international trade trevor hunter – with files from john siambanopoulos king’s university...

International Trade

Trevor Hunter – with files from John Siambanopoulos

King’s University College

Trade Policies

• Free Trade – No governmental restrictions on what its citizens can buy from or sell to another country

• An ideal based on theory and ideology but rarely practiced in reality (despite the WTO)

King's University College 2

Instruments of Trade Policies

• Tariffs – tax levied on imports– Fixed charge per unit imported– Ad velorum – proportion of imported value

• Subsidies – government payment to domestic producers– Artificially lowers costs of production giving domestic

players an unfair cost advantage lower prices incentive for domestic consumers to choose domestic suppliers


Instruments of Trade Policy

• Import quotas – direct restriction on how much of a certain good can be imported– Protects domestic producers by limiting the

amount of potentially lower cost competing goods

• Local content requirements – some specific fraction of a good be made domestically– Limits foreign imports by forcing them to use

locally made parts or raw materials


Instruments of Trade Policy

• Administrative trade policies – red tape making it difficult to fulfill requirements and therefore difficult to import– Protects domestic producers

• Antidumping policies – punish foreign firms that sell products at prices below “fair” market values– Protects higher cost domestic producers but could punish

more efficient firms– Taxes added to increase the price of imports



Tariffs, Duties and Protective Costs

• Many countries try to protect their citizens from competing foreign firms by applying tariffs on imported goods making them more expensive than those of domestic goods.– Higher price less attractive lowered demand

• Benefits companies in protected industries but is bad for the overall economy because the cheapest possible goods are not available

• Protectionism, economic nationalism inefficient


International Trade

• Good trade agreements provide the foundation for trade liberalization– Openness, fewer restrictions, level playing field

• Spurs economic competitiveness and benefits consumers

• Strong ties with trading partners (who were normally proximal) were created


GATT: General Agreement on Tariffs and Trade

• Drafted in 1947 in Bretton Woods, New Jersey• Brought many of the bilateral agreements into a

common agreement and created a framework for overlaps and inconsistencies

• Covered 90% of the world’s trade• Over time, many additions to GATT as new industries

emerged and new members joined


GATT: General Agreement on Tariffs and Trade

• Established upon the rules that a majority of countries consider “fair”– Labour standards, resources movement,

subsidy levels etc.• Agreement on the “value” of free trade and

its affect on economic growth– Inefficient firms should fail– Consumers benefit from lower prices and

better choice


WTO: World Trade Organization

• Established in 1995 during the Uruguay Round of GATT and given a “legal” or “institutional” personality

• Officially responsible for administration and enforcement of dozens of international trade agreements



• Forum for future trade negotiations• Monitors national trade policies• Assists developing countries in trade policy

through technical assistance and training• Cooperates with other international

organizations (WHO etc.)• Settles trade disputes



• Run by member governments• A legally ratified and binding agreement• Ministerial conferences (ultimate decision-

makers) every 2 years• General Council (reps from member countries)

meet several times a year• Ongoing business done by consensus

requiring committees



• Countries with more economic and political clout play a stronger role:– EU, USA, Japan, Canada (the Quad)

• Many members lack the resources to make their voice heard


Differences: GATT vs. WTO• GATT is only a negotiated contract

– Never ratified by governments– Only deals with standards and expectations– No provision for the creation of a governing body

• WTO is an entity– Has sound legal basis due to members’ ratifications– It implements the contract and does more as an

organization


Differences: GATT vs. WTO

• GATT dealt with trade in goods only, WTO covers services and intellectual property

• WTO dispute settlement system is faster, more automatic than in the old system. There is a formal procedure for everything so there is more structure and objectivity

WTO Membership

MembersObserversOthers

http://www.wto.org/english/res_e/statis_e/its2009_e/its09_world_maps_e.htm16King's University College


WTO Membership

• Membership (153 as of January 2009) allows equal access to others’ markets

• Getting in is difficult because a country has to demonstrate its willingness to open up for trade– Usually means changing laws to meet global

standards– China joined in 2001, Cape Verde most recent

(July 23, 2008)


Source of WTO Authority

• The WTO rules on many different laws in member countries

• Many rules are beyond the scope of international trade– Cultural, intellectual rights, banking, etc.

• Possesses powerful coercive weapon – trade sanctions


Sanctions and Punishments

• Previously all sanctions required agreement from all GATT members to be imposed

• Sanctions can be applied to any aspect of offending country’s trade


Key Policies

• Most Favoured Nation:– Obligates countries to give equal treatment to all

other member nations

• National Treatment:– Requires members to treat imported goods the

same as domestic goods

• TRIPS (Trade-Related Intellectual Property rights)


Problems with the WTO

• Many claim the WTO serves the interests of the developed world only

• Many developing countries have lost the ability to control their national trade policy– Can’t favour products that are made in a more

sustainable or environmentally friendly way (tuna/dolphin, banana cases)


NAFTA

• Purpose – to eliminate tariffs between Canada, USA and Mexico

• Aimed to integrate many sectors divided into four areas:– Education, democracy/human rights, poverty,

economic integration• Economic implications of NAFTA are most

evident


NAFTA

• Effective Jan. 1, 1994, creating a free trade policy between the three North American nations

• Lowered tariffs have lead to Canada and Mexico becoming major export markets


Key Areas

• The agreement sets out rules for:– Investment, intellectual property, competition

policy, and temporary entry for business people

• All countries have implemented many of the same customs procedures and rules– Pushed for equal regulations for all players in

many areas– Weak enforcement has been an issue


NAFTA Benefits

• Canadian producers are better able to compete, stay profitable and provide stable jobs by:– Operating in a larger, more efficient market– Gaining access to tariff-free, quality raw materials

and services from across North America for production of goods

Trans-Pacific Partnership (TPP)

• Will work with WTO but replace NAFTA• Not much known yet other than*:• Twelve countries make up the TPP: Australia, Brunei, Canada, Chile, Japan,

Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.• The TPP membership represents a market of nearly 800 million people and a

combined GDP of $28.5 trillion.• Eighty-one percent of Canada’s total exports already go to TPP members.• TPP countries include some of the fastest-growing economies in the world, and

this is expected to continue to be the case.• Many of the TPP members are wealthy economies. The average per capita GDP in

TPP countries is nearly $35,000.• The Asia-Pacific region is expected to represent two thirds of the world’s middle

class by 2030 and one half of global GDP by 2050.


*Source: http://www.international.gc.ca/media/comm/news-communiques/2015/10/02a.aspx?lang=eng


Trade Problems

• Environmental protection concerns– More pollution caused by more transportation– Race to the bottom

• Workers’ rights• Transition (loss of jobs, economic changes)


Trade Problems

• Most agreements lack true power (enforcement and punishment)

• Punishments seem to be from developed to developing countries (who needs the help?)

• Secretive, bureaucratic, exclusive• Sovereignty issues


Economic Integration

• Recent trend toward more economic integration:– Agreements between countries in a geographic

region to reduce tariff and non-tariff barriers to the free flow of goods, services and factors of production between each other.


Economic Integration

• Levels of economic integration:(least to most)

– Free trade area– Customs union– Common market– Economic union– Political union

Levels of Economic Integration


Free TradeArea

Customs Union

Common Market

Economic Union

Political Union

Level of IntegrationNAFTA

EU

Source: Hill, 2003



• Free Trade Area:– All barriers to the trade of goods and services

among member countries are removed. Members are free to set their own policies with respect to non-members.

– No tariffs, quotas, subsidies or administrative impediments are allowed to distort trade between member nations.

– European Free Trade Association (EFTA), NAFTA



• Customs Union:– Trade barriers are removed between members.– All members adopt a common policy with respect

to non-members.– Further along the road to economic and political

integration.



• Common Market:– No barriers to trade– Common policy to non-members– Factors of production are allowed to move freely

(labour, capital) as there are no restrictions to immigration, emigration or cross-border flow of capital.

– MERCOSUR in South America



• Economic Union:– Same as above but also has:

• Common currency• Harmonization of members’ taxation rates• Common monetary and fiscal policy

– No true economic unions but the EU is getting close with its common currency and central bank



• Political Union:– All of the above but independent states are

combined into a single union– The US could be considered a version of this type

of integration.


The Case for Regional Integration

• Economic:– Additional gains from free flow of goods beyond

standard trade agreements• Political:

– The more dependent upon each other two countries are, the less likely it is that there will be armed conflict

– Linked countries have more “clout” dealing with other nations


Impediments to Regional Integration

• Although there are benefits, certain groups lose in the short and long terms– Labour intensive industries will lose jobs– Overtime, the economy may shift to more

learning intensive industries

• Concerns over national sovereignty– Common currencies, economic and foreign

policies etc.


The Case Against Regional Integration

• Depends upon the extent of trade creation vs. trade diversion:– Trade Creation: low cost producers within the free

trade area replace high cost domestic producers.– Trade Diversion: higher cost suppliers within the

free trade area replace lower cost external suppliers

• Regional trade agreements will only work if the amount of trade created exceeds the amount of trade diverted


When Things go Wrong

• IMF: International Monetary Fund• The World Bank

• These organizations do not directly affect trade but their actions and decisions affect the environment for trade


International Monetary Fund

• A specialized agency of the UN set up in 1945 to help promote global economic health

• Central institution of the international monetary system entrusted to oversee the global financial system by monitoring foreign exchange rates and balance of payments as well as offering technical and financial assistance

• Facilitates international trade


IMF Goals

• It aims to prevent crises in the system by encouraging countries to adopt sound economic policies

• Is a fund that can be used by members for temporary financing

• Works for global prosperity by promoting the balanced expansion of world trade.


IMF Activities

• Monitors economic and financial developments and policies nationally and at the global level

• Gives policy advice to its members• Technical assistance as well as training for central

bank officials and governments• Lends funds to member countries to support

adjustment and reform policies aimed at correcting underlying problems


IMF Activities

• Build a stronger global financial system and strengthen all international financial sectors– The stronger the financial system is the more

stable countries and economies are which reduces global tension

• Enforce internationally accepted standards and codes of good practice (equal fairness)


IMF Activities

• At present IMF borrowers are all either:– Developing countries– Countries in transition from central planning to

market-based systems– Countries recovering from financial crises

• Many of these countries have only limited access to borrowing money due to their economic difficulties


Lending Issues with the IMF

• The IMF is not an aid agency or a development bank– It lends to help its members tackle problems and

restore growth. IMF lending is temporary• Loans are conditional on policies

– Borrower must adopt policies that promise to correct its problems before they get the money – accountability. But. . .


Problems with the IMF

• The IMF has been seen as a heavy-handed dictator of economic policy

• Many countries implement SAP reforms – Structural Adjustment Programs– Cuts to government spending, increase to

taxation– Privatization and selling off of government

assets and infrastructure


Problems with the IMF• Social problems often get cut in poor

countries• Unrestricted or poorly planned

privatization is usually disastrous– Water and electricity prices rise beyond

citizens’ ability to pay– Organized criminals or foreign firms move in

and buy up assets


Problems with the IMF

• The IMF “helps” by sending in a group of economists to evaluate the system and make changes

• Frequently these people:– Have no local experience or expertise– Don’t consult groups outside of the government or

industry– Have little time to prepare insights

• Issues of secrecy, accountability and corruption


World Bank

• Founded in 1944, is one of the world’s largest sources of development assistance

• Brings a mix of finance help and ideas to improve the living standards and eliminate the worst forms of poverty

• Specializes in different aspects of development toward the goal of poverty reduction


World Bank

• Works with government agencies, the private sector and NGOs to formulate assistance strategies

• Owned by 188 member countries• US holds 16.05% of total votes, Japan 8.94%,

Germany 5.76%, UK and France each had 4.22% http://treasury.worldbank.org/cmd/pdf/WorldBankInvestorBrief.pdf

– AS major decisions require an 85% super-majority, the US can block any proposal


World Bank Focus

• Helping the poorest people and countries emphasizing the need for:– Focus on social development and poverty

reduction– Strengthening governments’ delivery of quality

services– The creation of a stable environment for FDI


World Bank Focus

• Governments reform their overall economies and strengthen their banking and financial systems– Makes them more attractive to international firms

FDI improved economy


Roles of the IMF and World Bank

• IMF and World Bank make support available to governments in the development of their strategies but. . .

• Each focuses on its own area of expertise:– IMF advises governments in the areas of

economic and financial policy– World Bank takes the lead in advising on the

social policies involved in poverty reduction


Problems• The goal – poverty reduction. Has it

worked – not really– Life expectancy has fallen– Number of people living on less than $1 a

day rose• Many projects aren’t beneficial so in fact

the extra debt created by loans has contributed to the problem


Problems

• Developing countries are forced to open their markets to rich countries and to abandon efforts to protect infant domestic industries– Opening markets can allow trade but the speed is

often questioned– This concept works well in developed countries but in

those with more corruption, violence, weak social systems and inexperienced governments not so much


Problems

• Accountability and transparency• Voice for the minority• Degree of interference by outsiders• Role of the environment, culture, human

rights vs. development of international trade and globalization

Currency, Economics and Financial Markets

Trevor HunterKing’s University College


Foreign Exchange

• Foreign Exchange Market:– The market for converting the currency of one

country into that of another

• Exchange Rate:– The rate at which one currency is exchanged into

that of another country


Foreign Exchange

• Functions of the Foreign Exchange Market:– Convert currency of one country into another– Provide insurance against foreign exchange risk

• Foreign Exchange Risk:– Adverse consequences of unpredictable changes

in exchange rates.


Foreign Exchange

• What would happen if your business buys its raw materials in US dollars but earns sales in Canadian dollars and the Canadian dollar drops against the US?

• How can you guard against this?


Foreign Exchange

• Main uses of foreign exchange markets for international businesses:– Convert export payments, foreign investment

income or licensing income from host to home currency

– Payment of to suppliers of products or services to host country companies


Foreign Exchange

• Main uses of foreign exchange markets for international businesses:– Short term investments of spare cash in host

countries– Currency speculation (arbitrage) – short-term

movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates


Foreign Exchange

• Insurance against exchange risk:– Spot Exchange Rate: the rate at which a foreign

exchange dealer converts one currency into another

– Forward Exchange Rate: occurs when two parties agree to exchange currency and execute a deal at a future time

– Forward Exchange: rates for currency are typically quoted for 30, 90 or 180 days in the future


Economic Theories of Exchange Rate Determination

• Economic perspective:– Basically determined by supply and demand for

different currencies• The Law of One Price:

– In a competitive market free of non-production related costs or trade barriers, identical products sold in different countries must sell for the same price when expressed in the same currency


Prices and Exchange Rates• Purchasing Power Parity (PPP):

– Used to examine what exchange rates “should” be– Given relatively efficient markets (markets with

few impediments to international trade and investment) the price of a “basket of goods” should be roughly equivalent in each country

– If a basket of goods costs $200 in the US and Y20 000 in Japan, the exchange rate should be $US 1 = Y100


Prices and Exchange Rates

• The Economist’s Big Mac Index:– Examines the cost of Big Macs in about 120

countries to examine what the exchange rate between those countries’ currencies and the US dollar “should” be.

– For numerous reasons, currencies can be over or under valued. The difference between the PPP and the actual exchange rates suggests by how much a currency is valued incorrectly.


The Big Mac Index Example

• Price in US: $4.79*

• Equivalent Price in China: Yuan 17.00• Implied PPP exchange rate: $US1 = Yuan 3.55• Actual exchange rate: $US1 = Yuan 6.21• Yuan is undervalued by 42.8% and should

appreciate against the dollar in the future*Source: Oct. 2015 http://www.economist.com/content/big-mac-index,


Prices and Exchange Rates

• If prices increase in one country but not in the other, the currency in the country where prices increase devalues by the same amount as the price increase, against the first country.

• PPP is a powerful tool for predicting exchange rate fluctuations for businesses if they study the market in which they are operating well.


Convertibility and Government Policy

• Governments often restrict the convertibility of their currencies.– Government policies– Inflation control– Economic stabilization– Restrict external FDI– Restrict MNE profit repatriation



• Freely Convertible Currency:– Government allows residents and non-residents to

purchase unlimited amounts of foreign currency with its domestic currency

• Externally Convertible Currency:– Government allows non-residents to convert their

domestic currency into foreign currency, but residents can’t

• Non-convertible Currency:– Both residents and non-residents are prohibited from

converting their domestic currency into foreign currency



• Capital Flight:– Residents convert domestic currency into foreign

currency– Most likely to happen during periods of

hyperinflation or shaky economic prospects– Governments want to stop the loss of foreign

reserves to maintain or boost the domestic currency



• What happens if your business cannot convert the money it makes in a foreign country into your home country’s currency or transfer it out of the country? (profit repatriation)

• Countertrade:– Trade of goods and services for other goods and services

• Transfer pricing:– Charges to subsidiaries for services or products supplied

by the parent MNE or other subsidiaries


Foreign Exchange

• Dealing in multiple currencies is a requirement of doing business internationally, but it also creates risks and significantly alters the attractiveness of different investment locations (i.e. FDI) over time

• Firms can use foreign exchange markets to minimize the risks, but can also prevent them from benefiting from favourable changes


The Role of the IMF

• Frequent national and international financial crises have required the IMF to step in to save struggling economies burdened with debt.

• 188 members (April 2012 – South Sudan joins), 117 of which had some kind of surveillance program:– “To maintain stability and prevent crises in the

international monetary system, the IMF reviews country policies, as well as national, regional, and global economic and financial developments through a formal system known as surveillance” http://www.imf.org/external/np/exr/facts/glance.htm


The Role of the IMFA member country's quota subscription determines the maximum amount of financial resources the country is obliged to provide to the IMF. A country must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency.Voting powerThe quota largely determines a member's voting power in IMF decisions. Each IMF member's votes are comprised of basic votes plus one additional vote for each SDR 100,000 of quota. The number of basic votes attributed to each member is calculated as 5.502 percent of total votes. Accordingly, the United States has 421,965 votes (16.76 percent of the total), and Tuvalu has 759 votes (0.03 percent of the total).Access to financingThe amount of financing a member country can obtain from the IMF is based on its quota. For instance, under Stand-By and Extended Arrangements, which are types of loans, a member country can borrow up to 200 percent of its quota annually and 600 percent cumulatively.

Source: https://www.imf.org/external/about/members.htm


Crises Facing the IMF

• Currency Crisis:– Occurs when a speculative attack on the exchange

value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large amounts of international currency reserves and increase interest rates in order to defend the exchange rates.



• Currency Crisis:– If the domestic currency devalues:

• Imported goods increase in price – hyperinflation

• Loss of reserves – no secure source of funding vital operations

• Citizens rush to exchange their currency for others – further decreasing reserves

• Lowers the revenues exporting companies earn



• Banking Crisis:– A situation in which a loss of confidence in the

banking system leads to a run on the banks as individuals and companies withdraw their deposits

– If banks do not have cash on hand to meet their short term obligations (such as customer savings – that’s why they are considered liabilities to banks) they go out of business



• Banking Crisis:– If banks go out of business there is:

• Increased unemployment• No source of financing for businesses or

individuals meaning businesses close, people don’t buy things and the economy halts – fast.

• No place to save money - no injection of investment into economy

• No way to exchange foreign currency



• Foreign Debt Crisis:– A situation in which a country cannot service its

foreign debt obligations, whether private sector or government debt

– Essentially, a government owes more than it earns and risks defaulting

– What happens when a government goes bankrupt?



• Foreign Debt Crisis:– If a country owes more than it earns:

• Huge amounts of its GDP is earmarked for interest and principle payments on loans rather than the education and health of its citizens

• Government is not free to use its income to stimulate its economy

• National assets owned by foreigners



• Since the 1970s there have been six main crises:– Third World Debt – 1980s– The Russian economic crisis after 1991– 1995 Mexican currency crisis– the 1997 Asian financial crisis– Argentina foreign debt default in 2001– Great Recession 2008

• Generally all caused by excessive foreign borrowing, a weak or poorly regulated banking system and high inflation rates


Implications for Business

• In reality the currency markets don’t often work as they are planned or intended. Government intervention occurs often and can have disastrous results

• Speculative currency trading (which is a way that a lot of companies – including Canada’s banks – make a lot of money) can create currency volatility when such movement may not be economically warranted – Soros vs. Bank of England

international trade trevor hunter – with files from john siambanopoulos king’s university...

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