2_ Free Trade

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    Free TradeFree Trade

    Free trade refers to a situation where there isFree trade refers to a situation where there isunrestricted exchange of goods and servicesunrestricted exchange of goods and servicesbetween the countries of the world and thebetween the countries of the world and thegovernment follows the policy of nongovernment follows the policy of non--interference.interference.

    According to Prof. Lipsey A world of free tradeAccording to Prof. Lipsey A world of free tradewould be one with no tariffs and no restrictionswould be one with no tariffs and no restrictionsof any kind on importing or exporting, In such aof any kind on importing or exporting, In such a

    world, a country would import all thoseworld, a country would import all thosecommodities that it would buy from abroad at acommodities that it would buy from abroad at adelivered price lower than the cost of producingdelivered price lower than the cost of producingthem at home.them at home.

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    Free TradeFree Trade

    Disadvantages of free tradeDisadvantages of free trade

    The assumption of the existence ofThe assumption of the existence ofLaissezLaissez--fairefaire

    Encourages the sectors with comparativeEncourages the sectors with comparativeadvantage and neglects other sectorsadvantage and neglects other sectors

    Substandard and harmful commodities areSubstandard and harmful commodities are

    likely to be produced and tradedlikely to be produced and traded Encourages the emergence of foreignEncourages the emergence of foreign

    monopolies and local monopoliesmonopolies and local monopolies

    Not suitable for underdeveloped countriesNot suitable for underdeveloped countries

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    Free TradeFree Trade

    Advantages of Free TradeAdvantages of Free Trade

    Maximisation of output through specialisation inMaximisation of output through specialisation in

    productionproduction

    Optimum utilisation of resourcesOptimum utilisation of resources Leads to expansion of markets and prevent monopoliesLeads to expansion of markets and prevent monopolies

    Best policy for economic developmentBest policy for economic development

    Encourages import of capital flow, raw material, technicalEncourages import of capital flow, raw material, technical

    knowknow--how, managerial talents etchow, managerial talents etc Consumers are able to buy a variety of commodities, atConsumers are able to buy a variety of commodities, at

    economical priceseconomical prices

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    ProtectionProtection

    Under protectionist policy, a countryUnder protectionist policy, a countryimposes a number of restrictions on theimposes a number of restrictions on theimports of certain commodities to protectimports of certain commodities to protect

    the indigenous industries.the indigenous industries.

    Commercial prohibitionCommercial prohibition complete ban oncomplete ban on

    import of foreign goodsimport of foreign goods Quota system for importsQuota system for imports

    LicensingLicensing

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    ProtectionProtection

    Providing subsidies to domestic industriesProviding subsidies to domestic industries

    Discriminatory transport chargesDiscriminatory transport charges

    Boycotting of foreign goodsBoycotting of foreign goods

    Exchange controlExchange control

    Devaluation of currencyDevaluation of currency

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    Trade BarriersTrade Barriers

    Tariff BarriersTariff Barriers

    Tariffs in international trade refer to the duties or taxesTariffs in international trade refer to the duties or taxes

    imposed on internationally traded goods when they crossimposed on internationally traded goods when they cross

    the national barriers.the national barriers. Export dutyExport duty

    Import dutyImport duty

    Transit dutyTransit duty

    Specific dutySpecific duty

    AdAd--valorem dutyvalorem duty

    Countervailing and antiCountervailing and anti--dumping dutydumping duty

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    NonNon--Tariff BarriersTariff Barriers

    Practised by developing nations:Practised by developing nations:--

    1.1. For arresting foreign exchange outflowsFor arresting foreign exchange outflows

    2.2. By way of import licensingBy way of import licensing

    3.3. Quantitative restrictions thro Import/ExportQuantitative restrictions thro Import/Export

    quotasquotas

    4.4. Foreign Exchange RegulationsForeign Exchange Regulations

    5.5. Canalisation or State Trading of ImportsCanalisation or State Trading of Imports

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    NonNon--Tariff BarriersTariff Barriers

    Administered ProtectionAdministered Protection

    Safe guardsSafe guards

    Health standardsHealth standards

    Customs proceduresCustoms procedures

    ConsularformalitiesConsularformalities

    Govt procurement and state tradingGovt procurement and state trading

    Monetary contro

    lsMonet

    ary contro

    ls

    Environmental protection lawsEnvironmental protection laws

    Foreign Exchange regulationsForeign Exchange regulations

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    CartelsCartels

    International cartels are agreements betweenInternational cartels are agreements between

    producers located in different countries orproducers located in different countries or

    between governments of different countries tobetween governments of different countries to

    restrict competition.restrict competition.

    Organisation of petroleum Exporting CountriesOrganisation of petroleum Exporting Countries

    (OPEC)(OPEC)International Air Transport Association (IATA)International Air Transport Association (IATA)

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    Trade BlocksTrade Blocks

    Regionalisation of world trade is taking place.Regionalisation of world trade is taking place.

    IntraIntra--regional trade is growing at a faster pace.regional trade is growing at a faster pace.

    Three major trading blocks, viz, Americas, Europe and EastThree major trading blocks, viz, Americas, Europe and EastAsia, are dividing the World trade.Asia, are dividing the World trade.

    European Union (EU) or European EconomicEuropean Union (EU) or European EconomicCommunityCommunity

    European Free Trade Association (EFTA)European Free Trade Association (EFTA)

    Latin American Free Trade Association (LAFTA)Latin American Free Trade Association (LAFTA)

    The North American Free Trade Agreement (NAFTA)The North American Free Trade Agreement (NAFTA)

    The South Asian Association for Regional CoThe South Asian Association for Regional Co--operationoperation(SAARC)(SAARC)

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    International InstitutionsInternational Institutions

    GATT (1948) Transformed into WTO (1995)GATT (1948) Transformed into WTO (1995)

    IMF (1946)IMF (1946)

    IBRD or WORLD BANK (1945)IBRD or WORLD BANK (1945)

    IFC (1956)IFC (1956)

    IDA (1960)IDA (1960)

    ADB (1966) ADB (1966)

    ICC (1919)ICC (1919)

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    Indian InstitutionsIndian Institutions

    Reserve Bank Of India (1935)Reserve Bank Of India (1935)

    Export Import Bank Of India (1981)Export Import Bank Of India (1981)

    Export Credit Guarantee Corporation Of India (1957)Export Credit Guarantee Corporation Of India (1957)

    Foreign Exchange Dealers Association Of India (1939)Foreign Exchange Dealers Association Of India (1939)

    Director General Of Foreign Trade (DGFT)Director General Of Foreign Trade (DGFT)

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    International Monetary FundInternational Monetary Fund

    Bretton woods twinsBretton woods twins International Monetary FundInternational Monetary Fund(IMF) & International Bank For Reconstruction and(IMF) & International Bank For Reconstruction andDevelopment (IBRD)Development (IBRD)

    Promote international monetary coPromote international monetary co--operation through aoperation through apermanent institutionpermanent institution

    Facilitate the expansion and balanced growth ifFacilitate the expansion and balanced growth if

    international tradeinternational trade

    Promote exchange stability and to maintain orderlyPromote exchange stability and to maintain orderlyexchange arrangements among membersexchange arrangements among members

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    International Monetary FundInternational Monetary Fund

    Establishment of multilateral system of paymentsEstablishment of multilateral system of paymentsbetween members and elimination of foreign exchangebetween members and elimination of foreign exchangerestrictions between membersrestrictions between members

    Provide opportunity to correct maladjustments in theProvide opportunity to correct maladjustments in thebalance of payment position of member nationsbalance of payment position of member nations

    Monitor the proper conduct of the international monetaryMonitor the proper conduct of the international monetary

    systemsystem

    Provide a source of liquidity for countries in need ofProvide a source of liquidity for countries in need offoreign exchangeforeign exchange

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    International Monetary FundInternational Monetary Fund

    ResourcesResources

    QuotasQuotas

    Main resource for IMF is the members quotasMain resource for IMF is the members quotas Subscription by member countries to the capital fundSubscription by member countries to the capital fund

    Fixed for each country based on its economic sizeFixed for each country based on its economic size

    Forms the basis for determiningForms the basis for determining

    the drawing right from the IMFthe drawing right from the IMF

    Its voting powerIts voting power

    Share in allocation of SDRs (Special Drawing Rights)Share in allocation of SDRs (Special Drawing Rights)

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    International Monetary FundInternational Monetary Fund

    Special Drawing Rights (SDRs)Special Drawing Rights (SDRs)

    Entitlements granted to memberEntitlements granted to member--countries to draw from IMF apartcountries to draw from IMF apart

    from their quotasfrom their quotas

    Similar to bank credit linesSimilar to bank credit lines

    A country can sell its SDR to another country and get the requiredA country can sell its SDR to another country and get the required

    foreign exchangeforeign exchange

    It is an independent reserve assetIt is an independent reserve asset

    It has no backing of any securityIt has no backing of any security

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    International Monetary FundInternational Monetary Fund

    Allocation of SDRs is made to memberAllocation of SDRs is made to member--countries incountries inproportion to their quotasproportion to their quotas

    Value of SDR is linked to a basket of currenciesValue of SDR is linked to a basket of currencies USD,USD,EURO, JPY & GBPEURO, JPY & GBP

    IMF values SDRs everyday and announces the value inIMF values SDRs everyday and announces the value interms of USDterms of USD

    A country may swap SDRs with another country toA country may swap SDRs with another country toacquire a currencyacquire a currency

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    International Monetary FundInternational Monetary Fund

    SDRs are used as a reserve assetSDRs are used as a reserve asset

    Used as a means of settlement of internationalUsed as a means of settlement of international

    transactionstransactions

    SDRs can be used directly among member countriesSDRs can be used directly among member countries

    Without the approval of IMFWithout the approval of IMF

    Without restriction relating to the balance of paymentsWithout restriction relating to the balance of paymentsrequirementsrequirements

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    WORLD BANK GROUPWORLD BANK GROUP

    Consists of five closely associated institutionsConsists of five closely associated institutions

    MissionMission to fight poverty and improve living standardsto fight poverty and improve living standards

    for people in the developing worldfor people in the developing world

    International Bank for Reconstruction and DevelopmentInternational Bank for Reconstruction and Development

    (IBRD)(IBRD)

    aims to reduce poverty in poorer countries through loans,aims to reduce poverty in poorer countries through loans,

    guarantees and advisory servicesguarantees and advisory services

    International Development Association (IDA)International Development Association (IDA)

    Provides highly concessional financing to the poorest countriesProvides highly concessional financing to the poorest countries

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    WORLD BANK GROUPWORLD BANK GROUP

    International Finance Corporation (IFC)International Finance Corporation (IFC)

    Aims to promote economic development through private sectorAims to promote economic development through private sector

    Multilateral Investment Guarantee Agency (MIGA)Multilateral Investment Guarantee Agency (MIGA) Promote FDI in developing countries by providing guarantees toPromote FDI in developing countries by providing guarantees to

    investors against noninvestors against non--commercial riskscommercial risks

    International Centre for Settlements of InvestmentInternational Centre for Settlements of Investment

    Disputes (ICSID)Disputes (ICSID) Conciliation and arbitration of investment disputesConciliation and arbitration of investment disputes

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    WTOWTO

    GATT (General Agreement on tariffs and trade) wasGATT (General Agreement on tariffs and trade) was

    born in 1948born in 1948

    GATT dealt with trade in goodsGATT dealt with trade in goods

    Uruguay round of GATT (1986 to 1994 ) was the last andUruguay round of GATT (1986 to 1994 ) was the last and

    longest round of negotiationslongest round of negotiations

    WTO cover trade in services and in traded inventions,WTO cover trade in services and in traded inventions,

    creations and designs (intellectual property)creations and designs (intellectual property)

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    WTOWTO

    WTO is an organisation for liberalising tradeWTO is an organisation for liberalising trade

    It is a forum for Governments to negotiate tradeIt is a forum for Governments to negotiate trade

    agreementsagreements

    It is a place to settle trade disputesIt is a place to settle trade disputes

    Operate a system of trade rulesOperate a system of trade rules

    It is born out of negotiationsIt is born out of negotiations

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    WTOWTO

    Whatever WTO does is born out of negotiationsWhatever WTO does is born out of negotiations

    Currently host to new negotiations under DohaCurrently host to new negotiations under Doha

    Development Agenda launched in 2001Development Agenda launched in 2001

    WTO police the world trading system and ensureWTO police the world trading system and ensure

    adherence to trade treaties signed by its 153 membersadherence to trade treaties signed by its 153 members

    It liaison with IMF and IBRD and its affiliate agenciesIt liaison with IMF and IBRD and its affiliate agencies

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    WTOWTO

    Fundamental PrinciplesFundamental Principles

    NonNon discriminationdiscrimination

    Most favoured nation (MFN) status to all nationsMost favoured nation (MFN) status to all nations Freer TradeFreer Trade

    PredictabilityPredictability

    Trade barriers would not be raised arbitrarilyTrade barriers would not be raised arbitrarily

    Promotion of fair competitionPromotion of fair competition

    Concern for developing countriesConcern for developing countries

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    WTOWTO

    WTO AgreementsWTO Agreements

    General Agreement on Tariffs and Trade (GATT)General Agreement on Tariffs and Trade (GATT)

    General Agreement on Trade in Services (GATS)General Agreement on Trade in Services (GATS)

    General Agreement on Trade related aspects ofGeneral Agreement on Trade related aspects of

    Intellectual property rights (TRIPS)Intellectual property rights (TRIPS)