International Trade Theories and Trade Blocs

The World After 2nd World War

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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Time Line of Economic Interdependence

1910s to 40s Two World Wars and One Great Depression

1944 Emergence of US as world power. IMF, World Bank.

1950-European Community (now EU) 1960s -Rise in importance of MNCs 1970s- Market power enjoyed by the OPEC 1990s & 21st Century- Disintegration of USSR and Global economic interdependence became more sophisticated 1948 GATT to 1995 WTO Advocated free trade to solve economic crises-LDCs, and DCs

New World Order 21st Century

About Trade Blocs

One of the first economic blocs was the German Customs Union (Zollverein) initiated in 1834, formed on the basis of the German Confederation and subsequently German Empire from 1871.

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]

Stages of economic integration around the World:

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

Regional Trade Blocs

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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Free Trade Agreements

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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ORIGINAL MEMBERS (1967)

Indonesia

Malaysia

Phillipines

Singapore

Thailand

Brunei Darussalam (January 1984)

Vietnam (July 1995)

Myanmar (July 1997 )

Cambodia (April 1999 )

Lao PDR (July 1997 )

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FACTS AND FIGURES

Population - 500 million

Total Area - 4.5 million square kilometers

Combined Gross Domestic Product - US$ 700 billion

Total Trade - US$ 850 billion (approx

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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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ASEAN Free Trade Area

Agreement by the member nations of ASEAN

concerning local manufacturing in all ASEAN countries

Signed on January 28, 1992 in Singapore

Elimination of tariff and non-tariff barriers among member countries

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ASEAN Plus Three

A forum for ASEAN plus China, Japan and South Korea primarily to deal with the trade and monetary issues facing Asia.

Meetings held during each ASEAN Summit

May lead to a common market, single currency and even a new Bloc comprising of Northeast and Southeast Asia.
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ESTABLISHMENT AND MEMBERS

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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CARICOM Single Market and Economy (CSME)

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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Work Permits and the Free Movement of People:

The Caribbean Community (CARICOM) Free Movement of Persons Act, provides for the free movement of certain categories of skilled labour, (by applying for Skills Certificates) Harmonization of Legislation: Harmonized regimes for Anti-dumping and countervailing measures, Banking and securities, Consumer protection, Customs, Intellectual property rights etc. Free Movement of Capital and Single Currency: The free movement of Capital involves the elimination of the various restrictions such as foreign exchange controls and allowing for the convertibility of currencies or a single currency and capital market integration via a regional stock exchange.

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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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PARTA- Pacific Regional Trade Association.

Trade Agreement Type

Plurilateral Free Trade Agreement

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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A BRIEF HISTORY OF THE EU

The European Union has gone through many incarnations since its origins fifty-plus years ago.

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European Coal and Steel Community

*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)

* These units worked concurrently with the ECSC.

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Regional Integration (Theory)

From Free Trade Area: the elimination of tariffs for goods and services within region (NAFTA) Via Customs Union: an FTA with a common external tariff (EEC) To Single Market / Economic Union: Eliminating all tariff and non-tariff barriers Freedom of goods, services, labor and capital Harmonization of regulation May also have common currency (euro) To Political Union? Common Political Institutions / Constitution
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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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The European Community

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:

Environmental movements Regulatory acts Human rights concerns.

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THE EUROPEAN UNION

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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Principal Objects of the EU

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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International Monetary Fund

Why was it created?

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.
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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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Growth in IMF Membership, 1945 - 2005 (number of countries)

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The purposes of the International Monetary Fund

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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The purposes of the International Monetary Fund

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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The purposes of the International Monetary Fund

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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What the IMF Does?

Surveillance lending technical assistance

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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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The 2007 Decision on Bilateral Surveillance

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

provide loans to countries experiencing balance of payments problems.

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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Special Drawing Rights

The SDR is an international reserve asset, created in 1969 SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

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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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Fast Facts on the IMF

Current membership: 185 countries

Staff: approximately 2,635 from 143 countries

Total Quotas: $338 billion (as of 9/30/07) Loans outstanding: $17 billion to 68 countries, of which $6 billion to 57 on concessional terms (as of 9/30/07) Technical Assistance provided: 438.4 person years during FY2007 Surveillance consultations concluded: 134 countries during FY2007, of which 125 voluntarily published information on their consultation.
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World Bank

A group of 5 Institutions
Its five agencies are: International Bank for Reconstruction and Development (IBRD)

International Development Association (IDA)

International Finance Corporation (IFC)

Multilateral Investment Guarantee Agency (MIGA)

International Center for Settlement of Investment Disputes (ICSID)

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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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Theories of International Trade

Theories of International Trade

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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Limitation of the Absolute Advantage Theory

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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Ricardian Law of Comparative Advantage

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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The Product Life-Cycle Theory

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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The New Trade Theory

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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The New Trade Theory

Developing cost $ 5 bln For producing 100 aircrafts

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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National Competitive Advantage Theory

Porters Diamond

Factor endowments Demand conditions Related and supporting industries Firm strategy, Structure and Rivalry

Implications for business

Locational First mover Policy implications

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INTERNATIONAL TRADE POLICY

Free Trade Versus Protectionism Trade Barriers: Tariffs,Subsidies and Quotas

Other Commercial Policies

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From positive economics to normative economics

Trade Barriers

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Tariffs and Quotas

Importing countries can reduce trade by setting tariffs or quotas. Tariff = tax on imports Quota = ceiling on the volume of imports

How Tariffs and Quotas Work

Both tariffs and quotas raise the price of imports reduce the quantity of imports

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Most Common Trade Barriers

Trade barriers -obstacles to trade- take many forms, three most common ones are: 1)Tariffs: import duty (a tax on imports) -Can also be an export duty, but that is less common. 2) Export Subsidies: Government payments made to domestic firm to encourage exports Closely related to subsidies is the practice of dumping Dumping takes place when a firm or an industry sells products on the world market at price below the cost of production

3) Quotas and Voluntary Export Restraints (VERs):

A limit on the quantity of import can be mandatory or voluntary, and can be legislated or negotiated with foreign governments

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