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Institutions of the International Economy

Institutions of the International Economy . Development of the World Trading System. Intellectual arguments for free trade Adam Smith and David Ricardo Free trade emerged gradually as government policy in Britain, the leading nation in the 19 th century

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Institutions of the International Economy

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  1. Institutions of the International Economy

  2. Development of the World Trading System • Intellectual arguments for free trade • Adam Smithand David Ricardo • Free trade emerged gradually as government policy in Britain, the leading nation in the 19th century • Repeal of the Corn Laws (1846) allowed free trade in food • Leading European nations maintained free trade through late 19th Century to WW I

  3. Great Depression • US stock market collapse (1929) • Partial recovery • Congress adopted the Smoot-Hawley tariff (1930) • Almost every industry had its “made to order tariff” • Foreign response was to impose own barriers • Everyone’s exports tumbled • Depression continued almost till World War II

  4. Development of the World Trading System • No one wanted to repeat the mistakes of the 1930s • Big conference at Bretton Woods, NH, during WW II • Objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas

  5. Bretton Woods produced 3 sets of institutions that guide us today • General Agreement on Tariffs and Trade (GATT) - multilateral agreement under US leadership • 19 original members grew to 120 • International Monetary Fund • To prevent currency crises • World Bank • Originally aimed at lending for reconstruction of Europe • Mission expanded in 1950s to supporting ‘developing countries’

  6. Development of the World Trading System • GATT used ‘rounds of talks’ to reduce trade barriers gradually • Mutual tariff reductions negotiated • Dispute resolution only if complaints were received • Little permanent machinery • Uruguay Round GATT 1986-93

  7. 1980s Fears in the World Trading System • Pressure for greater protectionism in 1980s due to • Increase in the power of Japan and closed Japanese markets • US trade deficit • GATT circumvented by many countries • through use of “voluntary” export restraints

  8. The World Trade Organization • The WTO was created (1995) during the Uruguay Round of GATT to police and enforce GATT rules • Most comprehensive trade agreement in history

  9. Formation of WTO had an impact on • Agriculture subsidies (stumbling block: US/EU) • Applying GATT rules to • services and • intellectual property • Strengthening of monitoring and enforcement

  10. The WTO • 150 members in 2007 • Represents 90% of world trade • Russia not now a member • 9 of 10 disputes satisfactorily settled

  11. Under GATT and WTO • Tariff reduction from average 40% to average 5% • Trade volume of manufactured goods has increased 20-fold

  12. WTO at Work • 196 disputes handled by GATT in its 50 year history • 280 disputes brought to WTO between 1995 and 2003 • US is biggest WTO user • Big wins: beef, bananas • Big loss: Kodak vs. Fuji Film

  13. Basic principle: Follow ‘fair’ market prices • No new tariffs, quotas • Limits on subsidies, especially in developed countries • Real international rules that guide functioning of the global marketplace

  14. The WTO -Achievements • Telecommunications (1997) • 68 countries - 90% of world telecommunications revenues • Pledged to open their market to fair competition • Financial Services (1997) • 95% of financial services market • 102 countries would open their markets to varying degrees

  15. WTO in Seattle (1999) • “Millennium round” was aimed at further reduction of trade barriers in agriculture and services • WTO meeting disrupted by • Human rights groups • Trade unions • Environmentalists • Anti globalization groups • No agreement was reached • WTO still struggling for liberalization today

  16. The WTO in the 21st Century • China joined WTO in 2001 • A major step in emergence of market economy there • A focus of world trade • Despite criticism, WTO has been the center of economic evolution • Rapid growth of developing country economies seems to have undercut critics

  17. International Monetary Fund • Central banker for world’s central banks • Headquarters Washington DC, • Western Europeans have picked the head

  18. The IMF is the organization that is supposed to resolve catastrophes • Intervenes with loans when • currencies crash • nations can’t pay their bills • Establishes very strict conditions for aid • Radical cuts in government spending required • Examples • Iceland, 2008-09 (at least $2 billion) • Korea, Thailand, Indonesia ($40 billion) • Jamaica, 1977-78 • United Kingdom, 1976

  19. Voting is weighted to established nations, though • China, India, etc. are asked to contribute resources

  20. World Bank • Originally set up as a lending institution • Is seen as the world’s most important anti-poverty agency • Highly respected economists • But gets overwhelming share of revenue from close-to-market-rate lending • Poor country governments often lack skills to evaluate projects • If project fails, poor country still has to repay loan

  21. The world doesn’t have a body that carries out any really coherent program against poverty

  22. Regional Integration • While trade was growing freer globally, some regions focused on reducing barriers within themselves • “Regional economic integration” refers to agreements in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers for • goods, • services, and • factors of production

  23. Why Regional Integration? • Despite the trend toward freer trade, it is hard to get the whole world to agree on changes • Neighbors can often make more comprehensive agreements • Europe has freedom for banks to operate freely around Europe • Rest of world hasn’t been able to develop that • People, capital can move freely around Europe, too

  24. Levels of Economic Integration • In a Free Trade Area all barriers to the trade of goods and services among member countries are removed • A Customs Union eliminates trade barriers between member countries and adopts a common external trade policy • A Common Market has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members

  25. Levels of Economic Integration • An Economic Union involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy • A Political Union occurs when centralized political institutions coordinates the economic, social, and foreign policy of the member states

  26. Regional Economic Integration In Europe Member States of the European Union in 2007

  27. The North American Free Trade Agreement • The North American Free Trade Agreement (NAFTA) was ratified by the governments of the United States, Canada, and Mexico in 1993; it became law January 1, 1994 • NAFTA includes • reduced tariffs (99% of goods traded) • removal of most barriers on cross border flow of services • Removal of restrictions on FDI except in certain sectors • Mexican railway and energy • US airline and radio communications • Canadian culture • A customs union, not full economic union

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