IB Political Economy FINAL

7/30/2019 IB Political Economy FINAL

1/31


2/31

2

4. Foreign Exchange GainsEarnings from exports are in the form of foreign currency which can be used to pay for a

nations imports. Liberalizing trade enables the free flow of currency.

5. EmploymentGenerationEmployment will increase in exported-oriented industries, reducing unemployment and

improving standards of living. This can also contribute to a nations GDP as free trade

increases consumption.

6. Economic GrowthThe countries involved in free trade experience rising living standards, increased real

incomes and higher rates of economic growth. This is created by more competitive

industries, increased productivity, efficiency and production levels.

DISADVANTAGES OF FREE TRADE

Although free trade has benefits, there are a number of arguments put forward by lobby groups and

protestors who oppose free trade and trade liberalization. These include:

1. Structural UnemploymentRemoving trade barriers may cause unemployment in domestic infant industries which are

unable to compete with imported products. This can impact upon large numbers of workers,

their families and local economies.

2. Increased Domestic Economic Instability from International Trade CyclesAs economies become dependent on global markets, businesses, employees and consumers are

more vulnerable to downturns in the economies of our trading partners, eg. Recession in the

USA leads to decreased demand for Bangladeshi exports, leading to falling export incomes,

lower GDP, lower incomes, lower domestic demand and rising unemployment.


3/31

3

3. International Markets are not a Level Playing FieldCountries with surplus products may dump them on world markets at below cost. Some

efficient industries may find it difficult to compete for long periods under such conditions.

Further, countries whose economies are largely agricultural face unfavorable terms of trade

(ratio of export prices to import prices) whereby their export income is much smaller than the

import payments they make for high value added imports, leading to large CADs and

subsequently large foreign debt levels.

4. Environmental CostsCompanies fail to include these costs in the price of goods in trying to compete with companies

operating under weaker environmental legislation in some countries.


4/31

4

CASE:

HOW AUSTRALIA HAS BENEFITTED FROM FREE TRADE

Over the 2000s Australia's ratios of exports and imports to GDP have each risenevery year and the size of its import and export sectors are greater than 20% of its

GDP.

One result of the increase in trade and openness of the Australian economy was hasbeen structural change with a narrowing of the manufacturing and industrial base

and a rise in the resources base.

China became the world's manufacturing centre and increasingly lower pricedmanufactured goods made in China were imported into Australia, leading to the

closure of inefficient manufacturers. At the same time, demand by China for

Australian raw materials such as coal and iron ore increased rapidly, leading to

expansion in the minerals sector.

Whilst the manufacturing base in Australia has narrowed, manufacturing output hasactually increased by 40% and exports have risen by 400%.

Reducing tariffs has resulted in savings estimated to be at least $1000 per year tothe average Australian family. Without the reductions in tariffs on motor vehicles,

Australians would pay around $10,000 extra on a $30,000 car.

Having a bigger market to sell to means that a business can sell more, earn moreprofits and pay higher wages. Export-oriented businesses in Australia, on average,

pay more to workers and sell more per worker than non-exporters.

Export growth has been essential to economic growth and job creation in Australia. Forexample, over 400 000 jobs were created between 198384 and 1993-94. By 2010, one in

four jobs in Australia was related to exports.


5/31

5

CASE: How Australia Has Benefitted From Free Trade (Contd.)

Some Current Developments in Free Trade Agreements in Australia

Thailand. Australia signed a free trade agreement with Thailand in 2005. Theagreement was designed to reduce tariffs on products exported and imported by both

countries. By 2010 tariffs on 95% of current trade between both countries were to

fall to 0%.

The United States. Australia signed a free trade agreement with the United States in2005. This agreement was designed to increase exports of Australian raw materialsand agricultural products and increase imports of US services from the US economy.

Singapore. Australia signed a free trade agreement with Singapore in 2003 toincrease the import and exports of banking and education services as well as other

services like environmental and telecommunications services.

Chile. Australia signed a free trade agreement with Chile in 2009 to reduce tariffs andboost trade between these two countries. Tariffs on all existing merchandise trade

were to be removed by 2015.

ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). On January 32010 the Australian Trade Minister announced the commencement of our largest free

trade agreement. This agreement sees the removal of a range of tariffs on Australian

exports to ASEAN nations such as Malaysia and the Philippines. It should eliminate

tariffs on 96% of our current exports to ASEAN nations by 2020.

Future FTAs. Australia is also negotiating with countries including China, Japan,Korea, Malaysia and Gulf countries on possible future FTAs.


6/31

6

REGIONAL AND ECONOMIC INTEGRATION

TRADE BLOCS

These are agreements made between states, regions, or countries, to reduce barriers to tradebetween participating regions.

There are five types of regional integration which take place through the formation of trade blocs.

These are:

1. Preferential Trade Area (PTA)Where member countries agree to lower, but not eliminate, trade barriers within the group

to levels below those erected against outside economies.

Bilateral PTAs include, among others:

European Union ACP countries, formerly via thetrade aspects of the Cotonou Agreement, later via

Everything But Arms (EBA) agreements

India Afghanistan India Mauritius India Nepal India Chile India MERCOSUR ASEAN PR China Laos Thailand


7/31


8/31

8

Some currently operating FTAs are:

3. Customs UnionThis is a free trade area whose members agree on common tariffs against nonmember

countries. The purpose for establishing a customs union is increasing economic

efficiency and establishing closer political and cultural ties between the member countries.

ASEAN Free Trade Area (AFTA) Asia-Pacific Trade Agreement (APTA) Central American Integration System (SICA) Central European Free Trade Agreement (CEFTA) Common Market for Eastern and Southern

Africa (COMESA)

G-3 Free Trade Agreement (G-3) Greater Arab Free Trade Area (GAFTA) - June 1957 Gulf Cooperation Council (GCC) North American Free Trade Agreement (NAFTA) South Asia Free Trade Agreement (SAFTA) Southern African Development Community (SADC) Southern Common Market (MERCOSUR) Trans-Pacific Strategic Economic Partnership (TPP)


9/31

9

The following are few of the existing customs unions:

4. Common MarketThis is a customs union which permits the free movement of factors of production among

members.

Common Markets include:

5. Economic UnionThis has all the characteristics of a common market plus members agree to a uniform set of

macroeconomic and microeconomic policies. The participant countries have both common

policies on product regulation, freedom of movementofgoods, services and the factors of

East African Community (EAC) Andean Community (CAN) Customs Union of Belarus, Kazakhstan and Russia EU Andorra EU San Marino EU Turkey Israel Palestinian Authority

Southern African Customs Union (SACU)

Switzerland Liechtenstein

Canada Agreement on InternalTrade (AIT)

European Free Trade Association (EFTA) European Economic Area (EEA) Switzerland European Union
http://en.wikipedia.org/wiki/Freedom_of_movementhttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Freedom_of_movement


10/31

10

production (capital and labor) and a common external trade policy. The countries often

share a common currency.

Among others, existing economic unions are:

6. Economic and Monetary Union (EMU)This is a trade bloc which is composed of an economic union (common marketand customs

union) with a monetary union. It is to be distinguished from a mere monetary union which

does not involve a common market. EMU is established through a currency-related trade

pact. An intermediate step between pure EMU and a complete economic integration is the

fiscal union.

There is only one existing EMU, the Economic and Monetary Union of the European

Union with the Euro as the single currency for the Eurozone members of the European

Union.

BENEFITS OF TRADE BLOCS

1. Foreign Direct InvestmentAn increase in foreign direct investment results from trade blocs and benefits the economies of

participating nations. Larger markets are created, resulting in lower costs to manufacture

products locally.

Single market of the European Union CARICOM Single Market and Economyof

the Caribbean Community

Union State ofRussia andBelarus
http://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Labour_(economics)http://en.wikipedia.org/wiki/External_tradehttp://en.wikipedia.org/wiki/Trade_blochttp://en.wikipedia.org/wiki/Economic_unionhttp://en.wikipedia.org/wiki/Common_markethttp://en.wikipedia.org/wiki/Customs_unionhttp://en.wikipedia.org/wiki/Customs_unionhttp://en.wikipedia.org/wiki/Monetary_unionhttp://en.wikipedia.org/wiki/Monetary_unionhttp://en.wikipedia.org/wiki/Trade_pacthttp://en.wikipedia.org/wiki/Trade_pacthttp://en.wikipedia.org/wiki/Complete_economic_integrationhttp://en.wikipedia.org/wiki/Fiscal_unionhttp://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Unionhttp://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Unionhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Single_market_of_the_European_Unionhttp://en.wikipedia.org/wiki/CARICOM_Single_Market_and_Economyhttp://en.wikipedia.org/wiki/Caribbean_Communityhttp://en.wikipedia.org/wiki/Union_Statehttp://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Belarushttp://en.wikipedia.org/wiki/Belarushttp://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Union_Statehttp://en.wikipedia.org/wiki/Caribbean_Communityhttp://en.wikipedia.org/wiki/CARICOM_Single_Market_and_Economyhttp://en.wikipedia.org/wiki/Single_market_of_the_European_Unionhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Unionhttp://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Unionhttp://en.wikipedia.org/wiki/Fiscal_unionhttp://en.wikipedia.org/wiki/Complete_economic_integrationhttp://en.wikipedia.org/wiki/Trade_pacthttp://en.wikipedia.org/wiki/Trade_pacthttp://en.wikipedia.org/wiki/Monetary_unionhttp://en.wikipedia.org/wiki/Monetary_unionhttp://en.wikipedia.org/wiki/Customs_unionhttp://en.wikipedia.org/wiki/Customs_unionhttp://en.wikipedia.org/wiki/Common_markethttp://en.wikipedia.org/wiki/Economic_unionhttp://en.wikipedia.org/wiki/Trade_blochttp://en.wikipedia.org/wiki/External_tradehttp://en.wikipedia.org/wiki/Labour_(economics)http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Factors_of_production


11/31

11

2. Economies of ScaleThe larger markets created via trading blocs permit economies of scale. The average cost of

production is decreased because bulk production is allowed.

3. CompetitionTrade blocs bring manufacturers in numerous countries closer together, resulting in greater

competition. Accordingly, the increased competition promotes greater efficiency within

domestic firms.

4. Improved Consumer SovereigntyTrade blocs eliminate tariffs, thus driving the cost of imports down. As a result, demand changes

and consumers make purchases based on the lowest prices, allowing firms with a competitive

advantage in production to thrive and produce better quality products.

5. Market EfficiencyThe increased consumption experienced with changes in demand combines with a greater

amount of products being manufactured to result in an efficient market.

TRADE AGREEMENTS

ASSOCIATION OF SOUTH EAST ASIAN NATIONS (ASEAN)

ASEAN was established on 8 August 1967 in Bangkok by the five original member countries,

namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Now, it has a membership of 10

countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,

Philippines, Singapore, Thailand and Vietnam.

The ASEAN way can be traced back to the signing of the Treaty of Amity and Cooperation in

Southeast Asia. "Fundamental principles adopted from this included:

Mutual respect for the independence, sovereignty, equality, territorial integrity, andnational identity of all nations;

The right of every State to lead its national existence free from external interference,subversion or coercion;


12/31

12

Non-interference in the internal affairs of one another; Settlement of differences or disputes by peaceful manner; Renunciation of the threat or use of force; and Effective cooperation among themselves

Bangladesh, which is seen as a land bridge between SAARC and ASEAN, has enormous geographic

advantages for its proximity to Myanmar and to other South East Asian nations to promote inter

regional economic, political, and security cooperation. Once connected via the Asian Highway and

Trans-Asian Railway, South and South East Asian nations will be using Bangladesh as the main

transit point to increase economic interactions amongst themselves.

AGREEMENT ON SOUTH ASIA FREE TRADE AREA (SAFTA)

The Agreement on South Asian Free Trade Area (SAFTA) was signed by all the member States of the

South Asian Association for Regional Cooperation (SAARC) during the twelfth 'SAARC Summit' held

in Islamabad on 4-6th January, 2004. As a result, SAFTA came into force from 1st January, 2006. Its

members include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

The objectives of SAFTA are

To promote and enhance mutual trade and economic cooperation among the contractingStates

To eliminate barriers to trade in, and facilitate the cross-border movement of goodsbetween the territories of the Contracting States

Promoting conditions of fair competition in the free trade area, and ensuring equitablebenefits to all Contracting States, taking into account their respective levels and pattern of

economic development

Creating effective mechanism for the implementation and application of this Agreement, forits joint administration and for the resolution of disputes

Establishing a framework for further regional cooperation to expand and enhance themutual benefits of this Agreement.


13/31

13

According to the agreement, SAFTA will be implemented through some instruments such as Trade

Liberalization Program, Rules of Origin, Institutional Arrangements, Consultations and Dispute

Settlement Procedures, Safeguard Measures and any other instrument that may be agreed upon.

ASIA-PACIFIC TRADE AGREEMENT (APTA)

The Asia-Pacific Trade Agreement (APTA), formerly known as the Bangkok Agreement, was signed

on 31st of July 1975 as an initiative of the United Nations Economic and Social Commission for Asia

and the Pacific (ESCAP).It is the 'First Agreement' on trade negotiations among the developing

member countries of ESCAP. It is a preferential tariff arrangement that aims at promoting intra-

regional trade through exchange of mutually agreed concessions by the members (developing

country) of the ESCAP region.

The Bangkok Agreement is essentially a preferential trading arrangement designed to liberalize and

expand trade progressively in the ESCAP region through such measures as the relaxation of tariff

and non-tariff barriers and trade-related economic cooperation. The developing countries and

associate members of ESCAP are eligible to accede to the Agreement.

The objectives of the agreement is

To promote economic development through a continuous process of trade expansionamong the developing member countries of ESCAP

To develop further international economic cooperation through the adoption of mutuallybeneficial trade liberalization measures consistent with their respective present and future

development and trade needs, and taking into account the trading interest of third

countries, particularly those of other developing counties.

BIMSTEC (BAY OF BENGAL INITIATIVE FOR MULTI-SECTORAL TECHNICAL AND ECONOMICCOOPERATION)

BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), a sub-

regional economic cooperation grouping was formed in Bangkok in June 1997. Myanmar joined the

grouping later in December 1997. Its membership involves 5 members of SAARC (India,


14/31

14

Bangladesh, Bhutan, Nepal & Sri Lanka) and 2 members of ASEAN (Thailand, Myanmar). Thus, it is

visualized as a bridging link' between the two major regional groupings i.e. ASEAN and SAARC.

The involved countries agreed that the areas of cooperation should be expanded to 13 sectors and

each sector will be led by members in a voluntary manner. These include- Trade & Investment(Bangladesh), Technology (Sri Lanka), Energy (Myanmar), Transport & Communication (India),

Fisheries (Thailand) and others.

BIMSTEC Free Trade Area Framework Agreement is established in order to stimulate tradeand investment in the parties, and attract outsiders to trade with and invest in BIMSTEC at a

higher level.

The Framework Agreement includes provisions for negotiations on FTA in goods, servicesand investment.

A Trade Negotiating Committee (TNC) has been constituted to carry forward the program ofnegotiations. TNC's negotiation area covers trade in goods and services, investment,

economic cooperation, as well as trade facilitations and also technical assistance for LDCs in

BIMSTEC. It was agreed that once negotiation on trade in goods is completed, the TNC

would then proceed with negotiation on trade in services and investment.

GOVERNMENT INTERVENTION

Although nations are nominally committed to free trade, they tend to intervene in international

trade. There are two types of arguments for government intervention in international trade:

1. Political arguments2. Economic arguments

POLITICAL ARGUMENTS

Political arguments are concerned with protecting the interests of certain groups, often at theexpense of other groups, or with promoting goals with regard to foreign policy, human rights,

consumer protection, etc.

1. Protecting Domestic Employment and IndustriesThe levying of tariffs is often highly politicized. The possibility of increased competition

from imported goods can threaten domestic industries. These domestic companies may


15/31

15

fire workers or shift production abroad to cut costs, which means higher unemployment.

2. Supporting National SecurityBarriers are also employed by developed countries to protect certain industries that aredeemed strategically important, such as those supporting national security.

3. RetaliationCountries may also set tariffs as a retaliation technique if they think that a trading partner

has not played by the rules.

Tariffs were imposed on import of steel in 2002 in the US to

protect jobs and industries across several states of the country.

In 1986, the US federal government supported several semiconductor companies in the

country to protect them from foreign competitors, with the rationale that it would bedangerous for the United States to heavily depend on imports of semiconductors, as it

was a critical component of defense products.

The US threatened to impose 100% tariff on certain Chinese products because China

had lenient implementation of intellectual property regulations, which cost American

companies like Microsoft millions of dollars in lost revenue.


16/31

16

4. Protecting ConsumersA government may levy a tariff on products that it feels could endanger its population.

5. Furthering Foreign Policy ObjectivesA government sometimes uses trade policies to support their foreign policy objectives.

It may grant preferential trade terms to a country with which it wants to build strong

relations.It may be used to pressure or punish rogue states that do not abide by internal

law or norms.

6. Protecting Human RightsGovernments may use trade policies to try and improve the human rights policies of

trading partners.

ECONOMIC ARGUMENTS

Economic arguments are concerned with boosting the overall wealth of the nation.

1. Protecting Infant IndustriesThe use of tariffs to protect infant industries can be seen by the Import Substitution

Industrialization (ISI) strategy employed by many developing nations.

Several countries in 2003 (including Japan and South Korea) banned imports of

American beef after a single case of mad cow disease in Washington State, forconsumer protection.

The US has maintained trade sanctions against Cuba in the hope that impoverishing

Cuba will result in economic hardship which will lead to the downfall of its

Communist government and replacement with a more democratic and pro-US regime.

For years, the US did not grant the status of most favored nation (MFN) to China, which

allows goods to be exported to the US in favorable terms, primarily because of Chinas

disregard for human rights and its poor record. The MFN status was withheld from

China until considerable improvement in the human rights front was seen.


17/31

17

The government of a developing economy will levy tariffs on imported goods in industries

in which it wants to foster growth. This increases the prices of imported goods and creates a

domestic market for domestically produced goods, while protecting those industries from

being forced out by more competitive pricing.

2. Strategic Trade PolicyStrategic trade policy suggests that with subsidies, government can help domestic firms

gain first-mover advantages in global industries where economies of scale are important.

Government subsidies may also help domestic firms overcome barriers to entry in such

industries.

However, such policies may invite retaliation where all parties involved may lose, or these

policies may be captured by special-interest groups who will distort the policies to their

own ends.

DRAWBACKS OF GOVERNMENT INTERVENTION

1. It can be self-defeating because it tends to protect the inefficient rather than help firmsbecome efficient global competitors.

2. It is dangerous; it may invite retaliation and trigger a trade war.3. It is unlikely to be well executed, given the opportunity for such policies to be captured by

special-interest groups.

Several Taiwanese and South Korean firms have levied tariffs in industries like

semiconductors, textiles, and shipping to develop their potential comparative

advantage.

The Japanese government provided subsidies and research support for the liquid

crystal display (LCD) screens industry to capture the first-mover advantage in this

market.


18/31

18

INSTRUMENTS OF TRADE POLICY

At the broadest level, the instruments of trade policy are divided into:

1. Tariffs, and2. Non-tariff barriers

TARIFFS

Tariff is a tax levied/added to the cost of imported goods. Sometimes tariffs are levied on exports,

but this is rare.

Tariffs fall into two categories:

1. Specific tariff is a fixed charge for each unit of a good imported.2. Ad valorem tariff is levied on a good based on a percentage of that goods value.

NON-TARIFF BARRIERS

SUBSIDIES

Subsidies are government payments to domestic producers.

Subsidies help domestic producers to:

a) Compete against foreign importsb) Gain export markets

IMPORT QUOTAS

Import quotas are restrictions placed on the physical amount of a particular good that can be

imported. Import quotas are usually associated with the issuance of licenses.

Bangladeshs ad valorem tariff on imported cars is 300%.

During 2004-05 and 2005-06, the Bangladeshi government provided BDT 261.14 and

371.28 crores as subsidy for phosphate and potash fertilizers.

In 2011, the Indian government increased the duty-free import quota for garments from

Bangladesh by two million pieces to 10 million.


19/31

19

LICENSES

A license is granted to a business by the government, and allows the business to import a certain

type of good into the country.

TARIFF RATE QUOTAS (TRQ)In tariff rate quotas, a lower tariff rate is applied to goods imported within the quota and a higher

tariff rate is applied to imported goods that exceed the quota.

VOLUNTARY EXPORT RESTRAINT (VER)

This voluntary trade barrier is imposed by the exporting country, usually at the request of theimporting countrys government.

LOCAL CONTENT REQUIREMENTS

This is a government requirement that a specific percentage of a good be produced domestically.

While there is no general local-content requirement for foreign investment in Bangladesh, and

industries are free to use raw materials procured locally or from outside the country at competitive

prices; in the case of the pharmaceutical industry, raw materials of some drugs have to be locally

procured.

ADMINISTRATIVE POLICIES

These are formal, bureaucratic rules designed to make it difficult for imports to enter a country.

ANTIDUMPING POLICIES

Dumping is selling good in a foreign market below their fair market value, or below their costs of

production. Antidumping policies of a country are designed to punish foreign firms that engage in

dumping. If a countrys complaint of foreign firms dumping has merit, an antidumping duty (also

called countervailing duty) can be imposed on the offending foreign imports.

The tariff rate quota of imported rice, wheat, maize and sugar from India to Bangladesh in

2003-04 was 15% for a specified quantity of imports, and 50% for imports in excess of the

quota.

In 1971, the US negotiated voluntary export restraints on wool and human-made

fibres with Asian suppliers.

In Bangladesh, there is an immediate termination of investigation where the volume of dumped

imports is negligible which is less than 2% of export price. The volume of dumped imports is

regarded as negligible if it is less than 3% of imports.


20/31

20

THE ROLE OF THE WORLD TRADE ORGANIZATION (WTO)

The World Trade Organization (WTO) is an organization that intends to supervise

and liberalize international trade. The organization officially commenced on January 1, 1995 under

the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), whichcommenced in 1948.

The WTO has 153 members, representing more than 97% of the world's population, and 30

observers, most seeking membership. The WTO is governed by a ministerial conference, meeting

every two years; a general council, which implements the conference's policy decisions and is

responsible for day-to-day administration; and a director-general, who is appointed by the

ministerial conference.

FUNCTIONS OF THE WTO

Administering WTO trade agreements Forum for trade negotiations Handling trade disputes Monitoring national trade policies Technical assistance and training for developing countries Cooperation with other international organizations

DISPUTE RESOLUTION

Between 1995 and 2007, more than 360 trade disputes between member countries were brought

to the WTO. Of these, three-fourths had been solved through informal consultations between the

disputing countries. The remaining disputes were resolved through formal procedures.

The operation of the WTO dispute settlement process involves the DSB panels, the Appellate Body,

the WTO Secretariat, arbitrators, independent experts and several specialized institutions.
http://en.wikipedia.org/wiki/Free_tradehttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Marrakech_Agreementhttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/wiki/Marrakech_Agreementhttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Free_trade


21/31

21

SECTORAL REFORMS

The WTO has greatly liberalized and influenced two sectors:

Global TelecommunicationsIn February 1997, member countries agreed to open this sector to foreign competition. The

entire industry was revolutionized as all forms of telephone services such as voice

telephony, data and fax transmission, satellite and fax transmission were improved in

quality and lowered in costs.

Global Financial ServicesThe deal covers more than 95 percent of the worlds financial services market. Under the

agreement, which took effect at the beginning of March 1999, 102 countries pledged to

open to varying degrees their banking, securities, and insurance sectors to foreign

competition. In common with the telecommunication deal, the accord covers not just cross-

border trade but also foreign direct investment. Seventy countries agreed to dramatically

lower or eradicate barriers to foreign direct investment in their financial services sector.

THE DOHA ROUND

The Doha Development Round or Doha Development Agenda (DDA) is the current trade-

negotiation round of the World Trade Organization (WTO) which commenced in November2001. Its objective is to lower trade barriers around the world, which will help facilitate the

increase of global trade.

CRITICISMS OF THE WTO

Rich countries are able to maintain high import duties and quotas in certain products,blocking imports from developing countries (e.g. clothing);

The increase in non-tariff barriers such as anti-dumping measures allowed againstdeveloping countries;

The maintenance of high protection of agriculture in developed countries while developingones are pressed to open their markets;

Many developing countries do not have the capacity to follow the negotiations andparticipate actively in the Uruguay Round
http://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/Trade_barrierhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Dumping_(pricing_policy)http://en.wikipedia.org/wiki/Uruguay_Roundhttp://en.wikipedia.org/wiki/Uruguay_Roundhttp://en.wikipedia.org/wiki/Dumping_(pricing_policy)http://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Trade_barrierhttp://en.wikipedia.org/wiki/World_Trade_Organization


22/31

22

TRADE DISPUTES

Any disagreement between nations involving their international trade or trade policies is known as

a trade dispute.

CASE:

The Indo-Bangladesh Relationship

Bangladesh's export to India has increased six times in the last few years.

The Indo-Bangladesh bilateral relations have suffered a lot in the past, due to mistrust and lack

of political will. Instead of making progress in dealing with the critical issues between the two

countries, lack of trust has held back the development of the bilateral relations for a significant

period of time, particularly with regard to finding solutions to issues that are important from

the Bangladeshi perspective.

Non-tariff Barriers (NTB)

As the importance of tariff barriers decline, it is the nontariff barriers which are emerging as

major concerns for Bangladesh in terms of realizing export potentials in the Indian market.

Some of these NTBs are:

1. Biosecurity and sanitary permit (Primary agricultural products)2. Compliance of Food Adulteration Act regarding shelf life of goods (processed

food products)

3. Special labeling of country of origin (jute bags/sacks)4. Requirement of chemical testing (leather and melamine)5. Certificate of nonhalogenated hydrocarbon (jute products)6. Preshipment certificate about presence of no hazardous dyes ( textile and

textile products)

7. Registration of the drug with the Central Drug Standard Control Organization


23/31

23

CASE:

The Indo-Bangladesh Relationship (Contd.)

India has been slow to open up its import opportunities for Bangladesh and has operated a

variety of non-tariff barriers (NTB) which have constrained our export opportunities.

The constraints to expanding exports to India do not originate exclusively from India's

restrictive trade regime. India's import market now exceeds $300 billion and is being accessed

by a variety of exporters from Asia, such as China, Vietnam, Thailand and Indonesia without the

benefit of any tariff concessions.

Even Pakistan's exports, which are exposed to a variety of restrictions by India, exceed those of

Bangladesh. The small and rather undiversified industrial and export structure of Bangladesh

limits our export opportunities no less than India's import restrictions.

Negative/Sensitive List of India

India has already permitted duty free exports from Bangladesh under the SAARC concessionary

provision for least developed countries (LDC). However, the major problem is the size of

India's negative or sensitive list which denies this tariff concession for a variety of goods of

export interest to Bangladesh.

Over the years and through intense negotiations this negative list has been cut down to 460

items. This list still includes RMG, Bangladesh's most competitive export.

Bangladesh has, in recent negotiations prior to the visit of Dr. Manmohan Singh, presented a

list of 61 commodities of export interest to Bangladesh, to be removed from the negative list. Of

these, 47 items are from the RMG sector for items where Bangladesh is particularly

com etitive.


24/31

24

IMPLICATIONS FOR BANGLADESH (AND OTHER DEVELOPING

COUNTRIES)

1. Trade liberalization, combined with pro-market, developmental domestic reforms,enhances the economic growth potential of developing countries. The World Bank has

reported that per capita real income grew nearly three times faster for developing countries

that lowered trade barriers more (5.0 percent per year) than other developing countries

(1.4 percent per year) in the 1990s.

Developing countries would receive nearly two-thirds (63 percent) of the potential benefits

of eliminating agriculture distortions (tariffs and trade-distorting subsidies) by developing

and developed countries.

Models created by the World Bank economists indicate that 93 percent of the global welfare

gains from removing distortions to agricultural trade globally would come from reducing

import tariffs, while only 2 percent is due to export subsidies and 5 percent to domestic

support measures.

2. Trade is a powerful tool to generate income gains that can dwarf foreign assistance. Astudy by White and Anderson (2001) found that openness to trade is associated with

significantly higher income growth for each income group except the top 20 percent of thepopulation, and that the greatest effects proportionally are for the lower income groups

that is, the benefit of openness is progressive.

3. Global free trade can lift millions out of poverty. A study by the International Institute ofEconomics estimates that global free trade could lift as many as 500 million people out of

poverty and inject $200 billion annually into the economies of developing countries. The

number of people globally living in poverty declined by 350 million over the last three

decades. China, a country that has aggressively opened its markets and expanded its tradesaw poverty decline by 377 million. Poverty in Africa, on the other hand, has increased by

227 million.


25/31

25

APPENDIX A

CASE: TIES BETWEEN U.S.A. AND CHINA

U.S.-China economic ties have expanded substantially over the past three decades. China iscurrently the second largest U.S. trading partner, its third-largest export market, and its biggest

source of imports. Since U.S. imports from China have risen much more rapidly than U.S. exports to

China, the U.S. merchandise trade deficit has surged, rising from $10 billion in 1990 to $273 billion

in 2010. However, these two countries also have some disagreements over their trade relationship.

Chinas incomplete transition to a free market economy and its use of distortive economic policies

have contributed to growing trade friction with the United States over a number of issues, including

Chinas refusal to allow its currency to appreciate to market levels, its mixed record on

implementing its World Trade Organization (WTO) obligations, and its extensive use of industrial

policies and discriminatory government procurement policies to subsidize and protect domestic

Chinese firms at the expense of foreign companies.

The renminbi-dollar exchange rate is the largest and most important of the economicdisputes between the United States and China. It affects all US imports from China (valued at

$243 billion in 2005) and all US exports to China (valued at $42 billion in 2005) and has

repercussions throughout Asia. A revaluation of the renminbi and other Asian currencies by

20 percent, together with a sharp reduction in the US savings deficit, might reduce the US

global current account deficit ($760 billion in 2005) by as much as $120 billion per year.

Even if China revalues its currency, however, other conflicts threaten to worsen US-Chinaeconomic relations. When import quotas imposed under the Multi-Fiber Arrangement

ended in January 2005, Chinese textile and clothing exports expanded rapidly. Both the

United States and the European Union then negotiated a fresh set of bilateral quotas with

China. While the new quotas are set to expire in 2008, textile and clothing trade disputes

are virtually certain to continue for a decade or longer.

Disagreements over Chinese tax and tariff discrimination against imported semiconductors,automobile parts, and other products are also on the trade agenda. Chinese violation of

intellectual property rights (IPRs); US antidumping duties on bedroom furniture, color

television sets, and other products add to the litany of commercial disputes.


26/31

26

APPENDIX B

CASES BETWEEN CHINA AND U.S.A.

Pending U.S. Cases against China in WTO

On September 15, 2010, the USTRs office announced it was bringing a WTO caseagainst China over its improper application of antidumping duties and countervailing

duties on imports of grai oriented flat-rolled electrical steel from the United States.

On September 15, 2010, the USTRs office announced it was bringing a WTO caseagainst China over its discrimination against U.S. suppliers of electronic payment

services.

Resolved Cases or WTO Panel Ruling against China

On June 23, 2009, the United States brought a case against Chinas export restrictions (suchas export quotas and taxes) on raw materials (bauxite, coke, fluorspar, magnesium,

manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc). The United States

charges that such policies are intended to lower prices for Chinese firms (steel, aluminum,

and chemical sectors) in order to help them obtain an unfair competitive advantage. China

claims that these restraints are intended to conserve the environment and exhaustible

natural resources. In July 2011, a WTO panel issued a report that ruled that many of Chinas

export restraints on raw materials violated WTO rules. In particular the panel rejected

Chinas argument that that some of its export duties and quotas were justified because they

related to the conservation of exhaustible natural resources for some of the raw materials.

But China was not able to demonstrate that it imposed these restrictions in conjunction

with restrictions on domestic production or consumption of the raw materials so as to

conserve the raw materials, protect the health of its citizens, or to reduce pollution.

On December 22, 2010, the USTRs office announced that it would bring a WTO case againstChina over a government program that extended subsidies to Chinese wind power

equipment manufacturers that use parts and components made in China rather than

foreign-made parts and components. On June 7, 2011, the USTRs office announced that


27/31

27

China had agreed to end these subsidies. However, the USTR noted that it had taken

significant investigatory efforts by the U.S. Government, working with industry and

workers, to uncover Chinas wind subsidies because of the lack of transparency in China.

The USTR further noted that under the terms of Chinas WTO accession, it was required to

report on its entire subsidy programs, which, to date, it has failed to do.

On December 19, 2008, the USTR filed a WTO case against China over its support forFamous Chinese brand programs, charging that such programs utilize various export

subsidies (including cash grant rewards, preferential loans, research and development

funding to develop new products, and payments to lower the cost of export credit

insurance) at the central and local government level to promote the recognition and sale of

Chinese brand products overseas. On December 18, 2009, the USTR announced that China

had agreed to eliminate these programs.

On March 3, 2008, the USTR requested WTO dispute resolution consultations with Chinaregarding its discriminatory treatment of U.S. suppliers of financial information services in

China. On November 13, 2008, the USTR announced that China had agreed to eliminate

discriminatory restrictions on how U.S. and other foreign suppliers of financial information

services do business in China.

On April 10, 2007, the USTR filed a WTO case against China, charging that it failed to complywith the TRIPS agreement (namely in terms of its enforcement of IPR laws). On January 26,

2009, the WTO ruled that many of Chinas IPR enforcement policies failed to fulfill its WTO

obligations. On June 29, 2009, China announced that it would implement the WTO ruling by

March 2010. On the same day the USTR filed another WTO case against China, charging that

it failed to provide sufficient market access to IPR-related products, namely in terms of

trading rights and distribution services. In August 2009, the WTO ruled that many of Chinas

regulations on trading rights and distribution that were raised by the U.S. case were WTO-

inconsistent. China appealed the decision, but lost, and in February 2010 stated that it

would implement the WTO panel decisions.


28/31

28

APPENDIX C

CASE: INDIA LOSING GROUND TO CHINA ON TRADE WITH BANGLADESH

Since Bangladesh achieved independence, India has been its major trading partner. But since 2002

Chinas trade with Bangladesh has increased many times over, surpassing that of India. This

slowing down of economic relations between India and Bangladesh, coupled with strained and

uncertain political relations, is a cause for concern.

Indian exports to Bangladesh have registered a continuous decline. In 1991 Indias exports as a

percentage of Chinas exports to Bangladesh were more than 150 per cent, but by the end of 2010

they had decreased to 30 per cent. Given the similarity in the export baskets of China and India to

Bangladesh, Chinese exports are seen to be replacing Indian exports . China also imports less

than India from Bangladesh, resulting in a higher trade balance in favor of China.

Even Indias concessions to Bangladesh under the Asia Pacific Trade Agreement (APTA), the South

Asia Free Trade Agreement (SAFTA), and the recently-declared zero tariff on all products other

than the Sensitive List to all least developed countries (LDCs) in SAFTA have failed to improve the

trade relations between the two nations.

China has captured Bangladeshs market in industries such as textiles, footwear and head wear, and

machinery and mechanical appliances, where India also enjoys comparative advantage. Though

Chinese products in these industries are highly competitive on price, there are many other

economic and non-economic factors responsible for turning the table in favor of China.


29/31

29

Bangladeshi traders and industry bodies have claimed they face high non-tariff barriers such as

delays, bureaucratic harassment, limited transport routes, customs harassment and visa problems

in trading with India, which increases the cost of doing business and fosters a lack of trust. These

non-tariff barriers are exacerbated by corruption at the border, a rigid Indian bureaucracy,

excessive concerns over security and a lack of infrastructure.

Unlike India, China has been very proactive in the Bangladeshi market. Apart from the price

competitiveness of Chinese products, the welcoming attitude of Chinese traders and officials at

customs is encouraging to Bangladeshi traders. Visas are never a problem in Chinese cases (unlike

obtaining Indian visas) and China invites Bangladeshi enterprises to participate in exhibitions in

order to obtain better information about Chinese products. Chinese exporters are even ready to

redesign branded products at the request of Bangladeshi importers to cater to the price-sensitive

local market.

Since trade and investment together, India is not only losing its grip over trade ties but also has

negligible investment presence in Bangladesh. Though Indian investments are not discouraged,

there is mutual mistrust partly because of the Indian ban on Bangladeshi investment in India until

2007. India lifted the ban and allowed Bangladeshi FDI in expectation of mutual openness and to

ease Indian investment in major deals such as the Tata and Essar projects. To remedy the situation

the Bilateral Investment Promotion and Protection Agreement was signed between India and

Bangladesh in February 2009, but still substantial capital flows have not come in.

Like India, Chinas investment in Bangladesh is also low, but it is giving development assistance and

project loans, which fosters goodwill. China has constructed six friendship bridges and the

Bangladesh-China Friendship Conference Center in Bangladesh. China is looking for natural gas

reserves in Bangladesh and has been offered exploration rights at Barakpuria by Dhaka. Also, China

has gained naval access to Bangladeshs Chittagong port, which India has been watching for several

years. The two countries are also cooperating on the Bangladesh-Myanmar-China road link through

Kunming to further increase economic cooperation. In contrast, IndiaBangladesh collaboration in

gas exploration in Bangladesh and in Myanmar has failed. Given Indias slowdown in exports to

Bangladesh, even in industries where India used to dominate, there is a pressing need to reduce

non-tariff barriers.


30/31

30

APPENDIX D

CASE: TRADE DISPUTES BETWEEN E.U. AND RUSSIA

THE RUSSIAN IMPORT BAN ON POLISH AGRICULTURAL PRODUCTSOn 10 November 2005, the Russian Federal Service for Veterinary and Phyto-sanitary Surveillance

(Rosselkhoznadzor) banned a wide range of meat imports from Poland, which was supplemented

by a ban on plant products on 14 November. The Russian authorities asserted that several Polish

meat shipments had violated Russian veterinary regulations or had been accompanied by falsified

veterinary export certificates. Russia made similar accusations regarding counterfeit phytosanitary

certificates and inadmissible pesticide residues in Polish plant products. The Polish authorities

acknowledged certain shortcomings and took corrective measures by improving safeguards against

document falsification, tightening quality controls and strengthening the role of the Polish customs

service in meat export controls.

After fresh inspections of Polish meat plants, the meat ban and the restrictions on Polish plant

products not for human consumption were lifted in December 2007 and January 2008, respectively.

The remaining restrictions were lifted in March 2008 after the negotiation of an EU Russia

memorandum on the safety of plant products for human consumption.

The Export Duties on Raw TimberRussia has gradually raised the export duties on raw timber from July 2007 onwards and plans to

quintuple the tariff from 10 to 50 Euros by cubic meter by 2009. This is likely to stop all export of

timber from Russia. Obviously, this policy sprang from the growing willingness of Russia to

diversify its one-sided industrial structure in order to compete in the global market and to become

less dependent on sales of raw materials only. Russia was thus using its customs and duty policy to

compel Western countries to build up pulp and paper mills in Russia; while at the same time its

own industry is plotting to acquire cheap wood. Furthermore, the multiplication of the export

tariffs indicated that Russia does not simply want to increase its customs revenues but to stop theexport entirely.

However, the export duties contradicted with the regulations concerning free trade between the EU

and Russia. As a part of Russias WTO accession process, Russia and the EU signed a protocol, in

which Russia committed to giving up trade barriers, such as the wood tariffs. The EU held the hikes

in export tariffs as a violation against this protocol.


31/31

REFERENCES

JOURNALS

US-China Trade Disputes: Rising Tide, Rising Stakes; Gary Clyde Hufbauer, Yee Wong, andKetki Sheth, August 2006

Trade Disputes Between China and the United States: Growing Pains so Far, Worse Ahead?Gary Clyde Hufbauer and Jared C. Woollacott

Interstate Conflicts and Regionalism in South Asia: Prospects and Challenges Zahid ShahabAHMED, Stuti BHATNAGAR

WEBSITES

http://business.gov.in/trade/trade_agreements.php

http://www.cpd.org.bd/downloads/Presentation_Mustafiz.pdf http://people.stern.nyu.edu/rlevich/f1999/Chap-11.pdf http://ictenter.com.np/?p=156
http://business.gov.in/trade/trade_agreements.phphttp://www.cpd.org.bd/downloads/Presentation_Mustafiz.pdfhttp://people.stern.nyu.edu/rlevich/f1999/Chap-11.pdfhttp://ictenter.com.np/?p=156http://ictenter.com.np/?p=156http://people.stern.nyu.edu/rlevich/f1999/Chap-11.pdfhttp://www.cpd.org.bd/downloads/Presentation_Mustafiz.pdfhttp://business.gov.in/trade/trade_agreements.php

IB Political Economy FINAL

Documents

Transcript of IB Political Economy FINAL