© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 2 Trade Institutions and Trade Policy

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension The rise and fall of the Roman Empire and the emergence of feudalism can be attributed to trade. The principal approaches used to implement this emphasis was the Pax Romana, or the “Roman Peace,” and the common coinage.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension European feudalism encouraged the development of a closed-state economy that was inwardly focused and ultimately conceived for self-sufficiency and security.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension The Smoot-Hawley Act raised import duties to reduce the volume of imports into the United States to help restore domestic employment. – –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension Global division –The world was split into West and East, with Soviet Union as the leader of the Eastern bloc and the United States for the Western world. – –The United States created the Pax Americana driven by the belief that international trade was a key to worldwide prosperity.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension Global division – –It was designed to cover international commercial policies, domestic business practices, commodity agreements, employment and reconstruction, economic development and international investment, and a constitution for a new United Nations agency to administer the whole.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension Global division –The General Agreement on Tariffs and Trade (GATT) was initiated in –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade General Agreement on Tariffs and Trade (GATT) –Set of rules for non discrimination, transparent procedures and settlement of disputes in international trade. – –Reduced trade barriers and developed provisions for dealing with subsidies, and a more explicit definition of rules for import controls. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Trade Organization (WTO) – –Responsible for General Agreement on Trade in Services (GATS), Agreements on trade related aspects of intellectual property rights (TRIPS), and Trade related investment measures (TRIMS). –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Trade Organization (WTO) –Developed speedier trade dispute settlement procedures and streamlined the decision making process. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade International Monetary Fund (IMF) – –Designed to provide stability for the international monetary framework. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Bank –Also recognized as the International Bank for Reconstruction and Development, was formed in –Key functions:

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Bank –Current areas of focus: Promoting sustainable growth and development. Agricultural assistance for combating inflation in food articles. Greater participation of rising economic powers and developing nations in the bank’s governance.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade Regional institutions –European Coal and Steel Community: –Customs Unions: Common external tariff. –European Union (EU):

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade Regional institutions –North American Free Trade Agreement (NAFTA), Mercosur - Latin America, and Gulf Cooperation Council (GCC): –Private sectors have begun to develop international trade institutions of its own; example being Transatlantic Business Dialogue (TBD).

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Positions Compared International trade positions have changed substantially when measured in terms of world market share. Another important development is the rise of China’s trade position.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.1: Merchandise Exports and Imports as a Percentage of World Total, 2008

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Positions Compared Factors behind the decline in U.S. international competitiveness: – –Ignoring domestic firms in an attempt to boost the development of foreign economies. – –Lack of global interest. – –Unfamiliarity with international market conditions. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment The effect of trade – Exports are important as it: –Creates a trade balance by reducing trade deficits. – –Shapes public perception about competitiveness. – –Helps to achieve economies of scale.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment The effect of trade – Importance of imports: – –Gives rise to new marketing approaches, better processes or better products and services. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment The effect of international investment –Foreign direct investment is extensive in many U.S. industries. – –To some extent, foreign direct investments substitute for trade activities. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment Restriction on investments may – –Deny access to foreign capital and often innovation. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Policy Responses to Trade Problems Policy responses to trade problems have consisted mainly of political ad hoc reactions, which over the years have changed to protectionism. Voluntary import restrictions - Non-tariff barriers -

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Policy Responses to Trade Problems Export promotion efforts – –Offering mixed aid credits that take the form of loans composed partially of commercial interest rates and partially of highly subsidized developmental aid interest rates. –

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A Strategic Outlook for Trade and Investment Policies A strategic outlook for trade and investment policies - U.S. perspective –Improve the quality and amount of information government and business share to facilitate competitiveness. – –Overcome its export reluctance and its short-term financial orientation. – –Renewal of trade promotion authority.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A Strategic Outlook for Trade and Investment Policies A strategic outlook for trade and investment policies - An international perspective: –Bilateral or multilateral trade and investment negotiations must continue. – –Design new mechanisms to evaluate restraint measures. –