BNFN 304 CH 1

INTERNATIONAL BANKING
BNFN 304
CHAPTER ONE
THE WORLD OF
INTERNATIONAL BANKING
CHAPTER ONE
1.1 Overview
The World of International Banking
• No nation can prosper relying solely on its own resources or capital.
Trade with other nations therefore is a necessity.
• Adam Smith , writing in “The Wealth of Nations” in 1776 with the
Comparative advantage theory encourages nations to export as well as
import from each other.
• Michael Porter (1990) says: No nation can be competitive in everything. A
nation’s resources are limited. A nation, therefore should specialize in those
industries in which its firms are relatively more productive and import those
products where its firms are less productive.
• A nation’s international economic activities are broadly grouped in three
categories:
* The movement of goods
* The movement of services
* The movement of capital
• Because customers are engaged in such activities the banker is
asked to provide the skills and products that those customers need
in order to do their business
• Today you don’t need to have overseas branches in order to do
business internationally. You can do this type of businesses through
local bankers and correspondent banks.
1.2 Background
•Long distance trade started 9000 years ago in the Middle East (trading
pottery). Spread of trade lead to growth of nations and exploration
( Columbus, Magellan, Vasco de Gamma).
•In the 16th and 17th centuries the Portuguese, Dutch and British went to
Asia to trade for spices, textile, silk, elephant, tea, etc…London, Venice and
Amsterdam become great trading and financial centers.
•Trade with Asia demanded Gold and Silver for payment. The Silver and
Gold mines in Americas became crucial for Europe’s ability to buy from Asia.
•Europe paid for these metals and for tobacco by selling processed goods
such as furniture, foods, tea, etc…
The expansion of world trade continued with great speed. It
reached $3.1trillion in 1989,$5.5 trillion in 1996 and about $10
trillion in 2005.
1.3 Visible Trade

• These are physical goods, whether raw materials or manufactured
goods. It covers exports as well as imports. The principal
reasons for trade are as follows:
• A nation does not have a particular item. For example, the USA
does not grow tea; Turkey does not grow coffee beans or
manufacture commercial aircrafts.
• Some countries specialized in producing and manufacturing

certain products, Such as Brazil in coffee, Switzerland in watches,
Germany in cars, Japan in televisions and optic products, etc….
• No modern nation can completely eliminate foreign trade. In fact,

nations that actively export and imports have higher standards of
living than those who do not. Complete self–sufficiency has few
benefits.
• A nation does not have enough of a particular item. For example, the
USA does not grow enough coffee beans. Turkey does not produce enough
oil (petrol). Saudi Arabia produces more petrol than it needs.
• A nation can produce an item at a lower cost than other nations.

Economic theory suggest that foreign trade should take place because one
nation has a comparative advantage and absolute advantage in
producing an item Thus, each nation should produce what it most efficiently
can and trade the surplus for another nation’s product. For example, Saudi
Arabia in oil, Brazil in coffee, Turkey in hazel nuts, China in silk, etc.
• A nation produces items with a desirable style or innovation. For
example, German automobiles, French perfumes and French brandy.
1.3.1 Features of Trade
• The difference between imports and exports is balance of trade. When a
nation buys more than it sells, it is said to have a “deficit’’ balance of trade;
when it sells more than it buys it has a “surplus” balance of trade. A surplus
of trade brings with it net international income.
• The direction of trade can be determined by availability (e.g. oil-Saudi
Arabia and France), comparative cost from each source of supply, or
political factors (e.g. Great Britain old colonies), proximity (e.g. USA and
Mexico).
1.3.2 TRADE PROTECTIONISM
• When a country wishes to reduce imports it imposes a “tariff’’ or a

“quota” on its imports
• Tariff: is a tax put on imported goods.
• Quota: is a limit put on the amount of imported goods.
• Both quota and tariffs are put on imported goods to protect
domestic industries. Governments have other measures to
discourage imports.
• Trade protectionism is done for:
• -Protecting infant industries (questions are, which industries and
how long protection? Industries which have comparative
advantages!)
• -Against Dumping (differentiation between dumping and
efficiency)
• Protectionism in the long run encourages high costs and
inefficiencies and has a cost to consumers.
• Different tariff for different countries (most favored nation status)
• Some goods are imported to be used for raw materials in the
process of producing other goods for export.
1.3.3 EFFECT ON TRADE
• Imports and Exports have both benefits and costs. Export creates jobs, earn foreign
currency and reduce costs (economies of scale).
• EXPORTS
• USA 8% of GNP
• UK 25% of GNP
• GERMANY 30% of GNP
• TURKEY 25% of GNP (2005)
• Imports reduce costs but employment suffers.
• 1.3.4 LIBERALIZING TRADE
• Over the past 50 years the expansion of world trade has been encouraged through the
reduction of tariffs, quotas and restrictions. In this respect GAAT-WTO,EU,NAFTA and
MERCOSUR (Latin American Common Market) are important organizations.
1.4 INVISIBLE TRADE
• These are; transportation, insurance, tourism, remittances (from immigrants), foreign
construction projects, banks providing financial advisory services, computer programming
legal services, accounting services etc. (some of these services are becoming very
important for some countries such as India and Ireland).
1.5. INVESTMENTS
• International investment represents the transfer of savings from one country to another.
These are:
• Direct investments (establishing new plants)
• Indirect or portfolio investment (buying bonds and stocks)
1.7 CLASSIFYING COUNTRIES
They can be classified as develop and developing countries. Other expressions
that are used for developing countries are underdeveloped countries, less
developed countries, third world countries and south. IMF classified countries
as advance economies(28 countries,18% of the world population,55% of world
GDP and 77% of world exports),
Countries in transition(28 countries7 % of world population) and developing
countries(128 countries,77% of world poplulation,40%of world GDP,19%world
total export).
• Developing countries tend to export more agricultural goods and raw materials.
• Development is a very complex issue.
1.7 BALANCE OF PAYMENT
Table 1.1 Activities Represented in a Balance of Payments
• Income • Payments
• Received for: • Made for:
• Exports • Imports
• Services we do for others • Services others do for us
• Foreign tourists visiting us • Our tourists in other countries
• Money send by people in other • Money sent to people in other
countries countries
• Other’s investments in our • Our investments in other
country countries
• Interest and dividends on our • Interses and dividends on
investments in other countries others’ investments in our
contry
1.7.1Balance of Payments Categories
• Current account-visible and invisible trade

• Capital and Financial Account – Investments
• Net errors and omissions
• Change in reserves
• Balance of Payment is always in balance

1.7.2.CONNECTIONS TO THE DOMESTIC
ECONOMY
• DEVELOPMENTS IN Balance of Payments effect domestic economy and
events in domestic country will be reflected in the Balance of Payments.
• For example, foreign investments in a country will effect the Balance of
Payments jobs ,tax revenue, exports of that country.
• Likewise a country running large budget deficit will have a high rate of
inflation, high interest rate etc.
• Capital flight and protection of agricultural sector can have many
implications on the Balance of Payment and domestic economy.
GLOBALIZATION OF INDUSTRY
American facories in China exporting back to USA
Japanese auto factories in USA
Online services in India and Ireland

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INTERNATIONAL BANKING

1.3 Visible Trade

• Some countries specialized in producing and manufacturing

• No modern nation can completely eliminate foreign trade. In fact,

• A nation can produce an item at a lower cost than other nations.

• When a country wishes to reduce imports it imposes a “tariff’’ or a

• Current account-visible and invisible trade

• Balance of Payment is always in balance

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