IF - International Finance and Trade Organizations Lesson

International Finance and Trade Organizations

Foreign exchange rates are an important part of international trade, but not the only consideration. In this lesson, you will learn about the international organizations that have a great influence on international trade.

The three major international financial and trade organizations are the International Monetary Fund (IMF), the World Trade Organization (WTO), and the World Bank.

IMF

Did you know? Since the 1990s the IMF has worked with the World Bank to try to alleviate the economic issues of heavily indebted poor countries. In the wake of World War II, representatives from 45 countries came together in Bretton Woods, New Hampshire to seek an agreement that would establish a framework for international economic cooperation. The Bretton Woods Agreement laid the foundation for the International Monetary Fund (IMF) which was formally established in December of 1945 when 29 member countries signed the agreement. In 1947, the first year of formal operation, France became the first country to borrow from the IMF. Between 1947 and 1971, the countries that joined the IMF agreed to keep their exchange rates pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. The pegged rates were quoted in the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold. This par value system—also known as the Bretton Woods system—prevailed until 1971. As we learned earlier in this lesson, that is the year that the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

After the Bretton Woods system dissolved, IMF member countries were allowed to choose any exchange agreement they wished as long as they did not peg their exchange rates to gold. Most chose to allow their exchange rates to float freely, while a few pegged their currency to another currency, usually the U.S. dollar. This change over to floating rates proved timely as it allowed countries to adjust to higher oil prices more easily. Even with that change, however, many oil-importing countries found themselves having to borrow from the IMF in the early 1980s. This was particularly true of developing countries.

With the fall of the Berlin Wall in 1989, the number of IMF members jumped from 152 to 172. The IMF played a central role in helping formerly communist countries develop market-driven economies. In 1997, the IMF aided Asian countries that were affected by the financial crisis. Since the 1990s the IMF has worked with the World Bank to try to alleviate the economic issues of heavily indebted poor countries.

WTO

The World Trade Organization (WTO) works with the IMF to promote trade throughout the world. Founded in Geneva Switzerland in 1995, the WTO is an offshoot of the General Agreement on Trade and Tariffs. As the only international organization dealing with the rules of trade among nations, the WTO's main function is to ensure that trade flows smoothly, predictably, and equitably among nations.

The WTO serves three functions in international trade:

WTO: 3 Functions in International Trade The WTO is a forum. It is where member governments go to sort out trade problems. The WTO is a set of rules. WTO agreements, signed by the bulk of the world's trading nations, provide the legal ground-rules for international commerce. The WTO helps settle disputes. The WTO helps settle conflicting interests in disputes that often arise between trading partners.

The WTO seeks to accomplish several objectives when dealing with world trade. By helping to cut the cost of doing business internationally, they are able to increase economic growth and employment. They encourage good governance, while helping countries to develop economically and giving the weak a voice. Finally, they support the environment and health as well as contributing to peace and stability.

World Bank

The World Bank is the final piece of the triad that oversees world trade. Established in 1944 as a means to facilitate reconstruction after WWII, the World Bank has evolved to a mission of world- wide poverty alleviation. The World Bank is not a bank in the ordinary sense, but a partnership of five institutions managed by their member countries determined to alleviate poverty and support economic development around the world. Mouse over the graphic below to learn more about the functions of the five institutions that make up the World Bank Group.

What have you learned about these three United Nations agencies? In your International Finance and Trade Organization project you will explore some of the worthwhile projects associated with these agencies.

International Credit and Payment Transactions

We've learned about foreign exchange rates and which agencies oversee world trade, but how is payment made across borders and currencies? If you are doing business with a company half way across the world, how do you pay them if you are the buyer or how do you get paid if you are the seller?

The graphic below also provides a static picture of the methods of payment available to international consumers and producers.

Methods of payments examples

Documents required for an international sale can vary significantly from transaction to transaction, depending on the destination and the product being shipped. At a minimum, there will be two documents: the invoice and the transport document. The buyer will usually provide the seller with a list of documents needed to get the goods into his country as expeditiously and inexpensively as possible. Some documentary requirements are not open to negotiation, as they are needed by the importer to clear customs at the port of destination. Review the presentation below to learn about the documents you might need for international trade.

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