Economic Integration …
Institutions and Practices
Part 1: Introduction
2-1
Things you already know!! 
• It makes little sense for a country or a
region to produce what it can buy from
another country or region at a lower cost
• All countries can benefit if each country
specializes in production those goods it
can produce best and satisfy their other
wants and needs by trading for them
More, things you already know!!
• Static Gains from trade are gains in
world output that result from
specialization and trade
• Dynamic gains from trade are gains
from trade over time that occur
because trade induces greater
efficiency in the use of existing
resources
Even more, things you already know!!
• A country engaging in international trade uses
its resources more efficiently
• International trade increases not only the
quantity of the good we consume but, in many
instances, their quality
• International trade can be a very effective way
to enhance competition in a country’s domestic
market
Well then … why not “Free Trade”
• Free trade is a policy by which a
government does not discriminate against
imports or interfere with exports by
applying tariffs (to imports) or subsidies (to
exports) or quotas.
THE WELFARE EFFECTS OF TRADE
IN AN INDIVIDUAL PRODUCT
• From a public policy perspective, the gains to
society as a whole are greater than the losses that
occur within a particular industry
– Consumers tend to benefit from free trade but firms and
workers in importing industry “can” be harmed
– Special interest groups lobby for changes that benefit
them, though not necessarily society as a whole
Problem? … The gains to consumers are diffused but
the losses to producers and workers who care are
concentrated
GLOBALIZATION
• Globalization is the term used to convey
the idea that international factors are
becoming a more important part of the
world economy
• The simplest measure of globalization is
the ratio of exports to GDP
– Countries with a high ratio of exports to GDP
are generally more open to the world
economy than countries with a low ratio
GLOBALIZATION
Real World Exports of Goods as a Percentage of Real World
GDP
25% –
20% –
15% –
10% –
5% –
0% –
1975
1980
1985
1990
1995
Exports as a Percent of GDP
2000
2005
GLOBALIZATION
• Globalization or the increasing
openness of an economy, means
changes that are not universally
positive
• Globalization involves not only the
goods and service but the movement
of people and money as well
Economic Integration
• Economic integration is concerned with:
– The removal of trade barriers or impediments
between at least two participating nations
– Thus boosting the free movement of trade,
investment, and services across national
boundaries
Economic Integration … (Continued)
• Integration creates high levels of
globalization and regionalization
– Economic integration is best viewed as a
spectrum with the various integrative agreements
in effect today lying in the middle of this spectrum.
– The level of integration defines the nature and
degree of economic links among countries
Economic Integration …
• … economic & political agreements that give preference
to members within the agreement
– Global
– Regional … (or Bilateral)
Some Types of International Economic
Institutions… with Examples … (Just for info…)
More …. Types of International Economic
Institutions… with Examples
Our Focus
2-14
Economic Integration …
Institutions and Practices
Part 2: Global Trade
Agreements
2-15
WTO …
• Three global organizations that play a
major role in international economic
relations are:
– The International Monetary Fund (IMF)
– The World Bank
–The World Trade Organization
(WTO)
2-16
“Global” (past) General Agreement on Tariffs
and Trade (GATT)
• Idea began with 23 nations in 1946 when the
International Trade Organization (ITO) was
established
• The General Agreement on Trade and Tariffs
(GATT) followed in 1947… by 23 countries to
abolish quotas and reduce tariffs.
2-17
General Agreement on Tariffs and
Trade (GATT)
… based on the following basic principles:
National treatment: Imports must be given similar
treatment on the domestic market as domestically
produced goods
Nondiscrimination: Enshrined in the concept of most
favored nation (MFN) … every WTO member must treat
every other member as it treats its most favored trading
partner
However GATT could not enforce compliance
The GATT/WTO functions through trade rounds:
2-19
“Kennedy” … “Tokyo”
• During the Kennedy Round in the mid-1960’s, and
the Tokyo Round in the 1970’s, other issues
included:
- Problems with dumping
- Subsidies to industry
- Nontariff barriers to trade
2-20
The Uruguay Round
The Uruguay Round “famously” focused on
contentious issues such as:
• non-tariff barriers
• intellectual property rights
• trade in services
• agriculture.
However, the BIGGEST consequence…
2-21
From GATT to …. Global (now) …
World Trade Organization (WTO)
• The Uruguay Round established the WTO
– WTO members meet every two years to set WTO
policy objectives
– Membership now totals 155 (2012) … 156 on
the pending inclusion of Russia … 25+ more
applying…
2-22
“Who” is the WTO?
• Location: Geneva, Switzerland
• Established: 1 January 1995
• Created by: Uruguay Round (1986-94)
• Budget: 196 million Swiss francs for 2011 … (163 million
Euros)
• Secretariat staff: 640…..
• Head: Pascal Lamy (Director-General)
Chart
Members
2-23
What the WTO Stands for….
•
•
•
•
•
Non-discrimination
More “open”- ness
Predictability and transparency
More competitiveness
Benefits for less developed countries
(>75% are “developing” or LDCs)
• Protection for the environment***
2-24
WTO: Primary Functions
•
•
•
•
•
Administering WTO trade agreements
Forum for trade negotiations … (goods…+)
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for
developing countries
• Cooperation with other international
organizations
2-25
World Trade Organization (WTO)
** Has a more effective dispute settlement mechanism!! **
Monitors national trade practices more consistently
• Governments bring charges of unfair trade practices to the WTO
(***300 … 300)
• http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm
Countervailing Duty
• WTO rulings are binding … as they ultimately
permit countervailing duties
• Countervailing Duty—a tariff designed to
raise the price of an imported product to
its fair market value.
– After “permission” countries may use them to
offset production or export subsidies. ***
World Trade Organization (WTO) …
right now…
• The Doha Round/Doha Development Agenda (2001-)
– Focused on trade issues of importance to developing countries
– Key issues of Doha Development Agenda:
-Farm subsidies in high income countries of Europe, US, and
Japan
-Greater market access by developing countries and strong
farm sector high income countries
-Trade in services
-Problems poor countries face in implementation
The Doha Round
• Talks were started in Doha, Qatar in November
2001.
– Focus of the talks was on the links between economic
growth and trade liberalization.
– Talks collapsed in July 2008.
– The main point of contention is trade in agriculture
with major industrialized nations such as the U.S., EU
and Japan maintaining production subsidies and
import barriers.
Where are they now????
WTO and the Environment
• WTO rules block a country’s use of trade
measures as environmental policy
• Montreal Protocol – multilateral agreement to
ban trade of products that deplete the ozone
layer
• Kyoto Protocol – to reduce emissions of
greenhouse gases to levels below 1990 levels
WTO website…
http://www.wto.org/
2-31
Economic Integration …
Institutions and Practices
Part 3: Regional Trade
Agreements
2-32
Regional Trade Agreements
Besides these Global Agreements …
Regional Trade Agreements also form a
key part of the institutional structure of the
world economy
2-33
What are Regional Trade Agreements?
• Regional Trade Agreement: preferential
economic arrangement among 2 or more
countries.
– Such blocs have liberal rules for member
countries while a separate set of rules is laid for
non-members.
Types of Regional Trade Agreements
Partial trade agreement
Free trade areas
Customs Union
Common Market
Economic Union
Political Unions
Free Trade Areas
• Simplest form of economic integration
which provides the internal free trade
between member nations.
• Each member is allowed to determined its
own separate commercial policy with
respect to non-members.
– Example: Latin American Free Trade
Association (LAFTA), North American Free
Trade Area (NAFTA)
Customs Union
• More advanced form.
• Internal free trade among the member
nations and they also adopt a uniform
commercial policy against the nonmembers. (eg. common external tariffs)
– Example: EEC – European Economic
Community
Common Market
• There are no barriers to trade among
members and factors of production such
as capital, labor and technology are
mobile among them.
• It also has a uniform policy in respect to
non-members.
Economic Union
• Similar
to
“Common
Market”,
but
with
coordination
of
macroeconomic
policies
(including common currency, harmonization of
standards and regulations)
• Example: EU members participating in the Euro
currency zone
.
Political Union
• It is the ultimate type of economic
integration whereby member countries
achieve not only monetary and fiscal
integration but also political integration.
– Example: the Europe Union (EU) has moved
towards a political union similar to one
created by 50 states of the United States of
America.
Regional Economic Integration (review)
• Partial Trade
– Free trade in “select “industries
• Free Trade Area (FTA):
– No internal tariffs at all
• Customs union:
– … & … common external tariffs
• Common market:
– … & … Factor (labor, capital, technology) mobility
• Economic union:
– … & … Common currency
• Political union:
– … & … Political integration
For and Against RTAs
• The central economic question:
-Are RTAs supportive of gradual, long run
increases in world trade (building blocks),
or
-Do they tend to become obstacles to further
relaxation of trade barriers (stumbling blocks)?
2-42
For and Against RTAs (cont.)
• Proponents of RTAs view them as building
blocks toward freer, more open, world trade
• Opponents view RTAs as undermining
progress toward multilateral (worldwide)
agreements
2-43
Advantages of Regional Trade
Agreements
1. Access to larger markets leads to internal
economies of scale.
2. External economies of scale due to improved
infrastructure (e.g. transport and telecoms
links)
3. Greater international bargaining power.
4. Increased competition between members.
5. More rapid spread of technology.
Disadvantages of Regional Trade
Agreements
1. Country may lose resources to more efficient
members, or to geographical center, and
become depressed region.
2. Firms may co-operate, collude and merge,
leading to greater monopoly power.
3. Diseconomies of scale if firms become very
large.
4. High administrative costs of trading bloc.
Regional Trade AgreementsOpportunities
a.
Elimination of trade barriers within the region would encourage
the efficient firms to expand their business activities in all
countries within the region.
b.
Healthy competition within the region would help the less efficient
firms in acquiring competencies in order to challenge the efficient
firms.
c.
The overall business performance in 'terms of productivity,
quality, price,
d.
Delivery and customer service will improve.
e.
Consumers get better quality goods and services at competitive
price
f.
Employment opportunities in the region increase.
Regional Trade Agreements-Threats
a. The removal of trade barriers provides opportunities to the efficient
firms to enter the different markets within the region. This
endangers the survival of the less efficient firms.
b. The resources of the less efficient countries are exploited by the
firms from the advanced countries of the region.
c. The less developed countries of the region mostly become
consumption centers while the advanced countries of the region
become the production centers.
d. The less developed countries become still poorer whereas the
advanced countries of the region become still richer.
e. It discourages trade with non-members as trade with nonmembers is subject to strict rules and trade barriers.
Regional Trade Agreements and the
WTO
• Since 1948, over 400 agreements have been listed with
the WTO; 75% of those since 1995
• 225 of these agreements are still active (2008)
• The WTO and GATT allow RTAs, assuming they
create more new trade than they divert (destroy)
- trade creation > trade diversion
2-48
Trade Creation vs. Trade Diversion
• Trade Creation — an expansion in world
trade resulting from formation of an FTA
– a welfare-increasing effect.
• Trade Diversion —a shift in the pattern of
trade from low-cost world producers to
higher-cost FTA members
– a welfare-reducing effect.
Creation - Diversion
Example
• Assume there are three countries (A, B, and C) in
the world
– A is the world’s high-cost producer of beer
– B is the medium-cost producer
– C is the world’s low-cost producer
What happens if Country A is a closed economy …
and then opens its economy up to trade???
Country A is NOT yet open, so there is no trade … P= 18 , Q =7
Da
Sa
Pa =18
7
1st … Country A Opens trade to Countries B & C
“C” is low-cost producer
So “C” exports amount Qd=12 minus Qs= 2… = 10
Da
Sa
Pa =18
Pb=$12
Pc=$10
2
12
Now … Country A puts a $4 Tariff on BOTH countries’ goods
“C” is STILL the low-cost producer
“C” exports amount … Qd=9 minus Qs=5 … = 4
Da
Sa
Pa =18
Pb+T=$16
Pc+T=$14
5
9
Now … Country A enters a Trade Agreement with “B”
As “A” removes the tariffs from “B’s” good, “B’s” price is back to its earlier level
“B” is now the low-cost producer
“B” exports amount Qd=10 minus Qs= 4 … = 6
This agreement therefore CREATES trade from previous export level of 4
This “trade creation” is noted by triangles, “e” and “f”.
Pa =18
Pc+T=$14
e
Pb=$12
4
f
5
9
10
However by entering an agreement with “B” and not “C” … who is really
the low-cost producer….. Country A has diverted trade away from C
This TRADE DIVERSION is noted by rectangle G.
If the area (e + f) is greater than the area of G, world welfare will increase
If the area of G is greater than the area (e + f), world welfare will decrease
Pa =18
Pc+T=$14
e
Pb=$12
f
G
Pc=$10
4
5
9
10
***This is one extra one, JUST so that you can see all numbers
and lines together. We have already completed the discussion
Da
Sa
Pa =18
Pb+T=$16
Pc+T=$14
f
e
Pb=$12
G
Pc=$10
2
4
5
7
9
10 12
THE STATIC EFFECTS
of a Regional Trade Agreement
• One more time ….
• In this example, trade creation of the trade
agreement increases world welfare in triangles e
and f
• But trade diversion occurs in box G
• If the area of (e + f) is greater than the area of G,
world welfare will increase
• If the area of G is greater than the area (e + f),
world welfare will decrease
Why Would “A” Form a FTA With “B” Instead of
With “C”?
• Dynamic effects
– Overall growth in market
– Expanded production
– Greater economies of scale
• Maybe “location” issues…
• Political reasons
How does WTO react to this…
• GATT/WTO provides an exception to mostfavored-nation status for RTAs as, in general,
trade creation is larger than trade diversion
• RTAs may create losses for some producers in
some countries outside the agreement
• The number of RTAs is increasing thus
increasing the amount of trade diversion
European Union…. EU
• The European Union (EU) is an economic
and (partially) political union of 27 member
who are located primarily in Europe
Organization of EU
•
European Council
– Heads of State & President of European Commission
– Resolves major policy issues & sets direction – 2x year
•
European Commission – Brussels, Belgium
– Proposing, implementing & monitoring compliance - EU laws
– Commissioners appointed by each country – 5 year renewable terms
– Competition Commissioner regulator of competition and M&A
•
Council of the European Union
– Ultimate controlling authority – approves proposed laws
– 1 representative from each state – varies with topic
– Use majority voting rules rather than unanimous agreement
•
European Parliament – Strasbourg, France
– Directly elected by population – 732 members
– Debates legislation – Consultative body
•
Court of Justice
– Supreme appeals court for EU law
– 1 judge from each state – required to act as independent officials
Functions of EEC/EU
• Common Agricultural Policy (CAP).
– Free movement from one nation to the other,
– Imports allowed only when DD>SS,
– Rich farmers became richer,
• European Monetary Union (EMU).
• Common Transport Policy.
Central European Free Trade
Agreement (CEFTA)
• The members of the CEFTA agreement are: Albania,
Bosnia,
Herzegovina, Croatia, Macedonia, Moldova, Monten
egro, Serbia and UNMIK on behalf of Kosovo.
• Former parties are Bulgaria, the Czech
Republic, Hungary, Poland, Romania, Slovakia
and Slovenia. Their CEFTA membership ended when
they joined the EU. Croatia is set to join the EU in
2013.
European Free Trade Association- EFTA
• Formed in 1959.
• Member nations: Iceland, Liechtenstein Norway,
and Switzerland.
• Former members … UK, Denmark
Ireland, Austria, Sweden and Finland joined the
EU in 1995 and thus ceased to be EFTA
members.
Free Regional Trade Agreements in the
Americas
North American Free Trade
Agreement-NAFTA
• North American integration has an interest in purely
economic issues and there are no constituencies for
political integration.
– Came into being in 1994
– U.S.-Canada Free Trade Agreement
– North American Free Trade Agreement (NAFTA)
– Member Countries: US, Canada and Mexico
Other Aspects of NAFTA
• Objectives
– More business
opportunities in Mexico.
– Enhance competitive
advantage.
– Reduce prices
– Enhance industrial
development.
– Assist Mexico in earning
additional foreign
exchange.
– Improve political
relations.
• Measures:
– Residents of NAFTA can
invest easily in other
member nations.
– Protection of Intellectual
Property Rights.
– Similar Product Standards
– Free flow of FoP.
– Pollution Control.
What are the drawbacks?
• Many US industries shifted to Mexico
because Mexico offered less stringent
policies.
• It was perhaps implemented without prior
preparations.
Association of South-East Asian
Nations (ASEAN)
• The development in Asia has been different from that
in Europe and the Americas
• Asian interest in regional integration is increasing for
pragmatic reasons
• Asia accounts for 20% of world trade.
• It has substantial trade liberalisation.
• It has created numerous sub-regional economic trade
zones, which are named transnational export
processing zones, natural economic territories, or
growth triangles
Brief Background of ASEAN
• A group of 6 Nations: Singapore, Brunei, Malaysia,
Philippines, Thailand and Indonesia
• In 1992- established CEPT (Common Effective
Preferential Tariffs) Plan
–
–
–
–
Free trade area in 15 years.
Tariff cut from 0.50% to 20% beginning with 15 products.
Strength skilled and educated human resource.
Created Asean Free Trade Area (AFTA) in 1994.
About AFTA
• Objectives:
– To encourage inflow of foreign investments.
– To establish free trade area.
– To reduce tariff on the products produced in ASEAN
countries
South Asian Association for Regional
Cooperation (SAARC)
• Member nations: India, Bangladesh, Bhutan, Pakistan,
Maldives and Sri Lanka.
• Established in 1983.
• Objectives:
–
–
–
–
–
–
To improve quality of life and welfare of the people.
To develop region economically, socially and culturally.
To enhance the self reliance,
To provide conducive environment
To enhance mutual assistance.
To extend co-operation to other regional trade agreements.
Andean Community
• The Andean Community is a
customs union comprising
the South American countries
of Bolivia, Colombia, Ecuador and
Peru. The trade bloc was called
the Andean Pact until 1996
Mercosur
• Mercosur is an economic and
political agreement
among Argentina, Brazil,
• Paraguay and Uruguay. Its
purpose is to promote free
trade and the easy movement
of goods, people, and currency.
It has evolved into a full
customs union.
The Adean Community and Mercosur
… merging??
• In 2004 the Andean Community published a joint
letter of intention for future negotiations towards
integrating all of South America in a Union of South
American Nations (USAN), patterned after
the European Union.
There have been numerous
stalemates, however.
Prominent Regional Trade Blocs
2-76
(continued) … Prominent Regional Trade Blocs
2-77
(continued) … Prominent Regional Trade Blocs
2-78
Criticism of
International Institutions
•
International institutions receive three
types of criticism
1. Sovereignty and Transparency
-International institutions can violate national
sovereignty by imposing unwanted domestic
economic policies
-Transparency concerns are based on questions
about the mechanism with which decisions are
made within an international institution
2-79
Criticism of
International Institutions (cont.)
2. Ideology
-Critics argue that the advise and technical
assistance provided to developing countries are
often a reflection of the biases and wishes of
developed country wishes.
3. Implementation and adjustment costs
-When agreements are reached that combine
developed and developing countries, there are
often asymmetries in the ability to absorb the
costs associated with them that favor developed
nations.
2-80
Economic Integration …
Institutions and Practices
Part 4: Common “Justifications” for
Protectionism
2-81
Commercial Policy and Jobs
• It is important to compare the costs and
benefits of trade barriers and examine the
most common reasons given for protecting
specific industries
7-82
Direct Costs and Jobs Saved in Agriculture,
Clothing, and Textiles
• Since the phase in of the Uruguay Round tariff cuts,
average tariffs have fallen 40%—but few sectors are
average
• For example, agriculture, clothing and textiles
experience much smaller reductions in tariffs and quotas
(12%, 14%, 14% respectively)
• In addition, all of these sectors in the EU, Japan, and US
have significant non-tariff barriers applied to them
including large government subsidies in the case of
agriculture
7-83
EU, Japanese, and U.S. Protection in Three Sectors (Mid1990s, Millions of US$)
7-84
EU, Japanese, and U.S. Protection in Three Sectors (Mid1990s, Millions of US$)
7-85
Why Nations Protect Their Industries: The
Labor Argument
• The Labor Argument: Protection must be
used against imports from countries where
wages are much lower
-Problem: Does not consider differences in
productivity between different workforces: As
productivity rises, so will wages
7-86
Jobs Saved through Tariffs and Quotas
7-87
Jobs Saved through Tariffs and Quotas
7-88
Saving Jobs?
• Trade policy is a grossly inefficient mechanism
to create jobs
– It relies on too many intervening variables, and does
not go directly to the heart of the problem
– If job creation is the goal, tariffs and quotas are very
expensive
-Better job-creation tools: (1) sound
macroeconomic polices and (2) flexible labor
markets
7-89
Why Nations Protect Their Industries: The
Infant Industry Argument
• Infant Industry Argument: Developing countries have
“new” industries that must be protected against
competition from industrial countries
-Problems:
(1) may increase inefficiency and result in negative linkage
effects and
(2) (2) technological externalities are difficult to measure—
which industries should be protected?
7-90
Why Nations Protect Their Industries: The
National Security Argument
• National Security Argument: Certain
industries must be protected in order to guard
national security (military security, cultural
values)
7-91
Why Nations Protect Their Industries: The
Retaliation Argument
• Retaliation Argument: Another
country's trade barriers must be
countered with trade barriers
-Problems: Although retaliation can provide
an incentive for trade negotiations, it can
also lead to escalating trade wars
7-92
Economic Integration …
Institutions and Practices
Part 5: Trade … Labor and
Environmental Standards
Trade … “Laws” and “Standards”
• (We already know) - Since the end of WWII, many
of the formal barriers to trade have been removed...
• However, unrestricted flow of trade (and increased
integration) are still hampered by differences in
– National laws and regulations
– National technical, health and safety, environmental,
labor standards, etc.
-These are very often “good” ... But often adopted for
domestic reasons without consideration of the effects
on trade
Setting Standards: Harmonization, Mutual
Recognition, or Separate?
• Most trade agreements and WTO
commitments allow for the combination of:
– Harmonization of standards: Two or more
countries adopt a common set of standards
– Mutual recognition of standards: Countries
maintain their own standards, but accept the
standards of others as valid and sufficient
– Separate standards: Countries maintain their
own standards and refuse to recognize the
standards of others
Setting Standards: Harmonization, Mutual
Recognition, or Separate?
• No general rule determines which way of dealing
with the differences in standards is best for
international trade
• Each of the three mechanisms has advantages
and disadvantages
-Harmonization of technical standards, for example,
leads to a larger market and greater efficiency, but
may also freeze inferior standards into place
Setting Standards: Harmonization, Mutual
Recognition, or Separate? (cont.)
• However, differences in labor and environmental
standards, in particular, have generated concerns
– High-income countries often fear that more relaxed
standards in other countries induce domestic firms to
• adopt lower standards to remain internationally competitive... or
• move to countries with lax standards
– Countries are feared to engage in a “race to the
bottom”
• adoption of the lowest level of standards possible, in order to
attract foreign firms
Income Levels, Society and the Environment
Labor Standards
• The U.S., the EU and many other countries today want
labor and environmental standards be included in any
future trade agreements
– Some parties want “monetary fines” against
“violators”
– Some labor and environmental activists see fines as
inadequate ... demanding the use of trade sanctions
Defining Labor Standards
• The International Labor Organization (ILO) proposed
eight core labor standards in four basic areas:
– Freedom of association and recognition of the right to
collective bargaining
– Elimination of all forms of forced labor
– Effective abolition of child labor
– Elimination of discrimination in employment and
occupations
Defining Labor Standards (cont.)
• The four areas of standards are widely agreed upon, but
details are also ambiguous: for example, what is meant
by “exploitation”?
• Many potential labor standards are contentious:
– For example ...
• universal minimum wage level, limits on the number of work
hours, workplace health and safety, etc.
-
For example ... Low-income countries are reluctant to pay much
higher minimum wages: higher wages would reduce firm profits, and
result in closing down of production and a rise in unemployment
Labor Standards and Trade
As we have said before ...
• Low- and high-income countries face very different
sets of economic constraints; so harmonization of labor
standards is thus difficult
• Should one country, then, use trade sanctions to enforce
certain labor standards in another?
– Labor activists often favor the use of trade barriers
to enforce standards
– Trade economists think such barriers are ineffective
as an enforcement mechanism and only spur
protectionism and other economic inefficiencies
Economists express four concerns over the
use of trade measures to enforce standards:
1. Effectiveness:
only large countries or coalitions of countries can use
trade barriers successfully to enforce standards
2. Hazy borderline between protectionism and concern:
special interests sometimes use the issue of foreign
labor standards in order to attain their real goal,
protection against foreign competition
Economists express four concerns over the
use of trade measures to enforce standards....
3. The specific content of labor standards: there is no
international agreement on the specific content and
language of labor standards
4. The potential to set off a trade war, thus an infraction
of WTO rules
-Sanctions may cause retaliation from the targeted country, thus
further hurting international trade rules
Evidence on Low Standards
as a Predatory Practice (?)
Low standards are generally not an effective
mechanism to enhance competitiveness and attract
foreign investment
1. There is very little evidence that countries that lower
labor standards succeed in obtaining a comparative
advantage in a new line of production
2. Low labor standards are not a successful means to
attract foreign investment: low labor standards are
correlated with unskilled, less-literate labor forces
and lack of economic development
Trade and the Environment:
• There is considerable overlap in the debates on
labor and environmental standards ... Guess
what? ... The same concerns...
– Proponents of including environmental standards in
trade agreements believe sanctions should be used
to enforce such standards
– Critics of sanctions have concerns about the
ineffectiveness of sanctions, the hazy borderline
between protectionism and environmental concerns,
the lack of international definitions of environmental
standards, and the potential for trade wars
Non-Transboundary and Transboundary
Effects
• Three arguments by proponents of trade barriers
to enforce environmental standards are:
1) Without adequate enforcement of standards,
countries engage in an environmental race to the
bottom to boost industrial competitiveness
2) Lack of enforcement of standards in developing
countries induce dirty rich country industries to
“export pollution” and thus create pollution havens
3) Poor enforcement leads to environmental problems
that spill over to another country
Environmental Race to the Bottom
• Is there an environmental race to the
bottom?
– Most countries have adopted “tougher” environmental
standards over time. In order for race to the bottom to
occur, sectional interests would have to be politically
powerful
Trans-boundary Environmental Problems
• Do environmental spill-overs occur?
– Trans-boundary spill over effects are frequent
– However, a successful use of sanctions to
counter them is possible only by a large country
or a coalition of countries, and may lead to trade
wars
Alternatives to Trade Measures??
• As long as there are large income gaps between
countries, differences in labor and environmental
standards are unlikely to disappear
• Seeking enforcement of standards through sanctions,
however, is often futile and harms international trade
• How, then, can we enjoy the benefits from world
trade while resolving the conflicts over
standards?
Alternatives to Trade Measures??
• There are potentially three ways of enforcing
sanctions without hurting international trade
– Labels for exports
– Requiring home country standards
– Increasing international negotiations
Labels for Exports
• Labeling: A certification process whereby a label
is attached on an exported good to indicate to
consumers that the good was produced under
humane and environmentally sound conditions
– The method is already in place in some instances:
Cambodian textile exports to the U.S., Starbucks
coffee imports, etc.
– Problems: (1) Many countries resist labeling as an
infringement of their sovereignty and (2) consumers
must be convinced the label provides accurate
information
Requiring Home Country Standards
• Requiring home country standards: Highstandard countries can require their firms to
follow home country standards when operating
abroad
– Pros: impedes the race to the bottom; avoids the
problem of high-income countries’ dictating standards
– Cons: addresses only firms of high-standard countries
-Low-country producers are not affected
-A high-standard country firm may outsource
production to a low-standard country producer
Increasing International Negotiations
• Increasing international negotiations: Using
either existing international organizations or creating
new agreements and organizations
– ILO could be given a greater role and start, for example,
publicizing lack of compliance with labor standards
– New agreements and organizations could be created to
address environmental issues
The WTO is not an environmental organization;
however, it allows international environmental
agreements to develop their own enforcement
mechanism
Economic Integration …
Institutions and Practices
Part 6: International Trade …
and Economic Growth
Trade and Growth
We already know this….
• Economic growth is shown graphically as an
outward shift of the country’s production
possibility frontier (PPF).
• Since growth affects both production and
consumption, then it also affects international
trade.
Economic Growth
We already know this….
• An economy is said to grow when its total real
output or gross domestic product (GDP) rises.
• Per capita GDP is a measure of a country’s
standard of living. For standard of living to rise
over time, GDP must grow faster than the
population.
Economic Development
• Economic Development— the achievement of a quality of life
for the average citizen of a country that is comparable to the
average citizen of a country with a modern economy.
• Characterized by:
–
–
–
–
“High” levels of consumption
Broad-based educational achievement
Adequate housing
Access to high-quality health care, etc.
• Economic growth is essential for economic development.
Strategies for Economic
Development
• Primary Export-led Development Strategy
• Import-Substitution Development Strategy
• Outward-looking Development Strategy
Primary Export-Led Development
Strategy
• Policies designed to exploit natural
comparative advantage by increasing
production of a few current export goods
most closely related to the country’s resource
base.
– Country examples include Columbia (coffee), Mexico and
Nigeria (petroleum), and Malaysia (rubber).
Advantages of Primary Export-led
Development Strategy
• This strategy would encourage more intensive
use of existing or abundant resources.
• It could help attract foreign investment.
• It may provide linkage effects or benefits to
other industries as a result of one industry
expanding.
Arguments Against Primary Exportled Strategy
• The world markets for primary products do
not grow fast enough to support this type of
development.
• The prices of primary products relative to the
prices of manufactured goods may tend to fall
over time due to sluggish demand or
oversupply.
Import-Substitution Development
Strategy
• Policies designed to promote rapid
industrialization and development by erecting
high barriers to foreign goods to encourage
local production.
What?????? Do we like this??????
Arguments Against Importsubstitution Strategy
• The high barriers to trade rarely come down.
• The strategy encourages citizens to spend scarce
resources to lobby or bribe government officials
to protect their industries.
Outward-Looking Development
Strategy
• These policies involve government identifying
or targeting industries in which the country
has potential comparative advantage.
• Successful country examples include Japan,
South Korea, Singapore, and Taiwan.
• Refer to next slide for more examples…
Trade Reforms
in Selected Developing
Countries
Technological Change
• Technological (technical) change—
occurs when the same amount of output can
be produced with fewer factor inputs, or when
the same amount of inputs can produce
greater amounts of output.
• Our International Trade patterns enhance this
nowadays!
Direct Foreign Investment and
MNC’s
• Direct Foreign Investment—happens when a
domestic firm acquires ownership or control
of the operations of a foreign firm.
• Multinational Corporations (MNCs)—
firms that own and operate capital in one or
more foreign countries.
• Not exactly “trade” but can aid in spread of
Outsourcing
• Outsourcing—the movement or shifting of
production by a firm to a foreign location.
– Vilified in some circles, but often “not a bad thing”
– Can lead to domestic growth!
Economic Integration …
Institutions and Practices
Part 7: IMF and World Bank
The IMF, the World Bank,
and the WTO
• The three global organizations that play a
major role in international economic
relations are:
–The International Monetary Fund
(IMF)
–The World Bank
– The World Trade Organization (WTO) (We already met
them!)
The International Monetary Fund
(IMF) (Quick view…)
• The 188 member (2012) IMF is the central
monetary institution in today’s international
economy... However it can greatly affect “trade”.
• Funding for the IMF comes from its membership
fee, or quota (the price of membership)
– depends on the member’s size and status
– determines the member’s voting weight
IMF – Background…
• Great Depression and WWII led to HIGH trade
barriers…..
• This led to devaluation of national currencies and
decrease in world trade….
• So IMF founded by 29 nations (1944/1945) at the
Bretton Woods meetings between the Allies, to
help regulate monetary policy
IMF Functions
• Functions of the IMF:
-Prevents crisis in a financial system by
promoting sound macroeconomic policy,
which includes
-Balanced expansion of trade
-Stable exchange rates
-Avoidance of competitive devaluations
-Orderly corrections of Balance of Payments
problems
IMF Member Requirements
• Members must:
– make periodic membership payments towards their quota
– refrain from currency restrictions unless granted IMF
permission
– abide by the Code of Conduct in the IMF Articles of
Agreement
– and provide national economic information.
However BORROWERS … have stricter
requirements!
IMF “Borrowers”
• A Financial crisis occurs when a country runs out of foreign
exchange reserves, which are a major currency or gold that
can be used to pay for imports and international borrowings
• In the event of a financial crisis,
– Members borrow against IMF quotas
– IMF conditionality: Requirement for the borrowing
member to carry out economic reforms in
exchange for a loan
The World Bank (A Quick view…)
• Founded in 1944 as the International Bank for
Reconstruction and Development (IBRD)
• Has same membership and similar structure to
IMF
• Member’s voting rights are proportional to
number of shares owned
The World Bank
• Original purpose
– To provide financing mechanisms to rebuild
Europe after World War II
• Current Goal
- “The reduction of poverty”
World Bank … goal…
• The method that the World Bank ”reduces poverty” is
by providing loans to developing countries for capital
programs.
• According to the World Bank's Articles of Agreement its
decisions must be guided by a commitment to
promote foreign investment, international trade and
facilitate capital investment.
World Bank vs. World Bank Group
http://www.worldbank.org/
• World Bank
– International Bank for Reconstruction and
Development (IBRD)
– International Development Association (IDA)
• World Bank GROUP
– The two above … PLUS
– International Finance Corporation (IFC)
– Multilateral Investment Guarantee Agency (MIGA)
– International Centre for Settlement of Investment
Disputes (ICSID) http://www.worldbank.org/