Financial Markets Paper & Trading Bloc Recommendation

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The response addresses the queries posted in 1420, 1716 & 1683 words with references.

// For developing the Financial Markets Paper, it is essential to understand the role of international Financial Organization or Regional trading blocs. So here I am beginning with the definition and explanation of well known trading blocs in the following manner: //

Financial Markets & Regional Trading Blocs

Roles of International Financial Organization

Regional trading blocs can be defined as the intergovernmental relations that administer and encourage trade activities for specific regions of the world. It is seen as an important aspect in the process of economic and political globalization. There have been a large number of trading blocs in recent years. Some well known trading blocs include:

1) The EU (European Union),

2) NAFTA (North American Free Trade Agreement)

3) MERCOSUR (Mercado Comun del Cono Sur), also known as Southern Common Markets (SCCM),

4) ASEAN (Association of Southeast Asian Nations) (The role and function of regional trade blocs, 2006).

Europe has two blocs - the European Union and the European Free Trade Association. The European Union (EU) is the unification of twenty-seven member states that is located primarily in Europe. The EU has built a single market through a consistent system of laws which relate to all member states, assuring the freedom of movement of individuals, commodities, services and funds. The EU functions through a mixture of intergovernmentalism and supranationalism. Important institutions of the EU comprise the European Commission, the European Parliament, the Council of the European Union, the European Council, the European Court of Justice and the European Central Bank.

Another regional trading bloc is the North American free trade agreement (NAFTA) - world's largest trading house. This agreement came into being in January 1994 with a mission to remove trade and investment barriers among the United States, Mexico and Canada. In NAFTA, all non-tariff obstacles to agricultural trade between the United States and Mexico were abolished.

Various international financial organizations like IMF, International Finance Organizations, World Bank etc. Influence the regional trading blocs. These international financial organizations contribute to a great extent in developing the financial sector among the various countries across the globe. There are various countries which have adopted different strategies or reforms to develop their financial markets.

The International Monetary Fund (IMF) is a global financial institution which administers the international financial system. To oversee this financial system, various macroeconomic policies are followed. The amalgamation of financial sector and its expansion among the countries over the world is achievable through the active participation of the International Monetary Fund (International Monetary Fund, 2008). International Finance Corporation is an organization formed with a mission of promoting private sector investment in the developing nations of the world. This influences the regional trade blocs by maintaining a higher economic growth and improving the trade by boosting business climate in Europe (International Finance Corporation, 2008).

Foreign Direct Investment

FDI plays an important role in European Union. Foreign direct investment is high in the old states and has considerably increased in the new members states. In the European Union, foreign direct investment is subdivided as:

? Investments made into equity - Investment in the equity capital of an enterprise in a recipient country by an MNC or an individual.

? Re-invested profits - Profiles ploughed back by the subsidiary of an MNC. Such retained profits are assumed to be reinvested in the subsidiary.

? Other investments - Short-term long-term borrowing and lending of funds between the MNC and its subsidiary.

European Union: Trade Finance & FDI

In the year 2005, FDI inflows of European Union was ? 492 bn which constitutes about 20% of world's foreign direct investment inflows. At the end of year 2004, North America took about 52 percent of European Union FDI inward stocks. South and Central America hold 14 percent of EU foreign direct investment. U.S. and Switzerland has high investment in European Union. Asia also has a significant investment in EU (European Union foreign direct investment yearbook 2007, 2007)

United States, Japan, Canada and Switzerland are the main receiver of FDI of European Union. The main investors in EU are Asia, non EU countries and U.S. Polar regions also have a good investment in EU (European Union foreign direct investment yearbook 2007, 2007)

NAFTA: Trade Finance & FDI

After the formation of NAFTA, Canada's foreign direct investment relationship with Mexico has grown quickly. Canada's foreign direct investment in Mexico is very high.

There is immense increase in the Canada's FDI flows with United States from 1999 to 2002. Foreign direct investment from Canada to Mexico was about $ 83 million in the year 2002. In NAFTA, foreign capital flow across Mexico to capitalize on the country's low wages. Average annual foreign direct investment is $ 12 billion which goes primarily to Border States.

// Challenge lies in each and every segment, which restricts the progress of a particular system. Here some of the major challenges faced by the Foreign Exchange are provided. Identifications of these challenges helps in devising appropriate strategy to overcome them//

Foreign Exchange Challenges

The major foreign exchange challenges that exist for the European Union (EU) are as follows:-

? Implementation of policies - Many of the economies in the European zone are very dissimilar from each other and the structures of the economic activities are also different. So it is a difficult task for the leaders of the EU to implement the same monetary policy or other financial policies in the euro zone. A change in the exchange rate that helps an economy may harm to other economy. Changes in the interest rates can also affect the different economies of the euro zone (Hill, 2005).

? Price stability challenges - Inflation rates also affects the economy of the Euro countries because there are different business cycles and the exchange rates in different countries. Inflation in the different business cycles affects the prices of the products and causes of the price instability.

? Financial stability challenges - Large capital flows and credit growth in the world is causing the financial stability risk for the European Union. Large amount of loans causes an increase in nonperforming loans and fast growth of the credit leads to its low quality (Smaghi, 2006).

Following are the other challenges which European countries have to face in the Asian countries:

? Non tariff barriers.

? There is limitation on the license of import.

? Insecurity in the matters related to judicial issues.

? Difficult process of the licensing agreements (Regional Economic Cooperation in Asia: Challenges for Europe, 2001).

Foreign exchange challenges in NAFTA

NAFTA has a shorter global reach. It is basically only for the three countries that are Mexico, Canada and US. It is also blamed for the job cuts in the China and the United States. NAFTA is also facing the same problems which are experienced by the European Union. China is manipulating exchange rates between the US dollar and its own currency- Yuan, to receive trade advantages in an unfair manner (Nevaer, 2003).

Strategy to Manage the Financial Risk for the Regional Trading Blocs

European Union - To deal with the financial risk, EU should adopt the strategy of fiscal transfer i.e. the transfer of money from a profitable nation to a poor region of the zone. This strategy will establish price and financial stability and will help to manage the financial risk for the European countries. To manage the exchange rates risks, fixed exchange rate agreements should be framed.

NAFTA - To face the challenges that are imposed by China, NAFTA should negotiate and reevaluate the currency of China.

International Economics and Finance Theory

International economics include the following areas- International trade, monetary policy and International finance. In the above strategies, EU is making a flow of cash from one country to another country that is reflecting the components of monetary policy in the international economics because monetary policy explains the flow of cash on a nationwide basis. The above strategy also explains the exchange rate which is a component of the international finance theory.

In the strategy of NAFTA, international finance that is also a component of the international economics is reflected ...