Things you already know!! • It makes little 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
More, things you already know!! • Static Gains from trade are gains in world output that result from specialization and trade • Dynamic gains from trade are gains from trade over time that occur because trade induces greater efficiency in the use of existing resources
Even more, things you already know!! • 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 way to enhance competition in a country’s domestic market
Well then … why not “Free Trade” • Free trade is 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.
THE WELFARE EFFECTS OF TRADE IN AN INDIVIDUAL PRODUCT • From a public policy perspective, the gains to society as a whole are greater than the losses that occur within a particular industry • Consumers tend to benefit from free trade but firms and workers in importing industry “can” be harmed • Special interest groups lobby for changes that benefit them, though not necessarily society as a whole Problem?… The gains to consumers are diffused but the losses to producers and workers who care are concentrated
GLOBALIZATION • Globalization is 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
25% – 20% – 15% – 10% – 5% – 0% – 1975 1980 1985 1990 1995 2000 2005 Exports as a Percent of GDP GLOBALIZATION Real World Exports of Goods as a Percentage of Real World GDP
GLOBALIZATION • Globalization or the increasing openness of an economy, means changes that are not universally positive • Globalization involves not only the goods and service but the movement of people and money as well
Economic Integration • Economic integration is concerned with: • The removal of trade barriers or impediments between at least two participating nations • Thus boosting the free movement of trade, investment, and services across national boundaries
Economic Integration … (Continued) • 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 … • … economic & political agreements that give preference to members within the agreement • Global • Regional … (or Bilateral)
Some Types of International Economic Institutions… with Examples … (Just for info…)
More …. Types of International Economic Institutions… with Examples Our Focus
Economic Integration … Institutions and PracticesPart 2: Global Trade Agreements
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)
“Global” (past)General Agreement on Tariffs and Trade (GATT) • Idea began with 23 nations in 1946 when the International Trade Organization (ITO) was established • The General Agreement on Trade and Tariffs (GATT) followed in 1947… by 23 countries to abolish quotas and reduce tariffs.
General Agreement on Tariffs and Trade (GATT) … based on the following basic principles: National treatment: Imports must be given similar treatment on the domestic market as domestically produced goods Nondiscrimination: Enshrined in the concept of most favored nation (MFN)… every WTO member must treat every other member as it treats its most favored trading partner However GATT could not enforcecompliance
“Kennedy” … “Tokyo” • During the Kennedy Round in the mid-1960’s, and the Tokyo Round in the 1970’s, other issues included: - Problems with dumping - Subsidies to industry - Nontariff barriers to trade
The Uruguay Round • The Uruguay Round “famously” focused on contentious issues such as: • non-tariff barriers • intellectual property rights • trade in services • agriculture. • However, the BIGGEST consequence…
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…
“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 million Euros) • Secretariat staff: 640….. • Head: Pascal Lamy (Director-General) ChartMembers
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***
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
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
Countervailing Duty • WTO rulings are binding … as they ultimatelypermit countervailing duties • Countervailing Duty—a tariff designed to raise the price of an imported product to its fair market value. • After “permission” countries may use them to offset production or export subsidies. ***
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, and Japan -Greater market access by developing countries and strong farm sector high income countries -Trade in services -Problems poor countries face in implementation
The Doha Round • Talks were started in Doha, Qatar in November 2001. • Focus of the talks was on the links between economic growth and trade liberalization. • Talks collapsed in July 2008. • The main point of contention is trade in agriculture with major industrialized nations such as the U.S., EU and Japan maintaining production subsidies and import barriers. Where are they now????
WTO and the Environment • WTO rules block a country’s use of trade measures as environmental policy • Montreal Protocol – multilateral agreement to ban trade of products that deplete the ozone layer • Kyoto Protocol – to reduce emissions of greenhouse gases to levels below 1990 levels
WTO website… http://www.wto.org/
Economic Integration … Institutions and PracticesPart 3: Regional Trade Agreements
Regional Trade Agreements Besides these Global Agreements … Regional Trade Agreements also form a key part of the institutional structure of the world economy
What are Regional Trade Agreements? • Regional Trade Agreement: preferential economic arrangement among 2 or more countries. • Such blocs have liberal rules for member countries while a separate set of rules is laid for non-members.
Types of Regional Trade Agreements Partial trade agreement Free trade areas Customs Union Common Market Economic Union Political Unions
Free Trade Areas • Simplest form of economic integration which provides the internal free trade between member nations. • Each member is allowed to determined its own separate commercial policy with respect to non-members. • Example: Latin American Free Trade Association (LAFTA), North American Free Trade Area (NAFTA)
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: EEC – European Economic Community
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.
Economic Union • Similar to “Common Market”, but with coordination of macroeconomic policies (including common currency, harmonization of standards and regulations) • Example: EU members participating in the Euro currency zone .
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 one created by 50 states of the United States of America.
Regional Economic 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
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)?
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
Advantages of Regional Trade Agreements • Access to larger markets leads to internal economies of scale. • External economies of scale due to improved infrastructure (e.g. transport and telecoms links) • Greater international bargaining power. • Increased competition between members. • More rapid spread of technology.
Disadvantages of Regional Trade Agreements • Country may lose resources to more efficient members, or to geographical center, and become depressed region. • Firms may co-operate, collude and merge, leading to greater monopoly power. • Diseconomies of scale if firms become very large. • High administrative costs of trading bloc.
Regional Trade Agreements-Opportunities • Elimination of trade barriers within the region would encourage the efficient firms to expand their business activities in all countries within the region. • Healthy competition within the region would help the less efficient firms in acquiring competencies in order to challenge the efficient firms. • The overall business performance in 'terms of productivity, quality, price, • Delivery and customer service will improve. • Consumers get better quality goods and services at competitive price • Employment opportunities in the region increase.
Regional Trade Agreements-Threats • The removal of trade barriers provides opportunities to the efficient firms to enter the different markets within the region. This endangers the survival of the less efficient firms. • The resources of the less efficient countries are exploited by the firms from the advanced countries of the region. • The less developed countries of the region mostly become consumption centers while the advanced countries of the region become the production centers. • The less developed countries become still poorer whereas the advanced countries of the region become still richer. • It discourages trade with non-members as trade with non-members is subject to strict rules and trade barriers.
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, assuming they create more new trade than they divert (destroy) - trade creation >trade diversion
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.
Creation - DiversionExample Assume there are three countries (A, B, and C) in the world A is the world’s high-cost producer of beer B is the medium-cost producer C is the world’s low-cost producer What happens if Country A is a closed economy … and then opens its economy up to trade???