1. Institutions of the International Economy

2.  Intellectual arguments for free trade ◦ Adam Smith and David Ricardo  Free trade emerged gradually as government policy in Britain, the leading nation in the 19 th century ◦ Repeal of the Corn Laws (1846) allowed free trade in food ◦ Leading European nations maintained free trade through late 19 th Century to WW I

3.  Great Depression ◦ US stock market collapse (1929)  Partial recovery ◦ Congress adopted the Smoot-Hawley tariff (1930)  Almost every industry had its “made to order tariff”  Foreign response was to impose own barriers  Everyone’s exports tumbled ◦ Depression continued almost till World War II

4.  No one wanted to repeat the mistakes of the 1930s  Big conference at Bretton Woods, NH, during WW II ◦ Objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas

5.  General Agreement on Tariffs and Trade (GATT) ◦ multilateral agreement under US leadership ◦ 19 original members grew to 120  International Monetary Fund ◦ To prevent currency crises  World Bank ◦ Originally aimed at lending for reconstruction of Europe ◦ Mission expanded in 1950s to supporting ‘developing countries’

6.  GATT used ‘rounds of talks’ to reduce trade barriers gradually ◦ Mutual tariff reductions negotiated ◦ Dispute resolution only if complaints were received ◦ Little permanent machinery  Uruguay Round GATT 1986-93

7.  Pressure for greater protectionism in 1980s due to ◦ Increase in the power of Japan and closed Japanese markets ◦ US trade deficit ◦ GATT circumvented by many countries  through use of “voluntary” export restraints

8.  The WTO was created (1995) during the Uruguay Round of GATT to police and enforce GATT rules  Most comprehensive trade agreement in history

9.  Formation of WTO had an impact on ◦ Agriculture subsidies (stumbling block: US/EU) ◦ Applying GATT rules to  services and  intellectual property ◦ Strengthening of monitoring and enforcement

10.  156 members in 2012  Represents at least 95% of world trade ◦ Russia joined Aug. 22, 2012 ◦ This means it agreed to ‘liberalize’ a lot of its economy  Must effectively enforce contracts agreed by foreigners  Has to allow Hollywood movies, etc. ◦ Will it fulfill promises?

11.  It seems to have contributed to a liberalization in China’s economy ◦ Many disputes between China, others, ◦ But China mostly follows the rules in settling them  9 of 10 WTO disputes satisfactorily settled

12.  Under GATT and WTO ◦ Tariff reduction from average 40% to average 5% ◦ Trade volume of manufactured goods has increased 20-fold

13.  196 disputes handled by GATT in its 50 year history  280 disputes brought to WTO between 1995 and 2003  US is biggest WTO user ◦ Big wins: beef, bananas ◦ Big loss: Kodak vs. Fuji Film

14.  No new tariffs, quotas  Limits on subsidies, especially in developed countries  Real international rules that guide functioning of the global marketplace

15.  Telecommunications (1997) ◦ 68 countries - 90% of world telecommunications revenues ◦ Pledged to open their market to fair competition  Financial Services (1997) ◦ 95% of financial services market ◦ 102 countries would open their markets to varying degrees

17.  “Millennium round” was aimed at further reduction of trade barriers in agriculture and services  WTO meeting disrupted by ◦ Human rights groups ◦ Trade unions ◦ Environmentalists ◦ Anti globalization groups  No agreement was reached ◦ WTO still struggling for liberalization today

18.  Despite criticism, WTO has been the center of economic evolution  Rapid growth of developing country economies seems to have undercut critics

20.  Central banker for world’s central banks  Headquarters Washington DC, ◦ Western Europeans have picked the head

21.  Intervenes with loans when ◦ currencies crash ◦ nations can’t pay their bills  Establishes very strict conditions for aid ◦ Radical cuts in government spending required ◦ Countries devalue currencies, so wages decline, exports increase

22.  Examples ◦ Iceland, 2008-09 (at least $2 billion) ◦ Korea, Thailand, Indonesia, late 1990s ($40 billion) ◦ United Kingdom, 1976

23.  Voting is weighted to established nations, although  China, India, etc. are asked to contribute more resources than their voting weight would imply

24.  In a group of nations that shares the same currency, devaluation is not an option (unless governments are willing to destroy the group) ◦ But successful restructurings in the U.S. of New York City (1976) and Orange County (1995) could be models

26.  Originally set up as a lending institution  Is seen as the world’s most important anti- poverty agency ◦ Highly respected economists  But gets overwhelming share of revenue from close-to-market-rate lending ◦ Poor country governments often lack skills to evaluate projects  If project fails, poor country still has to repay loan

27.  The world doesn’t have a body that carries out any really coherent program against poverty

30.  While trade was growing freer globally, some regions focused on reducing barriers within themselves ◦ “Regional economic integration” refers to agreements in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers for  goods,  services, and  factors of production

31.  Despite the trend toward freer trade, it is hard to get the whole world to agree on changes  Neighbors can often make more comprehensive agreements ◦ Europe has freedom for banks to operate freely around Europe  Rest of world hasn’t been able to develop that ◦ People, capital can move freely around Europe, too

32.  Levels of integration are much higher in Europe than in the rest of the world ◦ In many places you can cross borders without knowing you’ve done so  Europe was in the midst of integration during the worldwide craze for deregulation in the late 90s, 2000s ◦ So it wound up with a highly deregulated, unwatched system  Incompatible regulations persist inside countries

33.  In a Free Trade Area all barriers to the trade of goods and services among member countries are removed  A Customs Union eliminates trade barriers between member countries and adopts a common external trade policy  A Common Market has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members

34.  An Economic Union involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates, and a common monetary and fiscal policy  A Political Union occurs when centralized political institutions coordinate economic, social, and foreign policy of the member states

35. Member States of the European Union in 2007

36.  The North American Free Trade Agreement (NAFTA) was ratified by the governments of the United States, Canada, and Mexico in 1993; it became law January 1, 1994  NAFTA includes ◦ reduced tariffs (99% of goods traded) ◦ removal of most barriers on cross border flow of services ◦ Removal of restrictions on FDI except in certain sectors  Mexican railway and energy  US airline and radio communications  Canadian culture  A customs union, not full economic union