International Finance Harvard Case Solution & Analysis

1. (15 points) Reading Travels of a T-Shirt should have provided you with a deeper understanding of international trade, beyond simplistic accusations and political slogans. How would you now respond to each of these criticisms?

a.) U.S. companies unfairly exploit sweatshop labor to sew clothing. This is not helpful for foreign economies and also hurts wage laborers in the U.S. when jobs are moved overseas.

The world moved towards industrialization for the purpose of improving the production process. Many companies tend to shift their focuses towards privatization and support competitions by preventing the formation of any type of monopoly in the market. The reason behind all these steps was to reduce costs incurred by companies and eliminate inefficiencies in the system, so that the value can be passed on to customers in terms of lower prices and higher quality. Finding low cost alternatives for the production process is an initiative by manufacturers to add-up to the effort of reducing costs.

The political system of China is complex that promotes low cost alternatives and low wage rates along with the usage of bulk production to achieve economies of scale.

Thus, according to many economists, U.S. companies do not exploit sweatshop unfairly but efficiently uses available resources to reduce their costs and provide value to customers. Hence, the low wage labor employed by multinational companies in developing nations is usually beneficial. Wages are typically higher than what is available in domestic work.

Some people do argue and launch movements against sweatshops that they should not be easily tolerated in developing nations. China has also improved their systems and they are also moving their factories to poorer countries so that they are able to pay their employees less and charge the same from U.S. companies. To avoid any further accusation, the U.S. and many other countries have put requirements in their contracts with overseas T-shirt manufacturers. Therefore, most of the clothing has to be made by a fairly paid employee in good working conditions in one way or another.

Overall, the process results in better foreign economies. It does not hurt wage laborers in the U.S. when jobs are moved overseas because the labor in the U.S. can shift their practices towards something at which they are more competent, so an overall efficiency can be achieved worldwide.

b.) U.S. fainters receive government support that is unfair and distorts the market for agricultural commodities.

The U.S. fainters do receive government support. If cotton prices drop, subsidies are provided to Texas cotton farmers that are regularly above the world price. Unlike other industries, government insurance payouts shield farmers if natural disasters or other business risks occur.  Nevertheless, it is not unfair because this sector needs the support of government as it is not a natural agricultural place. If the U.S. fainters wouldn’t have received these favors, Lubbock, the cultural and financial center of West Texas, would almost certainly become a waste land.

However, the industry should not be treated as an infant. Other industries would also demand such favors in hard economic times and will not focus on improving their own practices to reduce the cost to achieve efficiency. Hence, it is correct to support the U.S. fainters but there should be a limit to the level of support provided by government.

c. Modern finance, with its fast moving cash flows can cause asset bubbles, sudden stops, and market crashes in developing countries. Therefore, banks, stock exchanges, and finance in general have little to offer to the average citizen of a developing country.

In the modern finance, the cash flow moves faster in the emerging markets because it has higher interest rates as compared to developed nations. The emerging markets do promote the foreign direct investment but financial intermediaries and the government as a whole do contribute to save the economy from entering into any kind of bubbles, sudden stops and market crashes.

There are certain measures taken by these financial institutions to protect the citizens of developing countries. These measures include: exchange rate appreciation, interest rate reduction, capital controls and increasing bank reserve requirements and sterilization. Institutions try to balance negative and positive outlooks to come up with an optimal level of money that is to be floated within the country. This is called the impossible Trinity because a country must give up one factor that regulates the currency flow. The simultaneous achievement of all the three is not possible......................................

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