Economic Integration … Institutions and Practices

Part 1: Introduction

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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

• 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

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 country’s domestic market

Even more, things you already know!!

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.

• 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

THE WELFARE EFFECTS OF TRADE IN AN INDIVIDUAL PRODUCT

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

GLOBALIZATION

Real World Exports of Goods as a Percentage of Real World GDP

25% –

20% –

15% –

10% –

5% –

0% –1975 1980 1985 1990 1995 2000 2005

Exports as a Percent of GDP

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

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

• 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

Economic Integration … (Continued)

Economic Integration …

• … economic & political agreements that give preference to members within the agreement

– Global

– Regional … (or Bilateral)

Some Types of International Economic Institutions… with Examples … (Just for info…)

2-14Our Focus

More …. Types of International Economic Institutions… with Examples

Economic Integration … Institutions and Practices

Part 2: Global Trade Agreements

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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)

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“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.

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

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The GATT/WTO functions through trade rounds:

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“Kennedy” … “Tokyo”

• During the Kennedy Round in the mid-1960’s, and the Tokyo Round in the 1970’s, other issues included:

- Problems with dumping

- Subsidies to industry

- Nontariff barriers to trade

The Uruguay Round

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The Uruguay Round “famously” focused on contentious issues such as:

• non-tariff barriers

• intellectual property rights

• trade in services

• agriculture.

However, the BIGGEST consequence…

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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…

“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

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What the WTO Stands for….

• Non-discrimination• More “open”- ness• Predictability and transparency• More competitiveness• Benefits for less developed countries

(>75% are “developing” or LDCs)

• Protection for the environment***

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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  

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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

Countervailing Duty

• WTO rulings are binding … as they ultimately permit countervailing duties

• Countervailing Duty—a 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. ***

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

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????

WTO and the Environment

• WTO rules block a country’s 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

WTO website…

http://www.wto.org/

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Economic Integration … Institutions and Practices

Part 3: Regional Trade Agreements

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Regional Trade Agreements

Besides these Global Agreements …

Regional Trade Agreements also form a key part of the institutional structure of the world economy

What are Regional Trade Agreements?

• Regional Trade AgreementRegional 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.

Types of Regional Trade AgreementsTypes of Regional Trade Agreements

Partial trade agreementFree trade areasCustoms UnionCommon MarketEconomic UnionPolitical Unions

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)

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

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.

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

.

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.

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

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)?

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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

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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.

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.

Regional Trade Agreements-Opportunities

a. Elimination of trade barriers within the region would encourage the efficient firms to expand their business activities in all countries within the region.

b. Healthy competition within the region would help the less efficient firms in acquiring competencies in order to challenge the efficient firms.

c. The overall business performance in 'terms of productivity, quality, price,

d. Delivery and customer service will improve.

e. Consumers get better quality goods and services at competitive price

f. Employment opportunities in the region increase.

Regional Trade Agreements-Threats

a. 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.

b. The resources of the less efficient countries are exploited by the firms from the advanced countries of the region.

c. The less developed countries of the region mostly become consumption centers while the advanced countries of the region become the production centers.

d. The less developed countries become still poorer whereas the advanced countries of the region become still richer.

e. It discourages trade with non-members as trade with non-members is subject to strict rules and trade barriers.

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 > trade diversion

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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.

Creation - DiversionExample

• Assume there are three countries (A, B, and C) in the world

– A is the world’s high-cost producer of beer

– B is the medium-cost producer

– C is the world’s low-cost producer

What happens if Country A is a closed economy … and then opens its economy up to trade???

Pa =18

SaDa

7

Country A is NOT yet open, so there is no trade … P= 18 , Q =7

Pc=$10

Pb=$12

Pa =18

SaDa

1st … Country A Opens trade to Countries B & C“C” is low-cost producerSo “C” exports amount Qd=12 minus Qs= 2… = 10

2 12

Pc+T=$14

Pb+T=$16

Pa =18

SaDa

Now … Country A puts a $4 Tariff on BOTH countries’ goods“C” is STILL the low-cost producer“C” exports amount … Qd=9 minus Qs=5 … = 4

5 9

Pb=$12

Pc+T=$14

Pa =18

Now … Country A enters a Trade Agreement with “B”As “A” removes the tariffs from “B’s” good, “B’s” price is back to its earlier level“B” is now the low-cost producer “B” exports amount Qd=10 minus Qs= 4 … = 6This agreement therefore CREATES trade from previous export level of 4This “trade creation” is noted by triangles, “e” and “f”.

4 105 9

e f

Pb=$12

Pc+T=$14

Pa =18

4 105 9

e fG

Pc=$10

However by entering an agreement with “B” and not “C” … who is really the low-cost producer….. Country A has diverted trade away from CThis TRADE DIVERSION is noted by rectangle G.If the area (e + f) is greater than the area of G, world welfare will increaseIf the area of G is greater than the area (e + f), world welfare will decrease

***This is one extra one, JUST so that you can see all numbers and lines together. We have already completed the

discussion

Pc=$10

Pb=$12

Pc+T=$14

Pb+T=$16

Pa =18

SaDa

e fG

2 1254 97 10

• 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

THE STATIC EFFECTS of a Regional Trade Agreement

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

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

European Union…. EU

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

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 M&A

• 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– Supreme appeals court for EU law – 1 judge from each state – required to act as independent officials

Functions of EEC/EU

• Common Agricultural Policy (CAP).– Free movement from one nation to the other,– Imports allowed only when DD>SS,– Rich farmers became richer,

• European Monetary Union (EMU).

• Common Transport Policy.

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.

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.

Free Regional Trade Agreements in the Americas

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

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.

What are the drawbacks?

• Many US industries shifted to Mexico because Mexico offered less stringent policies.

• It was perhaps implemented without prior preparations.

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

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.

About AFTA

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

countries

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.

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 

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.

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.

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Prominent Regional Trade Blocs

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(continued) … Prominent Regional Trade Blocs

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(continued) … Prominent Regional Trade Blocs

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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

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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.

Economic Integration … Institutions and Practices

Part 4: Common “Justifications” for Protectionism

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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

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

• Since the phase in of the Uruguay Round tariff cuts, average tariffs have fallen 40%—but 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

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EU, Japanese, and U.S. Protection in Three Sectors (Mid-1990s, Millions of US$)

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EU, Japanese, and U.S. Protection in Three Sectors (Mid-1990s, Millions of US$)

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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

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Jobs Saved through Tariffs and Quotas

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Jobs Saved through Tariffs and Quotas

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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

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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:

(1)may increase inefficiency and result in negative linkage effects and

(2)(2) technological externalities are difficult to measure—which industries should be protected?

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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)

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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

Economic Integration … Institutions and Practices

Part 5: Trade … Labor and Environmental Standards

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

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

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

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

Income Levels, Society and the Environment

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

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

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

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

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

1. Effectiveness:

only large countries or coalitions of countries can use trade barriers successfully to enforce standards

2. 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

3. The specific content of labor standards: there is no international agreement on the specific content and language of labor standards

4. 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

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

Evidence on Low Standards as a Predatory Practice (?)

Low standards are generally not an effective mechanism to enhance competitiveness and attract foreign investment

1. There is very little evidence that countries that lower labor standards succeed in obtaining a comparative advantage in a new line of production

2. 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

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

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

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

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

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?

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

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

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

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

Economic Integration … Institutions and Practices

Part 6: International Trade … and Economic Growth

Trade and Growth

We already know this….

• Economic growth is shown graphically as an outward shift of the country’s production possibility frontier (PPF).

• Since growth affects both production and consumption, then it also affects international trade.

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 country’s standard of living. For standard of living to rise over time, GDP must grow faster than the population.

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.

Strategies for Economic Development

• Primary Export-led Development Strategy

• Import-Substitution Development Strategy

• Outward-looking Development Strategy

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 country’s resource base.

– Country examples include Columbia (coffee), Mexico and Nigeria (petroleum), and Malaysia (rubber).

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.

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.

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??????

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.

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…

Trade Reforms in Selected Developing

Countries

Technological Change

• Technological (technical) change—occurs 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!

Direct Foreign Investment and MNC’s

• Direct Foreign Investment—happens 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!

Outsourcing

• Outsourcing—the 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!

Economic Integration … Institutions and Practices

Part 7: IMF and World Bank

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!)

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

• The 188 member (2012) IMF is the central monetary institution in today’s 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 member’s size and status– determines the member’s voting weight

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

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

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!

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

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

• Member’s voting rights are proportional to number of shares owned

The World Bank

• Original purpose– To provide financing mechanisms to rebuild

Europe after World War II

• Current Goal- “The reduction of poverty”

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, international trade and facilitate capital investment.

World Bank vs. World Bank Grouphttp://www.worldbank.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/