Transcript World Trade and Its Players

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)
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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
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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
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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
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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
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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
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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
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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
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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
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WTO: World Trade Organization
• 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
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WTO: World Trade Organization
• Run by member governments
• A legally ratified and binding agreement
• Ministerial conferences (ultimate decisionmakers) every 2 years
• General Council (reps from member countries)
meet several times a year
• Ongoing business done by consensus
requiring committees
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WTO: World Trade Organization
• 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
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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
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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
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WTO Membership
Members
Observers
Others
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http://www.wto.org/english/res_e/statis_e/its2009_e/its09_world_maps_e.htm
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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)
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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
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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
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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)
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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)
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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
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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
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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
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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
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Trans-Pacific Partnership (TPP)
• Will work with WTO but replace NAFTA
• Not much known yet other than*:
•
•
•
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•
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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
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Trade Problems
• Environmental protection concerns
– More pollution caused by more transportation
– Race to the bottom
• Workers’ rights
• Transition (loss of jobs, economic changes)
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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
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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.
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Economic Integration
• Levels of economic integration:
(least to most)
– Free trade area
– Customs union
– Common market
– Economic union
– Political union
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Levels of Economic Integration
Political Union
Economic Union
Common Market
EU
Customs Union
Free Trade
Area
NAFTA
Source: Hill, 2003
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Levels of Economic Integration
• 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
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Levels of Economic Integration
• 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.
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Levels of Economic 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
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Levels of Economic Integration
• 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
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Levels of Economic Integration
• 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.
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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
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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.
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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
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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
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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
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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.
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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
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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)
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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
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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. . .
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Currency, Economics and
Financial Markets
Trevor Hunter
King’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
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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.
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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?
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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
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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
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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
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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
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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
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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.
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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,
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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.
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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
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Convertibility and Government Policy
• 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
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Convertibility and Government Policy
• 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
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Convertibility and Government Policy
• 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
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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
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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
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The Role of the IMF
A 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 power
The 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 financing
The 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
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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.
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Crises Facing the IMF
• 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
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Crises Facing the IMF
• 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
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Crises Facing the IMF
• 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
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Crises Facing the IMF
• 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?
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Crises Facing the IMF
• 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
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Crises Facing the IMF
• 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
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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
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