Global trade and finance are key drivers of economic globalization. Free trade agreements, currency exchange, and international banking facilitate the flow of goods, services, and capital across borders. These systems have created interconnected markets but also pose risks of financial crises and economic imbalances.

Stock markets, electronic trading, and offshore financial centers have transformed global finance. While these innovations increase efficiency and profitability, they also raise concerns about market volatility, tax avoidance, and systemic risks. Understanding these complex systems is crucial for navigating the globalized economy.

International Trade

Free Trade and Tariffs

• Free trade agreements reduce or eliminate trade barriers between countries to encourage international trade (NAFTA, TPP)
• Tariffs are taxes imposed on imported goods that increase the price of foreign products
  • Protectionist measure used to shield domestic industries from foreign competition
  • Can lead to trade wars where countries retaliate with their own tariffs (US-China trade war)
• Non-tariff barriers include quotas, subsidies, and regulations that restrict or discourage imports
• Debate over free trade centers on balancing economic benefits with concerns over job losses and environmental impacts

Currency Exchange and Trade Balances

• Currency exchange rates determine the relative value of different currencies in international markets
  • Fluctuations impact the price of imports and exports and can affect trade balances
  • Countries may manipulate exchange rates to make their exports cheaper (currency devaluation)
• Trade deficits occur when a country imports more than it exports, while trade surpluses occur when exports exceed imports
  • Persistent trade deficits can lead to economic imbalances and debt accumulation
  • Countries aim to maintain balanced trade or run surpluses through export promotion and import substitution strategies

Global Financial Markets

Stock Markets and Electronic Trading

• Stock markets facilitate the buying and selling of company shares and serve as a key indicator of global economic health (NYSE, NASDAQ, LSE)
  • Interconnected nature of global markets means events in one country can quickly impact others
  • 2008 financial crisis highlighted systemic risks posed by global market integration
• Rise of electronic trading has increased the speed and volume of global financial transactions
  • Algorithmic trading uses computer programs to execute trades based on market conditions
  • High-frequency trading exploits tiny price discrepancies for profit, but can contribute to market volatility

Offshore Financial Centers and Tax Havens

• Offshore financial centers are countries or jurisdictions with low tax rates and strict banking secrecy laws (Cayman Islands, Switzerland, Singapore)
  • Attract capital from individuals and corporations seeking to minimize taxes or maintain financial privacy
  • Controversial due to association with tax evasion, money laundering, and illicit financial flows
• Tax havens are countries with very low or no taxes that facilitate tax avoidance by multinational corporations
  • Companies shift profits to subsidiaries in tax havens to reduce overall tax burden
  • Governments seek to combat tax avoidance through international agreements and anti-avoidance legislation (OECD BEPS project)

International Banking and Finance

Global Banking System

• International banks facilitate cross-border financial transactions and provide credit to businesses and governments (HSBC, Citigroup, Deutsche Bank)
  • Enable global trade and investment by providing financing, foreign exchange services, and risk management
  • Correspondent banking relationships allow banks to provide services in countries where they lack a physical presence
• Bank for International Settlements (BIS) serves as a bank for central banks and promotes monetary and financial stability
  • Basel Accords establish international standards for bank capital requirements and risk management
• International Monetary Fund (IMF) provides loans to countries facing balance of payments crises and promotes global financial stability

Global Financial Crises and Contagion

• Global financial crises can spread rapidly due to interconnected nature of financial markets and banking systems
  • 1997 Asian financial crisis began in Thailand and spread to other East Asian countries through currency and stock market contagion
  • 2008 global financial crisis originated in US subprime mortgage market and spread worldwide through exposure to complex financial instruments
• Sovereign debt crises occur when countries are unable to repay or refinance government debt (Greece, Argentina)
  • Can lead to default, economic contraction, and contagion to other countries and financial markets
• Effective crisis response requires coordinated action by governments, central banks, and international financial institutions
  • Bailouts, liquidity provision, and fiscal stimulus can help stabilize markets and restore economic growth
  • Reforms to financial regulation and oversight aim to prevent future crises and improve resilience of global financial system