Economic Integration

1
Economic Integration Institutions and
PracticesPart 1 Introduction
2
Things you already know!! ?

• It makes little sense for a country or a region
  to produce what it can buy from another country
  or region at a lower cost
• All countries can benefit if each country
  specializes in production those goods it can
  produce best and satisfy their other wants and
  needs by trading for them

3
More, things you already know!!

• Static Gains from trade are gains in world output
  that result from specialization and trade
• Dynamic gains from trade are gains from trade
  over time that occur because trade induces
  greater efficiency in the use of existing
  resources

4
Even more, things you already know!!

• A country engaging in international trade uses
  its resources more efficiently
• International trade increases not only the
  quantity of the good we consume but, in many
  instances, their quality
• International trade can be a very effective way
  to enhance competition in a countrys domestic
  market

5
Well then why not Free Trade

• Free trade is a policy by which a government does
  not discriminate against imports or interfere
  with exports by applying tariffs (to imports) or
  subsidies (to exports) or quotas.

6
THE WELFARE EFFECTS OF TRADE IN AN INDIVIDUAL
PRODUCT

• From a public policy perspective, the gains to
  society as a whole are greater than the losses
  that occur within a particular industry
• Consumers tend to benefit from free trade but
  firms and workers in importing industry can be
  harmed
• Special interest groups lobby for changes that
  benefit them, though not necessarily society as a
  whole
• Problem? The gains to consumers are diffused
  but the losses to producers and workers who care
  are concentrated

7
GLOBALIZATION

• Globalization is the term used to convey the idea
  that international factors are becoming a more
  important part of the world economy
• The simplest measure of globalization is the
  ratio of exports to GDP
• Countries with a high ratio of exports to GDP are
  generally more open to the world economy than
  countries with a low ratio

8
GLOBALIZATION
Real World Exports of Goods as a Percentage of
Real World GDP
9
GLOBALIZATION

• Globalization or the increasing openness of an
  economy, means changes that are not universally
  positive
• Globalization involves not only the goods and
  service but the movement of people and money as
  well

10
Economic Integration

• Economic integration is concerned with
• The removal of trade barriers or impediments
  between at least two participating nations
• Thus boosting the free movement of trade,
  investment, and services across national
  boundaries

11
Economic Integration (Continued)

• Integration creates high levels of globalization
  and regionalization
• Economic integration is best viewed as a spectrum
  with the various integrative agreements in effect
  today lying in the middle of this spectrum.
• The level of integration defines the nature and
  degree of economic links among countries

12
Economic Integration

• economic political agreements that give
  preference to members within the agreement
• Global
• Regional (or Bilateral)

13
Some Types of International Economic
Institutions with Examples (Just for info)
14
More . Types of International Economic
Institutions with Examples
Our Focus
15
Economic Integration Institutions and
PracticesPart 2 Global Trade Agreements
16
WTO

• Three global organizations that play a major role
  in international economic relations are
• The International Monetary Fund (IMF)
• The World Bank
• The World Trade Organization (WTO)

17
Global (past) General Agreement on Tariffs and
Trade (GATT)

• Idea began with 23 nations in 1946 when the
  International Trade Organization (ITO) was
  established
• The General Agreement on Trade and Tariffs (GATT)
  followed in 1947 by 23 countries to abolish
  quotas and reduce tariffs.

18
General Agreement on Tariffs and Trade (GATT)

• based on the following basic principles
• National treatment Imports must be given similar
  treatment on the domestic market as domestically
  produced goods
• Nondiscrimination Enshrined in the concept of
  most favored nation (MFN) every WTO member must
  treat every other member as it treats its most
  favored trading partner
• However GATT could not enforce compliance

19
The GATT/WTO functions through trade rounds
20
Kennedy Tokyo

• During the Kennedy Round in the mid-1960s, and
  the Tokyo Round in the 1970s, other issues
  included
• - Problems with dumping
• - Subsidies to industry
• - Nontariff barriers to trade

21
The Uruguay Round

• The Uruguay Round famously focused on
  contentious issues such as
• non-tariff barriers
• intellectual property rights
• trade in services
• agriculture.
• However, the BIGGEST consequence

22
From GATT to . Global (now) World Trade
Organization (WTO)

• The Uruguay Round established the WTO
• WTO members meet every two years to set WTO
  policy objectives
• Membership now totals 155 (2012) 156 on the
  pending inclusion of Russia 25 more applying

23
Who is the WTO?

• Location Geneva, Switzerland
• Established 1 January 1995
• Created by  Uruguay Round (1986-94)
• Budget 196 million Swiss francs for 2011 (163
  million Euros)
• Secretariat staff 640..
• Head Pascal Lamy (Director-General)
• Chart Members

24
What the WTO Stands for.

• Non-discrimination
• More open- ness
• Predictability and transparency
• More competitiveness
• Benefits for less developed countries (gt75 are
  developing or LDCs)
• Protection for the environment

25
WTO Primary Functions

• Administering WTO trade agreements
• Forum for trade negotiations (goods)
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing
  countries
• Cooperation with other international
  organizations  

26
World Trade Organization (WTO)

• Has a more effective dispute settlement
  mechanism!!
• Monitors national trade practices more
  consistently
• Governments bring charges of unfair trade
  practices to the WTO (300 300)
• http//www.wto.org/english/thewto_e/whatis_e/tif_e
  /disp1_e.htm

27
Countervailing Duty

• WTO rulings are binding as they ultimately
  permit countervailing duties
• Countervailing Dutya tariff designed to raise
  the price of an imported product to its fair
  market value.
• After permission countries may use them to
  offset production or export subsidies.

28
World Trade Organization (WTO) right now

• The Doha Round/Doha Development Agenda (2001-)
• Focused on trade issues of importance to
  developing countries
• Key issues of Doha Development Agenda
• -Farm subsidies in high income countries of
  Europe, US, and Japan
• -Greater market access by developing countries
  and strong farm sector high income countries
• -Trade in services
• -Problems poor countries face in implementation

29
The Doha Round

• Talks were started in Doha, Qatar in November
  2001.
• Focus of the talks was on the links between
  economic growth and trade liberalization.
• Talks collapsed in July 2008.
• The main point of contention is trade in
  agriculture with major industrialized nations
  such as the U.S., EU and Japan maintaining
  production subsidies and import barriers.
• Where are they now????

30
WTO and the Environment

• WTO rules block a countrys use of trade measures
  as environmental policy
• Montreal Protocol multilateral agreement to ban
  trade of products that deplete the ozone layer
• Kyoto Protocol to reduce emissions of
  greenhouse gases to levels below 1990 levels

31
WTO website

• http//www.wto.org/

32
Economic Integration Institutions and
PracticesPart 3 Regional Trade Agreements
33
Regional Trade Agreements

• Besides these Global Agreements
• Regional Trade Agreements also form a key part of
  the institutional structure of the world economy

34
What are Regional Trade Agreements?

• Regional Trade Agreement preferential economic
  arrangement among 2 or more countries.
• Such blocs have liberal rules for member
  countries while a separate set of rules is laid
  for non-members.

35
Types of Regional Trade Agreements

• Partial trade agreement
• Free trade areas
• Customs Union
• Common Market
• Economic Union
• Political Unions

36
Free Trade Areas

• Simplest form of economic integration which
  provides the internal free trade between member
  nations.
• Each member is allowed to determined its own
  separate commercial policy with respect to
  non-members.
• Example Latin American Free Trade Association
  (LAFTA), North American Free Trade Area (NAFTA)

37
Customs Union

• More advanced form.
• Internal free trade among the member nations and
  they also adopt a uniform commercial policy
  against the non-members. (eg. common external
  tariffs)
• Example EEC European Economic Community

38
Common Market

• There are no barriers to trade among members and
  factors of production such as capital, labor and
  technology are mobile among them.
• It also has a uniform policy in respect to
  non-members.

39
Economic Union

• Similar to Common Market, but with coordination
  of macroeconomic policies (including common
  currency, harmonization of standards and
  regulations)
• Example EU members participating in the Euro
  currency zone
• .

40
Political Union

• It is the ultimate type of economic integration
  whereby member countries achieve not only
  monetary and fiscal integration but also
  political integration.
• Example the Europe Union (EU) has moved towards
  a political union similar to one created by 50
  states of the United States of America.

41
Regional Economic Integration (review)

• Partial Trade
• Free trade in select industries
• Free Trade Area (FTA)
• No internal tariffs at all
• Customs union
• common external tariffs
• Common market
• Factor (labor, capital, technology)
  mobility
• Economic union
• Common currency
• Political union
• Political integration

42
For and Against RTAs

• The central economic question
• -Are RTAs supportive of gradual, long run
  increases in world trade (building blocks),
• or
• -Do they tend to become obstacles to further
  relaxation of trade barriers (stumbling blocks)?

43
For and Against RTAs (cont.)

• Proponents of RTAs view them as building blocks
  toward freer, more open, world trade
• Opponents view RTAs as undermining progress
  toward multilateral (worldwide) agreements

44
Advantages of Regional Trade Agreements

1. Access to larger markets leads to internal
   economies of scale.
2. External economies of scale due to improved
   infrastructure (e.g. transport and telecoms
   links)
3. Greater international bargaining power.
4. Increased competition between members.
5. More rapid spread of technology.

45
Disadvantages of Regional Trade Agreements

1. Country may lose resources to more efficient
   members, or to geographical center, and become
   depressed region.
2. Firms may co-operate, collude and merge, leading
   to greater monopoly power.
3. Diseconomies of scale if firms become very large.
   
4. High administrative costs of trading bloc.

46
Regional Trade Agreements-Opportunities

• Elimination of trade barriers within the region
  would encourage the efficient firms to expand
  their business activities in all countries within
  the region.
• Healthy competition within the region would help
  the less efficient firms in acquiring
  competencies in order to challenge the efficient
  firms.
• The overall business performance in 'terms of
  productivity, quality, price,
• Delivery and customer service will improve.
• Consumers get better quality goods and services
  at competitive price
• Employment opportunities in the region increase.

47
Regional Trade Agreements-Threats

1. The removal of trade barriers provides
   opportunities to the efficient firms to enter the
   different markets within the region. This
   endangers the survival of the less efficient
   firms.
2. The resources of the less efficient countries are
   exploited by the firms from the advanced
   countries of the region.
3. The less developed countries of the region mostly
   become consumption centers while the advanced
   countries of the region become the production
   centers.
4. The less developed countries become still poorer
   whereas the advanced countries of the region
   become still richer.
5. It discourages trade with non-members as trade
   with non-members is subject to strict rules and
   trade barriers.

48
Regional Trade Agreements and the WTO

• Since 1948, over 400 agreements have been listed
  with the WTO 75 of those since 1995
• 225 of these agreements are still active (2008)
• The WTO and GATT allow RTAs, assuming they create
  more new trade than they divert (destroy)
• - trade creation gt trade diversion

49
Trade Creation vs. Trade Diversion

• Trade Creation an expansion in world trade
  resulting from formation of an FTA
• a welfare-increasing effect.
• Trade Diversion a shift in the pattern of trade
  from low-cost world producers to higher-cost FTA
  members
• a welfare-reducing effect.

50
Creation - DiversionExample

• Assume there are three countries (A, B, and C) in
  the world
• A is the worlds high-cost producer of beer
• B is the medium-cost producer
• C is the worlds low-cost producer
• What happens if Country A is a closed economy
  and then opens its economy up to trade???

51
Country A is NOT yet open, so there is no trade
P 18 , Q 7
Sa
Da
Pa 18
7
52
1st Country A Opens trade to Countries B
C C is low-cost producer So C exports amount
Qd12 minus Qs 2 10
Sa
Da
Pa 18
Pb12
Pc10
12
2
53
Now Country A puts a 4 Tariff on BOTH
countries goods C is STILL the low-cost
producer C exports amount Qd9 minus Qs5
4
Sa
Da
Pa 18
PbT16
PcT14
5
9
54
Now Country A enters a Trade Agreement with
B As A removes the tariffs from Bs good,
Bs price is back to its earlier level B is
now the low-cost producer B exports amount
Qd10 minus Qs 4 6 This agreement therefore
CREATES trade from previous export level of
4 This trade creation is noted by triangles,
e and f.
Pa 18
PcT14
e
f
Pb12
4
10
5
9
55
However by entering an agreement with B and not
C who is really the low-cost producer..
Country A has diverted trade away from C This
TRADE DIVERSION is noted by rectangle G. If the
area (e f) is greater than the area of G, world
welfare will increase If the area of G is greater
than the area (e f), world welfare will
decrease
Pa 18
PcT14
e
f
Pb12
G
Pc10
4
10
5
9
56
This is one extra one, JUST so that you can
see all numbers and lines together. We have
already completed the discussion
Sa
Da
Pa 18
PbT16
PcT14
f
e
Pb12
G
Pc10
2
5
4
9
7
12
10
57
THE STATIC EFFECTS of a Regional Trade Agreement

• One more time .
• In this example, trade creation of the trade
  agreement increases world welfare in triangles e
  and f
• But trade diversion occurs in box G
• If the area of (e f) is greater than the area
  of G, world welfare will increase
• If the area of G is greater than the area (e
  f), world welfare will decrease

58
Why Would A Form a FTA With B Instead of With
C?

• Dynamic effects
• Overall growth in market
• Expanded production
• Greater economies of scale
• Maybe location issues
• Political reasons

59
How does WTO react to this

• GATT/WTO provides an exception to
  most-favored-nation status for RTAs as, in
  general, trade creation is larger than trade
  diversion
• RTAs may create losses for some producers in some
  countries outside the agreement
• The number of RTAs is increasing thus increasing
  the amount of trade diversion

60
European Union. EU

• The European Union (EU) is an economic and
  (partially) political union of 27 member who are
  located primarily in Europe

61
Organization of EU

• European Council
• Heads of State President of European Commission
• Resolves major policy issues sets direction
  2x year
• European Commission Brussels, Belgium
• Proposing, implementing monitoring compliance -
  EU laws
• Commissioners appointed by each country 5 year
  renewable terms
• Competition Commissioner regulator of competition
  and MA
• Council of the European Union
• Ultimate controlling authority approves
  proposed laws
• 1 representative from each state varies with
  topic
• Use majority voting rules rather than unanimous
  agreement
• European Parliament Strasbourg, France
• Directly elected by population 732 members
• Debates legislation Consultative body
• Court of Justice

62
Functions of EEC/EU

• Common Agricultural Policy (CAP).
• Free movement from one nation to the other,
• Imports allowed only when DDgtSS,
• Rich farmers became richer,
• European Monetary Union (EMU).
• Common Transport Policy.

63
Central European Free Trade Agreement (CEFTA)

• The members of the CEFTA agreement are Albania,
  Bosnia, Herzegovina, Croatia, Macedonia, Moldova, 
  Montenegro, Serbia and UNMIK on behalf of Kosovo.
• Former parties are Bulgaria, the Czech
  Republic, Hungary, Poland, Romania, Slovakia
  and Slovenia. Their CEFTA membership ended when
  they joined the EU. Croatia is set to join the EU
  in 2013.

64
European Free Trade Association- EFTA

• Formed in 1959.
• Member nations Iceland, Liechtenstein Norway,
  and Switzerland.
• Former members UK, Denmark Ireland, Austria,
  Sweden and Finland joined the EU in 1995 and thus
  ceased to be EFTA members.

65
Free Regional Trade Agreements in the Americas
66
North American Free Trade Agreement-NAFTA

• North American integration has an interest in
  purely economic issues and there are no
  constituencies for political integration.
• Came into being in 1994
• U.S.-Canada Free Trade Agreement
• North American Free Trade Agreement (NAFTA)
• Member Countries US, Canada and Mexico

67
Other Aspects of NAFTA

• Objectives
• More business opportunities in Mexico.
• Enhance competitive advantage.
• Reduce prices
• Enhance industrial development.
• Assist Mexico in earning additional foreign
  exchange.
• Improve political relations.

• Measures
• Residents of NAFTA can invest easily in other
  member nations.
• Protection of Intellectual Property Rights.
• Similar Product Standards
• Free flow of FoP.
• Pollution Control.

68
What are the drawbacks?

• Many US industries shifted to Mexico because
  Mexico offered less stringent policies.
• It was perhaps implemented without prior
  preparations.

69
Association of South-East Asian Nations (ASEAN)

• The development in Asia has been different from
  that in Europe and the Americas
• Asian interest in regional integration is
  increasing for pragmatic reasons
• Asia accounts for 20 of world trade.
• It has substantial trade liberalisation.
• It has created numerous sub-regional economic
  trade zones, which are named transnational export
  processing zones, natural economic territories,
  or growth triangles

70
Brief Background of ASEAN

• A group of 6 Nations Singapore, Brunei,
  Malaysia, Philippines, Thailand and Indonesia
• In 1992- established CEPT (Common Effective
  Preferential Tariffs) Plan
• Free trade area in 15 years.
• Tariff cut from 0.50 to 20 beginning with 15
  products.
• Strength skilled and educated human resource.
• Created Asean Free Trade Area (AFTA) in 1994.

71
About AFTA

• Objectives
• To encourage inflow of foreign investments.
• To establish free trade area.
• To reduce tariff on the products produced in
  ASEAN countries

72
South Asian Association for Regional Cooperation
(SAARC)

• Member nations India, Bangladesh, Bhutan,
  Pakistan, Maldives and Sri Lanka.
• Established in 1983.
• Objectives
• To improve quality of life and welfare of the
  people.
• To develop region economically, socially and
  culturally.
• To enhance the self reliance,
• To provide conducive environment
• To enhance mutual assistance.
• To extend co-operation to other regional trade
  agreements.

73
Andean Community

• The Andean Community is a customs union
  comprising the South American countries
  of Bolivia, Colombia, Ecuador and Peru. The trade
  bloc was called the Andean Pact until 1996 

74
Mercosur

• Mercosur is an economic and political agreement
  among Argentina, Brazil, 
• Paraguay and Uruguay. Its purpose is to
  promote free trade and the easy movement of
  goods, people, and currency. It has evolved into
  a full customs union.

75
The Adean Community and Mercosur merging??

• In 2004 the Andean Community published a joint
  letter of intention for future negotiations
  towards integrating all of South America in
  a Union of South American Nations (USAN),
  patterned after the European Union.

There have been numerous stalemates, however.
76
Prominent Regional Trade Blocs
77
(continued) Prominent Regional Trade Blocs
78
(continued) Prominent Regional Trade Blocs
79
Criticism of International Institutions

• International institutions receive three types of
  criticism
• 1. Sovereignty and Transparency
• -International institutions can violate national
  sovereignty by imposing unwanted domestic
  economic policies
• -Transparency concerns are based on questions
  about the mechanism with which decisions are made
  within an international institution

80
Criticism of International Institutions (cont.)

• 2. Ideology
• -Critics argue that the advise and technical
  assistance provided to developing countries are
  often a reflection of the biases and wishes of
  developed country wishes.
• 3. Implementation and adjustment costs
• -When agreements are reached that combine
  developed and developing countries, there are
  often asymmetries in the ability to absorb the
  costs associated with them that favor developed
  nations.

81
Economic Integration Institutions and
PracticesPart 4 Common Justifications for
Protectionism
82
Commercial Policy and Jobs

• It is important to compare the costs and benefits
  of trade barriers and examine the most common
  reasons given for protecting specific industries

83
Direct Costs and Jobs Saved in Agriculture,
Clothing, and Textiles

• Since the phase in of the Uruguay Round tariff
  cuts, average tariffs have fallen 40but few
  sectors are average
• For example, agriculture, clothing and textiles
  experience much smaller reductions in tariffs and
  quotas (12, 14, 14 respectively)
• In addition, all of these sectors in the EU,
  Japan, and US have significant non-tariff
  barriers applied to them including large
  government subsidies in the case of agriculture

84
EU, Japanese, and U.S. Protection in Three
Sectors (Mid-1990s, Millions of US)
85
EU, Japanese, and U.S. Protection in Three
Sectors (Mid-1990s, Millions of US)
86
Why Nations Protect Their Industries The Labor
Argument

• The Labor Argument Protection must be used
  against imports from countries where wages are
  much lower
• -Problem Does not consider differences in
  productivity between different workforces As
  productivity rises, so will wages

87
Jobs Saved through Tariffs and Quotas
88
Jobs Saved through Tariffs and Quotas
89
Saving Jobs?

• Trade policy is a grossly inefficient mechanism
  to create jobs
• It relies on too many intervening variables, and
  does not go directly to the heart of the problem
• If job creation is the goal, tariffs and quotas
  are very expensive
• -Better job-creation tools (1) sound
  macroeconomic polices and (2) flexible labor
  markets

90
Why Nations Protect Their Industries The Infant
Industry Argument

• Infant Industry Argument Developing countries
  have new industries that must be protected
  against competition from industrial countries
• -Problems
• may increase inefficiency and result in negative
  linkage effects and
• (2) technological externalities are difficult to
  measurewhich industries should be protected?

91
Why Nations Protect Their Industries The
National Security Argument

• National Security Argument Certain industries
  must be protected in order to guard national
  security (military security, cultural values)

92
Why Nations Protect Their Industries The
Retaliation Argument

• Retaliation Argument Another country's trade
  barriers must be countered with trade barriers
• -Problems Although retaliation can provide an
  incentive for trade negotiations, it can also
  lead to escalating trade wars

93
Economic Integration Institutions and
PracticesPart 5 Trade Labor and
Environmental Standards
94
Trade Laws and Standards

• (We already know) - Since the end of WWII, many
  of the formal barriers to trade have been
  removed...
• However, unrestricted flow of trade (and
  increased integration) are still hampered by
  differences in
• National laws and regulations
• National technical, health and safety,
  environmental, labor standards, etc.
• -These are very often good ... But often
  adopted for domestic reasons without
  consideration of the effects on trade

95
Setting Standards Harmonization, Mutual
Recognition, or Separate?

• Most trade agreements and WTO commitments allow
  for the combination of
• Harmonization of standards Two or more countries
  adopt a common set of standards
• Mutual recognition of standards Countries
  maintain their own standards, but accept the
  standards of others as valid and sufficient
• Separate standards Countries maintain their own
  standards and refuse to recognize the standards
  of others

96
Setting Standards Harmonization, Mutual
Recognition, or Separate?

• No general rule determines which way of dealing
  with the differences in standards is best for
  international trade
• Each of the three mechanisms has advantages and
  disadvantages
• -Harmonization of technical standards, for
  example, leads to a larger market and greater
  efficiency, but may also freeze inferior
  standards into place

97
Setting Standards Harmonization, Mutual
Recognition, or Separate? (cont.)

• However, differences in labor and environmental
  standards, in particular, have generated concerns
• High-income countries often fear that more
  relaxed standards in other countries induce
  domestic firms to
• adopt lower standards to remain internationally
  competitive... or
• move to countries with lax standards
• Countries are feared to engage in a race to the
  bottom
• adoption of the lowest level of standards
  possible, in order to attract foreign firms

98
Income Levels, Society and the Environment
99
Labor Standards

• The U.S., the EU and many other countries today
  want labor and environmental standards be
  included in any future trade agreements
• Some parties want monetary fines against
  violators
• Some labor and environmental activists see fines
  as inadequate ... demanding the use of trade
  sanctions

100
Defining Labor Standards

• The International Labor Organization (ILO)
  proposed eight core labor standards in four basic
  areas
• Freedom of association and recognition of the
  right to collective bargaining
• Elimination of all forms of forced labor
• Effective abolition of child labor
• Elimination of discrimination in employment and
  occupations

101
Defining Labor Standards (cont.)

• The four areas of standards are widely agreed
  upon, but details are also ambiguous for
  example, what is meant by exploitation?
• Many potential labor standards are contentious
• For example ...
• universal minimum wage level, limits on the
  number of work hours, workplace health and
  safety, etc.
• - For example ... Low-income countries are
  reluctant to pay much higher minimum wages
  higher wages would reduce firm profits, and
  result in closing down of production and a rise
  in unemployment

102
Labor Standards and Trade

• As we have said before ...
• Low- and high-income countries face very
  different sets of economic constraints so
  harmonization of labor standards is thus
  difficult
• Should one country, then, use trade sanctions to
  enforce certain labor standards in another?
• Labor activists often favor the use of trade
  barriers to enforce standards
• Trade economists think such barriers are
  ineffective as an enforcement mechanism and only
  spur protectionism and other economic
  inefficiencies

103
Economists express four concerns over the use of
trade measures to enforce standards

• Effectiveness
• only large countries or coalitions of countries
  can use trade barriers successfully to enforce
  standards
• Hazy borderline between protectionism and
  concern
• special interests sometimes use the issue of
  foreign labor standards in order to attain their
  real goal, protection against foreign competition

104
Economists express four concerns over the use of
trade measures to enforce standards....

• The specific content of labor standards there is
  no international agreement on the specific
  content and language of labor standards
• The potential to set off a trade war, thus an
  infraction of WTO rules
• -Sanctions may cause retaliation from the
  targeted country, thus further hurting
  international trade rules

105
Evidence on Low Standards as a Predatory
Practice (?)

• Low standards are generally not an effective
  mechanism to enhance competitiveness and attract
  foreign investment
• There is very little evidence that countries that
  lower labor standards succeed in obtaining a
  comparative advantage in a new line of production
• Low labor standards are not a successful means to
  attract foreign investment low labor standards
  are correlated with unskilled, less-literate
  labor forces and lack of economic development

106
Trade and the Environment

• There is considerable overlap in the debates on
  labor and environmental standards ... Guess what?
  ... The same concerns...
• Proponents of including environmental standards
  in trade agreements believe sanctions should be
  used to enforce such standards
• Critics of sanctions have concerns about the
  ineffectiveness of sanctions, the hazy borderline
  between protectionism and environmental concerns,
  the lack of international definitions of
  environmental standards, and the potential for
  trade wars

107
Non-Transboundary and Transboundary Effects

• Three arguments by proponents of trade barriers
  to enforce environmental standards are
• 1) Without adequate enforcement of standards,
  countries engage in an environmental race to the
  bottom to boost industrial competitiveness
• 2) Lack of enforcement of standards in developing
  countries induce dirty rich country industries to
  export pollution and thus create pollution
  havens
• 3) Poor enforcement leads to environmental
  problems that spill over to another country

108
Environmental Race to the Bottom

• Is there an environmental race to the bottom?
• Most countries have adopted tougher
  environmental standards over time. In order for
  race to the bottom to occur, sectional interests
  would have to be politically powerful

109
Trans-boundary Environmental Problems

• Do environmental spill-overs occur?
• Trans-boundary spill over effects are frequent
• However, a successful use of sanctions to counter
  them is possible only by a large country or a
  coalition of countries, and may lead to trade wars

110
Alternatives to Trade Measures??

• As long as there are large income gaps between
  countries, differences in labor and environmental
  standards are unlikely to disappear
• Seeking enforcement of standards through
  sanctions, however, is often futile and harms
  international trade
• How, then, can we enjoy the benefits from world
  trade while resolving the conflicts over
  standards?

111
Alternatives to Trade Measures??

• There are potentially three ways of enforcing
  sanctions without hurting international trade
• Labels for exports
• Requiring home country standards
• Increasing international negotiations

112
Labels for Exports

• Labeling A certification process whereby a label
  is attached on an exported good to indicate to
  consumers that the good was produced under humane
  and environmentally sound conditions
• The method is already in place in some instances
  Cambodian textile exports to the U.S., Starbucks
  coffee imports, etc.
• Problems (1) Many countries resist labeling as
  an infringement of their sovereignty and (2)
  consumers must be convinced the label provides
  accurate information

113
Requiring Home Country Standards

• Requiring home country standards High-standard
  countries can require their firms to follow home
  country standards when operating abroad
• Pros impedes the race to the bottom avoids the
  problem of high-income countries dictating
  standards
• Cons addresses only firms of high-standard
  countries
• -Low-country producers are not affected
• -A high-standard country firm may outsource
  production to a low-standard country producer

114
Increasing International Negotiations

• Increasing international negotiations Using
  either existing international organizations or
  creating new agreements and organizations
• ILO could be given a greater role and start, for
  example, publicizing lack of compliance with
  labor standards
• New agreements and organizations could be created
  to address environmental issues
• The WTO is not an environmental organization
  however, it allows international environmental
  agreements to develop their own enforcement
  mechanism

115
Economic Integration Institutions and
PracticesPart 6 International Trade and
Economic Growth
116
Trade and Growth

• We already know this.
• Economic growth is shown graphically as an
  outward shift of the countrys production
  possibility frontier (PPF).
• Since growth affects both production and
  consumption, then it also affects international
  trade.

117
Economic Growth

• We already know this.
• An economy is said to grow when its total real
  output or gross domestic product (GDP) rises.
• Per capita GDP is a measure of a countrys
  standard of living. For standard of living to
  rise over time, GDP must grow faster than the
  population.

118
Economic Development

• Economic Development the achievement of a
  quality of life for the average citizen of a
  country that is comparable to the average citizen
  of a country with a modern economy.
• Characterized by
• High levels of consumption
• Broad-based educational achievement
• Adequate housing
• Access to high-quality health care, etc.
• Economic growth is essential for economic
  development.

119
Strategies for Economic Development

• Primary Export-led Development Strategy
• Import-Substitution Development Strategy
• Outward-looking Development Strategy

120
Primary Export-Led Development Strategy

• Policies designed to exploit natural comparative
  advantage by increasing production of a few
  current export goods most closely related to the
  countrys resource base.
• Country examples include Columbia (coffee),
  Mexico and Nigeria (petroleum), and Malaysia
  (rubber).

121
Advantages of Primary Export-led Development
Strategy

• This strategy would encourage more intensive use
  of existing or abundant resources.
• It could help attract foreign investment.
• It may provide linkage effects or benefits to
  other industries as a result of one industry
  expanding.

122
Arguments Against Primary Export-led Strategy

• The world markets for primary products do not
  grow fast enough to support this type of
  development.
• The prices of primary products relative to the
  prices of manufactured goods may tend to fall
  over time due to sluggish demand or oversupply.

123
Import-Substitution Development Strategy

• Policies designed to promote rapid
  industrialization and development by erecting
  high barriers to foreign goods to encourage local
  production.
• What?????? Do we like this??????

124
Arguments Against Import-substitution Strategy

• The high barriers to trade rarely come down.
• The strategy encourages citizens to spend scarce
  resources to lobby or bribe government officials
  to protect their industries.

125
Outward-Looking Development Strategy

• These policies involve government identifying or
  targeting industries in which the country has
  potential comparative advantage.
• Successful country examples include Japan, South
  Korea, Singapore, and Taiwan.
• Refer to next slide for more examples

126
Trade Reforms in Selected Developing Countries
127
Technological Change

• Technological (technical) changeoccurs when the
  same amount of output can be produced with fewer
  factor inputs, or when the same amount of inputs
  can produce greater amounts of output.
• Our International Trade patterns enhance this
  nowadays!

128
Direct Foreign Investment and MNCs

• Direct Foreign Investmenthappens when a domestic
  firm acquires ownership or control of the
  operations of a foreign firm.
• Multinational Corporations (MNCs)firms that own
  and operate capital in one or more foreign
  countries.
• Not exactly trade but can aid in spread of
  ideas and technology and enhance growth!

129
Outsourcing

• Outsourcingthe movement or shifting of
  production by a firm to a foreign location.
• Vilified in some circles, but often not a bad
  thing
• Can lead to domestic growth!

130
Economic Integration Institutions and
PracticesPart 7 IMF and World Bank
131
The IMF, the World Bank, and the WTO

• The three global organizations that play a major
  role in international economic relations are
• The International Monetary Fund (IMF)
• The World Bank
• The World Trade Organization (WTO) (We already
  met them!)

132
The International Monetary Fund (IMF) (Quick
view)

• The 188 member (2012) IMF is the central monetary
  institution in todays international economy...
  However it can greatly affect trade.
• Funding for the IMF comes from its membership
  fee, or quota (the price of membership)
• depends on the members size and status
• determines the members voting weight

133
IMF Background

• Great Depression and WWII led to HIGH trade
  barriers..
• This led to devaluation of national currencies
  and decrease in world trade.
• So IMF founded by 29 nations (1944/1945) at the
  Bretton Woods meetings between the Allies, to
  help regulate monetary policy

134
IMF Functions

• Functions of the IMF
• -Prevents crisis in a financial system by
  promoting sound macroeconomic policy, which
  includes
• -Balanced expansion of trade
• -Stable exchange rates
• -Avoidance of competitive devaluations
• -Orderly corrections of Balance of Payments
  problems

135
IMF Member Requirements

• Members must
• make periodic membership payments towards their
  quota
• refrain from currency restrictions unless granted
  IMF permission
• abide by the Code of Conduct in the IMF Articles
  of Agreement
• and provide national economic information.
• However BORROWERS have stricter requirements!

136
IMF Borrowers

• A Financial crisis occurs when a country runs out
  of foreign exchange reserves, which are a major
  currency or gold that can be used to pay for
  imports and international borrowings
• In the event of a financial crisis,
• Members borrow against IMF quotas
• IMF conditionality Requirement for the borrowing
  member to carry out economic reforms in exchange
  for a loan

137
The World Bank (A Quick view)

• Founded in 1944 as the International Bank for
  Reconstruction and Development (IBRD)
• Has same membership and similar structure to IMF
• Members voting rights are proportional to number
  of shares owned

138
The World Bank

• Original purpose
• To provide financing mechanisms to rebuild Europe
  after World War II
• Current Goal
• - The reduction of poverty

139
World Bank goal

• The method that the World Bank reduces poverty
  is by providing loans to developing
  countries for capital programs.
• According to the World Bank's Articles of
  Agreement its decisions must be guided by a
  commitment to promote foreign investment, internat
  ional trade and facilitate capital investment.

140
World Bank vs. World Bank Grouphttp//www.worldba
nk.org/

• World Bank
•  International Bank for Reconstruction and
  Development (IBRD)
• International Development Association (IDA)
• World Bank GROUP
• The two above PLUS
• International Finance Corporation (IFC)
• Multilateral Investment Guarantee Agency (MIGA)
• International Centre for Settlement of Investment
  Disputes (ICSID) http//www.worldbank.org/