PART 1 : Trade Theory

1.
1.1 Why do Nations Trade ? What are some of the major argument for and against
a Free Trade ? What are the Consequences (Benefits and Costs) of Free Trade
(Present: at Individual/Firms/Nation)?
 Nation Trade because:
Adam Smith detailed the benefits of specialization and division of labor in his book The
Wealth of Nations. Each worker could become an expert in a small area, greatly
increasing efficiency
- Differences in the technology used in each country (i.e., differences in each
country’s ability to manufacture products): The quality of goods and services is likely
to increases as competition encourages innovation, design and the application of new
technologies. Trade will also encourage the transfer of technology between countries.
- Differences in the total amount of resources (including labor, capital, and land) found
in each country :
Division of labour:
+ A division of labour means breaking down production into small, interconnected
tasks, and then allocating these tasks to different workers based on their suitability to
undertake the task efficiently. When applied internationally, a division of labour
means that countries produce just a small range of goods or services, and may
contribute only a small part to finished products sold in global markets.
Capital
Trade increases competition and lowers world prices, which provides benefits to
consumers by raising the purchasing power of their own income, and leads a rise in
consumer surplus
Trade also breaks down domestic monopolies, which face competition from more
efficient foreign firms
- The proximity of countries to each other (i.e., how close they are to one another)
- Specialize in the manufacture and export of products can be produced most
efficiently in that country : The exploitation of a country's comparative advantage,
which means that trade encourages a country to specialise in producing only those
goods and services which it can produce more effectively and efficiently, and at the
lowest opportunity cost.
Producing a narrow range of goods and services for the domestic and export market
means that a country can produce in at higher volumes, which provides further cost
benefits in terms of economies of scale.
- Import products can be produced more efficiently in other countries.
- Trade is also likely to increase employment, given that employment is closely related
to production. Trade means that more will be employed in the export sector and,
through the multiplier process, more jobs will be created across the whole economy.
 The major argument for Free Trade
- 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.This will lead to an optimum and efficient utilization of resources and,
hence, economy in production.
 - Free trade can raise aggregate economic efficiency and aggregate economic
welfare.
- Because of unrestricted trade, global output increases since specialization,
efficiency, etc., make production large scale. Free trade enables countries to
obtain goods at a cheaper price. This leads to a rise in the standard of living of
people of the world. Thus, free trade leads to higher production, higher
consumption and higher all-round international prosperity.
- Free trade will benefit a country even if it is less efficient than all other countries
in every industry
- Accessibility of Domestically Produced Goods and Services: Free trade enables
each country to get commodities which it cannot produce at all or can only
produce inefficiently. Commodities and raw materials unavailable domestically
can be procured through free movement even at a low price.
- Free trade would cause world resources to be utilized most efficiently,
maximizing world welfare.
- Import products can be produced more efficiently in other countries
- Competitive Spirit: Free Trade keeps the spirit of competition of the economy.
As there exists the possibility of intense foreign competition under free trade,
domestic producers do not want to lose their grounds. Competition enhances
efficiency. Moreover, it tends to prevent domestic monopolies and free the
consumers from exploitation
- Greater International Cooperation: Free trade safeguards against discrimination.
Under free trade, there- is no scope for cornering raw materials or commodities
by any country. Free trade can thus promote international peace and stability
through economic and political cooperation.
- Free from Interference: Free trade is free from bureaucratic interferences.
Bureaucracy and corruption are very much associated with unrestricted trade.
 The major argument Against Free Trade (Protectionism):
- Governments do restrict free international trade in order to protect domestic
industries from foreign competition. The restriction of international trade is
called protectionism.
- Supporters of "protectionist" laws claim that keeping out foreign goods will
+ Save jobs
+ Give ailing domestic industries a chance to recover and prosper
+ Reduce the trade deficits
+ More growth opportunities: Protectionism provides local industries with
growth opportunities until they can compete against more experienced firms in
the international market
+ Lower imports: Protectionist policies help reduce import levels and allow the
country to increase its trade balance.
+ More jobs: Higher employment rates result when domestic firms boost their
workforce
+ Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a
rise in domestic production
+Protectionism can also prevent dumping
+Protectionism makes domestic firms less competitive in the export market
 +Protectionism could improve a nations economic well-being is when a country
has monopoly power over a goods.
+Protectionism permits the new and upcoming firms to work and develop at an
aceptable rate. Because they will not be pressured by foreign, more experienced
firms
 Benefits of International Trade ( Give more examples)

Individuals
- Consumption of better quality products with lower prices : International trade
enables a country to consume things which either cannot be produced within its
borders or production may cost very high.Therefore it becomes cost cheaper to
import from other countries throgh foreign trade
- Consumption of diverse products : Imports and exports of different countries
provides opportunities to the consumer to buy and consume those goods which
can not be produced in their own country . They therefor get a diversity in choice
Firms
- Greater business opportunities
- Greater profit
Nation
- Fast economic growth
- Job creation
 Costs of International Trade

Individuals
- Loss of jbs employed in the less competitive industries
Firms
- Face stronger competition and may lose competitive edge : Increased competition
With more trade, domestic firms will face more competition from abroad.
Therefore, there will be more incentives to cut costs and increase efficiency. It
may prevent domestic monopolies from charging too high prices.
Nation
- Greater income disparity
- Possibility of environmental degradation in developing countries : International
trade help a country to utilize its resources to the maximum limit . If the country
does not takes up import and exports then its resources remain unexplored . Thus
it helps to eliminate thw wastage of resources
- Greater vulnerability to foreign shocks
OR

 Benefits of International Trade

- High prices for exports and lower prices for imports is a net gain for a
country. Efficient allocation of resources is a result of such exchanges. There’s
an increase in overall welfare because of the larger bundle of goods from such
affiance.
- Trade liberalization increases real GDP. Efficient allocation of resources has a
positive influence on GDP. International trade offers the exchange of ideas and
technical flow of expertise.
 - Development of high quality and more effective institution’s policies
encourages domestic innovations. Domestic productivity benefits from foreign
development and researchers.
- Global competition motivates companies to become more efficient because
they face an open field. Multinationals also operate on a larger scale leading to
cost savings.
- Consumers access a variety of goods and services at lower prices. Hence,
living standards of people improve. The absence of restrictions and tariffs enable
production and shipment; hence, ensuring availability of goods and services.
- An increase in competition leads to a fall in monopoly power. Thus, the
market becomes more efficient.
- Trade encourages efficiency. Through specialization, countries have to
concentrate on producing more of the goods they could produce very well over
goods they cannot produce with efficiency.
 Costs of International Trade
- Loss of jobs and inequality in income caused by competition. As states
concentrate on free trade, the domestic industries adjust to this change. As a
result, they exist as the main exporters. However, the same exporters face import
competition.
- Less efficient firms exit the market. Reason being resources are re-allocated
according to whether the firm is growing or contracting. As firms close, some
countries can be at a loss at the expense of other countries.
- An increase in imports causes domestic industries to compete with imports.
Technology and capital might not be as developed in some countries. As such,
they cannot compete with developed countries in some industries.

2. What were the Mercantilists view on Trade ? What are the new contribution of
Mercantilist’s views on Trade ? What is the weak point of Mercantilist’s ? Discuss?
 The Mercantilists view on trade:
- Mercantilism is an economic theory that advocates government regulation of
international trade to generate wealth and strengthen national power. Merchants and the
Government work together to reduce the trade deficit and create a surplus. It funds
corporate, military, and national growth. Mercantilism is a form of economic
nationalism.It advocates trade policies that protect domestic industries
- Export surpluses brought inflow of gold and silver.
- Trade policy was to encourage exports and restrict imports.
- One nation gained only at the expense of another.
 Mercantilism suggests that it is in a country’s best interest to maintain a trade
surplus – to export more than it imports. To ensure that a country exported a lot
and imported only a little, the Mercantilists were in favor of high tariffs.
Mercantilism advocates government intervention to achieve a surplus in the
balance of trade
 The new contribution of Mercantilist’s views on Trade
- To recognize the importance of International Trade.
- Mercantilism suggests that countries | government should design policies that lead to
an increase in their holdings of gold and silver.
- This was usually done by increasing exports and limiting imports. This economic
philosophy was used by Europeans from about the 1500s to the late 1700s.
 - To ensure that a country exported a lot and imported only a little, the mercantilists
were in favor of high tariffs. Mercantilism advocates government intervention to
achieve a surplus in the balance of trade
 The weak point of Mercantilist’s
- The key problem with the mercantilist view is that it views trade as a zero sum game,
where if one country benefits the other must lose. As an economic philosophy,
Mercantilism is flawed. Mercantilism weakens country in long run; enriches only a
few
- In 1770s, Adam Smith argued that import restrictions would reduce the gains from
specialization and make a nation poorer. He used absolute advantage to explain the
benefits of trade.
- It creates high levels of resentment.
Trickle-down economics works on paper. It just doesn’t work well in real life thanks
to the inherent greed that so many people have. Why give others money when you
can keep it for yourself? The rich tend to get richer in a system of mercantilism and
the working class gets to be stagnant at best. Eventually this creates resentment,
which leads to rebellion, and ultimately it led to many colonies seeking out their own
independence.
- It creates a preference for the mother nation to always be first.
Many colonies are also treated as a foreign nation in a system of mercantilism. This
means the colonies are forced to sell their local raw materials for a bargain basement
price and then be forced to purchase manufactured goods at a higher price than
necessary. This creates an even wider wealth gap between the different income
classes.
- There is always a risk of local raw materials and resources running out.
Because mercantilism is based on the complete use of natural resources, there will
always be a day when those resources run out. Natural resources are finite in nature,
so even if there is an extensive reserve in place that can be accessed, that reserve will
one day run out. If that happens sooner rather than later, then the entire economy can
collapse.
- The system is ultimately quite inefficient.
Because materials and goods are shipped back and forth between colonies and their
mother nation, the price of goods is inflated more than it needs to be. Even with
modern shipping methods, it costs less to manufacture goods locally where raw
resources are available than it does to ship those items back and forth. Because of
this, it also creates vulnerabilities in both economies should those shipments be
intercepted by someone else.
3. How were the Adams Smith (Theory of absolute advantage’s ) views on trade ? How
were gains from trade generated ? What policies did Adam Smith advocate in
International Trade ? What did he think was the proper function of government in the
economic life of the Nation?
 Adams Smith (Theory of absolute advantage’s ) views on trade
- "It is the maxim of every prudent master of a family, never to attempt to make at
home what it will cost him more to make than to buy.” (Adam Smith)
- Specialization and trade among regions and countries are based upon the same
principle as among individuals.
- 1776 Adam Smith, The Wealth of Nation
 + Word’s wealth is not a fixed quantity
+ International trade
 Increase the general level of productivity within a country
 Increase world output (wealth)
- Adam Smith argued that a country has an absolute advantage in the production of a
product when it is more efficient than any other country in producing it
- According to Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these goods for the goods produced
by other countries
 Gains from trade generated
- In 1770s, Adam Smith argued that import restrictions would reduce the gains from
specialization and make a nation poorer. He used absolute advantage to explain the
benefits of trade. Adam Smith argued that a country has an absolute advantage in the
production of a product when it is more efficient than any other country in producing
it
- When one nation has absolute advantage in production of a commodity, but an
absolute disadvantage with respect to the other nation in a second commodity, both
nations can gain by specializing in their absolute advantage good and exchanging
part of the output for the commodity of its absolute disadvantage.
 Policies Adam Smith advocate in International Trade
- According to Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these goods for the goods produced
by other countries
- Specialization and trade advantage both countries.
- Adam Smith and other classical economists advocated policy of laissez-faire, or
minimal government interference with economic activity.
- Free trade would cause world resources to be utilized most efficiently, maximizing
world welfare.
 The function of government in the economic life of the Nation
- As one might expect from Smith’s conviction that markets were extremely efficient,
he was in favor of a government that did not hamper the working of the market
- However, Smith emphasized the fact that the government should
+ Maintain law and order
+ Ensure the defense of the nation from foreign enemies,
+ Erect and maintain public works that private citizens would not build
+ Subsidize education for those who could not afford it, and
+ Regulate international trade when free trade endangers ‘infant industries’ or
compromises national security
4.
4.1 In that way was Ricardo’s law of Comparative Advantage superior to Smith’s
Theory of Absolute Advantage ?( Compare the theory of Absolute Advantage
and Comparative Advantage ?)
4.2 Why this theory is more relevant to the modern trade situation ?
4.3 How do gains from Trade Arise with Comparative Advantage?
4.1 Ricardo’s law of Comparative Advantage superior to Smith’s Theory of
absolute advantage:
 A country has an absolute advantage when it produces a large number of goods with the
same resources that other country are using, on the other hand, the comparative
advantage means producing better quality at cheaper price incurring lower opportunity
cost than the other country.
 The Smith does not take the limitation of production factor into the account while
Ricardo does. According to Smith, a country would produce all the goods in which they
are better performing. They have low absolute cost after having an absolute advantage;
spend fewer factors in making one unit of product, but it cannot be the manufacturing
center of all goods and services. A country cannot outperform in all types of goods and
secondly, it cannot take an advantage of economies of scale which leads to inefficiency if
a country tries to produce all goods and it may lead to an increase in prices.
 Instead, Ricardo focused on the relative cost of production. He emphasized that the
country should produce those goods in which they have comparatively low opportunity
cost than the other countries. A country has to decide what to produce and what to
sacrifice. This gives other countries an opportunity to produce goods efficiently and to
take advantage of economies of scale in which a large number of goods are produced at a
low cost.
Compare the theory of Absolute Advantage and Comparative Advantage:

Comparative Advantage Absolute Advantage

- Even if someone is absolutely -
more productive at 2 activities,
if he is comparatively more
productive at 1 activity than
another relative to a 2nd person,
he will be better off specializing
and trading than producing in
isolation.
- The causes of economic - David Ricardo, by contrast,
progress and the creation of focused on how wealth is
wealth was Adam Smith’s main shared among different
topic of interest groups in society
- According to Smith, the wealth -
of a nation derives from the
level of the technology in use.
- The level of technology and its
rate of improvement depend on
the division of labor.
 Comparative Advantage Absolute Advantage
Definition - Ability of country to - Ability of a country to
produce good better produce more goods
than other country with with same amount of
same amount of resources than other
resources. country.
Benefit - Trade is mutually - Trade is not mutually
beneficial beneficial
- Benefits both the - Beneits the Country
countries with absolute advantage
Cost - Opportunity cost of - Absolute cost of
producing good impact producing goods
the Country’s impacts if the country
comparative advantage has absolute advantage
Economic Nature - It is mutual and - It is not mutual and
reciprocal reciprocal

4.2 This theory is more relevant to the modern trade situation:

 A contemporary example: China’s comparative advantage with the United
States is in the form of cheap labor. Chinese workers produce simple
consumer goods at a much lower opportunity cost. The United States’
comparative advantage is in specialized, capital-intensive labor. American
workers produce sophisticated goods or investment opportunities at lower
opportunity costs. Specializing and trading along these lines benefit each.
 The theory of comparative advantage helps to explain why protectionism is
typically unsuccessful. Adherents to this analytical approach believe that
countries engaged in international trade will have already worked toward
finding partners with comparative advantages.
 If a country removes itself from an international trade agreement, if a
government imposes tariffs, and so on, it may produce a local benefit in the
form of new jobs and industry. However, this is not a long-term solution to a
trade problem. Eventually, that country will be at a disadvantage relative to
its neighbors: countries that were already better able to produce these items
at a lower opportunity cost.
4.3 Gains from Trade with Comparative Advantage:
 Country should specialize in the production of those goods in which it is
relatively more productive... even if it has absolute advantage in all goods it
produces
 Gain from trade depends on the comparative cost conditions. Comparative
cost doctrine suggests that trade can provide benefit to all countries if they
specialise in the production of those goods and, hence, export them in which
they have comparative advantage
 The idea of gains from trade was at the core of the classical theory of
international trade propounded by Adam Smith and David Ricardo.
According to Smith, the gains from trade arise form the advantages of
division of labour and specialisation—both at the national and international
level. Such advantages arise, according to Smith, due to the absolute
 differences in costs. Ricardo goes a step further. He says that trade
contributes “to increase the mass of commodities, and therefore, the sum of
enjoyments…” Ricardo adds that the gain from trade consists in the saving of
cost resulting from obtaining the imported goods through trade instead of
domestic production.
 Ricardo’s comparative cost thesis may be applied to establish the existence
of gains from trade. In other words, gain from trade depends on the
comparative cost conditions. Comparative cost doctrine suggests that trade
can provide benefit to all countries if they specialise in the production of
those goods and, hence, export them in which they have comparative
advantage.
 A country, thus, specialises in production and export in accordance with its
comparative advantage. Ricardo’s trading nations acquire complete
specialisation in production. As a result, global output becomes larger than
under autarky. Trade also enables each country to consume more than under
isolation. Thus, there is a production gain and a consumption gain arising out
of international trade. Such gains cannot be reaped in the absence of trade.

 Principle of comparative advantage: Even if a nation has an absolute cost

disadvantage in the production of both goods
- Even if a nation has an absolute cost disadvantage in the production of both goods
+ The less efficient nation
 Specialize in and export the good in which it is relatively less
inefficient
o Where its absolute disadvantage is least

+ The more efficient nation

 Specialize in and export the good in which it is relatively more
inefficient
o Where its absolute disadvantage is greatest
There are gains from trade for both countries. This is the second lesson of the Ricardian
model.
Countries have comparative advantage in producing different goods and hence they can
get mutual benefits from trade. This is because countries differ from each other. The
more different they are, the larger the (potential) benefits from trade
5. What are the sources of Comparative Advantage ?
 Comparative advantage is a dynamic concept meaning that it can and does change over
time. For a country, the following factors are important in determining the relative unit
costs of production:
 The quantity and quality of factors of production available for example some countries
have an abundant supply of good quality farmland, oil and gas, fossil fuels. Climate and
geography have key roles in creating differences in comparative advantage.
 Different proportions of factors of production – some countries have abundant low-cost
labour suitable for volume production of manufacturing products.
 Increasing returns to scale and the division of labour – increasing returns occur when
output grows more than proportionate to inputs. Rising demand in the markets where
 trade takes place helps to encourage specialisation, higher productivity and internal and
external economies of scale. These long-run scale economies give regions and countries a
significant advantage.
 Investment in research & development which can drive innovation and invention
 Fluctuations in the exchange rate, which then affect the relative prices of exports and
imports and cause changes in demand from domestic and overseas customers.
 Import controls such as tariffs, export subsidies and quotas – these can be used to create
an artificial comparative advantage for a country's domestic producers.
 The non-price competitiveness of producers - covering factors such as the standard of
product design and innovation, product reliability, quality of after-sales support. Many
countries are now building comparative advantage in high-knowledge industries and
specializing in specific knowledge sectors – an example here is the division of knowledge
in the medical industry, some countries specialize in heart surgery, others in
pharmaceuticals.
 Institutions – these are important for comparative advantage and important for growth
too. Banking systems are needed to provide capital for investment and export credits,
legal systems help to enforce contracts, political institutions and the stability of
democracy is a key factor behind decisions about where international capital flows.
6. What is meant by labor-intensive commodity ? Capital-Intensive commodity? What is
meant by Capital-Abundant nation ? Suppose that there: Airplane is Capital-Intensive
commodity and Rice is labor-intensive commodity, and we have 2 nations : France is
rich and Capital-Abundant nation ; Somali is a labor abundant country
 Labor-intensive commodity: The demand for labor relative to capital is assumed to be
higher in shoes than in computers, LS/KS > LC/KC. These two curves slope down just
like regular demand curves, but in this case, they are relative demand curves for labor
(i.e., demand for labor divided by demand for capital
 Capital-Intensive commodity: The term "capital intensive" refers to business processes
or industries that require large amounts of investment to produce a good or service and
thus have a high percentage of fixed assets, such as property, plant, and equipment
(PP&E). Companies in capital-intensive industries are often marked by high levels of
depreciation.
Capital intensive refers to the production that requires higher capital investment such as
financial resources, sophisticated machinery, more automated machines, the latest
equipment, etc. Capital intensive industries pose higher barriers to entry as they require
more investment in equipment and machinery to produce goods and services. An
industry, firm, or business is considered to be capital intensive taking into consideration
the amount of capital that is required in comparison to the amount of labor required.
Good examples of capital intensive industries include the oil refining industry,
telecommunications industry, airline industry, and public transport authorities that
maintain the roads, railways, trains, trams, etc.
 Capital-Abundant nation: The U.S., therefore, is capital abundant and Mexico is labor
abundant. Letting K measure the quantity of capital and L the quantity of labor,
(K/L)US>(K/L)MEX, or the amount of capital per laborer in the U.S. exceeds that of
Mexico. (Verify that it is possible for LUS to be greater than LMEX and
(K/L)US>(K/L)MEX ). Now invert the ratios, which reverses the inequality, so
(L/K)US<(L/K)MEX, which says that Mexico is labor abundant relative to the U.S. If
 one country is capital rich (more capital relative to labor) then the other is labor rich
(more labor relative to capital).
 France vs Somali
- A country has comparative advantage in those commodities that use its abundant
factors intensively
- Factor Endowments:
+ Notation: K=capital, L=labour, r = price of capital, w = price of labour
+ Physical definition: (K/L)1 > (K/L)2  France is capitalabundant (labour-scarce),
Somali is labour-abundant (capital-scarce)
+ Price definition: (r/w)1 < (r/w)2  France is capital-abundant, Somali is labour-
abundant
- In this case, the apparent contradiction of the Heckscher-Ohlin model could be
explained by factor-intensity reversal. In the France , Aviation industry belongs to
TOP most developed industry in France, production utilizes considerable capital and,
thus, many commodities such as airplane are relatively capital-intensive. In
Somali , however, agricultural production uses relatively much more labor than
capital and, in all likelihood, is a labor-intensive product. Since there is considerable
substitutability between capital and labor in the production of, for example, rice, it
would not be surprising to find that rice is a labor-intensive product in a labor-
abundant country such as Somali and capital-intensive in a capital-abundant country
such as the France . Consequently they both end up exporting the product because it
is intensive in their respective abundant factors.

7.
7.1 What can we say from the Trade pattern between two countries ?
 Trade is the exchange of goods and services between countries. Goods bought into a
country are called imports, and those sold to another country are called exports.
Developed countries have a greater share of global trade than developing countries .
 Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries, or which would be more
expensive domestically.
 The importance of international trade was recognized early on by political
economists like Adam Smith and David Ricardo.
 To better understand how modern global trade has evolved, it’s important to
understand how countries traded with one another historically. Over time, economists
have developed theories to explain the mechanisms of global trade. The main
historical theories are called classical and are from the perspective of a country, or
country-based. By the mid-twentieth century, the theories began to shift to explain
trade from a firm, rather than a country, perspective. These theories are referred to as
modern and are firm-based or company-based. Both of these categories, classical and
modern, consist of several international theories.
7.2 What dose Heckscher and Ohlin theory postulate ?
 The Heckscher-Ohlin theory argues that trade occurs due to differences in labor,
labor skills, physical capital, capital, or other factors of production across countries.
- Countries have different relative abundance of factors of production.
- Production processes use factors of production with different relative intensity.
 They wanted to explain this increase in trade during the “golden age” of international
trade.
- Definition: A nation will export the commodity whose production requires the
intensive use of the nation’s relatively abundant and cheap factor and import the
commodity whose production requires the intensive use of the nation’s relatively
scare and expensive factor.
- Or: the relatively labor-rich nation exports the relatively labor-intensive commodity
and imports the relatively capital -intensive commodity.
 Heckscher-Ohlin theorem: An economy has a comparative advantage in producing,
and thus will export, goods that are relatively intensive in using its relatively
abundant factors of production, and will import goods that are relatively intensive in
using its relatively scarce factors of production.
 In summary, the capital-abundant country exports the capital-intensive commodity,
and the labor-abundant country exports the labor-intensive commodity.
PART 2 :
8. What is primary function of tariffs in industrial nations ? What are the advantages and
disadvantages of Ad valorem and Specific Tariff ?
 Tariffs have three primary functions: to serve as a source of revenue, to protect
domestic industries, and to remedy trade distortions (punitive function).
- The revenue function comes from the fact that the income from tariffs provides
governments with a source of funding. In the past, the revenue function was indeed
one of the major reasons for applying tariffs, but economic development and the
creation of systematic domestic tax codes have reduced its importance in the
developed countries. For example, Japan generates about 90 billion yen in tariff
revenue, but this is only 1.7 percent of total tax revenues (fiscal 1996). In some
developing countries, however, revenue may still be an important tariff function.
- Tariffs is also a policy tool to protect domestic industries by changing the conditions
under which goods compete in such a way that competitive imports are placed at a
disadvantage. In some cases, “tariff quotas” are used to strike a balance between
market access and the protection of domestic industry. Tariff quotas work by
assigning low or no duties to imports up to a certain volume and then higher rates to
any imports that exceed that level.
- Punitive tariffs may be used to remedy trade distortions resulting from measures
adopted by other countries.
 The advantages and disadvantages of Ad valorem and Specific Tariff

AD VALOREM SPECIFIC TARIFF

Advantages - Automatic - Predictable. The
adjustment for government revenue
inflation. Since the is therefore
tax is tied to the protected against
product price, the industry price wars
tax automatically or price
adjusts with manipulations. For
inflation. example the
- Higher profit government can
margin is taxed. predict tobacco tax
Ad valorem tax revenue based on
reduces the tobacco demand.
industry profit - Raises all product
margin since a part prices. Since the tax
of any price/profit is applied to all
increase goes to the products at the same
government as tax rate, a higher tax
revenue. usually results in
similar prices
increase across the
board, regardless of
product. Specific
taxes reduce the gap
in prices between
cheap and more
 expensive products.
- Easy to determine
the amount of tax.
- Easier to
administer.
Disadvantages - Less predictable - Inflation erodes its
revenue stream. value. Because the
As ad valorem tax rate is not tied to
taxes are based on the product price, it
value, it is difficult does not
to predict tax automatically adjust
revenue over time with inflation.
- Difficult to Instead, the
determine the government must
amount of tax. periodically
- Leads to large implement
price differences additional rate
between products. increases, or add
Ad valorem into the tax law that
taxation widens the the specific excise
gap in prices tax rate will
between cheap automatically adjust
products and more with inflation.
expensive products. - Can be reduced by
- Difficult to changing products
administer. characteristics.

9. What is meant by the Consumption, Production, Trade, Revenue, and Redistribution

effects of a tariff ?
 Consumption Effect: Imposition of tariff raises the price, and as a result, the demand for
the commodity falls. Total outlay on consumption of the commodity is larger or smaller
depending upon whether demand is inelastic or elastic.
 Production Effect: When a tariff or other price-increasing policy is put in place, the effect
is to increase prices and limit the volume of imports.
 Revenue Effect: Tariff brings revenue to the government. The revenue to the government
is equal to the amount of the import duty multiplied by the quantity of imports.
 Redistribution Effect refers to the transfer of real income from the consumers to the
producers as a result of tariff.
 Trade Effect:
- When a country imposes a tariff duty, its willingness to receive imports is
reduced. For a given quantity of exports, the country now demands a larger
quantity of imports because a part of these imports are to be surrendered to the
customs authorities in the form of tariff payment. Or, putting the same thing
differently, the country is now willing to offer less of exports in exchange for a
given quantity of imports.
- Thus, the tariff reduces the country’s offer of exports for imports. This increases
the country’s terms of trade or the rate at which exports are exchanged for
imports.
10. What is an Import Quota ? How are they similar to and different from the effects of an
equivalent Import Tariff ? How does the revenue effect of an import quota differ from
that of a tariff ?
 Meaning of Import Quotas: A limit on the quantity of imports
- Can be mandatory or voluntary, and can be legislated or negotiated with foreign
governments
- Tariff Rate Quota (TRQ)—allows a certain quantity of a good into a country at
low or zero tariff rate, but applies higher tariff to quantities exceeding the quota.
- The import quota means physical limitation of the quantities of different products
to be imported from foreign countries within a specified period of time, usually
one year. The import quota may be fixed either in terms of quantity or the value
of the product. Can be mandatory or voluntary, and can be legislated or
negotiated with foreign governments.For instance, the government may specify
that 60,000 colour T.V. sets may be imported from Japan. Alternatively, it may
specify that T.V. sets of the value of Rs. 50 crores can be imported from that
country during a given year.
- Tariff rate quotas (TRQs) allow products imported within a certain quota to enter
the European Union's market at a lower tariff rate than for quantities outside the
quotas. They allow more variety to consumers whilst also encouraging non-EU
countries to open up their markets to European goods.
 They similar to and different from the effects of an equivalent import tariff:
Similar
- Firstly, both tariffs and quotas have the same objectives such as reduction in the
volume of imports, protection of home industries, expansion of employment and
economic activities and correction of balance of payments deficit.
- Secondly, a certain rate of tariff causes reduction in the quantity by a specified
extent and, therefore, it has a quota equivalent. The import quota, on the other
hand, while restricting the quantity, causes a rise in import price. It has, therefore,
an import tariff equivalent.
- Thirdly, tariff and quota both have similar price, protection, consumption,
redistribution, welfare, balance of payments and income effects.
Different
- A tariff is a tax on imports. It is normally imposed by the government on the
imports of a particular commodity. On the other hand, quota is a quantity limit. It
restricts imports of commodities physically. It specifies the maximum amount
that can be imported during a given time period.
- The main difference is that quotas restrict quantity while tariff works through
prices. Thus, quota is a quantitative limit through imports.
- A tariff raises revenue for the government, whereas an import quota creates
surplus for those who obtain the licenses to import.The profit for the holder of an
import licenses is the diferrent between the domestic price ( at which they sell the
emported good) and the world price ( at which they buy it)
- All the benefits of quotas go to the producers and to the lucky importers who
manage to get the scarce and valuable import permits. In such a situation, quotas
differ from tariff
- As a tax , triffs bring in revenue for the government. A quota, on the other hand,
benefits the sellers because they can now sell the imported product for more
money
- In assessing the costs and benefits of an import quota , it is crucial to determine
who gets the rents
 When the rights to sell in the domestic market are assigned to
governments of exporting countries , the transfer of rents abroad makes
the costs of a quota substantially higher than the equivalent tariff
 How does the revenue effect of an import quota differ from that of a tariff?
- A tariff is a tax on import able whereas an import quota is a direct quantitative
restriction on trade which places an absolute limit upon the volume of imports
that can be imported within a fixed time span.
- If government sells import licenses for full value, the revenue would equal that
from an equivalent tariff and tariffs and quotas would have identical results.
- Otherwise, quotas are worse than tariffs. Quotas will benefit for the Quota
License holder They become temporary monopoly in importing the product. It
cause deadweight losses.
- The Lessons for Trade Policy : Both tariffs and import Quota
o Raise domestic prices.
o Reduce the welfare of domestic consumers.
o Increase the welfare of domestic producers.
o Cause deadweight losses.
11. What is meant by dumping? What are the different types of dumping? Why is dumping
undertaken? What conditions are required to make dumping possible? Why does
dumping usually lead to trade restrictions? Analyze one case study many government
have used: solar panel
 Dumping is a term used in the context of international trade. It's when a country or
company exports a product at a price that is lower in the foreign importing market than
the price in the exporter's domestic market. Because dumping typically involves
substantial export volumes of a product, it often endangers the financial viability of the
product's manufacturers or producers in the importing nation.
 The different types of dumping
 Sporadic dumping: Manufactures practice sporadic dumping to get rid of excess
merchandise. A manufacturer with unsold inventories avoids starting a price war
in the home market to preserve his competitive position. Excess supplies are
destroyed. Example, Asian farmers dumped small chickens into the sea. Another
method is to have the excess supply dumped in a foreign market where the
product is normally not sold. Thus, sporadic dumping is aimed at liquidating
excess stocks that may arise occasionally.
 Predatory dumping: While sporadic dumping is occasional, predatory dumping is
permanent. Predatory dumping is also known as intermittent dumping. It involves
sale of goods in overseas markets at a price lower than the home market price.
This is selling at a loss to gain access to a market and eliminate competition.
After the competition is eliminated, the company becomes a monopolist.
Monopoly position is then used to increase the price. Anyway, there is a
disadvantage that former competitors may rejoin the market because of high
profit margins.
Example
Hitachi was accused of following predatory dumping for its EPROM (electrically
programmable read only memory) chips.Zenith in USA accused Japanese
Television manufacturers of using predatory dumping. A charge was leveled
against Japanese manufacturers for false billing and secret rebates to set low
 predatory prices on T.V. sets in U.S markets. It was argued that they tried to
drive U.S firms out of business in order to gain a monopoly.
 Persistent dumping (Long period dumping): It involves consistent selling at
lower prices in one market than in the rest of the market. This practice is based
on the fact that markets vary in terms of overhead costs and demand
characteristics. In persistent dumping, the firm may use marginal cost pricing
abroad while using full cost pricing (covering fixed costs at home) in domestic
market. Japan, for example, sold consumer electronics at high prices in its own
country. This is because it has no foreign competition. But it lowered prices in
the U.S market in order to maintain market share.
 Objective of Dumping
- To find a Place in the Foreign Market: Due to perfect competition in the foreign
market lowers the prices of commodity in comparision to the other competitors
so that the demand for commonly may increase.
- To sell surplus commodity: When there is excessive production of a monopolist’s
commodity and he is not able to sell in the domestic market, they wants to sell
the surplus at a very low price in the foreign market. But it happens occasionally.
- Expansion of Industry: The cost of production of commodity is reduced and bt
selling more quantity of the commodity at a lower price in the foreign and
domestic market, they earns larger profit.
- New trade relations: They sells their commodity at a low price in the foreign
market, thereby establishing new market relations with those countries.
 Conditions are required to make dumping possible:
- Persistent dumping , or international price discrimination , is the continuous
tendency of a domestic monopolist to maximize total profits by selling the
commodity at a higher price in the domestic market (which is insulated by
transportation costs and trade barriers )than internationally (where it must meet
the competition of foreign producers.
- The product must have a degree of Monopoly at least in the home market.
- There must be clearly defined separate market. In international trade, markets are
clearly differentiated between home and foreign markets. In fact, in international
trade markets are separated by space, differences in customs, nationality,
language, currency etc.
- It should not be possible for buyers to re-sell goods from a cheaper market to a
dearer one. In foreign trade, of course, the distance transport cost element and
customs duties prevent this tendency.
- Price discrimination is profitable only when two different markets have different
elasticities of demand. It is meaningless to resort to price discrimination if two
separate markets have identical demand curves because under such conditions,
the total sale receipts will not be affected by shifting to a uniform price policy.
 Dumping usually lead to trade restrictions :
- Dumping often condemned as “unfair trade practice” which accords exporters a
competitive advantage over producers of similar goods in the market of
importation.
- The problem with dumping is that it's expensive to maintain. It can take years of
exporting cheap goods to put the competitors out of business. Meanwhile, the
cost of subsidies can add to the export country's sovereign debt.
 - The second disadvantage is retaliation by the trade partner. Countries may
impose trade restrictions and tariffs to counteract dumping. That could lead to a
trade war.
- The third is censure by international trade organizations. These include the WTO
and the European Union.
 China with solar panel industry
- Solar tariffs on China are ‘counter-productive’ say experts Stopping Chinese
solar ‘dumping'
- The move comes after complaints by European producers to the EU Commission,
that China is flooding Europe with cheap solar panels sold at below the cost of
production. Fast growth, rude awakening
- German-based company, SolarWorld claimed Chinese manufacturers were
getting unfair support from their governments and that they were selling panels
below cost. Many European competitors — led by SolarWorld – have charged
that Chinese competitors are underpricing them in order to keep their grip on the
lucrative European market.
- EU announces tariffs on Chinese solar panels
The European Commission on Tuesday said it would begin to apply a provisional
staggered system of duties on Chinese solar imports, in anticipation of possible
talks with Beijing. EU Trade Commissioner Karel De Gucht said that an average
levy of 11.8 percent would be applied from June 6, with the levy rising to 47.6
percent on August 6, unless a solution could be agreed.
- China retaliates despite calls to end trade row with EU China had informed the
European Commission that European chemicals companies, notably Belgian
group Solvay, were the focus of an anti-dumping investigation, France's daily
newspaper Les Echo reported Monday.
- China accuses firms from the two sectors of selling their products below cost to
win market share and eliminate competitors.
- Earlier this month, the EU Commission imposed a higher customs duty of about
47 percent on Chinese solar panels, accusing Beijing of undercutting market
prices with hefty state subsidies. In addition, EU authorities announced a probe
into Chinese manufacturers of mobile network equipment amid claims they sell
their products at a loss.

12. Why do nations subsidize exports? To what problems do these subsidies give rise ?
Analyze few industries that China use the exports subsidize.
What are the major forms of subsidies that governments grant to domestic producers?
A subsidy may provide import-competing producers the same degree of protection as
tariff or quota but at a lower cost in terms of national welfare. It could have long-term
benefits for the economy. Explain.
 Nations subsidize exports because:
- Export subsidies are foreign trade policies undertaken by domestic governments
that are intended to "protect" domestic production by restricting
foreign competition. In general, a quota is simply a quantity restriction placed on
a good, service, or activity. For example, employers often face hiring quotas for
 different demographic groups and sales representatives often have quotas for
sales activities.
- Domestic Employment: Because foreign imports are produced in other countries
by foreign workers, subsidizing exports and increasing domestic production also
increases domestic employment.
- Low Foreign Wages: Subsidizing the exports of domestic production "levels the
competitive playing field" compared to imports produced by foreign workers
who receive lower wages.
- Infant Industry: If foreign imports compete with a relatively young domestic
industry that is not mature enough nor large enough to benefit from economies of
scale, then export subsidies protect the "infant industry" while it matures and
develops.
- Unfair Trade: Foreign imports might be sold at lower prices in the domestic
economy because foreign producers engage in unfair trade practices, such as
"dumping" imports at prices below production cost. Export subsidies once again
seek to "level the competitive playing field."
- National Security: Export subsidies can also encourage domestic production of
goods that are deemed critical to the security of the national economy.

 Problems do these subsidies give rise

- If demand is elastic, then a subsidy causes a bigger percentage rise in demand.
There is only a small fall in price. In this case, producers benefit from the subsidy
because their producer surplus increases more than consumer surplus
- If demand is price inelastic, then a subsidy causes a substantial fall in price,
however there is only a small increase in demand.
- Quantity restrictions imposed by the government of one nation on imports from
other nations. The primary goal of export subsidies is to reduce imports and
increase domestic production. Because the quantity of imports is restricted, the
price of imports increases, which thus encourages domestic consumers to buy
more domestic production. Export subsidies are one of three common foreign
trade policies designed to discourage imports and/or encourage exports.
 Few industries that China use the exports subsidize.
- In 2009, the Ministry of Finance of China implemented an increase in tax
reimbursement for 553 mechanical and electronic products from 14% to 17% for
robotic equipment for industrial use, from 11% and 13% to 14% for sewing
machines and motorcycles. In addition, the Ministry of Finance, the General
Department of Customs and the China Tax Administration have approved the
pilot project of "tax refund at the Export Port", which was officially implemented
in Shanghai City
- To encourage businesses to export, the Ministry of Finance of China has applied
incentive tax policies for more than 600 items export. Export taxes are
discounted on products including shoes, toys and souvenirs in the 5-17%
range.The Chinese government has also implemented a policy of promoting the
export of consumer goods by quota. Accordingly, the items subject to export tax
to 0%, applied from July 2009, include:
 o Light industrial products for consumption: Audiovisual
electronics, household electrical goods, children's toys, garments,
shoes, plastic products, wooden products.
o Goods and materials: Chemical fertilizers, pesticides and
preservatives for fruits and vegetables, food, roofing sheets
(corrugated iron, plastic), raw wood products (wood) Laminated
pine, veneer, MDF).
o Agricultural products: Fruits, vegetables.

- In terms of loans, Chinese commercial banks have provided short-term loans to

exporters that enjoy the rates
Preferential interest rates, with interest rates currently only at 4-5% / year. With low
interest rates, the volume of Chinese goods exported is increasing. Foreign businesses
only need to buy Chinese goods and materials to enjoy 0% interest rate support for
30% of the order value.
- In addition, Chinese commercial banks also provide loans with interest rates of
only 1-2% to encourage exporters to invest in building factories and workshops.
These conditions have enabled Chinese enterprises to produce products in large
quantities at the lowest cost.
 The major forms of subsidies that governments grant to domestic producers

- The main form of subsidy is a member of party government or any public body
to certain companies for their financial contributions and the right price or
income support, directly or indirectly increase the output of a product from its
territory or reduce the importation of certain products within its territory, or
Members of other damage to the interests of the formation of a government
measure.
- The export subsidy is a government intervention, therefore it has, as all trade
policies, the purpose to modify something in a country's terms of trade, in order
to pursue some specific political objectives. One of the main purposes that can be
found for export subsidies is to encourage national producers. As an example, in
developed countries, an export subsidy is given in order to protect their producers
in the international market from the competition of other countries, poorer
countries, where the cost of factors of production, such as labour or land, is much
cheaper and as a consequence, also the final price of the good will be lower.
Other important purposes could be to support income to the nation, stabilise
prices and equalise balance of payments (the record of a country's transactions
with the rest of the world).
 Explain
- A government subsidy granted to import-competing producers leads to increased
domestic production and reduced imports. The subsidy revenue accruing to the
producer is absorbed by producer surplus and high-cost production (protective
effect). A subsidy granted to exporters allows them to sell their products abroad
at prices below their costs. However, it entails a deadweight welfare loss to the
home country in the form of the protective effect and the consumption
effect.Omit the consumer taste
13. Do You agree or don’t agree with Protectionism ? What are the benefits and arguments
against Protectionism ?
Give some examples and trade tools that developed Nations : US, EU, Japan used to
protect their Industry | Agricultural
 We agree with Protectionism. Because:
- Trade protectionism is a policy that protects domestic industries from unfair
competition from foreign ones.
- Protectionism is a politically motivated defensive measure. It makes the country
and its industries less competitive in international trade.
- Trade protectionism brings temporary benefits to domestic producers, ensuring
the social goal of securing jobs for certain groups of workers.
- Protection of trade helps redistribute income. The redistribution of social income
is the intervention of the State through the provisions of law, policies to mobilize
and persuade high-income people to contribute to the State to help the
community and low-income people
 The benefits of protectionism:
- An advantage of protectionism is that it keeps the domestic economy rolling. Since
there is a decrease in imports, domestic firms have less competition, and so are able
to continue. The domestic economy will also be strengthened because unemployment
will be down due to the domestic firms and they will be able to produce and sell more
goods with a lot less difficulty, giving firms less reason to decrease its costs by
decreasing its workforce. Those with jobs will continue to consume while allowing
the economy to flow.
- Protectionism permits the new and upcoming firms to work and develop at an
acceptable rate, because they will not be pressured by foreign, more experienced
firms. The new firms can grow until they themselves are big enough to compete in
international markets, encouraging positive features for the domestic economy in the
future.
- Protectionism can also prevent dumping, this is where foreign and bigger economies
enter an economy and sell their goods at a price lower than the costs of production.
It can be seen that trade protection offers the following advantages:
- Reduce the competitiveness of imported goods
- Protection of domestic producers; help them to strengthen their strengths in the
domestic market
- Help manufacturers increase their competitiveness to penetrate foreign markets
- Help to regulate the international payment balance of the country, reasonable use of
foreign currency payment of each country.
 Arguments Against Protectionism.
- Various arguments are used against protectionism. These include: Inefficiency of
resource allocation in the long run - the imposition of tariffs, or other protectionist
measures, in the long run results in losses of allocative efficiency.
- Protectionism invites a retaliatory response and countries can get locked into trade
war : Risk of Retakiation , Market Distortion , Higher prices for consumers , Regress
effect on income inequality , By-passing import controls , Higher cost for exporters.
The WTO has found it impossible to negotiate a wide ranging global trade agreement
Besides these advantages , the following disadvantage are also mentioned:
 - It hurt the process of developing international trade , causing economic isolation in a
globalized world
- Imposing dependency and stagnation in domestic businesses , resulting in stronger
protection , makes the strategic , investment and business industries less flexible .
Investment and business activities are no longer effecttive
- Cause lack of variety in design , style, quality of good , as commodity prices become
more expensive than commercial liberalization , causing damage to consumers.
- Market distortion and loss of Economic Efficiency
- Protectionism can be an ineffective and costly of sustaining jobs and supporting
domestic economic growth
- Higher prices for Consumers
Example: In G-7, Japan and Germany particularly responded strongly to the trend of
trade protectionism. Ahead of the meeting, Japanese Finance Minister Shoichi Nakagawa
announced that Tokyo would resist any manifestation of trade protectionism. He
emphasized that the lesson from the Great Depression in the early 20th century made it
clear that the closure would lead to disaster and at the G-7 Conference, Japan will discuss
measures to prevent this from happening again.
14. What are the technical, administrative, and other non-tariff barriers to trade? How do
they restrict trade? What is the importance of these non-tariff barriers relative to tariff
barriers? Give some examples that countries used in Trading Practice?
 Non-tariff barries
- Non-tariff barriers to trade (NTBs) or sometimes called "Non-Tariff Measures
(NTMs)" are trade barriers that restrict imports or exports of goods or services
through mechanisms other than the simple imposition of tariffs. The SADC says, "a
Non-Tariff Barrier is any obstacle to international trade that is not an import or
export duty. They may take the form of import quotas, subsidies, customs delays,
technical barriers, or other systems preventing or impeding trade." According to the
World Trade Organisation, non-tariff barriers to trade include import licensing, rules
for valuation of goods at customs, pre-shipment inspections, rules of origin ('made
in'), and trade prepared investment measures.
- There are several different variants of division of non-tariff barriers. Some scholars
divide between internal taxes, administrative barriers, health and sanitary regulations
and government procurement policies. Others divide non-tariff barriers into more
categories such as specific limitations on trade, customs and administrative entry
procedures, standards, government participation in trade, charges on import, and
other categories.
- Standards take a special place among non-tariff barriers. Countries usually impose
standards on classification, labeling and testing of products in order to be able to sell
domestic products, but also to block sales of products of foreign manufacture. These
standards are sometimes entered under the pretext of protecting the safety and health
of local populations.

 Administrative and bureaucratic delays at the entrance

- Among the methods of non-tariff regulation should be mentioned administrative and
bureaucraticdelays at the entrance, which increase uncertainty and the cost of
maintaining inventory. For example, even though Turkey is in the European Customs
Union, transport of Turkish goods to the European Union is subject to extensive
administrative overheads that Turkey estimates cost it three billion euros a year.
 Technical Barriers
 - Technical barriers to trade (TBT) refer to technical regulations and voluntary
standards that set out specific characteristics of a product, such as its size, shape,
design, functions and performance, or the way a product is labelled or packaged
before it enters the marketplace. Included in this set of measures are also the
technical procedures that confirm that products fulfill the requirements laid down in
regulations and standards. Product specifications are often written in such detail that
a fair chance of winning a contract might mandate extensive product modification.
The product testing process might take several months to several years. Such tactics
become market entry barriers especially when they are not required of domestic
firms.
 The importance of these non-tariff barriers relative to tariff barriers
- As against the tariff barriers, non-tariff barriers are government policies and
administrative practices that regulate or restrict the foreign trade. Non-tariff barriers
are quantitative restrictions which influence the volume of trade unlike tariff barriers,
non-tariff barriers impose absolute limitations upon foreign trade and inhibit market
responses. The non-tariff barriers are numerous. Following are some common
excuses offered by a country to impose non-tariff barriers:
Human rights.
Damage to environment.
Health considerations.
Injury to domestic industries.
 Some examples:
- European Union (EU)—The EU has adopted a series of directives that establish
essential requirements for a whole variety of equipment including
telecommunications equipment. Equipment must be labeled with the CE mark to
indicate that it has complied with all relevant directives. Other countries including
U.S. and Japan have their own standards for telecommunications and equipment. The
purpose of such regulations include electrical safety, electromagnetic compatibility,
user safety and quality of communications.
- Japan—Access to Japan’s value chain network creates market barriers since there are
tight corporate and cultural ties among original Equipment manufacturers (OEM),
wholesaler and retailers. Keiretsu are large groups of Japanese companies linked
together often through one main affiliated bank.
PART 3 : Economic Integration : FTA – Common Market
15. What are the main drivers of Globalization? What are the benefits and challenges of
Globalization ?
 The main drivers of Globalization : The media and almost every book on globalization
and international business speak about different drivers of globalization and they can
basically be separated into five different groups:
1) Technological drivers
Technology shaped and set the foundation for modern globalization.
Innovations in the transportation technology revolutionized the industry
2) Political drivers
Liberalized trading rules and deregulated markets lead to lowered tariffs
and allowed foreign direct investments in almost all over the world.
3) Market drivers
As domestic markets become more and more saturated, the opportunities
for growth are limited and global expanding is a way most organizations
choose to overcome this situation
4) Cost drivers
Sourcing efficiency and costs vary from country to country and global
firms can take advantage of this fact. Other cost drivers to globalization
are the opportunity to build global scale economies and the high product
development costs nowadays
5) Competitive drivers
With the global market, global inter-firm competition increases and
organizations are forced to “play” international.
 Benefits of Globalization
- Improved Living Standards
One of the main benefits of globalization is the massive rise in living standards in
developing nations. These same countries also have access to huge technological
improvements without going through the difficulties that developed nations have
experienced.
- Increased Creativity and Innovation
Global competition can encourage creativity and innovation, helping companies to
stay one step ahead of competitors. This drive toward quality and price can improve
products and keeps costs low. The free movement of labor and capital means that
ideas from developing nations can drive innovation around the world.
Before globalization, getting funding for an idea in an underdeveloped country was
extremely difficult. Since communications have evolved, individuals without access
to funding can still make a difference in both their home market and around the
world.
- Lowered Costs for Goods and Services
Lowered costs help people in both developing and developed countries live better on
less money. Huge cost reductions from inexpensive manufacturing and logistics have
lowered the cost of living for everyone around the world
- Easy Access to Foreign Culture
 Globalization has also made it easier to access foreign culture, including food,
movies, music, and art

 Challenges of Globalization
- Job Mobility
One of the most common critiques of the global trade system is how it ships jobs,
especially manufacturing jobs, from less developed countries to developing countries.
Lower-skilled workers who lose manufacturing jobs in developed countries often
have a difficult time finding new, comparably compensated work.
- Western Dominance
Despite huge growth in emerging markets, the Western developed world still holds
the reigns on international order and on how capital flows from country to country
- Loss of Cultural Identity
While globalization has made foreign cultures easier to access, it has also begun to
meld cultures together. The success of certain cultures throughout the world have
caused other countries to emulate these lifestyles and culture
16. What is the globalization? Describe the benefits and challenges of current wave of
Globalization for Vietnam’s economy
 Globalization is the connection of different parts of the world resulting in the expansion
of international cultural, economic, and political activities. It is the movement and
integration of goods and people among different countries. There are advantages and
disadvantages to globalization, all of which have economic, social, political, and cultural
impacts.globalization describes mainly trade practices, extending also to the
communication patterns and cultural system that underlie these practices.
 Benefits of current wave of Globalization for Vietnam’s economy
- Increasing export revenues
As a result of integrating into the regional and global market, export revenues have
increased continually since 1990, speeded up sine 1995 when Vietnam joined
ASEAN and grew sharply since Vietnam joined WTO in 2007.
- Rapid increase in foreign direct investment (FDI)
As a WTO member, Vietnam has become an attractive destination for foreign
investors. Registered FDI surged to US$71 billion in 2008, compared with only $12
billion in 2006. During the three years of WTO membership, total registered FDI into
Vietnam reached more than $114 billion, 4.5 times higher than the target set for the
2006-2010 period. Of this, $29.5 billion was disbursed in the five years
- Increase in enterprises’ awareness, adaptation and performance
Joining WTO means that Vietnam has entered a large “play ground” where
Vietnamese enterprises have to compete with many giant players-big foreign
corporations with strong financial power and experience. This is also a chance for
state-owned enterprises pending on the Government protection and subsidies
restructure their operation. Otherwise they will be defeated even in the domestic
market. So under the competition pressure, the Vietnam’s enterprises will become
more effective and competitive.
- More favorable legal system for trading activities
Global economic integration and accession to the WTO have given Vietnam a chance
to refine its policy and legal system to be more transparent, sustainable and
predictable to be in line with WTO regulations and to attract more foreign investors.
 Moreover, as a WTO member, Vietnam is treated as a full WTO membership.
Vietnamese enterprises have a healthy environment for development in foreign
markets. If there are trade disputes, they can be treated under WTO’s Dispute
Settlement Mechanism.
 Challenges of current wave of Globalization for Vietnam’s economy
- Low competitiveness of nation, enterprises and products
Vietnamese enterprises are mainly medium and small-sized. None of Vietnam’s
state-owned enterprises was on the list of 1000 world biggest corporations, neither its
commercial trademarks in the list of 1000 most prestigious global trademarks. If we
want to gain strong competitiveness in international market, we must have many
strong enterprises like Sony, Toyota of Japan, or Hyundai, Samsung of South Korea
- Issues relating to macro policies and administrative procedure
A widening trade deficit, an overheating economy, and a global rise in commodity
prices caused inflation to shoot up to 23 percent in 2008.This in turn triggered a crisis
of confidence, big swings in interest rates, and a sharp fall of the dong, the local
currency”. Although this issue was over and the government has performed better
when dealing with the global financial crisis, it is an important lesson that because
the Vietnamese economy has integrated deeply into the global economy, the
exchange rates, inflation, balance of payment and budget deficit will develop
unpredictably.
- Difficulties in agricultural sector
Agriculture [1] is the main sector in the economy, accounting for 20 percent of GDP
and 66 percent of the national population. However, it is confronting with vigorous
competition in the global market. Farmers lack knowledge and professional skills.
Production technology is small and backward, which increases the production costs
compared to those of other countries and makes the quality of the products low.
Agricultural enterprises are often of small size and disperse. As a result, they have
weak financial capacity to improve production technology and labor productivity.

17. What are the benefits and challenges of ASEAN Economic Community ?
Describe the opportunities and economic benefits of Vietnam in the AEC ?
Why Vietnam actively participates in many FTAs ?
What are the benefits and costs of Vietnam when we sign FTAs and joint WTO ?
What are the challenges for Vietnam in this period: Trade tension between US- China ?

 The benefits of ASEAN Economic Community:

Trade
- Concerning the free flow of goods: as of 2010, duties were eliminated on 99.2% of
tariff lines for the ASEAN-6 Member States (Brunei Darussalam, Indonesia,
Malaysia, Philippines, Singapore and Thailand).
- In the other member states (Cambodia, Lao PDR, Myanmar and Viet Nam), 97.52%
of tariff lines have been reduced to 0-5%. Measures to reduce technical barriers to
trade are also being implemented.
Investment
- ASEAN is committed to building an investment environment to attract businesses: it
created the ASEAN Comprehensive Investment Agreement (ACIA), which includes
 commitments towards the liberalization and protection of cross-border investments
operations, together with best practices for the treatment of foreign investors and
investments
- For the free flow of capital, stock exchanges from Indonesia, Malaysia, Philippines,
Singapore, Thailand and Viet Nam are working together to form the ASEAN
Exchanges, aiming to promote ASEAN capital markets and to offer more
opportunities to investors in the region.
Labor
- ASEAN works towards facilitating the free flow of skilled labor: the ASEAN
Agreement on the Movement of Natural Persons (MNP) provides a legal framework
to ease temporary cross-border movements of people engaged in the trade in goods,
services and investment.
Competitive Economic Region : By creating a competitive economic region, the
AEC wants to foster a culture of fair competition, which includes protection of
consumers and guarantees for intellectual property rights. It also requires
infrastructures (highways, airports and rail links, power grids and gas pipelines)
under planning and development.
Equitable Economic Development : The AEC will enhance competitiveness and
expansion of SMEs in ASEAN through various projects under the Strategic Action
Plan for ASEAN SME Development (2010-2015).
Integration into the Global Economy
- Thanks to various “ASEAN+1” free trade agreements with the People’s Republic of
China, Japan, the Republic of Korea, Australia, New Zealand and India, ASEAN is
positioned in the middle of global supply chain, developing strong trade connections
with the major Asian economies and generating new business opportunities.
- Increased business interest in the AEC ASEAN is benefiting from a steady increase
in Foreign Direct Investment (FDI), with an average growth of 14% since 2000.
 Challenges of ASEAN Economic Community:
- The Trump administration's 'America first' policy injected ambiguity in economic
activities.
- The risk intensified as the trade war between the US and several countries - China,
India, Russia, Mexico, Canada, the European Union - became effective. These have
long-term implications in terms of reconfiguration of manufacturing supply-chains
and confidence in the multilateral trading framework of the WTO.
- Simultaneously, the world economy is witnessing the process of Brexit, an outcome
of a referendum when Britain decided to leave the European Union.
- While it marked the rise of populist policies, it also criticised globalisation,
particularly trade and immigration, for income inequality and economic insecurity.
- The ASEAN countries are not aloof from these adverse global developments. There
are concerns over how AEC 2015 has benefitted individual ASEAN members and its
businesses and people
- Low awareness of AEC often lead to debates of uneven benefit of economic
integration and conflicts of interest between the 'winners' and 'losers'.
- These are limiting the governments from committing to bold measures and
compelling them to undertake populist policies to raise their future political
prospects.
 - As a result, the pace of ASEAN economic integration may be slowed.
Implementation could be uneven and attention might be paid to more inclusive and
people-centric trade and investment measures.
- However, trade will remain at the core of AEC. Although tariffs have been almost
eliminated for flow of goods in the region, facilitation initiatives, such as the ASEAN
Single Window and Self-Certification Scheme, will gain importance.
 The opportunities of Vietnam in the AEC
- Opportunity to get a wider market
This is a good opportunity for Vietnamese businesses to expand their markets. The
AEC creates a unified market and manufacturing area, which leads to the economy of
many countries to become more prosperous, resulting in increased income and
formation of a new amount of middle-income consumers with high incomes – also
the very potential customers of businesses.
- Extended Export Opportunities
When participating in AEC, the export market for goods in Vietnam will be
increasingly expanding. When AEC is formed, Vietnamese enterprises can sell goods
to ASEAN countries almost domestic sales. This is one of the advantages for the flow
of goods of businesses. The import and export procedures will be more cumbersome
and the reform of the procedure of origin, towards allowing enterprises to
certification of origin will also facilitate the business customs clearance of goods to
the market ASEAN.
- Opportunity to enhance competitiveness for Vietnam's exports
When AEC is established, Vietnamese enterprises will have a wider market. In
addition, when the tax rate in ASEAN is reduced to 0%, Vietnamese enterprises will
have conditions to reduce costs, lower prices for exports, contribute to increasing
competitiveness.
- Opportunity to attract investment sources
AEC will also help Vietnam to better improve the business environment from
customs clearance, administrative procedures to create more balanced investment
incentives.
 The benefits of Vietnam in the AEC
- Reduce the risks in export-imports from minimizing dependency to the Chinese
market, increasing the replacement of the ASEAN market for the Chinese market.
- Creating opportunities for Viet Nam to be deeper into the value chain and the
regional supply chain is firstly the supply chain value agricultural products and
intermediate products.
- To promote the process of implementing strategic breakthroughs to Vietnam to
basically become industrialization in the modern direction in 2020
- Strengthening the comprehensive understanding between Vietnam and other AEC
member countries, expanding socio-cultural exchanges across countries, facilitating
the development of Vietnamese values and identity in AEC,
 Vietnam actively participates in many FTAs because
- Having better trade relations with some other partners in other regions contributed to
helping Vietnam balance its trade deficit
- Tranfers the knowledge and technology
 - Take advantage of reduced tariff
- Enable vietnam is economic develpment to continue to shift away from exporting
low tech manufacturing products to high tech goods
- FTAs has contributed to raising Vietnamese exports
- FTAs also help Vietnam improve its infrastructure, attract more investment capital;
accelerate administrative reform; abolish barriers for the market access.
 Benefits and cost of Vietnam when we sign FTAs
o Benefits
- Enable Vietnam’s economic development to continue to shift away from
exporting low-tech manufacturing products and primary goods to more
complex high-tech goods
- Sophisticated business practices and technology will help boost
Vietnamese labor productivity and expand the country’s export capacity.
- Trade agreements will allow Vietnam to take advantage of the reduced
tariffs, both within the ASEAN Economic Community (AEC) and with the
EU and US to attract exporting companies to produce in Vietnam and export
to partners outside ASEAN.
- Vietnam's participation in trade agreements will also ensure compliance
with national standards, from employee rights to environmental protection.
o Cost
- Such agreements are likely to trigger aggressive competition from foreign
rivals on local businesses – particularly in the agriculture sector including
meat and dairy products from the EU, Australia and Canada
- If local firms do not adapt, make use of new market opportunities and
potential partnerships with foreign firms – they could find competing in the
market challenging.
- The Vietnamese government would also need to continue on its path of
reforms – strengthening the banking sector, removing corruption, refining
legal and tax structures, and improving trade facilitation.

 Benefits and costs of Vietnam when we joint WTO

o Benefits
- Vietnam has access to markets for goods and services in all member
countries with reduced import tariffs and non-discriminatory service sectors.
- When participating in WTO, Vietnam's business environment is increasingly
improved.
- Vietnam has the same status as other members in global trade policy making,
has an opportunity to fight to establish a fairer, more reasonable, conditional
economic order. to protect the interests of the country, the business.
- Integration into the world economy also promotes the domestic reform
process, ensuring that Vietnam's reform process is more synchronized and
more effective.
- WTO accession will enhance our position in the international arena, creating
conditions for Vietnam to effectively implement foreign policies.
 o Costs
- Competition will be fiercer, with more "competitors", on a wider and deeper
scale
- In the world, the "distribution" of benefits of globalization is uneven.
Countries with low developed economies benefit less
- International economic integration in a globalized world, interdependence
among countries will increase. In the context of limited potential of the
country, incomplete legal system, limited experience in operating a market
economy, this is not small difficulty.
- International economic integration raises new issues in protecting the
environment, protecting the national security, preserving the fine cultural
identity and traditions of the nation, against pragmatic lifestyles and pursuing
coin.
 The challenges for Vietnam in this period: Trade tension between US- China
o Impacts on economy, trade and impacts on Vietnamese enterprises
- Creating opportunities for Vietnamese enterprises to export high-tech goods to the US. However,
the increase in exports to the United States also means increasing the US trade deficit with
Vietnam. That will cause Vietnamese goods to fall under the scope of US inspection, affecting
export businesses.
- US-China trade tensions also increase the risk of trade deficit with China in a short time. The
surplus of Chinese goods will flow to Vietnam market, causing price competition for Vietnamese
businesses (the yuan has depreciated sharply, making Chinese goods cheaper).
- Export goods from Vietnam to China will be more difficult because China strengthens
enforcement measures to protect the domestic market.
o Impact on investment flows of FDI enterprises
- Vietnam is considered as one of the important destinations of FDI flows away from China thanks
to its strategic location, low labor costs, abundant human resources, macro environment and
stable politics. Increasing production costs in China are also causing investors to shift to more
cost-effective investment locations, and Vietnam is seen as an alternative option.
- However, the rapid increase of FDI inflows from China is also a matter of concern, because many
FDI projects from China to Vietnam were formerly backward technology projects, causing
pollution. environment.
o Impact on financial markets, currencies, banks
- Besides the implications for the Vietnamese economy, US-China trade tensions also have a
strong impact on Vietnam's financial and monetary markets. Trade war, though not directly
affecting interest rates in Vietnam, can be indirectly affected by exchange rate fluctuations and
inflationary pressures
-
18. Present the different level of Economic Integration ? What is the advantage and benefit
of FTA and Custom Union for one country ? What are the principles of WTO and how
ist differ a FTA ?
 The different level of Economic Integration : Economic integration can be classified in
five additive levels
 - Free trade. Tariffs (a tax imposed on imported goods) between member
countries are significantly reduced, some abolished altogether. Each member
country keeps its own tariffs in regard to third countries.
- Custom union. Sets common external tariffs among member countries,
implying that the same tariffs are applied to third countries; a common trade
regime is achieved.
- Common market. Services and capital are free to move within member
countries, expanding scale economies and comparative advantages.
However, each national market has its own regulations such as product
standards.
- Economic union (single market). All tariffs are removed for trade between
member countries, creating an uniform (single) market. There is also free
movements of labor, enabling workers in a member country is able to move
and work in another member country. Monetary and fiscal policies between
member countries are harmonized, which implies a level of political
integration.
- Political union. Represents the potentially most advanced form of integration
with a common government and were the sovereignty of member country is
significantly reduced.
 Advantage of Free Trade Agreements (FTA) : Free trade agreements are designed to
increase trade between two or more countries
- Increased Economic Growth
- More Dynamic Business Climate: Often, businesses were protected before
the agreement. These local industries risked becoming stagnant and non-
competitive on the global market. With the protection removed, they have the
motivation to become true global competitors.
- Lower Government Spending: Many governments subsidize local industry
segments. After the trade agreement removes subsidies, those funds can be
put to better use.
- Foreign Direct Investment: Investors will flock to the country. This adds
capital to expand local industries and boost domestic businesses.
- Expertise: Global companies have more expertise than domestic companies
to develop local resources. When the multinationals partner with local firms
to develop the resources, they train them on the best practices. That gives
local firms access to these new methods.
- Technology Transfer: Local companies also receive access to the latest
technologies from their multinational partners.
 Benefits of Free Trade Agreements (FTA )
 - Contribute to greater economic activity and job creation in the country , and
deliver opportunities for big and small businesses to benefit from greater
trade and investment.
- Reduce and eliminate tariffs, improve rules that affect issues like intellectual
property.
- Free trade agreements give businesses and consumers improved access to a
wider range of competitively priced goods and services, new technologies,
and innovative practices.
- Free trade agreements help obtain more benefits from foreign investment.
- Promote regional economic integration and build shared approaches to trade
and investment between one country and trading partners.
- Support stronger people-to-people and business-to-business links that
enhance Australia’s overall bilateral relationships with FTA partners.
- Free trade agreements can continue to provide additional benefits and
trading partners over time, including via in-built agendas that encourage
ongoing domestic reform and trade liberalisation.
 Advantages of Custom Union
- Increase in trade flows and economic integration
The main effect of a free-trade agreement is that it increases trade between
member countries. It helps improve the allocation of scarce resources that
satisfy the wants and needs of consumers and boosts foreign direct
investment (FDI). Customs unions lead to better economic integration and
political cooperation between nations and the creation of a common market,
monetary union, and fiscal union.
- Trade creation and trade diversion
The effectiveness of a customs union is measured in terms of trade creation
and trade diversion. Trade creation occurs when the more efficient members
of the union sell to less efficient members, leading to a better allocation of
resources.
Trade diversion occurs when efficient non-member countries sell fewer
goods to member countries because of external tariffs. It gives less efficient
countries in the union the opportunity to capitalize on their position and sell
more goods within the union.
- Reduces trade deflection: One of the main reasons a customs union is
favored over a free trade agreement is because the former solves the problem
of trade deflection. This occurs when a non-member country sells its goods
to a low-tariff FTA (free trade agreement) country, which then resells to a
high-tariff FTA country, leading to trade distortions. The presence of a
common external tariff in customs unions helps avoid problems that arise
from tariff differentials.
 Benefits of Custom Union
a) To Producers :
- Producers get a larger and wider market and can thus produce more goods.
- The Custom Union lowers cost of production
- It offers equal protection to all manufacturers against third country imports
and minimizes the possibility of transshipment or trade deflection.
 - It levels the economic environment and promotes fair competition by
reducing disparities in production costs for manufacturers in the various
countries with regard to taxes on imported raw materials and intermediate
goods from third countries.
b) To Traders within the CU:
- Traders get wider source of goods therefore, bargaining power in dealing
with suppliers resulting in cost savings for their customers.
c) To the Importers:
- Because the CU removes border controls and trade barriers, importing goods
becomes faster since traders do not have to go through so many customs
procedures in different countries. This reduces transaction costs and results in
timely deliveries.
d) To Consumers:
- Consumers get a wider choice of goods and they also benefit from the
advantages of increased productivity which leads to lower prices.
e) To the CU Members:
- In a CU with a Free Trade Area, intra-regional trade is enhanced as there are
no tariffs or quotas on goods originating from within the region,
- It seeks to maintain a price advantage for regionally produced goods over
goods produced outside the Customs Union.
f) To Land locked Countries:
- Land locked countries that are neighbours to CU members who have access
to the sea, will in actual terms no longer be landlocked, given that their goods
will be cleared at first port of entry and will have free circulation rights when
moving to such, countries as all customs formalities would have been
discharged at the port of entry.
g) To the Region as a Whole (CU Members):
- A customs union promotes cross-border investment and serves to attract
investment, both Foreign Direct Investment (FDI) and domestic investment,
as the enlarged market is more attractive to investors than the previously
small individual national markets.

 The principles of WTO

- Trade without discrimination
Under the WTO agreements, countries cannot normally discriminate between
their trading partners. Grant someone a special favour (such as a lower
customs duty rate for one of their products) and you have to do the same for
all other WTO members.
Imported and locally-produced goods should be treated equally — at least
after the foreign goods have entered the market. The same should apply to
foreign and domestic services, and to foreign and local trademarks,
copyrights and patents
- Freer trade: gradually, through negotiation
Lowering trade barriers is one of the most obvious means of encouraging
trade. The barriers concerned include customs duties (or tariffs) and
measures such as import bans or quotas that restrict quantities selectively
 - Predictability: through binding and transparency
Sometimes, promising not to raise a trade barrier can be as important as
lowering one, because the promise gives businesses a clearer view of their
future opportunities. With stability and predictability, investment is
encouraged, jobs are created and consumers can fully enjoy the benefits of
competition — choice and lower prices. The multilateral trading system is an
attempt by governments to make the business environment stable and
predictable.
In the WTO, when countries agree to open their markets for goods or
services, they “bind” their commitments. For goods, these bindings amount
to ceilings on customs tariff rates. Sometimes countries tax imports at rates
that are lower than the bound rates. Frequently this is the case in developing
countries. In developed countries the rates actually charged and the bound
rates tend to be the same.
- Promoting fair competition
The rules on non-discrimination — MFN and national treatment — are
designed to secure fair conditions of trade. So too are those on dumping
(exporting at below cost to gain market share) and subsidies. The issues are
complex, and the rules try to establish what is fair or unfair, and how
governments can respond, in particular by charging additional import duties
calculated to compensate for damage caused by unfair trade.
- Encouraging development and economic reform
The WTO system contributes to development. On the other hand, developing
countries need flexibility in the time they take to implement the system’s
agreements. And the agreements themselves inherit the earlier provisions of
GATT that allow for special assistance and trade concessions for developing
countries.
 Differ from a FTA
The WTO includes many agreements in different areas of trade (goods, services,
intellectual property, investment, etc.). These agreements are aimed at unifying rules for
global trade and reducing trade barriers. However, the WTO has only succeeded in
reducing but not reaching the level of removing barriers to the majority of trade as in
FTAs. Therefore, there is no FTA agreement in the WTO.
-
19. Present the evolution of International Monetary System : From
A. Gold standard (1870-1914) + earlier
B. Gold exchange standard (1918-1939)
C. Bretton Woods (1944-1973)
D. Floating (1973-present)
How can International Monetary System be classified ?
What was agreed on at the Jamaica Accords?
The institutional arrangements that countries adopt to govern exchange rates are known as the
international monetary system
A/ Gold standard (1870-1914) + earlier
❖ The gold standard dates back to ancient times when gold coins were a medium of

exchange, unit of account, and store of value

❖ Payment for imports was made in gold or silver

❖ Later, as trade grew, payment was made in paper currency which was linked to gold at a fixed rate

Rules of Gold Standard:

❖ Pegging currencies to gold and guaranteeing convertibility is known as the gold

standard

❖ In the 1880s, most of the world’s trading nations followed the gold standard

❖ Under the gold standard one U.S. dollar was defined as equivalent to 23.22 grains of

"fine (pure) gold

❖ The amount of a currency needed to purchase one ounce of gold was called the gold

par value
The great strength of the gold standard was that it contained a powerful mechanism for achieving
balance-of-trade equilibrium (when the income a country’s residents earn from its exports is equal to the
money its residents pay for imports) by all countries
B/ Gold exchange standard (1918-1939)

❖ The gold standard worked fairly well from the 1870s until the start of World War I in

1914

❖ During the war, many governments financed their war expenditures by printing money, and in doing
so, created inflation

❖ People lost confidence in the system and started to demand gold for their currency putting pressure on
countries' gold reserves, and forcing them to suspend gold convertibility

❖ By 1939, the gold standard was dead

C/ Bretton Woods (1944-1973)

In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new
international monetary system that would facilitate postwar economic growth .
Under the new agreement:

❖ a fixed exchange rate system was established

❖ all currencies were fixed to gold, but only the U.S. dollar was directly convertible to

gold
❖ devaluations could not to be used for competitive purposes

❖ a country could not devalue its currency by more than 10% without IMF approval

The Bretton Woods agreement also established two multinational institutions:

❖ the International Monetary Fund (IMF) to maintain order in the international monetary system

❖ the World Bank to promote general economic development

D/Bretton Woods worked well until the late 1960s

❖ It collapsed when huge increases in welfare programs and the Vietnam War were

financed by increasing the money supply and causing significant inflation

❖ Other countries increased the value of their currencies relative to the dollar in response to speculation
the dollar would be devalued

❖ However, because the system relied on an economically well managed U.S., when the U.S. began to
print money, run high trade deficits, and experience high inflation, the system was strained to the
breaking point
• The US dollar was the only currency that could be converted into gold
• The US dollar served as the reference point for all other currencies
• Any pressure to devalue the dollar would cause problems through out the world

Washington Consensus (1973 – Present)

After the collapse of the Smithsonian Agreement, the major currencies of North America, Europe and
Japan floated. During the 1970s, the dollar depreciated as inflation bit and then commenced its dramatic
ascent following the 1979-80 Volcker Shock when US interest rates were hiked to unprecedented levels.
By 1985, the dollar’s strength was harming US competitiveness, prompting the US, Japan, Germany,
France to sign the Plaza Accord, under which they jointly intervened to lower the dollar. Their
intervention was so effective that they had to sign another agreement in 1987 - the Louvre Accord - to
stop the further fall of the dollar. Prior to these meetings, free floating exchange rates were considered the
best but thereafter, the major countries began to cooperate more.

How can International Monetary System be classified

 The international monetary system can be divided according to the regime of exchange rates or
the way of determining international reserve assets. According to the exchange rate regime, there
is an international monetary system according to the fixed exchange rate regime and the floating
exchange rate regime.
  Classification according to the method of determining the international reserve assets, we have a
monetary system according to the gold standard system (gold is the only international reserve
asset), the monetary system follows the indigenous regime of a currency. country (for example,
the US dollar).

What was agreed on at the Jamaica Accords?

The accords allowed the price of gold to float with respect to the U.S. dollar and other currencies, albeit
within a set of agreed constraints. In practice the dollar had been floating in this way, in contravention of
the articles of an agreement of the IMF, since the Nixon shock in 1971. The accords also made provisions
for financial assistance to developing countries representing the Group of 77 member countries to
compensate for lost earnings from the export of primary commodities.[4] An amendment was made in
1978 to allow for the creation of Special Drawing Rights, described as "a rather cheap line of credit" for
developing countries.