Download Slides on International Institutions (Session 3)

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Institutions of the International
Intellectual arguments for free trade
◦ Adam Smith and David Ricardo
Free trade emerged gradually as
government policy in Britain, the leading
nation in the 19th century
◦ Repeal of the Corn Laws (1846) allowed free trade in
◦ Leading European nations maintained free trade
through late 19th Century to WW I
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
No one wanted to repeat the mistakes of
the 1930s
Big conference at Bretton Woods, NH, during
◦ Objective was to liberalize trade by eliminating tariffs,
subsidies, and import quotas
General Agreement on Tariffs and Trade
◦ 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
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
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
The WTO was created (1995) during the
Uruguay Round of GATT to police and
enforce GATT rules
Most comprehensive trade agreement in
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
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
 Must effectively enforce contracts agreed by
 Has to allow Hollywood movies, etc.
◦ Will it fulfill promises?
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
9 of 10 WTO disputes satisfactorily settled
Under GATT and WTO
◦ Tariff reduction from average 40% to average
◦ Trade volume of manufactured goods has
increased 20-fold
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
No new tariffs, quotas
Limits on subsidies, especially in developed
Real international rules that guide functioning
of the global marketplace
Telecommunications (1997)
◦ 68 countries - 90% of world telecommunications
◦ Pledged to open their market to fair competition
Financial Services (1997)
◦ 95% of financial services market
◦ 102 countries would open their markets to varying
“Millennium round” was aimed at further
reduction of trade barriers in agriculture and
WTO meeting disrupted by
Human rights groups
Trade unions
Anti globalization groups
No agreement was reached
◦ WTO still struggling for liberalization today
Despite criticism, WTO has been the center of
economic evolution
Rapid growth of developing country
economies seems to have undercut critics
Central banker for world’s central banks
Headquarters Washington DC,
◦ Western Europeans have picked the head
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
◦ Iceland, 2008-09 (at least $2 billion)
◦ Korea, Thailand, Indonesia, late 1990s
◦ United Kingdom, 1976
($40 billion)
Voting is weighted to established nations,
China, India, etc. are asked to contribute
more resources than their voting weight
would imply
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
Originally set up as a lending institution
Is seen as the world’s most important antipoverty 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
The world doesn’t have a body that carries
out any really coherent program against
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
Despite the trend toward freer trade, it is
hard to get the whole world to agree on
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
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
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
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
Member States of the European Union in 2007
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