Professional Documents
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International Trade Theories and Trade Blocs
International Trade Theories and Trade Blocs
Popular Sayings
"When America sneezed, Japan and Europe used to catch a cold "No nation is immune to economic events that occur in far away places "Surely there is no closed economy in the real-world, except the world economy!"
Examples
"As Toyotas flooded the US market, producers in the US faced a hard choice: to either trim their budgets or close their doors. Many workers lost their jobs, and louder and louder calls for 'protection from ruinous foreign competition' were heard. As a result, the country that championed free trade in the world economy had second thoughts about the benefits of free trade.
And how about the impact of China and India in many industries today!
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Surges of trade bloc formation were seen in the 1960s and 1970s, as well as in the 1990s after the collapse of Communism. By 1997, more than 50% of all world commerce was conducted under regional trade blocs.[2]
Economic and Monetary Union (CSME/EC$, EU/) Economic union (CSME, EU) Customs and Monetary Union (CEMAC/franc, UEMOA/franc) Common market (EEA, EFTA, CES) Customs Union (CAN, CUBKR, EAC, EUCU, MERCOSUR, SACU)
Multilateral Free Trade Area (AFTA, CEFTA, CISFTA, COMESA,GAFTA, GCC, NAFTA, SAFTA, SICA, T PP)
Economic and Monetary Union Economic union Customs and Monetary Union Common market Customs Union Multilateral Free Trade Area
TRADE BLOCS
Trade Bloc
A trade bloc is a large free trade area formed by one or more tax, tariff and trade agreements. Typically trade pacts that define such a bloc specify formal adjudication bodies, e.g. NAFTA trade panels. This may include even a more democratic and participative system, as the EU. A trade bloc is established through a trade pact (or pacts) covering different issues of the economic integration.
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Description
The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. In terms of population, its sphere of influence is the largest of any regional organization: almost 1.5 billion people, the combined population of its member states. It was established on December 8, 1985 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the Association's 14th summit, Afghanistan became its eighth member.
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MEMBERS
Headquarters Kathmandu, Nepal Membership 8 member states,6 observers
Islamic Republic of Afghanistan Kingdom of Bhutan Republic of India Republic of Maldives State of Nepal Islamic Republic of Pakistan People's Republic of Bangladesh Democratic Socialist Republic of Sri Lanka
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OBJECTIVES
To promote the welfare of the people of South-Asia and to improve their quality of life. To accelerate economic growth. To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields. To promote and strengthen collective self-reliance among the countries of South Asia. To contribute to mutual trust, understanding and appreciation of one anothers problems
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History
In the late 1970s, Bangladesh's president Ziaur Rahman proposed the creation of a trade bloc consisting of South Asian countries. The Bangladeshi proposal was accepted by India, Pakistan and Sri Lanka during a meeting held in Colombo in 1981. In August 1983, the leaders adopted thehich was held in New Delhi. The seven South Asian countries, which also included Nepal, Maldives and Bhutan, agreed on five areas of cooperation: Agriculture and Rural Development Telecommunications, Science, Technology and Meteorology Health and Population Activities Transport Human Resource Development
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In 1993, SAARC countries signed an agreement to gradually lower tariffs within the region, in Dhaka. Nine years later, at the 12th SAARC Summit at Islamabad, SAARC countries devised the South Asia Free Trade Agreement (SAFTA) which created a framework for the establishment of a free trade area covering 1.4 billion people. This agreement went into force on July 1, 2006. Under this agreement, SAARC members will bring their duties down to 20 per cent by 2007.
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Political Issues
SAARC has intentionally laid more stress on "core issues" mentioned before rather than more decisive political issues like;
the Kashmir dispute, between India and Pakistan the Sri Lankan civil war.
However, political dialogue is often conducted on the margins of SAARC meetings. SAARC has also refrained itself from interfering in the internal matters of its member states. During the 12th and 13th SAARC summits, extreme emphasis was laid upon greater cooperation between the SAARC members to fight terrorism.
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Ineffectiveness
SAARC's
inability to play a crucial role in integrating South Asia is often credited to the political and military rivalry between India and Pakistan. It is due to these economic, political, and territorial disputes that South Asian nations have not been able to harness the benefits of a unified economy.
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Dhaka 2005
The
summit accorded observer status to People's Republic of China, Japan, South Korea and United States of America. The nations also agreed to organize development funds under a single financial institution with a permanent secretariat, that would cover all SAARC programs ranging from social, to infrastructure, to economic ones.
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DESCRIPTION
The ASEAN bloc was established on August 8, 1967, when foreign ministers of five countries Indonesia, Malaysia, the Philippines, Singapore, and Thailand met at the Thai Department of Foreign Affairs building in Bangkok and signed the ASEAN Declaration, commonly known as the Bangkok Declaration. It is an Association for Regional Cooperation among the Countries of Southeast Asia.
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Indonesia
Malaysia
Phillipines
Singapore
Thailand
OBJECTIVES
To accelerate economic growth, social progress and cultural development in the region Preferential trading including reduced tariffs and non-tariff barriers Guaranteed member access to the markets throughout the region Harmonized Investment Incentives To promote regional peace and stability through abiding respect for justice and the rule of law
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A forum for ASEAN plus China, Japan and South Korea primarily to deal with the trade and monetary issues facing Asia.
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CARICOM
was established by the Treaty of Chaguaramas on 1st August 1973 and the four signatories were Barbados, Jamaica, Guyana and Trinidad and Tobago. CARICOM has 15 full members, five associate members and seven observers.
Currently
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STRUCTURE
CARICOM has organised itself into a state like Government structure made up of the following branches: The Executive, The Legislation and The Judiciary The goal of the Secretariat is To provide dynamic leadership and service, in partnership with Community institutions and Groups, toward the attainment of a viable, internationally competitive and sustainable Community, with improved quality of life for all."
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The CSME is an integrated development strategy (July 1989) has three key Features: 1. Deepening economic integration by advancing beyond a common market towards a Single Market and Economy.
2.
Widening the membership and thereby expanding the economic mass of the Caribbean Community.
3.
Progressive insertion of the region into the global trading and economic system by strengthening trading links with non-traditional partners
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Trade in goods: All goods which meet the CARICOM rules of origin are traded throughout without restrictions. Caribbean Regional Organization on Standards and Quality (CROSQ): Responsible for establishing regional standards in the manufacture and trade of goods which all Member States must adhere to. Trade in Services and The Right of Establishment: The main objective is to facilitate trade and investment in the services sectors of CSME Member States through the establishment of economic enterprises and CARICOM service providers will be able to offer their services throughout the region
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COUNCIL MEMBERS
The United Arab Emirates The State of Bahrain The Kingdom of Saudi Arabia The Sultanate of Oman The State of Qatar The State of Kuwait
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OBJECTIVES
The basic objectives of the Cooperation Council are: To effect coordination, integration and inter-connection between Member States in all fields. Strengthening ties between their peoples. Formulating similar regulations in various fields such as economy, finance, trade, customs, tourism, legislation & administration.
Fostering scientific and technical progress in industry, mining, agriculture, water and animal resources.
Establishing scientific research centers, setting up joint ventures, and encouraging cooperation of the private sector.
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Participating Nations
Australia, Cook Islands, Fiji, Kiribati, New Zealand, Niue, Papua New Guinea, Solomon Islands, Tonga, Tuvalu, Western Samoa
Notes
A PARTA would represent a market of almost 29 million and a total GDP of US $657.7 billion (of which Australia and New Zealand account for US $640 billion).
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It is expected that the free trade area across the Forum Island Countries will be complete in coming years. The most contentious issue amongst Forum Island Countries, and therefore, obstacle to a RTA is how to include Australia and New Zealand in a reciprocal Free Trade Agreement without disadvantaging the smaller Pacific Island economies.
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European Union
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The European Union has gone through many incarnations since its origins fifty-plus years ago.
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*1952: The basis of the EU began with the signing of the Treaty of
Paris, establishing the European Coal and Steel Community (ECSC), to regulate European industry & improve commerce, post WWII. * The six founding states were Belgium, France, Germany, Italy, Luxembourg, and The Netherlands. *1957: the Treaties of Rome were signed by the six member states, forming:
-The European Economic Community (EEC) -The European Atomic Energy Community (Euroatom)
The EU is a unique, treaty-based institutional framework defining and managing economic and political cooperation among its 27 member states
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1967: ECSC, EEC, and EuroAtom merged to form the basis of the EC.
1973: the United Kingdom, Denmark, and Ireland joined the EC. 1981: Greece joined. 1986: Spain and Portugal joined. 1995: Finland, Sweden, and Austria joined.
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Goals of the EC
To continue to improve Europes economy by regulating trade and commerce. To form a single market for Europe's economic resources. As these goals were accomplished, other goals were developed:
1992: the Maastricht Treaty was ratified, which re chartered the EC as the European Union.
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Basis of the EU
The European Union is based on the rule of law and democracy. It is neither a new State replacing existing ones nor is it comparable to other international organisations. Its Member States delegate sovereignty to common institutions representing the interests of the Union as a whole on questions of joint interest. All decisions and procedures are derived from the basic treaties ratified by the Member States.
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Establish European Citizenship Ensure freedom, security, and justice Promote economic and social progress Assert Europes role in the world
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THE EURO
The euro Europe's new single currency - represents the consolidation and culmination of European economic integration. Its introduction on January 1, 1999, marked the final phase of Economic and Monetary Union (EMU), a three-stage process that was launched in 1990 as EU member states prepared for the 1992 single market.
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IMF
185 member countries. Established in 1944 to promote
international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment
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To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
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To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
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To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. In accordance with the above, to shorten the duration and lessen the degree of dis-equilibrium in the international balances of payments of members
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Surveillance
overseeing the international monetary system and monitoring the economic and financial policies of its 185 member countries provide an expert assessment of economic and financial developments, both globally and in individual countries. It advises on risks to stability and growth and guides the countries if policy adjustments are warranted.
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countries' policies promote external stability what is and is not acceptable to the international community in terms of how countries run their exchange rate policies that surveillance is a collaborative, candid, and evenhanded process between the Fund and its members
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Lending
enables countries to rebuild their international reserves; stabilize their currencies; continue paying for imports; and restore conditions for strong economic growth.
Unlike development banks, the IMF does not lend for specific projects.
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IMF Lending
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IMF Lending
Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF). The interest rate levied on PRGF and ESF loans is only 0.5 percent, and loans are to be repaid over a period of 5-10 years. Stand-By Arrangements (SBA). For short-term balance of payments problems. The length of a SBA is typically 12-24 months, Extended Fund Facility (EFF). This facility was established in 1974 to help countries address longer-term balance of payments problems. Repayment within 4-7 years.
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IMF lending
Supplemental Reserve Facility (SRF). From 1997 to meet a need for very short-term financing on a large scale. The motivation for the SRF was the sudden loss of market confidence experienced by emerging market economies in the 1990s, which led to massive outflows of capital and required financing on a much larger scale than the IMF had previously provided. Repay within 2-2 years, but may request an extension of up to six months. All SRF loans carry a substantial surcharge of 3-5 percentage points.
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IMF lending
Compensatory Financing Facility (CFF). Assist countries experiencing either a sudden shortfall in export earnings or an increase in the cost of cereal imports, often caused by fluctuating world commodity prices. Emergency assistance. The IMF provides emergency assistance to countries that have experienced a natural disaster or are emerging from conflict. Emergency loans are subject to the basic rate of charge, although interest subsidies are available for PRGF-eligible countries, subject to availability. Loans must be repaid within 3-5 years.
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Technical Assistance
IMF technical assistance supports the development of the productive resources of member countries by helping them to effectively manage their economic policy and financial affairs. The IMF helps these countries to strengthen their capacity in both human and institutional resources, and to design appropriate macroeconomic, financial, and structural policies
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IMF Quotas
Quota subscriptions generate most of the IMFs financial resources. Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy.
A members quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing.
Quotas are denominated in Special Drawing Rights (SDRs), the IMF's unit of account.
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Tranches
Gold
Financial Assets
Foreign Currency
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Calculating SDR
The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling). The SDR currency value is calculated daily and the valuation basket is reviewed and adjusted every five years.
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World Bank
A group of 5 Institutions
Its five agencies are: International Bank for Reconstruction and Development (IBRD)
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The World Bank (IBRD and IDA), IFC, and MIGA work together and complement each others activities to achieve their shared goals of reducing poverty and improving lives.
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The World Bank Group, among the worlds largest development institutions, is a major source of financial and technical assistance to developing countries around the world.
The World Bank Group advances ideas about international projects on trade, finance, health, poverty, education, infrastructure, governance, climate change, and more to benefit the poor seeking new opportunities.
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Absolute Advantage Comparative Advantage Factor price equalization Life cycle Theory New Trade Theory National Competitive Advantage theory
No nation was ever ruined by trade.
Benjamin Franklin
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Absolute Advantage
One country is said to have an absolute advantage over another country in the production of a particular good if it can produce that good using smaller quantities of resources. Eg: England produces Textiles; France Wine
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What if one trading nation has absolute advantage in both & the other has in neither Still, trade is possible according to the Comparative Cost theory by Ricardo The weaker nation would specialize production of that good where the disadvantage is lower
Post-trade, the weaker nation would improve efficiency due to economies of scale
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Comparative Advantage
One country is said to have a comparative advantage over another country in the production of a particular good if it produces that good with lower opportunity costs. Two countries can mutually benefit from trade even if one country is at an absolute advantage relative to another country in the production of every good.
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When countries differ in relative labor productivity (comparative advantage), Each country can increase its welfare by Specializing in production of those goods for which it has a comparative advantage
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Heckscher-Ohlin Theory
Comparative advantage arises from the differences in Factor endowments The abundance of factor makes its cost low Hence a country exports those goods that make intensive use of factor that is abundantly present It imports goods that require intensive use of factors that are locally scarce. US exports capital-intensive goods China exports labor-intensive
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US dominance (1945-75) in new product innovations New Products developed and sold in local market and also exported. Demand for export increases and production facilities shift to other countries
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Based on economies of scale that helps in unit cost reduction World market may be able to support only limited number of firms that enter first gain advantage Aerospace example Boeing and Airbus Dominance of US and Europe. China is a recent example.
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Fixed costs $ 50 mln ($5 bln/100) Variable costs $ 80 mln, Total cost $ 130 mln If we increase to 500 FC will come down to $10 mln and total cost to $90 mln (10+80) Economies of scale, learning effects
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Porters Diamond
Factor endowments Demand conditions Related and supporting industries Firm strategy, Structure and Rivalry
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Trade Barriers
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Importing countries can reduce trade by setting tariffs or quotas. Tariff = tax on imports Quota = ceiling on the volume of imports
Both tariffs and quotas raise the price of imports reduce the quantity of imports
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