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Transcript of Redmond Economic Integration
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Economic Integration Institutions and Practices
Part 1: Introduction
2-1
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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 Integration
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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Economic Integration
Institutions and Practices
Part 2: Global TradeAgreements
2-15
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2-16
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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2-17
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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2-19
The GATT/WTO functions through trade rounds:
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2-20
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
2-21
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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2-22
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
2-23
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 open- ness Predictability and transparency
More competitiveness
Benefits for less developed countries(>75% are developing or LDCs)
Protection for the environment***
2-24
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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
2-25
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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/
2-31
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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Economic Integration
Institutions and Practices
Part 3: Regional TradeAgreements
2-32
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2-33
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)?
2-42
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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
2-43
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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
2-48
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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
212
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
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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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2-77
(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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2-79
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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2-80
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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Economic Integration
Institutions and Practices
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
7-82
Direct Costs and Jobs Saved in Agriculture,
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7-83
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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7-84
EU, Japanese, and U.S. Protection in Three Sectors (Mid-
1990s, Millions of US$)
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7-85
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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7-88
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
Why Nations Protect Their Industries: The
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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?
Why Nations Protect Their Industries: The
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National Security Argument
National Security Argument: Certainindustries must be protected in order to guard
national security (military security, culturalvalues)
Why Nations Protect Their Industries: The
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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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Economic Integration
Institutions and Practices
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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Defining Labor Standards
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
Defining Labor Standards
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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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Economic Integration
Institutions and Practices
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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Economic Integration
Institutions and Practices
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
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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
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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/
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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)