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INTERNATIONAL BUSINESS

ENVIRONMENT

TOPIC 5

The Regulation of International

Exchange

Protectionism hazards (reminder)

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Public choice

Strategic trade policies are likely to be captured by private interest groups who will distort it to their own ends

Negative impact on domestic economy

Rent-seeking behaviour leading to higher prices for consumers, less incentive to quality and innovation

Non-cooperative behaviour

Strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbour

policies that boost national income at the expense of other countries

Retaliation and trade wars

Countries that enforce protectionist measures will probably provoke retaliation. Cross-retaliation may in turns lead to a trade war

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Lessons from the Great Depression

Until the Great Depression of the

1930s, most countries had some

degree of protectionism, that

deepened the effects of economic

crisis.

After the 2nd World War, developed

countries recognised

The value of free trade

The need to regulate international

economic relations among nations in

order to avoid trade wars

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International monetary system

Foreign direct investment

International trade

The 3 pillars of international economic regulation

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A variety of institutions

The General Agreement on Tariffs and Trade (GATT), later World

Trade Organization (WTO)

The United Nations (UN), including the International Labour Office

(ILO), the United nations Council for Trade and Development

(UNCTAD)

The International Monetary Fund (IMF)

The International Bank for Reconstruction and Development (World

Bank) and its sister institutions

The Organisation for Economic Cooperation and Development

(OECD)

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A negotiating forum The WTO is a place where member governments go, to try to sort out

the trade problems they face with each other

The WTO was born out of negotiations, and everything the WTO does is the result of negotiations

A set of rules WTO agreements, negotiated and signed by the bulk of the world's

trading nations provide the legal ground-rules for international commerce

They are essentially contracts, binding governments to keep their trade policies within agreed limits

A place to settle disputes The dispute settlement process written into the WTO agreements aims

to settle differences through some neutral procedure based on an agreed legal foundation

The WTO in brief (http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm)

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Opening the way: the GATT

General Agreement on Tariffs and Trade (GATT) was created by Geneva agreement (October 1947), parallel to International Trade Organisation negotiations, Signed by 23 nations

Aims: promote free trade, regulate international trade, settle trade disputes

Principles and clauses

Reciprocity

Most favoured nation (Article I)

Non-discrimination / National treatment (Article III)

Transparency (Article X)

Reduction of tariff barriers (Article XIII) + ban on quotas (Article XI)

Several "negotiation rounds" held between 1947 and 1995

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

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GATT rounds

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From GATT to WTO

The WTO was born from the GATT in 1995 (Marrakesh Agreement)

Current director-general: Pascal Lamy (French, former EU Commissioner for Trade)

153 Member States in 2009 (incl. China)

Includes a Dispute Settlement Body

Enlarged negotiations (Singapore issues)

Agriculture

Services (GATS)

Foreign investment (TRIMs), intellectual property (TRIPs)

Public procurement

Negotiation rounds:

Millenium Round aborted in 1999

Doha Round launched in November 2001

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The trade dispute settlement procedure: introduction

http://www.wto.org/english/res_e/webcas_e/webcas_e.htm#intro

Environmental standards for gasoline (Venezuela and Brazil vs. US)

Sound recordings (US and EC vs. Japan)

What are these cases about? What are the principles referred to? What were the steps taken to address the issues?

Why is the first case specifically interesting? What is missing in this movie?

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Gasoline case: debriefing

Complaint from Venezuela and Brazil against the US for enforcing protectionist measures on gasoline imports

US standpoint: need to preserve environment and human health (GATT, article XX) by imposing norms on gasoline products (http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#art20)

Venezuelan standpoint: measures are discriminatory / not consistent with national treatment principle

Steps taken

DSB establishes panel that produces a report

US appeals against ruling, appelate body reviews panel decision and produces own report. DSB adopts both reports and produces a ruling

US agrees on DSB ruling and adapts legislation

Key issues

Small country dependent on oil exports to the US prevails on the US

Procedure is focused on nation states, does not say much about business issues

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A recent case of dispute

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The United States filed a complaint Tuesday with the World Trade Organization that says China violated

international trade rules when it imposed tariffs last year on American chicken exports.

The tariffs affect an industry that employs about 300,000 people, said Ron Kirk, the United States trade

representative (left). They ranged from 50 to 100 percent, which means some Chinese importers paid as

much as twice the price for American chicken.

”We will not stand still if we believe that China has violated its commitments as a W.T.O. member and is therefore threatening American jobs,” Mr. Kirk said.

http://www.nytimes.com/2011/09/21/business/global/us-files-complaint-over-chinese-chicken-

tariffs.html?ref=worldtradeorganization

Liberalising trade: the millenium round

The Millennium Round proposal was initiated by the EU, with support from Japan, Canada and some Latin American countries.

It was an attempt to begin another round of trade negotiations, which would add new issues to the WTO’s existing rules

Negotiation areas included: foreign direct investment, government procurement, competition policy, trade facilitation, electronic commerce

The negotiation agenda was meant to be discussed during a Ministerial Meeting of the WTO held in Seattle between November 29th and December 3rd 1999

Due to poor organisation and massive demonstrations from anti-globalisation activists, negotiations collapsed …

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The Doha Round on hold

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The Doha trade round has collapsed in a welter of acrimony with much finger-pointing between the world's two richest trading blocs, the US and the EU.

The stumbling block was farm subsidies, with the Europeans and the Americans accusing each other of not going far enough in cutting back support for their

respective farmer communities. So western farmers will be one group that will be pleased that Doha has gone off the rails. […] Agriculture's share of global GDP has fallen from one-tenth in the 1960s to about 1/30th today. In the developed world, the sector accounts for only 1.8% of GDP and only a little more as a percentage of

the labour force.

But if agriculture matters less and less for the rich countries it matters a great deal for the poor countries […]. So the promise of Doha, called the development round,

has gone unfulfilled and Africa stands to lose the most. The danger for African countries, as NGOs see it, is that the EU will drive hard bargains in regional trade

agreements - the so-called economic partnership agreements (EPAs), the EU wants to sign with African, Caribbean and Pacific countries to replace previous trade

arrangements.

Mark TRAN in The Guardian, 24 July 2006 http://www.guardian.co.uk/news/blog/2006/jul/24/dohadeadasdo

Liberalising trade: the Doha Round

Several meetings

► Intergovernmental meetings: Cancún (2003), Hong Kong (2005)

► Negotiation meetings: Geneva (2004, 2006, 2008), Paris (2005), Potsdam (2007).

Aims

► Opening of agricultural and manufacturing markets

► Extension to trade in services (GATS) and intellectual property regulation (TRIPS)

► Fairer trade rules for developing countries (called "Development Round")

Issues

► Cutting tariffs on industrial goods and services (in developing countries)

► Phasing out subsidies to agricultural producers (in developed countries)

► Reducing barriers to cross-border investment affecting trade (TRIMs)

► Limiting the use of anti-dumping laws

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Trade vs. economic development

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"Calling for trade liberalisation is putting the cart before the horse: when poor countries have stronger economies they will

be in a better position to trade.

The history of industrial capitalism since the mid-18th century has shown that there has not been a single country - not Britain,

not the US, not Germany, Japan or China - that has developed without protecting its infant industries.

Growth, in other words, leads to trade and not vice versa".

Larry ELLIOT in The Guardian, 27 January 2009

http://www.guardian.co.uk/news/blog/2006/jan/27/post64

Assessing WTO action

A major economic cooperation forum

A legitimate international trade regulator

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Focus on trade, leaving capital (foreign direct investment) and labour movement aside

Limited progress with regards to actual multilateral trade liberalisation (incl. proliferation of regional agreements)

Bias towards liberalisation and deregulation

Unbalanced agreements, favouring developed countries

Primacy of trade issues over social or environmental ones?

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The WTO and China

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Sunday, December 11 is the 10th anniversary of China’s joining the World

Trade Organization — a membership that helped turn China into the world’s biggest

economy after the United States. Companies and consumers worldwide have benefited from China’s emergence as a top

trading partner.

And yet, because of special breaks and loopholes for China when it joined the

WTO, it still shields its domestic markets from foreign competition much more than

any other big nation.

By KEITH BRADSHER, New York Times, December 8, 2011

Assignment: Russia's WTO membership

1. Why has Russia long been reluctant to join the World Trade Organisation (WTO)?

2. Why did it eventually join the organization in December 2011?

3. Why does the US strongly support Russia's WTO membership?

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Wrap-up question: in which sense is Russia an illustration of the opportunities and threats of free trade?

Elvira Nabiullina, Russia's minister of economic development,

left, and Pascal Lamy of the W.T.O at a ceremony in Geneva.

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Other bodies: the International Monetary Fund

UN agency created in July 1944, based in Washington (US)

187 members in 2010

Objectives: foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, reduce poverty

Means

Surveillance: follow up of members' macroeconomic policies, in particular those with an impact on exchange rates and the balance of payments

Conditional loans to countries that experience serious financial and economic difficulties, using IMF deposits (Special Drawing Rights)

http://www.imf.org/external/np/exr/facts/glance.htm

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Other bodies: the World Bank (http://www.worldbank.org)

The World Bank – also called International Bank for Reconstruction and Development (IBRD) – is an international financial institution that provides leveraged loans to poorer countries for capital programs with a goal of reducing poverty.

The World Bank is a UN affiliate

It comprises two institutions:

The International Bank for Reconstruction and Development (IBRD)

The International Development Association (IDA)

Their work is complemented by that of

The International Finance Corporation (IFC)

The Multilateral Investment Guarantee Agency (MIGA)

The International Centre for the Settlement of Investment Disputes (ICSID).

The WB gathers 186 members, its current President is Robert Zoellick (former U.S. Trade Representative)

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World Bank resources and activities

Funding

IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the world's financial markets.

IBRD earns a small margin on lending, but the greater proportion of its income comes from lending out its own capital. This capital consists of reserves built up over the years and money paid in from the Bank's 185 member country shareholders.

Loans

Two basic types of loans and credits: investment operations and development policy operations.

Analytic and Advisory Services

Economic research and data collection on broad issues such as the environment, poverty, trade and globalization

Country-specific, non-lending activities: evaluation of a country's economic prospects by examining its banking systems and financial markets, as well as trade, infrastructure, poverty and social safety net issues, for example

Capacity Building

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OTHER INTERGOVERNMENTAL ORGANISATIONS

The ICISD

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ICSID is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States with

over one hundred and forty member States.

ICSID does not conciliate or arbitrate disputes; it provides the institutional and procedural framework for independent conciliation commissions and arbitral tribunals constituted in each case to resolve the dispute. ICSID has two sets of procedural rules

that may govern the initiation and conduct of proceedings under its auspices. These are: (i) the ICSID Convention, Regulations and Rules; and (ii) the ICSID Additional Facility

Rules.

The ICSID Convention provides the basic procedural framework for conciliation and arbitration of investment disputes arising between member countries and investors that

qualify as nationals of other member countries. This framework is supplemented by detailed Regulations and Rules adopted by the ICSID Administrative Council pursuant to

the Convention. The Additional Facility Rules authorize the ICSID Secretariat to administer certain types of proceedings between States and foreign nationals which fall

outside the scope of the Convention.

http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=RightFrame&FromPage=Dispute Settlement Facilities&pageName=Disp_settl_facilities

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Other bodies: the OECD

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History

The Organisation for European Economic Co-operation (OEEC) was created in 1948 to help administer the Marshall Plan for the reconstruction of Europe after World War II.

It became the OECD in 1961

Nature

International organisation of 34 countries that accept the principles of representative democracy and free-market economy.

Located at the "Château de la Muette" (Paris).

Purpose

Forum where peer pressure can act as a powerful incentive to improve policy and implement "soft law"

Compare policy experiences, seek answers to common problems, identify good practices, and co-ordinate domestic and international policies.

(http://www.oecd.org/pages/0,3417,en_36734052_36734103_1_1_1_1_1,00.html

The OECD and free trade

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It is well established that by liberalising trade and capitalising on areas of comparative advantage, countries can benefit economically. Use of resources - land, labour,

physical and human capital - should focus on what countries do best.

Consumers ultimately benefit because liberalised trade can help to lower prices and broaden the range of quality goods and services available. Companies can benefit

because liberalised trade diversifies risks and channels resources to where returns are highest. When accompanied by appropriate domestic policies, trade openness also

facilitates competition, investment and increases in productivity.

Trade reforms, even if beneficial for a country overall, may negatively affect some industries or some jobs and many commentators worry about negative effects on the environment. The solution to these problems is not to restrict trade. They should be

tackled directly at source through labour, education and environmental policies.

The OECD aims to create better understanding of how trade openness can best influence economies in member countries as well as in the major emerging and non-

member economies.

http://www.oecd.org/document/2/0,3343,en_2649_37431_41049090_1_1_1_1,00.html

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A need for change?

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The […] the existing multilateral system […] has made important contributions to the unprecedented progress and economic growth

that many countries have enjoyed since the end of the Second World War.

Yet, the challenges of globalization today cannot adequately be handled by a system that was designed largely for the world of more

than half a century ago.

For a range of common problems the world has no formal institutional mechanism to ensure that voices representing all relevant domains are

heard in the discussion, nor is there an instrument or procedure commonly agreed upon for deciding who does what.

http://www.ycsg.yale.edu/core/economic_governance.html