Redmond Economic Integration

8/10/2019 Redmond Economic Integration

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Economic Integration Institutions and Practices

Part 1: Introduction

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Things you already know!!

It makeslittle sense for a country or a

region to produce what it can buy from

another country or region at a lower cost

All countries can benefit if each country

specializes in production those goods it

can produce best and satisfy their other

wants and needs by trading for them


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Static Gains from trade are gains inworld output that result fromspecialization and trade

Dynamic gains from trade are gainsfrom trade over time that occur

because trade induces greaterefficiency in the use of existingresources

More, things you already know!!


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A country engaging in international trade uses

its resources more efficiently

International trade increases not only the

quantity of the good we consume but, in many

instances, their quality

International trade can be a very effective wayto enhance competition in a countrys domestic

market

Even more, things you already know!!


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Well then why not Free Trade

Free tradeis a policy by which a

government does not discriminate against

imports or interfere with exports by

applying tariffs (to imports) or subsidies (to

exports) or quotas.


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From a public policy perspective, the gains tosociety as a whole are greater than the losses thatoccur within a particular industry

Consumers tend to benefit from free trade but firms andworkers in importing industry can be harmed

Special interest groupslobby for changes that benefitthem, though not necessarily society as a whole

Problem? The gains to consumers are diffusedbutthe losses to producers and workers who care areconcentrated

THE WELFARE EFFECTS OF TRADE

IN AN INDIVIDUAL PRODUCT


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GLOBALIZATION

Globalizationis the term used to convey

the idea that international factors are

becoming a more important part of the

world economy

The simplest measure of globalization is

the ratio of exports to GDP

Countries with a high ratio of exports to GDP

are generally more open to the world

economy than countries with a low ratio


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GLOBALIZATION

Real World Exports of Goods as a Percentage of Real WorldGDP

25%

20%

15%

10%

5%

0%

1975 1980 1985 1990 1995 2000 2005

Exports as a Percent of GDP


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GLOBALIZATION

Globalization or the increasing

openness of an economy, means

changes that are not universallypositive

Globalization involves not only thegoods and service but the movement

of people and money as well


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Economic Integration

Economic integrationis concerned with:

The removal of trade barriers or impedimentsbetween at least two participating nations

Thus boosting the free movement of trade,investment, and services across nationalboundaries


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Integration creates high levels of

globalization and regionalization

Economic integration is best viewed as a

spectrum with the various integrative agreements

in effect today lying in the middle of this spectrum.

The level of integration defines the nature and

degree of economic links among countries

Economic Integration (Continued)


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economic & political agreements that give preference

to members within the agreement

Global

Regional (o r B ilateral)


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Some Typesof International Economic

Institutions with Examples (Just for info)


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2-14Our Focus

More . Typesof International Economic

Institutions with Examples


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Institutions and Practices

Part 2: Global TradeAgreements

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WTO

Three global organizations that play a

major role in international economic

relations are:

The International Monetary Fund (IMF)

The World Bank

The World Trade Organization

(WTO)


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Global (past)General Agreement on Tariffsand Trade (GATT)

Idea began with 23 nations in 1946 when theInternational Trade Organization (ITO) wasestablished

The General Agreement on Trade and Tariffs(GATT)followed in 1947 by 23 countries toabolish quotas and reduce tariffs.


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General Agreement on Tariffs and

Trade (GATT)

based on the following basic principles:

National treatment: Imports must be given similartreatment on the domestic market as domesticallyproduced goods

Nondiscrimination: Enshrined in the concept of mostfavored nation (MFN) every WTO member must treatevery other member as it treats its most favored tradingpartner

However GATT could not enforcecompliance


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The GATT/WTO functions through trade rounds:


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Kennedy Tokyo

During the Kennedy Round in the mid-1960s, andthe Tokyo Round in the 1970s, other issuesincluded:

- Problems with dumping

-Subsidies to industry

- Nontariff barriers to trade


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The Uruguay Round

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The Uruguay Round famously focused oncontentiousissues such as:

non-tariff barriers

intellectual property rights

trade in services

agriculture.

However, the BIGGESTconsequence


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From GATT to . Global (now)

World Trade Organization(WTO)

The Uruguay Round established the WTO

WTO members meet every two years to set WTO

policy objectives

Membership now totals 155(2012) 156 on

the pending inclusion of Russia 25+ more

applying


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Who is the WTO?

Location: Geneva, Switzerland

Established: 1 January 1995

Created by: Uruguay Round (1986-94)

Budget: 196 million Swiss francs for 2011 (163 millionEuros)

Secretariat staff:640..

Head:Pascal Lamy (Director-General)

Chart Members

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http://www.wto.org/english/thewto_e/whatis_e/tif_e/organigram_landscape_e.pdfhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/organigram_landscape_e.pdfhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/organigram_landscape_e.pdf


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What the WTO Stands for.

Non-discrimination

More openness Predictability and transparency

More competitiveness

Benefits for less developed countries(>75% are developing or LDCs)

Protection for the environment***

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WTO: Primary Functions

Administering WTO trade agreements

Forum for trade negotiations (goods+)

Handling trade disputes

Monitoring national trade policies

Technical assistance and training for

developing countries

Cooperation with other international

organizations

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World Trade Organization (WTO)

** Has a more effective dispute settlement mechanism!! **

Monitors national trade practices more consistently

Governments bring charges of unfair trade practices to the WTO

(***300 300)

http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm
http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htmhttp://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm


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Countervailing Duty

WTO rulings are binding as they ultimatelypermit coun tervai ling du t ies

Countervailing Dutya tariff designed toraise the price of an imported product toits fair market value.

After permission countries may use them tooffset production or export subsidies.***


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World Trade Organization (WTO)

right now

The Doha Round/Doha Development Agenda (2001-)

Focused on trade issues of importance to developing countries

Key issues of Doha Development Agenda:

-Farm subsidies in high income countries of Europe, US, andJapan

-Greater market access by developing countries and strongfarm sector high income countries

-Trade in services

-Problems poor countries face in implementation


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The Doha Round

Talks were started in Doha, Qatar in November2001.

Focus of the talks was on the links between economicgrowth and trade liberalization.

Talks collapsed in July 2008.

The main point of contention is trade in agriculturewith major industrialized nations such as the U.S., EUand Japan maintaining production subsidies andimport barriers.

Where are they now????
http://www.wto.org/english/tratop_e/dda_e/dda_e.htmhttp://www.wto.org/english/tratop_e/dda_e/dda_e.htm


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WTO and the Environment

WTO rules block a countrys use of trade

measures as environmental policy

Montreal Protocolmultilateral agreement toban trade of products that deplete the ozone

layer

Kyoto Protocolto reduce emissions of

greenhouse gases to levels below 1990 levels


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WTO website

http://www.wto.org/

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http://www.wto.org/http://www.wto.org/http://www.wto.org/http://www.wto.org/http://www.wto.org/http://www.wto.org/http://www.wto.org/


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Part 3: Regional TradeAgreements

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Regional Trade Agreements

Besides theseGlobal Agreements

Regional Trade Agreementsalso form a

key part of the institutional structure of the

world economy


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What are Regional Trade Agreements?

Regional Trade Agreement: preferential

economic arrangement among 2 or morecountries.

Such blocs have liberal rules for member

countries while a separate set of rules is laid fornon-members.


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Types of Regional Trade Agreements

Partial trade agreement

Free trade areas

Customs Union

Common Market

Economic Union

Political Unions


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Free Trade Areas

Simplest form of economic integrationwhich provides the internal free trade

between member nations. Each member is allowed to determined its

own separatecommercial policy withrespect to non-members.

Example: Latin American Free TradeAssociation (LAFTA), North American FreeTrade Area (NAFTA)


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Customs Union

More advanced form.

Internal free trade among the member

nations and they also adopt a uniform

commercial policy against the non-

members. (eg. common external tariffs)

Example: EECEuropean Economic

Community


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Common Market

There are no barriers to trade among

members and factors of production such

as capital, labor and technology are

mobile among them.

It also has a uniform policy in respect to

non-members.


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Economic Union

Similar to Common Market, but withcoordination of macroeconomic policies

(including common currency, harmonization of

standards and regulations)

Example: EU members participating in the Euro

currency zone

.


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Political Union

It is the ultimate type of economic

integration whereby member countries

achieve not only monetary and fiscal

integration but also political integration.

Example: the Europe Union (EU) has moved

towards a political union similar to onecreated by 50 states of the United States of

America.


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RegionalEconomic Integration (review)

Partial Trade Free trade in select industries

Free Trade Area (FTA): No internal tariffs at all

Customs union: & common external tariffs

Common market: & Factor(labor, capital, technology) mobility

Economic union: & Common currency

Political union: & Political integration


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For and Against RTAs

The central economic question:

-Are RTAs supportive of gradual, long run

increases in world trade (building blocks),or

-Do they tend to become obstacles to further

relaxation of trade barriers (stumbling blocks)?

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For and Against RTAs (cont.)

Proponents of RTAs view them as building

blocks toward freer, more open, world trade

Opponents view RTAs as undermining

progress toward multilateral (worldwide)agreements

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Advantages of Regional Trade

Agreements

1. Access to larger markets leads to internaleconomies of scale.

2. External economies of scale due to improvedinfrastructure (e.g. transport and telecomslinks)

3. Greater international bargaining power.

4. Increased competition between members.

5. More rapid spread of technology.

Di d f R i l T d


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Disadvantages of Regional Trade

Agreements

1. Country may lose resources to more efficient

members, or to geographical center, and

become depressed region.2. Firms may co-operate, collude and merge,

leading to greater monopoly power.

3. Diseconomies of scale if firms become very

large.

4. High administrative costs of trading bloc.

l d


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Regional Trade Agreements-

Opportunitiesa. Elimination of trade barriers within the region would encourage

the efficient firms to expand their business activities in allcountries within the region.

b. Healthy competition within the region would help the less efficientfirms in acquiring competencies in order to challenge the efficient

firms.

c. The overall business performance in 'terms of productivity,quality, price,

d. Delivery and customer service will improve.

e. Consumers get better quality goods and services at competitiveprice

f. Employment opportunities in the region increase.


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Regional Trade Agreements-Threats

a. The removal of trade barriers provides opportunities to the efficientfirms to enter the different markets within the region. Thisendangers the survival of the less efficient firms.

b. The resources of the less efficient countries are exploited by thefirms from the advanced countries of the region.

c. The less developed countries of the region mostly becomeconsumption centers while the advanced countries of the regionbecome the production centers.

d. The less developed countries become still poorer whereas theadvanced countries of the region become still richer.

e. It discourages trade with non-members as trade with non-

members is subject to strict rules and trade barriers.

i l d A d h


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Regional Trade Agreements and the

WTO

Since 1948, over 400 agreements have been listed with

the WTO; 75% of those since 1995

225 of these agreements are still active (2008)

The WTO and GATT allow RTAs, assumingtheycreate more new trade than they divert (destroy)

- trade creation >trade diversion

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Trade Creation vs. Trade Diversion

Trade Creation an expansion in world

trade resulting from formation of an FTA

a welfare-increasing effect.

Trade Diversion a shift in the pattern of

trade from low-cost world producers to

higher-cost FTA members

a welfare-reducing effect.


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Creation - Diversion

Example

Assume there are three countries (A, B, and C) in

the world A is the worlds high-cost producer of beer

B is the medium-cost producer

C is the worlds low-cost producer

What happens if Country A is a closed economy

and then opens its economy up to trade???


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Pa =18

Sa

Da

7

Country A is NOT yet open, so there is no trade P= 18 , Q =7

1st Country A Opens trade to Countries B & C

C is lo cost prod cer


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Pc=$10

Pb=$12

Pa =18

Sa

Da

C is low-cost producer

So C exports amount Qd=12 minus Qs= 2 = 10

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Now Country A puts a $4 Tariff on BOTH countries goodsC is STILL the low cost producer


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Pc+T=$14

Pb+T=$16

Pa =18

Sa

Da

C is STILL the low-cost producer

C exports amount Qd=9 minus Qs=5 = 4

5 9

Now Country A enters a Trade Agreement with B

A A th t iff f B d B i i b k t it li l l


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Pb=$12

Pc+T=$14

Pa =18

As A removes the tariffs from Bs good, Bs price is back to its earlier level

B is now the low-cost producer

B exports amount Qd=10 minus Qs= 4 = 6

This agreement therefore CREATES trade from previous export level of 4

This trade creation is noted by triangles, e and f.

4 105 9

e f

However by entering an agreement with B and not C who is reallythe low cost producer Country A has diverted trade away from C


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Pb=$12

Pc+T=$14

Pa =18

4 105 9

e f

GPc=$10

the low-cost producer.. Country A has diverted trade away from C

This TRADE DIVERSION is noted by rectangle G.

If the area (e + f) is greater than the area of G, world welfare will increase

If the area of G is greater than the area (e + f), world welfare will decrease

***This is one extra one, JUST so that you can see all numbers


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This is one extra one,JUST so that you can see all numbers

and lines together. We have already completed the discussion

Pc=$10

Pb=$12

Pc+T=$14

Pb+T=$16

Pa =18

Sa

Da

ef

G

212

54 9710


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One more time .

In this example, trade creation of the trade

agreement increases world welfare in triangles eand f

But trade diversion occurs in box G

If the area of (e + f) is greater than the area of G,

world welfare will increase

If the area of G is greater than the area (e + f),world welfare will decrease

THE STATIC EFFECTS

of a Regional Trade Agreement

h ld i h d f


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Why Would A Form a FTA With B Instead of

With C?

Dynamic effects Overall growth in market

Expanded production

Greater economies of scale

Maybe location issues

Political reasons


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How does WTO react to this

GATT/WTO provides an exception to most-favored-nation status for RTAs as, in general,trade creation is larger than trade diversion

RTAs may create losses for some producers insome countries outside the agreement

The number of RTAs is increasing thusincreasing the amount of trade diversion


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European Union. EU

The European Union(EU) is an economicand (partially) political union of 27 memberwho are located primarily in Europe


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Functions of EEC/EU

Common Agricultural Policy (CAP).

Free movement from one nation to the other,

Imports allowed only when DD>SS,

Rich farmers became richer,

European Monetary Union (EMU).

Common Transport Policy.

Central European Free Trade


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Central European Free Trade

Agreement (CEFTA)

The members of the CEFTA agreement are: Albania,Bosnia,Herzegovina, Croatia, Macedonia, Moldova, Monten

egro, Serbia and UNMIK on behalf of Kosovo. Former parties are Bulgaria, the Czech

Republic, Hungary, Poland, Romania, Slovakiaand Slovenia. Their CEFTA membership ended when

they joined the EU. Croatia is set to join the EU in2013.


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European Free Trade Association- EFTA

Formed in 1959.

Member nations: Iceland, Liechtenstein Norway,

and Switzerland.

Former members UK, DenmarkIreland, Austria, Sweden and Finland joined the

EU in 1995 and thus ceased to be EFTAmembers.

Free Regional Trade Agreements in the
http://en.wikipedia.org/wiki/Liechtensteinhttp://en.wikipedia.org/wiki/Liechtenstein


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Free Regional Trade Agreements in the

Americas

North American Free Trade


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North American Free Trade

Agreement-NAFTA

North American integration has an interest in purelyeconomic issues and there are no constituencies forpolitical integration.

Came into being in 1994

U.S.-Canada Free Trade Agreement

North American Free Trade Agreement (NAFTA)

Member Countries: US, Canada and Mexico

Oth A t f NAFTA


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Other Aspects of NAFTA

Objectives More business

opportunities in Mexico.

Enhance competitive

advantage. Reduce prices

Enhance industrialdevelopment.

Assist Mexico in earningadditional foreignexchange.

Improve politicalrelations.

Measures:

Residents of NAFTA can

invest easily in other

member nations.

Protection of Intellectual

Property Rights.

Similar Product Standards

Free flow of FoP.

Pollution Control.


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What are the drawbacks?

Many US industries shifted to Mexico

because Mexico offered less stringent

policies.

It was perhaps implemented without prior

preparations.

Association of South-East Asian


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Association of South-East Asian

Nations (ASEAN)

The development in Asia has been different from thatin Europe and the Americas

Asian interest in regional integration is increasing for

pragmatic reasons Asia accounts for 20% of world trade.

It has substantial trade liberalisation.

It has created numerous sub-regional economic tradezones, which are named transnational exportprocessing zones, natural economic territories, orgrowth triangles


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Brief Background of ASEAN

A group of 6 Nations: Singapore, Brunei, Malaysia,

Philippines, Thailand and Indonesia

In 1992- established CEPT (Common EffectivePreferential Tariffs) Plan

Free trade area in 15 years.

Tariff cut from 0.50% to 20% beginning with 15 products.

Strength skilled and educated human resource.

Created Asean Free Trade Area (AFTA) in 1994.


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About AFTA

Objectives:

To encourage inflow of foreign investments.

To establish free trade area.

To reduce tariff on the products produced in ASEANcountries

South Asian Association for Regional


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South Asian Association for Regional

Cooperation (SAARC)

Member nations: India, Bangladesh, Bhutan, Pakistan,Maldives and Sri Lanka.

Established in 1983.

Objectives: To improve quality of life and welfare of the people.

To develop region economically, socially and culturally.

To enhance the self reliance,

To provide conducive environment

To enhance mutual assistance.

To extend co-operation to other regional trade agreements.


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Andean Community

The Andean Communityis a

customs union comprising

the South American countriesof Bolivia, Colombia, Ecuador and

Peru. The trade bloc was called

the Andean Pactuntil 1996


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Mercosur

Mercosuris an economic andpolitical agreementamong Argentina, Brazil,

Paraguay and Uruguay. Itspurpose is to promote freetrade and the easy movementof goods, people, and currency.

It has evolved into a fullcustoms union.

The Adean Community and Mercosur


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The Adean Community and Mercosur

merging??

In 2004 the Andean Community published a joint

letter of intention for future negotiations towards

integrating all of South America in a Union of South

American Nations (USAN), patterned afterthe European Union.

There have been numerous

stalemates, however.

P i R i l T d Bl


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Prominent Regional Trade Blocs

( ti d) P i t R i l T d Bl


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(continued) Prominent Regional Trade Blocs

( ti d) P i t R i l T d Bl


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(continued) Prominent Regional Trade Blocs

Criticism of


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Criticism of

International Institutions

International institutions receive threetypes of criticism

1. Sovereigntyand Transparency

-International institutions can violate nationalsovereignty by imposing unwanted domesticeconomic policies

-Transparency concerns are based on questions

about the mechanism with which decisions aremade within an international institution

Criticism of


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International Institutions (cont.)

2. Ideology-Critics argue that the advise and technicalassistance provided to developing countries areoften a reflection of the biases and wishes of

developed country wishes.

3. Implementation and adjustment costs-When agreements are reached that combinedeveloped and developing countries, there are

often asymmetries in the ability to absorb thecosts associated with them that favor developednations.


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Part 4: Common Justifications for

Protectionism

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Commercial Policy and Jobs

It is important to compare the costs and

benefits of trade barriers and examine themost common reasons given for protectingspecific industries

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Direct Costs and Jobs Saved in Agriculture,


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Clothing, and Textiles

Since the phase in of the Uruguay Round tariff cuts,average tariffs have fallen 40%but few sectors are

average

For example, agriculture, clothing and textiles

experience much smaller reductions in tariffs and quotas(12%, 14%, 14% respectively)

In addition, all of these sectors in the EU, Japan, and US

have significant non-tariff barriers applied to them

including large government subsidies in the case of

agriculture


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EU, Japanese, and U.S. Protection in Three Sectors (Mid-

1990s, Millions of US$)


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EU, Japanese, and U.S. Protection in Three Sectors (Mid-

1990s, Millions of US$)

Why Nations Protect Their Industries: The


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7-86

Labor Argument

The Labor Argument: Protection must be

used against imports from countries wherewages are much lower

-Problem: Does not consider differences in

productivity between different workforces: Asproductivity rises, so will wages


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7-87

Jobs Saved through Tariffs and Quotas


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Jobs Saved through Tariffs and Quotas

Saving Jobs?


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7-89

Saving Jobs?

Trade policy is a grossly inefficient mechanismto create jobs

It relies on too many intervening variables, and does

not go directly to the heart of the problem

If job creation is the goal, tariffs and quotas are very

expensive

-Better job-creation tools: (1) sound

macroeconomic polices and (2) flexible labormarkets



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7-90

Infant Industry Argument

Infant Industry Argument: Developing countries havenew industries that must be protected againstcompetition from industrial countries

-Problems:

(1) may increase inefficiency and result in negative linkageeffects and

(2) (2) technological externalities are difficult to measurewhich industries should be protected?



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National Security Argument

National Security Argument: Certainindustries must be protected in order to guard

national security (military security, culturalvalues)



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Retaliation Argument

Retaliation Argument: Another

country's trade barriers must be

countered with trade barriers

-Problems: Although retaliation can provide

an incentive for trade negotiations, it can

also lead to escalating trade wars


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Part 5: Trade Labor andEnvironmental Standards


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Trade Laws and Standards

(We already know) - Sincethe end of WWII, manyof the formal barriers to trade have been removed...

However, unrestricted flow of trade (and increased

integration) are still hampered by differences in

National laws and regulations

National technical, health and safety, environmental,

labor standards, etc.

-These are very often good ... But often adopted fordomestic reasons without consideration of the effectson trade

Setting Standards: Harmonization, Mutual


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Recognition, or Separate?

Most trade agreements and WTOcommitments allow for the combination of:

Harmonization of standards: Two or morecountries adopt a common set of standards

Mutual recognition of standards: Countriesmaintain their own standards, but accept the

standards of others as valid and sufficient Separate standards: Countries maintain their

own standards and refuse to recognize thestandards of others

Setting Standards: Harmonization, Mutual


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Recognition, or Separate?

No general rule determines which way of dealingwith the differences in standards is best forinternational trade

Each of the three mechanisms has advantagesand disadvantages

-Harmonization of technical standards, for example,

leads to a larger market and greater efficiency, butmay also freeze inferiorstandards into place


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Income Levels Society and the Environment


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Income Levels, Society and the Environment

Labor Standards


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Labor Standards

The U.S., the EU and many other countries today wantlabor and environmental standardsbe included in any

future trade agreements

Some parties want monetary fines against

violators

Some labor and environmental activists see fines as

inadequate ... demanding the use of trade sanctions

Defining Labor Standards


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The International Labor Organization (ILO) proposedeight core labor standards in four basic areas:

Freedom of association and recognition of the right tocollective bargaining

Elimination of all forms of forced labor

Effective abolition of child labor

Elimination of discrimination in employment andoccupations



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Defining Labor Standards (cont.)

The four areas of standards are widely agreed upon, butdetails are also ambiguous: for example, what is meantby exploitation?

Many potential labor standards are contentious:

For example ...

universal minimum wage level, limits on the number of workhours, workplace health and safety, etc.

- For example ... Low-income countries are reluctant to pay muchhigher minimum wages: higher wages would reduce firm profits, andresult in closing down of production and a rise in unemployment

Labor Standards and Trade


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Labor Standards and Trade

As we have said before ...

Low- and high-income countries face very different

sets of economic constraints; so harmonization of labor

standards is thus difficult

Should one country, then, use trade sanctions to enforcecertain labor standards in another?

Labor activists often favor the use of trade barriers

to enforce standards

Trade economists think such barriers are ineffective

as an enforcement mechanism and only spur

protectionism and other economic inefficiencies

Economists express four concerns over the

f t d t f t d d


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use of trade measures to enforce standards:

1. Effectiveness:

only large countries or coalitions of countries can use

trade barriers successfully to enforce standards

2. Hazy borderline between protectionism and concern:

special interests sometimes use the issue of foreignlabor standards in order to attain their real goal,protection against foreign competition

Economists express four concerns over the

use of trade measures to enforce standards


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3. The specific content of labor standards: there is nointernational agreement on the specific content and

language of labor standards

4. The potential to set off a trade war, thus an infractionof WTO rules

-Sanctions may cause retaliation from the targeted country, thusfurther hurting international trade rules

use of trade measures to enforce standards....

Evidence on Low Standards

P d t P ti (?)


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as a Predatory Practice (?)

Low standards are generally not an effectivemechanism to enhance competitiveness and attractforeign investment

1. There is very little evidence that countries that lowerlabor standards succeed in obtaining a comparativeadvantage in a new line of production

2. Low labor standards are not a successful means to

attract foreign investment: low labor standards arecorrelated with unskilled, less-literate labor forces

and lack of economic development

Trade and the Environment:


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There is considerable overlap in the debates onlabor and environmental standards ... Guesswhat? ... The same concerns...

Proponents of including environmental standards intrade agreements believe sanctions should be usedto enforce such standards

Critics of sanctions have concerns about theineffectiveness of sanctions, the hazy borderlinebetween protectionism and environmental concerns,the lack of international definitions of environmentalstandards, and the potential for trade wars

Non-Transboundary and Transboundary

Eff t


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Effects

Three arguments by proponents of trade barriersto enforce environmental standards are:

1) Without adequate enforcement of standards,

countries engage in an environmental race to thebottomto boost industrial competitiveness

2) Lack of enforcement of standards in developingcountries induce dirty rich country industries toexport pollution and thus create pollution havens

3) Poor enforcement leads to environmental problemsthat spill over to another country

Environmental Race to the Bottom


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Is there an environmental race to thebottom?

Most countries have adopted tougher environmentalstandards over time. In order for race to the bottom tooccur, sectional interests would have to be politicallypowerful

Trans-boundary Environmental Problems


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y

Do environmental spill-overs occur?

Trans-boundary spill over effects are frequent However, a successful use of sanctions to

counter them is possible only by a large country

or a coalition of countries, and may lead to trade

wars

Alternatives to Trade Measures??


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As long as there are large income gaps betweencountries, differences in labor and environmental

standards are unlikely to disappear

Seeking enforcement of standards through sanctions,

however, is often futile and harms international trade

How, then, can we enjoy the benefits from world

trade while resolving the conflicts over

standards?

Alternatives to Trade Measures??


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There are potentially three ways of enforcing

sanctions without hurting international trade

Labels for exports

Requiring home country standards

Increasing international negotiations

Labels for Exports


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Labels for Exports

Labeling:A certification process whereby a labelis attached on an exported good to indicate toconsumers that the good was produced underhumane and environmentally sound conditions

The method is already in place in some instances:Cambodian textile exports to the U.S., Starbuckscoffee imports, etc.

Problems: (1) Many countries resist labeling as aninfringement of their sovereignty and (2) consumers

must be convinced the label provides accurateinformation

Requiring Home Country Standards


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Requiring home country standards: High-standard countries can require their firms to

follow home country standards when operating

abroad

Pros: impedes the race to the bottom; avoids theproblem of high-income countries dictating standards

Cons: addresses only firms of high-standard countries

-Low-country producers are not affected-A high-standard country firm may outsource

production to a low-standard country producer

Increasing International Negotiations


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Increasing international negotiations:Usingeither existing international organizations or creatingnew agreements and organizations

ILO could be given a greater role and start, for example,publicizing lack of compliance with labor standards

New agreements and organizations could be created to

address environmental issuesThe WTO is not an environmental organization;however, it allows international environmentalagreements to develop their own enforcementmechanism


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Part 6: International Trade

and Economic Growth

Trade and Growth


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Trade and Growth

We already know this.

Economic growth is shown graphically as anoutward shift of the countrys production

possibility frontier (PPF).

Since growth affects both production andconsumption, then it also affects international

trade.

Economic Growth


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Economic Growth

We already know this.

An economy is said to grow when its total realoutput or gross domestic product (GDP) rises.

Per capita GDP is a measure of a countrys

standard of living. For standard of living to rise

over time, GDP must grow faster than the

population.

Economic Development


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Economic Development

Economic Developmentthe achievement of a quality of lifefor the average citizen of a country that is comparable to theaverage citizen of a country with a modern economy.

Characterized by: High levels of consumption

Broad-based educational achievement

Adequate housing

Access to high-quality health care, etc.

Economic growth is essential for economic development.

Strategies for Economic

l


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Development

Primary Export-led Development Strategy

Import-Substitution Development Strategy

Outward-looking Development Strategy

Primary Export-Led Development

S


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Strategy

Policies designed to exploit natural

comparative advantage by increasing

production of a few currentexport goodsmost closely related to the countrys resource

base.

Country examples include Columbia (coffee), Mexico and

Nigeria (petroleum), and Malaysia (rubber).

Advantages of Primary Export-led

D l S


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Development Strategy

This strategy would encourage more intensive

use of existing or abundant resources.

It could help attract foreign investment.

It may provide linkage effects or benefits to

other industries as a result of one industryexpanding.

Arguments Against Primary Export-

l d S


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led Strategy

The world markets for primary products do

not grow fast enough to support this type of

development.

The prices of primary products relative to the

prices of manufactured goods maytend to fall

over time due to sluggish demand oroversupply.

Import-Substitution Development

S


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Strategy

Policies designed to promote rapid

industrialization and development by erecting

high barriers to foreign goods to encouragelocal production.

What?????? Do we like this??????

Arguments Against Import-

b tit ti St t


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substitution Strategy

The high barriers to trade rarely come down.

The strategy encourages citizens to spend scarceresources to lobby or bribe government officialsto protect their industries.

Outward-Looking Development

St t


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Strategy

These policies involve government identifying

or targetingindustries in which the country

has potential comparative advantage.

Successful country examples include Japan,

South Korea, Singapore, and Taiwan.

Refer to next slide for more examples

Trade Reforms


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Trade Reforms

in Selected Developing

Countries

Technological Change


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g g

Technological (technical) changeoccurs when the same amount of output can

be produced with fewer factor inputs, or when

the same amount of inputs can producegreater amounts of output.

Our International Trade patterns enhance thisnowadays!

Direct Foreign Investment and

MNC


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MNCs

Direct Foreign Investmenthappens when a

domestic firm acquires ownership or control

of the operations of a foreign firm.

Multinational Corporations (MNCs)

firms that own and operate capital in one or

more foreign countries.

Not exactly trade but can aid in spread of

Outsourcing


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Outsourcingthe movement or shifting of

production by a firm to a foreign location.

Vilified in some circles, but often not a bad thing

Can lead to domestic growth!


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Part 7: IMF and World Bank

The IMF, the World Bank,and the WTO


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and the WTO

The three global organizations that play a

major role in international economic

relations are:

The International Monetary Fund

(IMF)

The World Bank The World Trade Organization (WTO) (We already met

them!)

The International Monetary Fund

(IMF)


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(IMF) (Quick view)

The 188 member (2012) IMF is the centralmonetary institution in todays internationaleconomy... However it can greatly affect trade.

Funding for the IMF comes from its membershipfee, or quota(the price of membership)

depends on the members size and status

determines the members voting weight

IMFBackground
http://www.imf.org/external/index.htmhttp://www.imf.org/external/index.htm


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g

Great Depression and WWII led to HIGH trade

barriers..

This led to devaluation of national currencies anddecrease in world trade.

So IMF founded by 29 nations (1944/1945) at theBretton Woods meetings between the Allies, to

help regulate monetary policy

IMF Functions


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Functions of the IMF:-Prevents crisisin a financial system by

promoting sound macroeconomic policy,

which includes-Balanced expansion of trade

-Stable exchange rates

-Avoidance of competitive devaluations

-Orderly corrections of Balance of Paymentsproblems

IMF Member Requirements


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Membersmust: make periodic membership payments towards their quota

refrain from currency restrictions unless granted IMF

permission

abide by the Code of Conduct in the IMF Articles of

Agreement

and provide national economic information.

However BORROWERS have stricter

requirements!

IMF Borrowers
http://www.imf.org/external/pubs/ft/aa/index.htmhttp://www.imf.org/external/pubs/ft/aa/index.htmhttp://www.imf.org/external/pubs/ft/aa/index.htmhttp://www.imf.org/external/pubs/ft/aa/index.htm


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A Financial crisis occurs when a country runs out of foreign

exchange reserves, which area major currency or gold that

can be used to pay for imports and international borrowings

In the event of a financial crisis, Members borrow against IMF quotas

IMF conditionality: Requirement for the borrowing

member to carry out economic reforms inexchange for a loan

The World Bank (A Quick view)


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Founded in 1944 as the International Bank forReconstruction and Development (IBRD)

Has same membership and similar structure toIMF

Members voting rights are proportional tonumber of shares owned

The World Bank


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Original purpose To provide financing mechanisms to rebuild

Europe after World War II

Current Goal

- Thereduction of poverty

World Bank goal


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The method that the World Bankreduces poverty is

by providing loansto developing countries for capitalprograms.

According to the World Bank'sArticles of Agreementits

decisions must be guided by a commitment to

promote foreign investment, international tradeand

facilitate capital investment.

World Bank vs. World Bank Grouphttp://www.worldbank.org/
http://www.worldbank.org/http://www.worldbank.org/


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World Bank

International Bank for Reconstruction andDevelopment (IBRD)

International Development Association (IDA)

World Bank GROUP

The two above PLUS

International Finance Corporation (IFC)

Multilateral Investment Guarantee Agency (MIGA)

Documents

Redmond Economic Integration