Institutions of the International Economy

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

food◦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 WW II◦Objective was to liberalize trade by eliminating tariffs,

subsidies, and import quotas

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’

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 history

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 economy Must effectively enforce contracts agreed by foreigners

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 them

9 of 10 WTO disputes satisfactorily settled

Under GATT and WTO◦Tariff reduction from average 40% to average 5%

◦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 countries

Real international rules that guide functioning of the global marketplace

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

“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

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

Examples ◦ Iceland, 2008-09 (at least $2 billion)◦ Korea, Thailand, Indonesia, late 1990s ($40 billion)

◦ United Kingdom, 1976

Voting is weighted to established nations, although

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 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

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

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 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

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 states

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