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)