €1.10 so the American airline anticipated paying $1 billion for
the 10 aircraft when they were delivered (€1.2 billion/1.1 = $1.09
billion). However, imagine that the value of the dollar depreciates
against the euro over the intervening period, so that one dollar only
buys €0.80 in 2008 when payment is due ($1 = €0.80). Now the total
cost in U.S. dollars is $1.5 billion (€1.2 billion/0.80 = $1.5 billion), an
increase of $0.41 billion! The transaction exposure here is $0.41
billion, which is the money lost due to an adverse movement in
exchange rates between the time when the deal was signed and
when the aircraft were paid for.
Example: Translation Exposure
• Consider a U.S. firm with a subsidiary in Mexico. If the value of the
Mexican peso depreciates significantly against the dollar it would
substantially reduce the dollar value of the Mexican subsidiary’s
equity. In turn, this would reduce the total dollar value of the firm’s
equity reported in its consolidated balance sheet. This would raise
the apparent leverage of the firm (its debt ratio), which could
increase the firm’s cost of borrowing and potentially limit its access
to the capital market.
• Similarly, if an American firm has a subsidiary in the European
Union, and if the value of the euro depreciates rapidly against that
of the dollar over a year, it will reduce the dollar value of the euro
profit made by the European subsidiary, resulting in negative
translation exposure.
Example: Economic Exposure
• Economic exposure is concerned with the long-run effect of
changes in exchange rates on future prices, sales, and costs. The
rapid rise in the value of the dollar on the foreign exchange market
in the 1990s hurt the price competitiveness of many U.S. producers
in world markets. U.S. manufacturers that relied heavily on exports
(such as Caterpillar) saw their export volume and world market
share decline.
• The reverse phenomenon occurred in 2000–2007, when the dollar
declined against most major currencies. The fall in the value of the
dollar helped increase the price competitiveness of U.S.
manufacturers in world markets.
Reducing Translation and Transaction Exposure
• A lead strategy involves attempting to collect foreign currency
receivables (payments from customers) early when a foreign
currency is expected to depreciate and paying foreign currency
payables (to suppliers) before they are due when a currency is
expected to appreciate.
• A lag strategy involves delaying collection of foreign currency
receivables if that currency is expected to appreciate and delaying
payables if the currency is expected to depreciate.
• Leading and lagging involves accelerating payments from weak-
currency to strong-currency countries and delaying inflows from
strong-currency to weak-currency countries.
Reducing Economic Exposure
• It requires strategic choices that go beyond the realm of financial
management.
• The key to reducing economic exposure is to distribute the firm’s
productive assets to various locations so the firm’s long-term
financial well-being is not severely affected by adverse changes in
exchange rates.