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 provisions of the Omnibus Trade and Competitiveness

Act• The importance of GATT and the World Trade Organization• The emergence of the International Monetary Fund and the

World Bank Group

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Top Ten 2004 U.S. Trading Parnters($ billions, merchandise trade)

• Insert Exhibit 2.1

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Balance of Payments

• Transactions recorded yearly• Must always be in balance• A record of condition, not determinant of condition• A Balance of Payments statement includes three accounts:

- Current account- Capital account - Reserves account

Balance of Payments is the system of accounts that records a nation’s international finance transactions.

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U.S. Current Account by Major Components, 2002 ($ billions)

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United States Current Account Balance (% of GDP)

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What Would One U.S. Dollar Buy?

• Insert Exhibit 2.5

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Trade Barriers

• Tariffs• Quotas• Voluntary Export Restraints• Boycotts and Embargoes• Monetary Barriers

- Blocked currency- Differential exchange- Government approval

• Standards• Antidumping Penalties

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The Omnibus Trade and Competitiveness Act

• Designed to deal with trade deficits, protectionism, and the overall fairness of our trading partners.

• The bill covers three areas considered critical in improving U.S. trade:

- Market access- Export expansion- Import relief

• Four ongoing activities to support the growth of international trade:

- GATT- The associated World Trade Organization (WTO)- International Monetary Fund (IMF)- The World Bank Group

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General Agreement on Tariffs and Trade

• Paved the way for the first effective worldwide tariff agreement.• Basic Elements of the GATT:

- 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- Consultation shall be the primary method used to solve global trade

problems.

• Eliminating barriers to international trade (Uruguay Round):- The General Agreement on Trade in Services (GATS)- Trade-Related Investment Measures (TRIMs)- Trade-Related Aspects of Intellectual Property Rights (TRIPs)

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World Trade Organization

• An institution, not an agreement as was GATT• Sets many rules governing trade between its 148 members• Provides a panel of experts to hear and rule on trade disputes between

members.• Issues binding decisions• All member countries will have equal representation• For the first time, member countries, will undertake obligations to open

their markets and to be bound by the rules of the multilateral trading system.

• Trouble with U.S. ratification:- Concern for the possible loss of sovereignty over its trade laws to WTO- The lack of veto power- The role the U.S. would assume when a conflict arises over an individual

state’s laws that might be challenged by a WTO member.• Skirting the Spirit of GATT and WTO

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The International Monetary Fund

• Created to assist nations in becoming and remaining economically viable.

• Objectives of the IMF:- Stabilization of foreign exchange rates- Establishment of freely convertible currencies to facilitate the

expansion and balanced growth of international trade

• Special Drawing Rights (SDRs)- “paper gold”

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The World Bank Group

• Institution that has as its goal the reduction of poverty and the improvement of living standards by promoting sustainable growth and investment in people.

• The World Bank has five institutions each of which performs the following services:

- Lending money to the government of developing countries - Providing assistance to governments for developmental projects to

the poorest developing countries.- Lending directly to the private sector - Providing investors with investment guarantees against

“noncommercial risk.”- Promoting increased flows of international investment

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Summary

• The benefits from absolute or comparative advantage clearly can accrue to any nation.

• Increased pressure for protectionism from every region of the globe.

• The consumer seldom benefits from such protection.• Free international markets help underdeveloped countries become

self-sufficient.• Freer trade will always be partially threatened by various

governmental and market barriers that exist or are created for the protection of local businesses.

• The future of open global markets lies with the controlled and equitable reduction of trade barriers.