Topic Category: Trade & Finance

In May 2003, a task force commissioned by the International Chamber of Commerce (ICC) began work on revising rules governing letters of credit, with a target date of July 1, 2007. The new regulations are expected to eliminate barriers that have increasingly hampered international trade.

As commerce among nations grew in the early 20th Century, conflicting laws governing letters of credit among countries became major barriers to expansion. The ICC in 1933 created the first Uniform Customs and Practice for Documentary Credits (UCP) rules that brought uniformity to letters of credit.

When market participants attempt to predict currency shifts, they must be wary of applying outmoded assumptions. Projecting currency moves has become increasing challenging in globalized markets. A misinterpretation of trends can lead to poor business decisions.

Fading Currency Assumptions

It is also increasingly difficult to predict the impact currency shifts may have. For example, it used to be thought that as the U.S. dollar fell against other currencies, American exports benefited. That’s because U.S. goods became less expensive when prices were translated into foreign currencies. As a result, American manufacturers became more competitive abroad. At the same time, a relatively weaker U.S. dollar was expected to lead to increased prices in imported goods. For a variety of reasons, these assumptions may be outdated.

As trade between nations rapidly increased in the early part of the 20th Century, a major barrier to expansion were conflicting laws governing letters of credit among countries. In 1933, members of the International Chamber of Commerce (ICC) created the first Uniform Customs and Practice for Documentary Credits (UCP), a set of rules that brought uniformity to letters of credit.

Since its inception, the UCP has become the most successful private set of rules for trade ever developed. Now firmly established, the UCP continues to remain an essential component in international trade. It establishes the conditions under which the majority of banks operate in documentary commercial credit transactions in more than 160 countries.

Shifts in the value of the U.S. dollar can be felt in a variety of ways. Old assumptions regarding the impact of a rising or falling currency may not necessary hold true. In this era of globalization and infinite supply chain strategies, new realities are increasingly painting a different picture.

Currency Assumptions Fade

A weakening dollar traditionally has been assumed to result in less expensive American exports, making them more competitive abroad. A weakened dollar also is expected to cause the price of U.S. imports to rise. Increasingly, however, both U.S. and foreign manufacturers rely on imported components and materials, making the impact of exchange rate fluctuations more nuanced.

The title of this article is the headline of a June 7, 2006 piece in The Straits Times, a Singaporean newspaper. According to a recent survey by the American Chamber of Commerce in Singapore, senior U.S. executives within the six-nation Asean bloc are reported to be “positively exuberant” about operating within southeast Asia, they are “optimistic about their growth and profit prospects this year and in 2007,” and three-quarters of them indicate that their “company’s business will grow in the next two years. No one expects a reduction in business.”

The U.S.-Central American-Dominican Republic Free Trade Agreement, referred to as DR-CAFTA or simply CAFTA, includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. The agreement is anticipated to spur North-South trade and investment while promoting stability and the rule of law in the region.

Leveling the Playing Field

Prior to the establishment of the accord, the U.S. weighted average tariff rate on CAFTA countries was 2.6 percent, according to the World Bank. This reflected the fact that approximately 80 percent of CAFTA imports already entered the U.S. duty free. On the other hand, the weighted average tariff rate on U.S. goods was 10.1. percent in the Dominican Republic, 5.8 percent in Costa Rica, 6.1 percent in El Salvador, 5.8 percent in Guatemala, 7.3 percent in Honduras, and 2.3 percent in Nicaragua.

In May, the U.S. Department of the Treasury issued its much anticipated, semiannual Report to the Congress on International Economic and Exchange Rate Policies. The report’s key conclusion, that China is not a currency manipulator, was met with incredulity on the part of a number of members of Congress, some who suggested that the Treasury’s inaction would move them closer to enacting provocative legislation to compel China to allow the yuan to rise.

To them, it’s simple. China’s currency is purposely undervalued to encourage Chinese exports and discourage imports. Such “manipulation” explains much of the bilateral trade deficit, which is costing U.S. jobs. Thus, appreciation of the yuan is a matter of such urgency that any adverse consequences of compelling that outcome would be trivial by comparison.

Question: Globalization is affecting manufacturing. What’s the good and the bad?

Answer:

The integration of traditional manufacturing, new technologies, national markets, and improved supply chain management— all spawned by globalization—is transforming American manufacturing. In the process, resources have shifted to sectors with competitive advantages.

As a result, productivity has climbed to new highs and due to the American ability to change and improve, innovation is flourishing. Brawn power—the use of muscle on the factory floor—is quickly being replaced by brainpower.

Buried beneath the daily stories about car bombs and insurgents is an underappreciated but comforting fact: The world has somehow become a more peaceful place.

War Is Declining

As one little-noticed headline on an Associated Press story recently reported, “War declining worldwide, studies say.” According to the Stockholm International Peace Research Institute, the number of armed conflicts around the world has been in decline for the past half century. In just the past 15 years, ongoing conflicts have dropped from 33 to 18, with all of them now civil conflicts within countries. As 2005 draws to an end, no two nations in the world are at war with each other.