International Economics Module 4 – The Dynamic Environment of International Trade

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Learning Objectives

The basis for the reestablishment of world trade following World War II
The importance of balance-of-payment figures to a country’s economy
The effects of protectionism on world trade
The seven types of trade barriers
The importance of GATT and the World Trade Organization
Introduction to EU
The emergence of the International Monetary Fund and the World Bank Group

Introduction

Proliferation of trade and emergence of the global economy
Intensification of global competition
More emerging markets
Developments in technology allow communications with global consumers and movement of goods

World Trade and U.S. Multinationals

Rapid growth of underdeveloped countries and new global marketing opportunities
Rising living standards have created marketing opportunities for U.S. firms
Resistance over domination of U.S. multinationals
Expropriation and domestication of U.S. investments in Latin America
In the Europe, U.S. multinationals were controlled tightly by protectionism laws

Resurgence of competition from all over the world challenged the supremacy of American industry
Newly industrialized countries (NICs) such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong experienced rapid industrialization
Economic power evenly distributed with growth of MNCs from other countries
Establishment of the WTO
Integration of European Union countries
Creation of NAFTA, AFTA, and APEC

21st Century: The First Decade and Beyond

With exception of China, slower economic growth in U.S. and other countries is currently evident.
Faster growth rates expected in developing countries such as Brazil, China, India, Indonesia, and Russia.
More trade expected in emerging markets, regional trade areas, and the established markets in Europe, Japan, and U.S.
Companies need to be more efficient, improve productivity, expand global reach, and respond quickly.
Greater growth in international sales expected by smaller firms.

Protectionism: Logic and Illogic

Countries use protectionist measures to shield a country’s markets from intrusion by foreign competition and imports.

Arguments for Protectionism include:

maintain employment and reduce unemployment.
increase of business size, and
retaliation and bargaining.
protection of the home market.
need to keep money at home.
encouragement of capital accumulation.
maintenance of the standard of living and real wages.
conservation of natural resources.
protection of an infant industry
industrialization of a low-wage nation
national defense

Arguments 9-11 above are considered valid for protectionism

In general, protectionism contributes to industrial inefficiency and makes a nation uncompetitive

Protectionism is implemented through the imposition of trade barriers, which include tariff barriers and non-tariff barriers

Six Types of Non-Tariff Barriers

1. Specific Limitations on Trade:

Quotas
Import Licensing requirements
Proportion restrictions of foreign to domestic goods (local content requirements)
Minimum import price limits
Embargoes

2. Customs and Administrative Entry Procedures:

Valuation systems
Antidumping practices
Tariff classifications
Documentation requirements
Fees

3. Standards:

Standard disparities
Intergovernmental acceptances of testing methods and standards
Packaging, labeling, and marking

4. Government Participation in Trade:

Government procurement policies
Export subsidies
Countervailing duties
Domestic assistance programs

5. Charges on imports:

Prior import deposit subsidies
Administrative fees
Special supplementary duties
Import credit discriminations
Variable levies
Border taxes

6. Others:

Voluntary export restraints
Orderly marketing agreements

Monetary Barriers

In addition to the Six Types of Non-Tariff Barriers, monetary barriers are also used by countries

Three types of monetary barriers include:

Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency.
Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice-versa
Government approval: In countries where there is a severe shortage of foreign exchange, an exchange permit to import foreign goods is required from the government

General Agreement on Tariffs and Trade (GATT)

1.GATT created as an agency to serve as watchdog over world trade and provide a process to reduce tariffs

2. GATT also provided a mechanism to resolve trade disputes bilaterally

3. GATT now replaced by the World Trade Organization

GATT covers three basic areas:

trade shall be conducted on a nondiscriminatory basis;
protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas; and
consultation shall be the primary method used to solve global trade problems.

World Trade Organization (WTO)

1. Unlike GATT, World Trade Organization is an institution, not an agreement

2. WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions

European Union (EU) – Economic & Political Integration

European Union, 1993

positive integration – actively fostering integration

Maastricht Treaty, 1992
Amsterdam Treaty, 1997

15 members currently

Greece (1986), Spain (1986), Portugal (1986), Austria (1995), Finland (1995), Sweden (1995)
10 candidate countries (Bulgaria, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Romania, Slovenia, Slovakia, Turkey)

European Union (EU) – Institutions

legislative – shared legislative powers

Council of the European Union

ministers and heads of state of member countries

European Parliament

direct election

executive – European Commission

President and commissioners appointed by member states
confirmed by European Parliament

judiciary – Court of Justice

European Union (EU) – Economic Integration

single market

free movement of people, capital (investment), goods and services

monetary union

the Euro

comes into existence January, 1999
banknotes and coins in circulation, January 2002
national banknotes and coins withdrawn from use (February 2002)

common labor market

Schengen Agreement, 1985

European Union (EU) – Political Integration

political integration

common political institutions
e.g. European Parliament

common European citizenship

freedom of movements
fundamental rights
civil and political rights

common social citizenship (limited)

access to social programs in other countries

common currency

money traditionally symbol of sovereignty
requires integrated monetary policy

Association of Southeast Asian Nations (ASEAN)

Brunei
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
Japan
S. Korea
China

Asia-Pacific Economic Cooperation (APEC)

Australia
Brunei
Canada
Chile
China
Hong Kong
Indonesia
Japan
South Korea
Malaysia
Mexico
New Zealand
Papua New Guinea
Peru
Philippines
Russia
Singapore
Taiwan
Thailand
U.S.A.
Vietnam

North American Free-Trade Area (NAFTA)

Canada
United States
Mexico

The International Monetary Fund (IMF)

IMF was created to assist nations in becoming and remaining economically viable
It assists countries that seek capital for economic development and restructuring
IMF loans come with stipulations that borrowing countries slash spending and impose controls to curb inflation
It helps maintain stability in the world financial markets

Objectives of the IMF include:

stabilization of foreign exchange rates
establish convertible currencies to facilitate international trade
lend money to members in financial trouble

World Bank Group (WBG)

The goal of WBG is to reduce poverty and the improvement of living standards by promoting sustainable growth and investment in people.

The functions of the WBG include:

lending money to countries to finance development projects in education, health, and infrastructure;
providing assistance for projects to the poorest developing countries;
lending directly to the private sector in developing countries with long-term loans, equity investments, and other financial assistance;
provide investors with investment guarantees against “noncommercial risk,” so developing countries will attract FDI; and
provide conciliation and arbitration of disputes between governments and foreign investors

Protests Against Global Institutions

In 1999 “anti-capitalist protestors” complained against the WTO, and IMF, over the unintended consequences of globalization that include:

environmental concerns
worker exploitation and domestic job losses
cultural extinction
higher oil prices, and
diminished sovereignty of nations