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Chapter 2

Chapter 2. The Dynamic Environment of International Trade. Chapter Learning Objectives. The basis for the reestablishment of world trade following Second World War The importance of balance-of-payment figures to a country’s economy The effects of protectionism on world trade

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Chapter 2

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  1. Chapter 2 The Dynamic Environment of International Trade

  2. Chapter Learning Objectives The basis for the reestablishment of world trade following Second World War The importance of balance-of-payment figures to a country’s economy The effects of protectionism on world trade The seven types of trade barriers The importance of the GATT and the WTO The emergence of the International Monetary Fund and the World Bank Group

  3. Global Perspective:Australia to Play Catalyst to Break Down Trade Barriers Barriers to trade, both tariff and nontariff, are one of the major issues confronting international marketers. If the benefits of the social, political, and economic changes now taking place are to be fully realised, free trade must prevail throughout the global marketplace. WTO (World Trade Organisation) Countries are pushing for speedier removal of quotas on textiles and clothing while the WTO examines cuts in agricultural support.

  4. Top Ten 2006 Australian Trading Partners

  5. The Twentieth to the Twenty-First Century First Half of the Twentieth Century Widespread economic depression WW I and WW II Last Half of the Twentieth Century Marred by struggles between countries espousing the socialist Marxist approach and those following a democratic capitalist approach to economic development. Marshall Plan Move toward international cooperation among trading nations was manifest in the negotiation of the General Agreement on Tariffs an Trade, (GATT).

  6. World Trade and Australian Economic Growth Period following Second World War provided economic growth driven by expansive immigration policy Growth in demand for goods Growth in demand for manufacturing Growth fueled by: Increased investment from abroad Government policy of import replacement

  7. Australian Economic Growth, 1828 - 2000

  8. The First Decade of the Twenty-First Century and Beyond The Organisation for Economic Cooperation and Development (OECD) estimates that the economies of member countries will expand an average of 3% annually for the next 25 years. The economies of the developing world will grow at faster rates from an annual rate of 4% in the past quarter century to a rate of 6% for the next 25 years. The level of intensity of competition will change as companies focus on gaining entry or maintaining their position in: Emerging markets Regional Trade Areas Established markets in Europe, Japan, and the U.S.

  9. Balance of Payments Transactions recorded yearly. Must always be in balance. A record of condition, not determinant of condition. A Balance of Payments statement includes three accounts: Current account Capital account Reserves account Balance of Payments is the system of accounts that records a nation’s international finance transactions.

  10. Australian Current Account by Major Components, 2006 ($ millions)

  11. Australian Current Account Balance (% of GDP)

  12. Exchange Rates: Australian Dollar Against Other Major Currencies

  13. Australia’s Balance of Merchandise Trade with Key Trading Partners

  14. Protectionism: Logic and Illogic Arguments concerning protectionism on trade: Protection of infant industry Protection of the home market Need to keep money at home Encouragement of capital accumulation Maintenance of the standard of living and real wages Conservation of natural resources Industrialisation of a low-wage nation Maintenance of employment and reduction of unemployment National defence Increase of business size Retaliation and bargaining

  15. Trade Barriers Trade barriers are used to encourage and protect existing domestic industry Tariffs Increase Weaken Restrict Quotas Voluntary Export Restraints (VERs) or Orderly Market Agreements (OMAs) Boycotts and Embargoes

  16. Trade Barriers (cont.) • Monetary Barriers • Blocked currency • Differential exchange rate • Government approval • Standards • Anti-dumping Penalties

  17. General Agreement on Tariffs and Trade Paved the way for the first effective worldwide tariff agreement. Basic Elements of the GATT: Trade shall be conducted on a non-discriminatory basis. Protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas. Consultation shall be the primary method used to solve global trade problems. Eliminating barriers to international trade (Uruguay Round): The General Agreement on Trade in Services (GATS) Trade-Related Investment Measures (TRIMs) Trade-Related Aspects of Intellectual Property Rights (TRIPs)

  18. World Trade Organisation An institution, not an agreement as was GATT. Sets many rules governing trade between its 148 members. Provides a panel experts to hear and rule on trade disputes between members. Issues binding decisions. All member countries have equal representation. For the first time, all member countries undertake obligations to open their markets and to be bound by the rules of the multilateral trading system. Offers a framework for continuous discussion and resolution of issues that hamper trade. Trouble with ratification: Japan US EU Skirting the Spirit of GATT and WTO.

  19. The International Monetary Fund Created to assist nations in becoming and remaining economically viable. Objectives of the IMF: Stabilisation of foreign exchange rates. Establishment of freely convertible currencies to facilitate the expansion and balanced growth of international trade. Special Drawing Rights (SDRs) “paper gold” Role of IMF in Asian Financial Crisis (1997)

  20. The World Bank Group Institution that has as its goal the reduction of poverty and the improvement of living standards by promoting sustainable growth and investment in people. The World Bank has five institutions each of which performs the following services: Lending money to the government of developing countries. Providing assistance to governments for developmental projects to the poorest developing countries. Lending directly to the private sector. Providing investors with investment guarantees against “non-commercial risk.” Promoting increased flows of international investment.

  21. Protests against Global Institutions The basic complaint against the WTO, IMF and others is the amalgam of unintended consequences of globalising: Environmental concerns Worker exploitation and domestic job losses Cultural extinction Higher oil prices Diminished sovereignty of nations “Anti-sweatshop” campaigns

  22. Summary The benefits from absolute or comparative advantage clearly can accrue to any nation. Increased pressure for protectionism from every region of the globe. The consumer seldom benefits from such protection. Free international markets help underdeveloped countries become self-sufficient. Freer trade will always be partially threatened by various governmental and market barriers that exist or are created for the protection of local businesses. The future of open global markets lies with the controlled and equitable reduction of trade barriers.

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