Pevehouse Ch.9 Globalization and Finance PDF

**Pevehouse Ch.9** **9.1 Globalization and Finance** Globalization has significantly impacted various aspects of international relations, including global security and international trade. However, its most profound influence has been on how states, businesses, and individuals interact with financ...

**Pevehouse Ch.9** **9.1 Globalization and Finance** Globalization has significantly impacted various aspects of international relations, including global security and international trade. However, its most profound influence has been on how states, businesses, and individuals interact with financial markets. Today, global financial markets are highly integrated. Investors can easily buy and sell assets or exchange currency with a few taps on a phone. Banks\' investment portfolios often include millions of dollars in assets (real estate, land, stocks) from other countries. Approximately \$3 trillion is exchanged daily on currency markets for business and to bet on the rise and fall of the value of currencies. Financial integration offers significant advantages, such as access to overseas markets for economic growth and better investment returns for individuals investing in college tuition or retirement. However, it also carries risks, as an economic crisis in one state can quickly spread globally, affecting both small and large economies. In 2008, the economic downturn in the United States began with many Americans unable to repay their home mortgages. As home values fell, banks couldn\'t recover the money they had loaned, even by reclaiming the homes. These bad loans had been resold by banks as investments to other businesses, often internationally. Consequently, several large U.S. banks announced they were on the verge of failing due to their significant exposure to these bad loans. This situation affected not only the banks and the individuals who couldn\'t pay for their homes but also the businesses that had purchased these loans as investments. The global integration of financial markets caused the U.S. housing crisis to escalate into a global banking crisis. Several British banks announced near bankruptcy. The U.S. government responded with an \$800 billion rescue package, while Britain created a nearly \$450 billion package. Iceland\'s entire banking sector was taken over by the government, and the country needed an IMF loan to avoid bankruptcy. The financial crisis caused global stock markets to plummet dramatically, by a third, a half, and even two-thirds in the case of China. Unemployment rose worldwide. What started as a problem in the U.S. housing market escalated into a global financial meltdown. After recovering from the 2008 financial crisis, the world economy faced the ripple effects of a debt crisis in Europe, starting in Greece and spreading to Spain, Portugal, and Italy. This threatened the EU and hindered U.S. growth, highlighting global financial interdependence. The COVID-19 pandemic further illustrated this interdependence, as economic closures in some countries led to global economic uncertainty, goods shortages, and higher inflation. **9.2 The Currency System** Nearly every state prints its own currency, a key aspect of state sovereignty. However, in a globalized trade and finance system, businesses and individuals often need other states\' currencies for transactions. **About Money** Due to state sovereignty, the international economy relies on national currencies rather than a world currency. A key power of national governments is to create their own currency as the sole legal tender within their territory. While these currencies have no inherent value in other countries, they can be exchanged for one another. For centuries, the European state system used precious metals like gold and silver as a global currency, valued in all countries. Gold was the most important, followed by silver. These metals had inherent value due to their appearance, rarity, and durability. They were rare, and the mining of new gold and silver was slow. They were also difficult to counterfeit and could be easily molded into jewelry. Over time, gold and silver gained value as a world currency due to global trust in their exchangeability for goods, overshadowing their inherent functional value. States held gold and silver bars as a form of international currency. These metals were central to mercantilist trade policies and gold served as key in funding power resources for states to buy armies or influence other countries. In recent years, the world has moved away from the gold standard to an international monetary system without tangible mediums like precious metals. Some investors still buy gold or silver during political or economic instability for their perceived future value. However, these metals now behave like other commodities with unpredictable price fluctuations. This shift to abstract money has made international economics more efficient, but without tangible backing like gold, currencies may seem less trustworthy to some people. **gold standard**: A system in international monetary relations, prominent for a century before the 1970s, in which the value of national currencies was pegged to the value of gold or other precious metals. **International Currency Exchange** Today, national currencies are valued against each other through exchange rates, rather than against gold or silver. These exchange rates determine how much one currency is worth in terms of another, such as the Canadian dollar to the U.S. dollar. Exchange rates impact nearly all international economic transactions, including trade, investment, tourism, etc. **exchange rate**: The rate at which one state\'s currency can be exchanged for the currency of another state. Since 1973, the international monetary system has depended mainly on floating rather than fixed exchange rates. See also convertible currency, fixed exchange rates, and managed float. Most exchange rates are expressed in terms of major world currencies like the U.S. dollar, Japanese yen, Chinese yuan (renminbi), and the EU\'s euro. The exchange rate for currencies like Danish kroner and Brazilian reals depends on their value relative to these major currencies. The exchange rates that most impact the global economy are those involving the largest economies, including the U.S. dollar, euro, yen, yuan, British pound, and Canadian dollar. The relative values of currencies are arbitrary at any given time; only changes in values over time are meaningful. For example, the euro is close in value to the U.S. dollar, while the Japanese yen is closer to the U.S. penny. This difference doesn\'t indicate the desirability of these currencies or the financial position of their states. However, when the euro\'s value rises or falls relative to the dollar, it is considered strong or weak. A strong currency makes imports more affordable, while a weak currency makes exports more competitive. For instance, when the U.S. dollar\'s value fell from 2001-2006, exports of 200 large U.S. companies with substantial foreign sales increased from 32% to 44% of their total sales. Some states have nonconvertible currencies, meaning holders cannot guarantee exchanging them for another currency. This is common in states isolated from the world capitalist economy, like North Korea or the former Soviet Union. Nonconvertible currencies can sometimes be sold in black markets or directly with the issuing government, but often at very low prices. Rapidly inflating currencies are also practically nonconvertible, as holding them even briefly results in financial loss. Inflation reduces a currency\'s value compared to more stable currencies. **convertible currency**: The guarantee that the holder of a particular currency can exchange it for another currency. Some states\' currencies are nonconvertible. See also hard currency. Until recently, the industrialized West maintained low inflation rates, mostly below 5 percent annually since 1980. The 1970s saw inflation rates exceeding 10 percent per year in many industrialized economies, including the United States. However, since 2021, inflation has surged in the West, peaking at over 9 percent in the U.S. and over 10 percent in Great Britain. In the global South, inflation had dramatically decreased until increasing recently, with Latin America reducing it from 750 percent to around 5 percent, and China and the Middle East achieving rates below 5 percent. Recently, inflation in the global South has risen again, from an average of 5.4 percent in 2019 to 10.8 percent in 2022. Inflation has spiked recently due to several factors. The COVID-19 pandemic and the Russia-Ukraine war disrupted the supply of various products, creating shortages and driving up prices. In some countries, like the United States, increased government spending and stimulus payments during the pandemic put more money in people\'s hands, leading to rising prices. Additionally, many people left the labor force during the pandemic and did not return, causing wages to grow for those still working, which firms then passed on as higher prices. Hyperinflation is extremely high, uncontrolled inflation, exceeding 50 percent per month or 13,000 percent per year. In 2009, Zimbabwe\'s \$100 trillion notes quickly lost most of their value (about \$30 U.S.) under hyperinflation exceeding 200 million percent per year. More recently, Venezuela\'s annual inflation rate rose to over 1 million percent in 2018, leading to economic collapse. Even moderately high inflation causes money to lose value weekly, making business difficult. **Hyperinflation**: An extremely rapid, uncontrolled rise in prices, such as occurred in Germany in the 1920s and in some third world countries more recently. Hard currency can be readily converted to leading world currencies, unlike nonconvertible currency. For example, a Chinese computer producer can receive payment in hard currency like dollars or euros, which can be used to import components for production. However, a Chinese farmer paid in Chinese currency for rice cannot directly buy imported goods, as foreign currency exchange is controlled by the government. In some countries, like Cuba, two versions of currency circulate: one convertible to foreign hard currency and one for internal use only. Cubans often find needed goods available only in stores accepting the hard version, while their salaries are paid in the soft version. As economies develop and join the global marketplace, their currencies evolve from unstable versions to more stable ones, eventually becoming fully convertible. **hard currency**: Money that can be readily converted to leading world currencies. See also convertible currency. States maintain reserves of hard currency, similar historical gold stockpiles. National currencies are now backed by these hard-currency reserves instead of gold. However, some states still keep gold reserves; for example, in 2010, Saudi Arabia had over 300 tons of gold worth more than \$10 billion. By 2022, China had nearly 2,000 tons of gold, and Russia had almost 2,300 tons. Industrialized countries have financial reserves proportional to their economies. **Reserves**: Hard-currency stockpiles kept by states. One form of currency exchange involves fixed exchange rates, where governments establish official rates for their currencies, either individually or jointly. For example, the Canadian and U.S. dollars were once equal in value with a fixed rate of one to one. States use various methods to maintain or adjust these fixed rates in response to changing economic conditions. **fixed exchange rates**: The official rates of exchange for currencies set by governments; not a dominant mechanism in the international monetary system since 1973. See also floating exchange rates. Floating exchange rates are now more common for major world currencies. These rates are determined by global currency markets where private investors and governments buy and sell currencies. The supply and demand for each currency cause prices to adjust constantly based on market conditions. Just as investors buy stocks expecting their value to rise, they buy currencies like the Japanese yen with the same expectation. Short-term speculative trading in international currencies helps adjust exchange rates to changes in the longer-term supply and demand for currencies. **floating exchange rates**: The rates determined by global currency markets in which both private investors and governments buy and sell currencies. See also fixed exchange rates. Major international currency markets operate in key cities like New York, London, Zurich (Switzerland), Tokyo, and Hong Kong, connected by instantaneous computerized communications. These markets focus on predicting future currency values relative to their current worth. They handle vast amounts of money---\$3 trillion daily---though only computerized information moves. These private markets are less regulated by governments compared to stock markets. National governments periodically intervene in financial markets to manipulate currency values, a practice known as a managed float system. This involves buying and selling currencies and sometimes changing interest rates. Leading industrialized states often collaborate in these interventions. For example, if the U.S. dollar\'s value drops too much (a political judgment), governments buy dollars to stabilize or increase its price. Conversely, if the dollar\'s value rises too high, they sell dollars to lower the price. These interventions usually happen quickly and may be repeated over several weeks. Monetary intervention requires costly multilateral cooperation, which liberals see as evidence of states recognizing their long-term interest in a mutually beneficial international economy. **managed float**: A system of occasional multinational government interventions in currency markets to manage otherwise free-floating currency rates. Governments face challenges in international currency market interventions because they control only a small portion of the market, with most of it being privately owned. However, they can collaborate to make modest price changes and operate in secret to prevent speculators from profiting at their expense. This secrecy ensures that the public only learns about interventions after they occur. Note that this is an area where states have a common interest (making sure a large economy does not collapse) aligned against transnational actors (investors who are trying to make money at the expense of states). A successful intervention in currency markets can benefit governments at the expense of private speculators. For example, if G20 governments buy U.S. dollars (and selling other hard currencies) to raise their price and succeed, they can later sell at a profit. However, if the intervention fails and the dollar\'s price continues to fall, governments may incur losses and need to keep buying to stop the decline. If investors become aware of the intervention, they might see it as a sign of currency weakness, further depressing the currency\'s price. In extreme cases, governments could deplete their hard currency reserves and face significant losses. Therefore, governments must be realistic about their limited influence on currency prices. These limits were well illustrated in the 2001 Argentine financial collapse. In the 1990s, Argentina fixed the peso to the U.S. dollar to curb runaway inflation, but this led to a loss of control over its monetary policy. Argentina and the United States in the late 1990s had different needs. While the U.S. experienced prosperity and thus high interest rates, Argentina faced a recession and couldn\'t lower rates to stimulate growth. Accumulating over \$100 billion in foreign loans, Argentina struggled to service its debts. IMF assistance required strict financial policies, which critics argued worsened the recession. In 2001, Argentina\'s economy collapsed, leading to presidential resignations, a populist leader defaulting on foreign debts, and devaluing the peso. By 2003, Argentina defaulted on a \$3 billion IMF payment, the largest in IMF history. The economy eventually recovered, and Argentina repaid the IMF in 2006, though negotiations with foreign creditors continued. Venezuela\'s poor currency policy choices led to significant economic issues. Starting in 2003, Venezuela imposed a differentiated exchange rate-the official exchange rate varied depending on what was being bought and sold. This made some imported luxury goods cheap (luxury cars and liquor) while staple goods like milk became expensive. By 2018, the country faced hyperinflation and a shortage of hard currency. In response, Venezuela introduced a new currency in 2018, but this was unsuccessful, leading to the introduction of another new currency in 2021. China\'s currency policy, like Argentina\'s in 2001, pegged the yuan to the U.S. dollar, which didn\'t adapt to differing economic conditions between the two countries. China maintained a large trade surplus, while the U.S. had a significant trade deficit, over \$380 billion with China alone in 2022 and almost \$1 trillion in total. During the first decade of the twenty-first century, to boost exports, China kept the yuan\'s value low, making its goods cheaper in the U.S. This led to accusations of an artificially high dollar-yuan exchange rate, contributing to the trade imbalance and loss of U.S. manufacturing jobs-a very sensitive issue in U.S. domestic politics. In response, the U.S. raised tariffs on Chinese goods from 2017-2019 and the Trump administration labeled China a currency manipulator in 2019. However, a 2017 U.S. Federal Reserve study argued that China\'s currency behaved like a floating currency, though this could change. The U.S. later dropped the currency manipulator label in 2020. **Why Currencies Rise or Fall** In the short term, exchange rates are influenced by speculation about future currency values. Over the long term, a currency\'s value changes relative to other currencies due to supply and demand. Supply is controlled by how much money a government prints. Printing money is a quick way to generate revenue for the government, but the more money that is printed, the lower its price. Domestically, printing too much money creates inflation because the amount of goods in the economy is unchanged, but more money is circulating to buy the goods with. Currency demand depends on a country\'s economic health and political stability; stable countries have stronger currencies. People do not want to own the currency of an unstable country because political instability leads to the breakdown of economic efficiency and of trust in the currency. For example, in 2001, the Indonesian rupiah increased by 13% in two days when a new president took office, because of expectations of greater stability. Currency stability is challenging to maintain. In the past few years, the U.S. dollar dropped from over 90 Japanese yen to under 80, then rose to 120, and then increased again to around 135 in 2023. This causes disruptions in trade-oriented businesses due to unpredictable changes in costs (e.g., changes in the cost of computer chips from Japan needed to manufacture U.S. computers, or U.S. software needed in Japan). States have a shared interest in currency stability to avoid losses to speculators at the expense of central banks and maintain economic integrity. Counterfeiting is another concern, with the U.S. accusing North Korea and Iran of producing large quantities of counterfeit dollars, which undermines the U.S. Treasury. Despite shared interests in currency stability, states often conflict over currency exchange. They typically prefer a low currency value for their states to boost exports and turn trade deficits into surpluses as mercantilists especially favor. For example, from 2009 to 2012, as Canada\'s dollar rose 25% relative to the U.S. dollar, American automakers moved production and thousands of jobs from Canada to the United States. Exchange rates and trade surpluses or deficits tend to adjust automatically toward equilibrium, which liberals prefer. An overvalued currency, whose exchange rate is too high, creates a chronic trade deficit, which can be addressed by printing more money, diluting its value and reducing the exchange rate (assuming it is allowed to float freely). Liberals view these adjustments as positive, helping the world economy correct inefficiencies and maximize growth. Devaluation is the unilateral reduction of a currency\'s value by changing its fixed or official exchange rate. While it can provide a short-term financial fix, it often leads to new problems, such as losses for foreign holders of the currency, reduced trust, and decreased demand, even at the new lower rate. Investors may become wary of future devaluations, which can occur repeatedly in unstable economies. For example, in early 2009, Russia devalued its ruble six times after oil prices fell. During the Great Depression, many leading economies devalued their currencies to boost exports, causing economic conflicts. A currency may be devalued by being allowed to float freely after a period of fixed exchange rates, often bringing a single sharp drop in values. Generally, sharp or artificial changes in exchange rates disrupt international trade and wealth creation. **Devaluation**: A unilateral move to reduce the value of a currency by changing a fixed or official exchange rate. See also exchange rate. Stable exchange rates are considered a collective good, benefiting all members of the international economy by providing a stable framework for investments and sales. However, individual countries may devalue their currency for their own economic or political gains. It doesn\'t matter if the benefits of changing a currency\'s exchange rate are economic (like boosting exports) or political (like gaining favor with voters). What matters is that state leaders believe that changing the exchange rate will benefit their country. According to the theory of collective goods, international exchange rate stability is more achievable under hegemony (the dominance principle) or through cooperation among a small group of key states (where the reciprocity principle operates effectively). Hegemonic stability involves a dominant power supporting global currency stability, using the hegemon\'s economic clout and its influence over other great powers. Lacking a hegemon, a small group of countries cooperates to provide currency stability. In the small group setting, defectors stand out and mutual cooperation is enforced more readily. In recent years, cryptocurrencies like Bitcoin (now accepted by many businesses around the world) have gained global attention. These digital currencies don\'t exist in physical form and can be traded for traditional currencies online. Bitcoin\'s value has fluctuated dramatically, from \$0.05 at its creation to nearly \$70,000 in 2021, before dropping to about \$28,000 in 2023. Unlike state-issued currencies, cryptocurrencies are used by individuals for transactions, initially often for illegal goods. Their role in global commerce is still uncertain due to their volatility and lack of regulation. Confidence in cryptocurrencies was notably shaken by the 2022 collapse of FTX, a major cryptocurrency exchange, leading to significant financial losses estimated to be billions of dollars. **Central Banks** Governments control their currency supply, with some leaders directly managing money printing, often leading to high inflation in these states as a quick fix for political issues. However, in most industrialized countries, politicians delegate these decisions to a central bank to enforce self-discipline and maintain public trust in the currency\'s value. **central bank**: An institution common in industrialized countries whose major tasks are to maintain the value of the state\'s currency and to control inflation. Central banks, managed by economists and technical experts, aim to maintain currency value by limiting money supply and thus inflation. Politicians appoint central bank leaders for long terms that usually do not coincide with election terms, ensuring decisions are made in the national interest, separate from partisan politics. If a state leader orders a military intervention, the generals obey, but if the leader orders an intervention in currency markets, the central bank does not have to comply. While central banks have varying degrees of autonomy. For example, in 2001, Thailand\'s prime minister fired the central bank head over an interest rate dispute. In the United States, the central bank is the Federal Reserve (the Fed), which manages the government\'s stockpile of hard currency. The Fed influences the economy by releasing or hoarding money and intervenes in international currency markets. Multilateral interventions are coordinated by central banks and treasury (finance) ministries of leading countries. The long-term, objective approach of central bankers helps to achieve the collective good of a stable world monetary system. Domestically, the Federal Reserve (the Fed) primarily controls the economy by setting the discount rate, the interest rate for loans to private banks. Central banks have only private banks, not individuals and corporations, as their customers. This rate influences how quickly money enters the economy. A very low discount rate can lead to inflation by increasing money circulation, while a very high rate can slow economic growth by making borrowing more expensive. In 2023, the Fed raised the discount rate to over 5% to combat inflation, which helped reduce rising prices but also raised concerns about a potential recession due to higher borrowing costs and reduced spending. **discount rate**: The interest rate charged by governments when they lend money to private banks. The discount rate is set by countries\' central banks. Central bank decisions on the discount rate have significant international impacts. Higher interest rates in one state attract foreign capital because they offer better returns on investments. High economic growth in one country also boosts exports. Consequently, states are concerned about each other\'s monetary policies. These international conflicts are resolved politically (like G20 meetings), not technically, as each central bank prioritizes its own state\'s interests despite being removed from domestic politics. Central banks control significant currency reserves but are limited by their share of global money, with private banks and corporations holding most wealth. States often follow the world economy\'s direction rather than drive it in the long term. However, during global economic crises (especially recently), states play a crucial role by implementing financial stimulus packages, rescuing private banks and corporations nearing bankruptcy, and prosecuting individuals causing economic harm. **The World Bank and the IMF** International cooperation is crucial for a stable world monetary system and overcoming collective goods problems. As a result, international regimes and institutions have developed norms of behavior in monetary relations, like how the UN supports regimes based on norms in international security affairs. As in security affairs, the main international economic institutions were created near the end of World War II. The Bretton Woods system, established in 1944 at a conference of the winning states in 1944 (at Bretton Woods, New Hampshire), created the International Bank for Reconstruction and Development (better known as the World Bank) to provide loans for rebuilding Western European economies and addressing future financial difficulties. Later, the main borrowers were developing countries and, in the 1990s, Eastern European ones. Closely linked with the World Bank is the International Monetary Fund (IMF), also established to coordinate international currency exchange, balance of payments, and national accounts. The World Bank and IMF remain central pillars of the international financial system. **Bretton Woods system**: A post-World War II arrangement for managing the world economy, established at a meeting in Bretton Woods, New Hampshire, in 1944. Its main institutional components are the World Bank and the International Monetary Fund (IMF). **World Bank**: Formally the International Bank for Reconstruction and Development (IBRD), an organization that was established in 1944 as a source of loans to help reconstruct the European economies. Later, the main borrowers were Third World countries and, in the 1990s, Eastern European ones. **International Monetary Fund (IMF)**: An intergovernmental organization (IGO) that coordinates international currency exchange, the balance of international payments, and national accounts. Along with the World Bank, it is a pillar of the international financial system. See also IMF conditionality. The Bretton Woods system established a stable monetary exchange regime from 1944 to 1971, based on the U.S. dollar backed by gold. The dollar had a fixed value equal to an ounce of gold, and the U.S. government guaranteed to buy dollars for gold at this rate (from a stockpile in Fort Knox, Kentucky). Other currencies were exchanged at fixed rates relative to the dollar. The IMF set these rates based on long-term equilibrium rather than short-term political considerations. Currency markets operated within a narrow range around the fixed rate, requiring countries to use their hard-currency reserves to stabilize their currency if it deviated by more or less than 1% from the fixed rate (selling currency when higher than 1% and buying currency at less than 1%). The gold standard was abandoned in 1971, often referred to as the \"collapse of Bretton Woods,\" though the institutions and monetary regime adjusted rather than collapsed. The U.S. economy\'s dominance had waned due to European and Japanese recovery from WWII, Vietnam War overspending, and oil dollar outflows, leading to an overvalued dollar. By 1971, the dollar\'s value relative to gold had diminished, prompting President Nixon to end the fixed exchange rate and dollar-gold system, allowing the dollar to float freely, resulting in a significant drop in its value relative to gold. The abandonment of the gold standard benefited the United States but negatively impacted Japan and Europe, whose leaders were shocked by the unilateral U.S. actions. The interdependence of the world capitalist economy, which had driven record economic growth for Western countries post-World War II, also set the stage for new international conflicts. To replace gold as a world standard, the IMF created a new world currency, the Special Drawing Right (SDR), often called \"paper gold.\" SDRs are created in limited amounts by the IMF, held as hard-currency reserves by central banks, and can be exchanged for various international currencies. While SDRs are the closest thing to a world currency, they cannot buy goods---only currencies---and are owned only by states (central banks), not individuals or companies. Their value is linked to a basket of key international currencies, periodically adjusted by the IMF to reflect the dollar\'s strength or weakness. The SDR\'s value remains stable with minor currency fluctuations but rises with worldwide inflation. **Special Drawing Right (SDR)**: A world currency created by the International Monetary Fund (IMF) to replace gold as a world standard. Valued by a \"basket\" of national currencies, the SDR has been called \"paper gold.\" Since the early 1970s, the managed float system has governed major national currencies. Transitioning from the dollar-gold regime to this system was challenging, requiring political bargaining over currency exchange rate targets at Group of Six (G6) summits. The G6 expanded to the G8 with Canada in 1976 and Russia in 1997, though Russia\'s membership was suspended in 2014 after annexing Crimea, forming the current G7. In 2009, it was announced that the G20, including more developed and developing countries, would replace the G8 for major financial deliberations. The IMF\'s technical mechanisms involve member states depositing financial reserves based on a quota determined by their economic size and strength. This quota includes hard currency and the state\'s own currency. This quota is not related to the concept of trade quotas, which are import restrictions. States can borrow against their quota (even exceeding it somewhat) to stabilize their economy during tough times and repay the IMF later. In 2009, world leaders pledged an additional \$1 trillion to help developing countries during the global financial crisis. Unlike the WTO or UN General Assembly, the IMF and World Bank use a weighted voting system where each state\'s vote is proportional to its financial quota. This system gives advanced economies significant control, with the United States holding the largest vote share at 16.5%. Both institutions are headquartered in Washington, DC. In 2008, the IMF adjusted its voting formula to modestly increase the quota and voting power of China and other developing countries (from about 3 to 3.7 percent of the total). Further adjustments in 2016 raised China\'s quota and vote share to over 6%, reflecting its growing economic importance. Since 1944, the IMF and the World Bank have aimed to achieve three major goals. First, they provided stability and access to capital for states devastated by World War II, particularly Japan and Western Europe, leading to significant growth and prosperity. Second, from the 1970s onwards, they focused on promoting economic development, but this mission has been less successful, with persistent poverty in much of the global South. Third, in the 1990s, they worked to integrate Eastern Europe and Russia into the world capitalist economy. This effort has been largely successful, though recent sanctions and measures in response to Russia\'s invasion of Ukraine threaten to isolate Russia politically and economically. **9.3 State Financial Positions** As currency rates change and state economies grow, the overall positions of states relative to each other shift. **National Accounts** The IMF maintains a system of national accounts statistics to monitor each state\'s overall monetary position. A state\'s balance of payments, like a company\'s financial statement, summarizes all money that flows into and out of the country. This system is technical and not political. It includes three types of international transactions: the current account, capital flows, and changes in reserves. **balance of payments**: A summary of all the flows of money into and out of a country. It includes three types of international transactions: the current account (including the merchandise trade balance), flows of capital, and changes in reserves. The current account is essentially the balance of trade, money flows out of the state to pay for imports and flows into the state to pay for exports of goods and services. For example, money spent by a British tourist in Florida is equivalent to money spent by a British consumer buying Florida oranges in a London market, in both cases, money flows into the U.S. current account. It also includes government transactions like military and foreign aid grants, as well as salaries and pensions for employees abroad. Remittances, such as profits sent by companies to their home countries or money sent by individuals to families abroad, are also part of the current account. For instance, a Honda subsidiary in America may send profits back to Honda in Japan, or a British citizen working in New York may send money to her parents in London. Capital flows, the second category in the accounts, consist of foreign investments in and by a country. They are measured in net terms, which is the total investments and loans foreigners make in a country minus the investments and loans that country\'s companies, citizens, and government invest abroad. Most investments are private, though some involve government agencies and state-owned industries. Capital flows are divided into foreign direct investment (FDI), such as owning a factory or real estate in a foreign country, and indirect portfolio investment, like buying stocks and bonds or making loans to foreign companies. While these types of capital flows have different political consequences, they are essentially equivalent in the overall national accounts. The third category, changes in foreign exchange reserves, ensures that national accounts balance. Any difference between money inflows and outflows (from the current account and capital flows combined) is offset by an equal but opposite change in reserves. These changes include the state\'s purchases and sales of SDRs, gold, and hard currencies, as well as changes in its IMF deposits. When a state has more money flowing out than coming in, it uses its foreign exchange reserves to cover the difference. These reserves include assets like gold, Special Drawing Rights (SDRs), and foreign currencies. Conversely, if a state has more money flowing in than out, the surplus is added to its reserves. This balancing act ensures that the national accounts always even out, maintaining economic stability. However, there is a residual category for errors and omissions, because even the most efficient and honest government (many governments are neither) cannot track every bit of money crossing its borders. **International Debt** An economy is constantly in motion with money moving through production, trade, and consumption processes. However, it also contains standing wealth, which includes hard-currency reserves owned by governments. It also includes tangible investments like homes, cars, farms, factories, ports, and railroads, which are more important. Capital goods, such as factories, are products that can be used as inputs for further production. Nothing lasts forever, but standing wealth lasts for longer than goods that are quickly consumed. The main difference is that capital can be used to create more wealth: factories produce goods, railroads support commerce, and so forth. As standing wealth increases, it creates new wealth by supporting production and commerce, leading to economic growth over time. In a capitalist economy, money makes more money. Interest rates reflect these economic growth dynamics. Real interest rates are the rates for borrowing money above the rate of inflation. For example, if the annual interest rate is 8% and inflation is 3%, the real interest rate is 5%. Businesses and households borrow money, believing they can create new wealth that generates a higher return than the loan\'s interest rate. If a state\'s economy is healthy, it can borrow money from foreign entities and generate enough new wealth to repay its debts. However, if the state operates at a loss, its debts increase, leading to a cycle where more income is used to pay interest, and additional borrowing is needed. If the state\'s fortunes improve, it can create wealth and repay its debts over time. If not, it may need to sell off standing wealth, such as buildings and factories, reducing its net worth (all its assets minus all its liabilities). Failure to repay debts hinders future borrowing, which is crucial for economic growth. When debts become unpayable, lenders (banks and governments) must write them off or settle for a fraction of their value. For example, in 2001, Argentina\'s debt crisis led creditors to accept less than one-third of the owed amount in a 2005 restructuring deal. Similarly, fears of a Greek default from 2010-2012 caused financial market slumps on large debts, with concerns that the impact would spread to larger European economies-Spain, Portugal, Ireland, and perhaps Italy. In 2012, bailouts helped stabilize the crisis, but austerity measures led to a recession in the eurozone. **austerity measures**: Government policies that severely cut government spending or raise taxes (or both). The policies are adopted to reduce government budget deficits, usually to pay off debt. In 2015, fed up with austerity measures, Greeks elected a new government to renegotiate debt and lift austerity measures. However, the government struggled to convince creditors it wouldn\'t default without these reforms. By mid-2015, it accepted more loans and tough austerity measures to avoid default, leading to new elections. Despite winning reelection, budget cuts remained unpopular. Nonetheless, from 2017 to 2019, Greece saw modest economic growth, though unemployment stayed high (over 20 percent). The economy contracted in 2020 due to COVID-19 but has grown steadily since. States go into debt for two main reasons. First, a trade deficit, where borrowing is common to cover the trade deficit gap in the balance of payments. Second, the income and consumption patterns of households and businesses. When people and firms spend more than they earn or save, they must borrow to pay their bills. The credit they use may come from local banks, which often get their funds from foreign lenders. A third reason for national debt is that government spending often exceeds income. According to Keynesian economics, governments sometimes spend more on programs than they derive from tax revenue-deficit spending to stimulate economic growth. Many G8 countries, particularly the United States, used this strategy during the last financial crisis. If successful, this approach leads to increased economic growth and higher tax revenues to make up the deficit. If not, the state ends up with a poor economy and deeper debt. **Keynesian economics**: The principles articulated by British economist John Maynard Keynes, used successfully in the Great Depression of the 1930s, including the view that governments should sometimes use deficit spending to stimulate economic growth. Government decisions about spending and taxation are called fiscal policy, while decisions about money supply are called monetary policy. These are the main tools for managing an economy. High taxation can hinder growth, printing too much money causes inflation, and borrowing to cover deficits can deplete a state\'s wealth. Ultimately, a state\'s wealth and power depend on the health of its economy, including the education and training of its workforce, the quality of its capital goods, the morale of its population, and the skill of its managers. In the long run, international debt reflects these underlying economic realities. **fiscal policy**: A government\'s decisions about spending and taxation and one of the two major tools of macroeconomic policy making (the other being monetary policy). **monetary policy**: A government\'s decisions about how much money to print and circulate and one of the two major tools of macroeconomic policy making (the other being fiscal policy). Shifts in financial fortune among the great powers often accompany changing power relations. Consider how the past two decades have changed the financial positions of the United States, of Russia and Eastern Europe, and of Asia. **The Position of the United States** The United States is an extraordinarily wealthy and powerful state, excelling in international security as the world\'s superpower. Economically, it is the world\'s largest and most technologically advanced in sectors like computers, telecommunications, aviation, aerospace, and biotechnology. The U.S. also leads in scientific research and higher education. The financial position of the United States has shifted over the decades. After World War II, U.S. hegemony peaked, but it gradually eroded as competitors in Western Europe and Asia gained ground. In the early 1950s, the U.S. economy GDP was about twice the size of the next six advanced industrial states combined. By the 1980s, its share of world GDP had dropped by half, and by 2022, it was slightly more than 15 percent. The U.S. also saw a decline in its share of the world\'s financial reserves, from 50 percent in 1950 to less than 10 percent by 1980. This long-term decline after the extraordinary post-1945 U.S. hegemony was likely unavoidable. The trade deficit (exports minus imports) grew from near zero to \$200 billion in just a few years in the early 1980s, shrank, and then grew again, reaching over \$700 billion in 2007. After shrinking again during the 2008-2009 recession, the trade deficit began to grow in 2010 and rose to more than \$500 billion in 2017. The budget deficit also fluctuated, exceeding \$1 trillion a year from 2008-2012 due to war spending, tax cuts, and Keynesian efforts to stimulate economic growth during the recession. These trends have raised concerns about U.S. international economic leadership. The U.S. economy faced several challenges at the start of the twenty-first century after a prosperous 1990s. The burst of the Internet investment bubble led to a global recession in 2001, followed by economic disruptions from the September 2001 terrorist attacks. Tax cuts and war spending spurred growth from 2002-2006 but increased debt. The Great Recession hit in 2008, the worst downturn since the 1930s (although not nearly that bad). Growth resumed in 2009 but was slow, with high unemployment, rising debt, and contentious government decisions. By 2013, stock markets recovered, but unemployment remained high until 2017. These economic factors like stubborn unemployment rates, high trade deficits, and rising national debt led to frustration with U.S. foreign policy in 2016, contributing to Donald Trump\'s election as president. Trump, a critic of trade agreements, blamed unemployment and the trade deficit on free trade agreements signed by previous American presidents. As president, he withdrew the U.S. from the Trans-Pacific Partnership (a major Asian trade agreement), replaced NAFTA with the U.S.-Mexico-Canada Agreement, imposed tariffs on goods like aluminum and steel, launched a trade war with China, and demanded renegotiations of existing trade agreements. These actions sparked significant controversy, even within his own party, due to fears of tariffs increasing unemployment and economic stagnation. The U.S. government\'s national debt has grown significantly over the decades, from about \$1 trillion in 1980 to over \$31 trillion in 2023. Interest payments on this debt are equivalent to what would otherwise be a healthy rate of economic growth. Once the world\'s leading lender state, the United States is now the world\'s leading debtor state. **national debt**: The amount a government owes in debt because of deficit spending. U.S. financial trends have significantly impacted the global political economy. These trends undermined the U.S. role in stabilizing international trade and monetary relations in the 1980s, reconstructed it in the 1990s, and undermined it again since 2000 (in ensuring the provision of collective goods, and in providing capital for the economic development of other world regions). In a more decentralized and privatized world economy with an uncertain U.S. role, solving collective goods problems and achieving free trade becomes more challenging. **The Position of Russia and Eastern Europe** After the Cold War, the United States provided limited capital (investments, loans, and grants) to help Russia and Eastern Europe recover. However, it did not create an aid program for these regions like the ones developed for Western Europe and Japan after World War II. States in this region faced significant challenges transitioning from centrally planned to capitalist economies and integrating into the global economy. These challenges included joining the world trading system (membership in the WTO, bilateral trade agreements, etc.) and attracting foreign investment. One of the toughest tasks was joining the international monetary system, as having a stable and convertible currency is crucial for attracting foreign business and expanding trade. Most former Soviet bloc states joined the IMF and were assigned quotas. However, the IMF and World Bank required these states to curb inflation, balance budgets, and ensure economic stability before providing loans. This created a chicken-and-egg problem, as achieving stability would have been easier with the loans. After the Cold War, the economies of the region experienced a deep depression (shrinking GDP), with the former Soviet Union\'s economies shrinking by half over seven years before recovering. Eastern European countries generally turned their economies around more effectively than the former Soviet republics. Russia, with its inherited infrastructure and natural resources (especially oil and natural gas), was better off but faced political instability which discouraged foreign investment. Inflation in Russia reached 1,500 percent in 1992. In the 1990s, organized crime became a significant issue as plutocrats seized state-owned companies and drained their wealth. The transition period led to widespread corruption among officials' government. In 2004, President Putin shut down Yukos, Russia\'s largest oil company, over nonpayment of a \$10 billion tax bill, and its assets were acquired by a state-owned business. (Yukos\'s owner was an opponent of Putin). The state has since strengthened control over major companies and the media, using its power to control or push aside plutocrats. After the 1998 financial crisis, Russia experienced a decade of strong economic growth and reduced inflation to below 10 percent annually. However, the 2008-2009 global recession hit hard as oil prices fell. Hopes for stability with Putin\'s 2012 return were dashed by declining oil prices and investment. The 2014 conflict with Ukraine further destabilized the economy, slowing growth to around 1 percent. Increased perceptions of political repression harmed investment. The 2022 invasion of Ukraine led to over 13,000 Western sanctions, freezing assets and limiting banking access, freezing its gold reserves and overseas assets and limiting its ability to use the international banking system. In addition, many foreign businesses with operations in Russia decided to leave after the invasion. This caused a GDP reduction of over 2 percent in 2022. The decline would have been greater if the price of oil and natural gas had not remained relatively high. Russia\'s economic future depends on oil and gas prices, the impact of sanctions, relations with key partners (especially China, India, Brazil, and South Africa), and investor perception of political stability. **The Position of Asia** By the 1980s, Japan emerged as a potential rival to the United States as the world\'s leading industrial power. Japanese auto manufacturers gained ground after the 1970s oil-price shocks when smaller cars became popular, and Japanese products began to dominate global markets in electronics and other fields. Japanese capital also became a significant economic force in nearby developing economies (such as China and Thailand) and the United States, where Japanese creditors financed much of the growing U.S. national debt. The economic growth of the 1980s masked serious problems, as stock and real estate prices soared due to speculation rather than inherent value. When these prices collapsed at the end of the decade, banks were left with bad loans backed by deflated stocks and real estate. These issues were covered up, and problems like lax banking regulation, political cronyism, and corruption persisted through the 1990s. In the 1990s, East and Southeast Asian countries repeated Japan\'s financial mistakes, leading to overvalued real estate and stocks due to speculation. Banks made bad loans based on these assets, aided by political corruption and cronyism. The 1997 Asian financial crisis began when currency speculators sold off Southeast Asian currencies, forcing devaluations in Thailand, the Philippines, Malaysia, and Indonesia. This led to stock market crashes and affected other emerging markets like Brazil, as investors feared similar issues elsewhere. After losing \$1 billion by unsuccessfully defending its currency\'s value, the Philippines addressed its economic problems by letting its currency float and securing a \$1 billion stabilization loan from the IMF (to reduce inflation). In return, the government agreed to keep interest rates high, reduce budget deficits (to reduce inflation), pass a tax reform law, and tighten control of banks. These tough measures, despite creating political problems (especially when banks are politically connected or when governments are corrupt), won international approval. Other Asian countries faced greater economic setbacks due to indecisive actions. Currency speculators attacked Indonesia, leading to a fall in its currency, higher interest rates, and a stock market drop. Indonesia sought tens of billions of dollars IMF loans but resisted reforms, causing continued economic and political instability in 1998. Riots and protests led to President Suharto\'s resignation after 30 years of dictatorship. Thailand, Malaysia, and Indonesia saw their stock markets lose about half their value and currencies about a quarter of their value. In 1997, South Korea\'s stock markets collapsed, and banks were burdened with \$50 billion in bad loans due to cronyism. The IMF provided a \$60 billion bailout, the largest ever, leading to the election of a new reformist president. The financial crisis brought both reform and pain to South Korea, like Thailand and Indonesia. China avoided the 1997 crisis due to less speculative economic growth, a non-convertible currency, massive hard currency reserves, and disciplined inflation control. The government reduced inflation from 20% to less than 4% between 1995-1997, with Zhu Rongji, the architect of this policy, becoming prime minister in 1998. Successful inflation fighters also became presidents of Brazil and Argentina in the 1990s. In theory, the instant free flow of capital should stabilize economies by allowing investors to shift money quickly based on changing conditions. Rather than waiting for governments to make significant changes to the value of their currencies when economic problems become severe, financial markets can make smaller, frequent adjustments to currency values based on daily economic conditions. However, in practice, this global liquidity can be destabilizing, as small events can have amplified effects worldwide. The problems in Thailand led to an Asian crisis and then an emerging-markets crisis, with capital fleeing rapidly. These events foreshadowed the 2008 financial crisis, where issues in one country quickly spread globally. Governments face a dilemma: politically desirable policies like stimulating growth, keeping taxes low, and supporting banks and businesses owned by friends and relatives can undermine currency stability. If these policies continue, they may lead to economic collapse and loss of foreign investment. However, tough policies to maintain currency stability may cause a government to lose power. China is currently the most important economic power in East Asia (India is the most important economy in South Asia), led by the Communist Party of China (sometimes referred to as the Chinese Communist Party). Until the late 1970s, China followed socialist economic policies with state ownership and central planning. In the late 1970s, China began opening its economy and adopting capitalist principles, leading to impressive economic growth of nearly 10 percent annually since the reforms, although growth has slowed in recent years. In 2013, China launched the Belt and Road Initiative (BRI) to build infrastructure like railways, ports, and highways, connecting China to other regions. The goal was to create business opportunities and expand China\'s economic and political power. China has invested over \$1 trillion in the BRI, with over 100 countries partnering or showing interest. The BRI now includes building industrial areas in foreign countries and promoting Chinese products. While it has benefited many countries, especially in the global South, it has also increased their debt to China as many projects are financed through loans. Some projects have faced issues like shoddy construction and corruption. The U.S. is concerned that the BRI will increase other countries\' economic dependence on China, boosting China\'s power relative to the U.S. **9.4 Multinational Business** Although states are the main rule makers for currency exchange and other international economic transactions, those transactions are carried out mainly by private firms and individuals, not governments. Most important among these private actors are multinational corporations. **Multinational Corporations** Multinational corporations (MNCs) are companies based in one country with branches or subsidiaries in other countries. There is no exact definition, but they operate globally with fixed facilities and employees in multiple locations. While there\'s no exact count, estimates suggest there are tens of thousands of MNCs worldwide. **multinational corporation (MNC)**: A company based in one state with affiliated branches or subsidiaries operating in other states. See also home country and host country. Industrial corporations, particularly in the automobile, oil, and electronics industries, are the most important MNCs. They produce goods in factories across various countries and sell them globally. Most of the largest MNCs are based in G8 states. Financial corporations, especially banks, operate multinationally but often face more restrictions than industrial MNCs. The U.S. does not lead among the largest commercial banks due to its antitrust policies limiting geographic expansion. In 1995, the global integration of financial markets was highlighted when a 28-year-old trader in Singapore lost \$1 billion speculating on Japanese markets, bankrupting a 200-year-old British investment bank. Some MNCs sell services, like Google and AT&T, as well as international airlines that sell tickets globally. Even retail grocery stores can become MNCs. The United States leads in service MNCs, just as it does in industrial ones. The role of MNCs in international political relations is complex and debated. Some scholars view MNCs as agents of their home governments, aligning with mercantilism, where economic activity serves political authorities. Thus, MNCs have clear national identities and act as members of their national society under state authority. From a more revolutionary worldview, others see national governments as agents of MNCs, with state interventions (economic and military) serving private, monied interests. Others view MNCs as global citizens with no allegiance to any government, acting in the interests of their international stockholders and driven by profit maximization, without loyalty to any state. For instance, the head of Dow Chemical once expressed a desire to establish the company\'s headquarters on an island beyond any state\'s jurisdiction. However, state-owned MNCs, a small minority, reflect state interests but have gained more autonomy to pursue profit (as part of the economic reforms instituted in many countries), with many being privatized in recent years. Multinational corporations (MNCs) are increasingly powerful independent actors in the international arena. Many industrial MNCs have annual sales in the tens of billions, with the top corporations reaching hundreds of billions. In 2017, only 25 states had more economic activity (GDP) than Walmart, which had nearly \$500 billion in sales. However, the largest state, the United States, had government revenues exceeding \$3 trillion, six times that of Walmart. While MNCs do not rival the largest states, their power surpasses that of many poorer states, impacting their operations in the global South. Giant MNCs contribute to global interdependence by being deeply integrated into many states, fostering a strong interest in the stable operation of the international system, including security, trade, and monetary relations. They thrive in a stable international environment that allows for free trade, movement, and capital flows, governed by market forces with minimal government interference. Overall, MNCs are a strong force for liberalism in the world economy, although some MNCs in specific industries may push for mercantilist policies to protect their own interests. Most MNCs have a world management system based on subsidiaries in each state, subject to local legal authority. The parent MNC in the home country owns these subsidiaries (in whole or in substantial part) and controls top management appointments (hiring and firing the top managers). This business infrastructure is crucial for transnational relations, linking people and groups across borders. MNC operations support a global business infrastructure, connecting a transnational community of businesspeople. For example, a U.S. manager in Seoul, South Korea, does not encounter a confusing or unfamiliar environment. Rather, he or she moves through a familiar sequence of airport lounges, telephone calls and faxes, international hotels, business conference rooms, and CNN broadcasts-most likely hearing English spoken in all. **Foreign Direct Investment** MNCs not only operate in foreign countries but also own capital there, such as buildings, factories, and cars. For example, U.S. and German MNCs own capital in Japan, while Japanese MNCs own capital in the U.S. and Germany. Investment involves exchanging money for ownership of capital to generate income over time. Investments in foreign countries are crucial and politically sensitive activities for MNCs. Foreign direct investment has shown a strong upward trend over time, though it fluctuates with global economic conditions. Foreign direct investment (FDI) involves tangible assets like factories and office buildings, unlike portfolio investment, which is paper based (including ownership of a sizable fraction of a company\'s total stock, as opposed to a portfolio with little bits of many companies). FDI includes significant ownership in companies and cannot be easily moved between states. It is long-term and more visible than portfolio investment. Manufacturing sector investments require substantial investment in facilities and training, while service sector investments are less costly and easier to exit if conditions change. **foreign direct investment**: The acquisition by residents of one country of control over a new or existing business in another country. Also called direct foreign investment. Mercantilists often view foreign investments in their country with suspicion. In developing countries, FDI can raise concerns about loss of sovereignty, as governments may be less powerful or wealthy than the investing MNCs. These fears are rooted in the historical fact that most foreign investment in the global South once came from colonizers. While FDI creates jobs, it can also disrupt traditional ways of life and cultures. Many poor and transitional states welcome and encourage foreign direct investment (FDI) to stimulate economic growth, despite concerns from economic nationalists. However, most FDI, like portfolio investment, is concentrated in industrialized countries rather than the global South. Economic nationalists in industrialized countries worry about losing power and sovereignty due to foreign investment. In Canada, for example, mercantilists are concerned that U.S. firms own more than half of Canada\'s manufacturing and oil and more than two-thirds of Canada\'s oil and gas industry. Given Canada\'s smaller size and heavy dependence on U.S. trade, some Canadians fear becoming an economic, cultural, and political annex of the United States, losing their national culture and economic control. **Public Opinion and International Relations** **Foreign Investment** Foreign direct investment (FDI) can be controversial in host states, with the popularity of such investments depending on how companies interact with local conditions and residents. In 2018, a survey in 27 countries explored individuals\' feelings toward foreign businesses and the perceived helpfulness of ties with these businesses. The poll results show that most respondents in each country view foreign business ties positively, with a clear majority in every country surveyed finding them helpful (somewhat or very good). However, in countries like Argentina and Italy, larger segments of respondents are skeptical, rating foreign business ties as somewhat or very bad. The high level of support for foreign businesses across countries can be explained by globalization. People have come to rely on goods and services from other countries and view foreign companies as beneficial, especially when they sell popular brands like Apple, Samsung, or Gap. Additionally, respondents recognize that these investments often create jobs and stimulate economic growth. Despite the controversy surrounding FDI, the positive survey results might be questioned due to the ambiguity of \"foreign business ties\" for respondents. It could signify jobs and growth, cultural imperialism, or access to foreign products. However, the data indicates that many global populations do not inherently view foreign economic ties skeptically. U.S. economic nationalists are concerned about FDI due to the accumulation of U.S. debts. Mercantilists see a loss of power when foreign investors buy existing companies or real estate, rather than building new facilities. For example, in 2005, a Chinese oil company withdrew its bid to buy Unocal after a U.S. outcry, leading to a sale to a U.S. company at a lower price (Chinese business and government leaders resented what they saw as a U.S. double standard). However, when Honda builds a new factory in Ohio, adding jobs and facilities, Americans do not perceive a loss. Conversely, liberal economists argue that global efficiency and wealth generation result from MNCs investing freely across borders, with investment decisions based on economic grounds rather than nationalism. They believe foreign investments in the U.S. benefit the economy, as profits from foreign factories support U.S. workers and consumers. For example, many benefits of a profitable Japanese factory in the United States include U.S. workers at the plant and U.S. consumers of its products, even if some profits go back to Japan (and even those profits may be reinvested in the United States). Additionally, U.S. MNCs have over \$6 trillion in FDI abroad, making the situation mutually beneficial. **Host and Home Government Relations** A state where a foreign MNC operates is called the host country, while the state where the MNC has its headquarters is the home country. MNC operations can create problems and opportunities for both host and home countries\' governments. Conflicts between the host government and the MNC can escalate into interstate conflicts between the host and home governments. For example, if a host government seizes an MNC\'s property without compensation or arrests its executives, the home government may intervene to assist the MNC. **host country**: A state in which a foreign multinational corporation (MNC) operates. See also home country. **home country**: The state in which a multinational corporation (MNC) has its headquarters. See also host country. Host governments can regulate activities within their territories, so an MNC cannot operate against the government\'s wishes. Conversely, MNCs have many states to choose from, so a host government cannot force an MNC to do business there. Ideally, MNCs operate in host countries when it benefits both parties. Common interests arise from the wealth created by the MNC, benefiting the MNC through profits and the government through taxes and economic growth (generating future taxes and political support). Conflicts can arise between MNCs and host governments, particularly over the distribution of new wealth. This distribution depends on tax rates, on MNC activities or profits and operational rules. Before investing, MNCs negotiate these issues with the government. The government\'s leverage is the promise of a favorable business climate, while the MNC\'s leverage is the threat of moving its capital elsewhere. Governments can attract MNC investment by offering incentives like special tax and regulation terms. In resource extraction, negotiations may focus on leasing rates for land and mineral rights. Governments might also provide infrastructure, such as roads and airports, at their expense. MNCs may also build infrastructure if given favorable terms. Over time, some locations develop strong business infrastructure, gaining a comparative advantage in attracting MNCs. Trade regulations aim to maximize jobs and taxable income within the host country. For example, the U.S. government pressures Toyota to use more U.S. parts in its cars to avoid import restrictions. Such \"domestic content\" rules are part of the U.S.-Mexico-Canada Agreement. MNCs prefer the freedom to assemble goods from parts made anywhere, while governments want to maximize local wealth creation. With parts coming from various countries, determining a product\'s origin is complex and often leads to lengthy negotiations between MNCs and host governments. Monetary policy can cause conflicts between MNCs and host governments. Currency devaluation makes imports more expensive, which can hurt foreign MNCs selling imported products. For example, if the dollar falls relative to the yen, this means that each dollar buys fewer yen. Since Toyota USA imports parts from Japan, they need yen to pay for these parts. If the dollar is weaker, Toyota USA must spend more dollars to get the same quantity of yen. Thus, Toyota USA may have to charge more U.S. dollars for its cars to pay for the parts it brings in from Japan. Therefore, MNCs prefer stable currencies for long-term investments. MNCs may face conflicts with host governments over international security and domestic political stability. When investing, MNCs expect their facilities to operate profitably over time. However, wars or revolutions can damage or destroy these facilities, leading to income and capital losses like standing wealth. For example, in 2001, ExxonMobil suspended operations in Indonesia\'s Aceh province due to attacks by armed separatists, prompting the Indonesian government to intervene. Similarly, in 2003, Chevron Texaco, Shell, and Total halted oil production in Nigeria for weeks due to ethnic violence. In negotiating over these sources of conflict, MNCs use various methods to influence host governments, like domestic corporations. They hire lobbyists, use advertisements to sway public opinion, and offer incentives to politicians, such as locating facilities in their districts. These activities can be politically sensitive, as host-country citizens and politicians may resent foreign influence. Corruption is a significant means of influence over host governments. MNCs may use payoffs, kickbacks, gifts, and similar methods to gain favorable policies from government officials. This practice is common in the global South, where officials are often poorly paid, but it also occurs in wealthy industrialized countries. MNCs face conflicts with their home governments, like those with host governments. Key issues include taxation and trade policies. MNCs often complain that sanctions and restrictions aimed at political adversaries harm them more than the intended targets. Competing MNCs from other countries usually fill the gap when a government restricts its own MNCs. Generally, MNCs continue doing business wherever profitable, regardless of their home governments\' political preferences. Sometimes, governments prevail because MNCs need their support. In the 1990s, Conoco, a U.S.-based oil company, agreed to a billion-dollar project in Iran, just when the U.S. government was trying to isolate Iran as a rogue state. However, under U.S. government pressure, Conoco backed out to avoid conflict with its home government. This decision cost Conoco a lucrative contract, which went to a European company instead. The location of an MNC\'s headquarters determines its home nationality. Traditionally, shareholders and top executives were citizens of the home country. However, with global economic integration, this is changing. MNCs now operate worldwide and assemble products from parts made in various countries, leading to more international shareholders and managers. All business activity is influenced by politics. MNCs thrive in environments with stable international security, as violence and war make it difficult and risky to generate wealth. War destroys wealth, reduces labor supply, and distorts markets. While some businesses, like arms merchants and smugglers, profit from instability, they are exceptions. Politics can influence which MNCs a government allows to operate within its borders. For instance, in 2022, the Biden administration barred two Chinese telecommunications firms Huawei Technologies and ZTE from selling equipment in the U.S., citing espionage concerns. Similarly, in 2023, the U.S. government banned the Chinese-owned TikTok from federal employees\' work phones due to similar concerns. Beyond national security concerns, MNCs favor political stability in international business rules. In monetary policy, they benefit from stable rates under the managed float system. In trade policy, they benefit from stable tariff levels within the WTO framework. International law norms also benefit businesses by holding governments accountable for predecessors\' debts and requiring compensation for nationalized foreign assets. Occasionally, MNCs can get their home governments to provide security when host governments fail to do so. IR scholars continue to study the relationships between the international economic activities of MNCs and the international security activities of their home governments. Corporate alliances involving MNCs often have international implications. When alliances form within a single state, they may promote economic nationalism. Increasingly, however, corporate alliances are forming across national borders. Such alliances tend to promote liberalism rather than economic nationalism. These alliances undermine economic nationalism and the concept of rival trading blocs, creating interdependence among home states. This intertwining of national interests reduces conflicts between states. While MNCs are foreigners in other countries, international alliances make them at home in several countries at once.