The Basics of Foreign Trade and Exchange - Federal Reserve Bank of New York

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The Basics of Foreign Trade and Exchange

Working Across Borders

Many large companies are "multinational" in that they have branches and subsidiaries all over the world. By some estimates, intra-firm trade, or trade between branches of the same company in different countries, accounts for 40 percent of U.S. exports.

Many companies buy and sell goods overseas and others form partnerships with foreign companies so that cooperation replaces competition. This has a profound effect on how companies operate in the global marketplace. Businesses around the world work side-by-side to produce and market products, thereby reducing the economic risks of global production and marketing.

For instance, there may be a running shoe company:

Headquartered in the United States,
Financed by a Japanese bank,
Buying rubber from Indonesia and leather from Spain,
Manufacturing in Mexico,
Employing a U.S. company for the legal and accounting work,
And a British firm to handle all its advertising and marketing.

Multinational companies shift resources from one country to another to maximize profits and productivity.

The running shoes may be sold all over the world. If a shoe is shipped from San Francisco to Indonesia, it is simply a U.S. export. However, if Indonesia imposes a tariff on the shoe, it harms more than just the U.S. exporter; all businesses around the world that were involved in the process are affected, including Indonesia’s own rubber exports. With globalization, it is increasingly difficult for governments to target trade policies effectively.

To remain competitive, individuals, companies, and governments all must adapt to the changing global marketplace.

Business practices vary from country to country and may require new approaches to making profits. In the United States, a signed contract is considered all but sacrosanct; in the Far East, southern Europe and the Middle East, the spirit of the agreement can sometimes matter more than the letter.

The "get down to business" approach that the U.S. and German businesses usually favor may be considered brusque or harsh in Japan or Korea. Even small details of business behavior—whether or not to look someone in the eye, tone of voice, exchange of gifts—vary significantly from country to country.

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Introduction

Growing Trade, Shrinking World

Benefits of Trade

Free Trade Vs. Protectionism

Foreign Currency Exchange

Role of Central Banks

Working Across Borders

International Organizations and Trade Issues

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