IFIN – Lecture 10 Trade barriers and new technologies for handling them /Michał Dzieliński, Stockholm Business School Did you ever… ● …wonder how all these products make it from place to place? /Michał Dzieliński, Stockholm Business School Typology of trade barriers Transportation costs Tariffs Non-tariff barriers Technical measures Communication, administration… Internal taxes or charges Customs rules and procedures Restrictions on market access /Michał Dzieliński, Stockholm Business School Trust Transportation costs are down globally /Michał Dzieliński, Stockholm Business School The same used to be true about tariffs… /Michał Dzieliński, Stockholm Business School …but now they strike back. ● Currently, US has tariffs on $200bln of Chinese goods – almost half of all its imports from China. ● In return, China put tariffs on $60bln of US goods – most imports from US. ● The two sides engaged in negotiations, which later broke down and US hiked tariffs from 10% to 25%. China followed suit. ● ??? /Michał Dzieliński, Stockholm Business School Are tariffs a good idea? “Nearly 80 percent of 60 economists who answered a question on the tariffs said they would do more harm than good and the rest said it would do nothing or very little. Not one respondent said they would benefit the world’s largest economy.” Reuters, March 18th, 2018 /Michał Dzieliński, Stockholm Business School Is the US losing on trade with China? ● Is trade deficit a loss? ● What does winning a trade war look like? /Michał Dzieliński, Stockholm Business School Trade and the domestic economy ● India liberalized trade in 1991. Surge in imports. ● Final vs. Intermediate goods – Indian firms could produce new products with new inputs! – “…during the 1990s, a quarter of India's manufacturing output growth was driven by new products.” Source: Goldberg, P., Khandelwal, A., Pavcnik, N., & Topalova, P. (2009). Trade Liberalization and New Imported Inputs. The American Economic Review, 99(2), 494-500. /Michał Dzieliński, Stockholm Business School Trade agreements ● Rise in TAs coincides with the founding of the WTO. /Michał Dzieliński, Stockholm Business School World Trade Organization ● The WTO, founded in 1995, is: – an organization for liberalizing trade – a forum for governments to negotiate trade agreements – a place for them to settle trade disputes – based on a system of trade rules ● It emerged from the General Agreement on Trade and Tariffs (GATT) – Created in 1947 under the umbrella of the UN – Enjoyed substantial in lowering average tariffs from 22% to 5% between 1947 and 1986. /Michał Dzieliński, Stockholm Business School Trade negotiations are getting more difficult Source: Wikipedia /Michał Dzieliński, Stockholm Business School Why are non-tariff measures so tricky? /Michał Dzieliński, Stockholm Business School Trade and COVID-19 /Michał Dzieliński, Stockholm Business School Let’s talk about trust ● International trade must work around a fundamental dilemma: – – – – Counterparties reside in different countries… …with different legal systems… …making enforcement costly and time-consuming… …and they usually do not know each other. ● In essence, there could be distrust, and clearly the importer and exporter would prefer two different arrangements for payment/goods transfer. /Michał Dzieliński, Stockholm Business School Chicken-or-egg problem… ● …as applied to international trade. ● Can they find middle ground? /Michał Dzieliński, Stockholm Business School Trade relationship ● The fundamental dilemma of being unwilling to trust a stranger in a foreign land is currently solved by using a trusted intermediary (e.g. a bank). ● Key role of the bank is to issue Letter of Credit (L/C) – A promise to pay the exporter upon presentation of certain documents. ● Two such documents are typically: 1. Sight/time draft ( request for payment) 2. Bill of lading ( document issued by carrier to confirm receipt of cargo) /Michał Dzieliński, Stockholm Business School L/C example /Michał Dzieliński, Stockholm Business School Typical trade transaction /Michał Dzieliński, Stockholm Business School Is there a better way? ● Current system requires trusted intermediaries, which makes it slow, complicated and costly. “To quantify the documentation involved in ‘business as usual’, Danish shipping giant Maersk tracked a shipment of flowers from the Kenyan port of Mombasa to Rotterdam. The process generated dozens of documents and nearly 200 communications involving farmers, freight forwarders, land-based transporters, customs brokers, governments, ports and carriers.” Source: https://www.ft.com/content/a36399fa-a927-11e7-ab66-21cc87a2edde /Michał Dzieliński, Stockholm Business School Trustworthy system without trust *Source: https://www.ibm.com/blogs/blockchain/2018/01/digitizing-global-trade-maersk-ibm/ /Michał Dzieliński, Stockholm Business School Building blocks of blockchain ● Blockhain = a digital and distributed ledger (record) of who owns/does/pays what: – Transactions are formed into blocks… – …which are subsequently chained together. /Michał Dzieliński, Stockholm Business School Permanence of blockchain ● Sheer size of the network and difficulty of hashing problems is what keeps the blockchain secure. ● Suppose you wanted to go back in the blockchain and erase a transaction in which you sent bitcoin: – You would need to re-hash the block… – …and the next block, since it contains the earlier blocks’s hash, and so on… – …until you reach the current block, all that while the rest of the network keeps adding new blocks. ● That would require controlling at least 51% of computational power – practically impossible. /Michał Dzieliński, Stockholm Business School Public vs. private blockchain ● Differ on who is allowed to verify and add transactions. ● Public blockchains need much tougher ”proof of work” in order to protect the network from attack. /Michał Dzieliński, Stockholm Business School I came here to study finance… ● …but finance is now FinTech! “…as banking moves into such activities, the distinction between finance and technology will become less and less clear.” *Source: https://www.ft.com/content/2f6f5ba4-dc97-11e6-86ac-f253db7791c6 /Michał Dzieliński, Stockholm Business School Anatomy of an ICO ● Anyone can start an ICO basically for free! /Michał Dzieliński, Stockholm Business School Blockchain frontiers /Michał Dzieliński, Stockholm Business School Thank you! Want to know more? https://www.coursera.org/learn/cryptocurrency/home/info /Michał Dzieliński, Stockholm Business School
