Economic integration: integration of the world market.

Removal of barriers adopting free trade and a global economy

globalisation: Adopting free trade and economic integration.
Freetrade, removal of trade barriers (imposed by governments). Free flow of goods and services:

allows specialisation and economies of scale. More competition requires greater efficiency.
This is done to achieve more world output, lower unit costs, more stability and higher quality and higher living
standards.

Rationale for Freetrade:

Free trade should be initiated if both parties have an absolute advantage. (Wealth of Nations 1776, Smith).
o
Absolute advantage, more production of a good with the same level of resources
*Free trade can be initiated if a country has a comparative advantage. David Ricardo (1817)
o
Ie.it is comparatively (less opportunity cost) better at producing something
Free trade allows specialisation in factor endowments (technical efficiency. Aus wheat, coal etc.)
Cheaper unit costs, higher living standards, more world output, more technical, allocative efficiency

+ Side
Domestic:
Specialising > Economies of scale=

Lower unit costs, allocative efficiency, technical

efficiency
stable employment, higher living standards.
wider range, quality products, lower consumer
prices, higher living standards

Global:
higher + more efficient, quality world output
Equalisation of resource prices.
Increase in living standards
More world output, lower costs

- Side
Domestic:

Hard for infant industries to compete, cannot

attain scale against more efficient competition

Efficient producers will attract resources away

inefficient producers. Regional inequality,
structural unemployment. Retraining programs
needed

Negative externalities unless the environment is

accounted for
Global:

Countries are unable to diversify their export base

and are prone to weaknesses (primary fluctuations
in price)

Dumping of goods, causing unemployment

If long term CAD problems

Relies on market fluctuations. The recession 2008.

Protection: Is the imposition of trade barriers(tariffs, subsidies, quotas etc.) which restrict the free flow of goods and services.

Tariffs: tax on imports, raising the price of imports. Higher market share.
+ Raises prices allowing domestic to compete (in foreign comp), raise revenue for Gov
-Tariffs cause resources to be allocated to inefficient industries, raise prices for goods. Inflation
Subsidy: A cash payment made to producers, encourages supply, and allows us to compete lower unit costs.
+paid for from general tax, lower general prices and more subject to review(changes in subsidy)
-redistributes income to other sectors, distorts resource allocation
Quotas: restriction on the quantity imported.
+increased domestic share
-restricts quality, quantity and range of good

The need for global trade liberalisation (freer trade)

+ side

DFAT, 2003 despite 50 years of trade reform. Global trade barriers impose considerable costs on world economies
Trade policies in developed countries: the EU, USA, South Korea and Japan. Finance huge agriculture protection
depressing the world market by 12% (2001 estimate)
The WB, 2002, estimates countries would increase their welfare by $1.5 billion.
OECD,2001 ag policies of OECD cost consumers and taxpayers $300 billion annually
WB, 2002 removal of trade barriers $111 billion each year

Allows infant industries to develop (against foreign

competitors).

Tariffs generate revenue for the government.

Improve CAD

Subsidies allow lower costs for consumers

Protects domestic employment and outflows. Less

imports and improved BOP, CAD

War (restrictions on oil, food), self sufficiency and

cultural identity.
ALLOWS DIVERSIFIED EXPORT BASE, ALLOWS
INDUSTRIES TO DEVELOP.

-side

Uneven playing field if others dont adopt free trade.

Less protection for industry unable to compete.

Industries become reliant on free trade, inefficiency

in resource allocation, and innovation (TCF, CARS)

Makes goods more expensive and inflationary

Consumes government expenditure, less money

Abuse of externalities

More expensive goods, less range, less quality in

goods we produce.
SLOWED ECO GROWTH. COST OF MAINTAINING
PROTECTION

Contemporary trading blocs:

Agreements made between two or more countries:

o
Multilateral multiple parties more than two (WTO), non exclusive trade creation(encourage trade)
o
Bilateral two party trade policy (AUS-NZ CERTA)
o
Regional: trade policy between countries in a region (NAFTA)
Free trade agreements:
o
Customs union: abolish protection, same restrictions on foreign imports
o
Common market: free mobility of labour and capital
o
Economic Union: adoption of common currency and monetary policy coordinated by central bank.
There has a been a growing rise in intra regional trade due to economic integration and globalisation.
Trading blocs are only beneficial when trade is created within regions rather than diverted (EU). Diverted within the
region others are excluded. Therefore less trade to EU.

The EU:
Joint policy decisions are made
political integration: joint decisions on matters
creation of a single European market
a single currency, interest rates set
500 million population, EU 20% of world trade

Formed in 59, treaty of Rome, Common market between Germany, France, Italy, Belgium. Luxembourg, and the
Netherlands
1969 Customs union, through (CET) and (CAP)
Maastricht Treaty, came into effect 1993-7 years for implementation. Complete Economic union
Impetus: increase international competitiveness
Adoption of a single currency (EURO), and control over monetary policy ECB
Membership grew to 15, another 10 in 2005. 27 states in 2007

+
reduction in transaction costs due to single currency
greater eco stability
improved performance with coordinated monetary, exchange
and other policies

Loss of national sovereignty

Macroeconomic policy autonomy, and political opposition

NAFTA:

1988 CUSTA (Canada-US). NAFTA start talks 1991, signed 92, came into force 94.
Improve int competitiveness, and create a market of 400m consumers
Removal of trade barriers, integrate the market
USA+CANADA use lower production costs, Mexico larger trade area and access to more exports and imports
Divert trade to mexico, but rules of origin stopped trade diversion
o
Wholly produced in region
o
Produced from materials in the region
o
Satisfy regional content requirement

Value added in production of good, special tariff provisions if not met

NAFTA industries: ag, auto, energy, petrochemcials, financial, transport and intellectual.
FTAA 34 nations met. Joining the Americas 2005.

APEC:

Multilateral trade forum. 1819, 21 countries

APEC countries account for 50% world GDP, 60% world trade.
AIMs: Closer trade and investment links within the ASIA pacific region
o
Trade liberalisation
o
Technical coop
o
Institutionalism
o
Open regionalism, not exclusive
BOGOR declaration, 1994 dismantle trade barriers by 2020.
IAPS (individual action plans), CAPS (collective Action plans) for trade liberalisation

ASEAN:

1967 formed, 5 countries

Aims: promote eco growth and development, social progress and cultural development
Since 1967 Ministerial Council making joint decisions
ASEAN Free trade association (AFTA)_ in 2003. Enhance global competitiveness.

ANZCERTA:

1965 Free Trade Agreement

1980s early, CER formed in 1983.
o
Strengthen eco relationship, mutual benefits from expansion of free trade
o
Eliminate trade barriers in a minimal fashion, trade under fair competition
Both countries have similar factor endowments, exporters of primary
Importers of manufactured and intermediate goods
NZ purchased 5.7% Aus exports, Aus purchased 3% NZ exports

International Organisations affecting trade:

OECD, WTO, IMF, World bank prominent

o
OECD, Eco research, policy recommendations
o
WTO provides a forum, free trade is promoted, trade disputes solved
o
IMF: lending funds to Countries with short term CAD probs (Norway 08)
o
WB: promotes Eco development in developing countries (invest in infrastructure)
Criticism, controlled by developing countries, stringent policy conditions attached to IMF and WB funds.

WTO:

GATT, General Agreement on Tariffs and Trades, signed by 23 countries in 47.

100 nations, steady reduction in tariff and non tariff barriers 1947-1995
WTO replaced GATT 1995.
o
Purpose: Monitoring developments in world trade and reviewing barriers
Aims:
o
Non discriminatory trade concessions
o
Trade liberalisation (removing barriers)
o
Stability in trading relations (solve disputes)
o
Transparency trade agreements open to discussion

IMF:

1944, Bretton Woods Agreement to promote INTm financial stability.

o
Facilitate multilateral payments
o
Stable, fixed, xchange rates pegged to USD
o
Remove foreign exchange restrictions
Pool of money to bail out countries
Money comes from countries paying into this. Richer pay more US, UK
SDR, Voting rights
Usually loans have to be paid back, interest, conditions

The WRLD Bank:

Long term development projects in developing countries, Africa, central and south america
Influence macro and micro policies to allow foreign investment
Conditions imposed on the borrowing of funds

Chapter 4: Australias Trade and Financial Flows:

International Trade: the exchange of goods and services across national boundaries. Including debt, and equity borrowings,
foreign exchange and derivatives trading.

Australias balance of payments:

Balance of payments: Record of all financial transactions between Aus and the rest of the world. Must =0
When there is a current account surplus, there is a CFD when CAD CFS. Due to savings and investment balance.
Aus high CAD, due to large foreign investment low savings, High CFS due to investment going into Australia.

Current account=
o
Balance on goods and services: Exports-Imports (small deficit, surplus September 2008)
o
Income: income earned from Australia owned assets overseas, minus payment for Overseas owned
assets in Australia. In Australia this is the LARGEST because we have lots of foreign investment (-)
o
Current Transfers: receipts of money from foreign aid, migrants funds, pensions etc. ongoing payments.(+)

Capital and Financial account=

o
Balance on capital account: (small)

Net capital (savings etc.) brought in from overseas. ONE OFF PAYMENT
o
Balance on Financial account: (large)

net direct investment: a controlling stake in a company 10% or more

Net portfolio investment: an investment less than 10%

Reserve assets: Gold, Exchange, money, SDR held by RBA.

Other investments: other investments abroad, inflows and outflows

Financial derivatives: options, futures etc.

o
DEBT AND EQUITY in the Financial Account:

Debt is equal to the amount owed, borrowings, liabilities

Equity is ownership in an asset, so foreign ownership in Aus, and Aus ownership abroad.

Net errors and emissions: made by RBA in order to balance the Capital and Financial account and the Current
account MUST balance under a floating exchange rate.

The terms of Trade:

Relative price paid by a country for its exports and pays for its imports
Measured using index numbers, a base year selected given 100 index used as comparison
Terms of trade: +
o
If terms of trade improves,

Export prices(income) rise, relative to imports

Or Export prices fall slower than import prices

o
More can be purchased for the same prices
o
Same level of imports can be purchased for less
Terms of Trade: o
Terms of trade deteriorates:

Export prices rise less quickly than imports

Export prices fall more than import prices

Foreign Debt:
Net foreign debt=
Net foreign liabilities: Money owed, total debt + equity
Net foreign Debt: Loans, debts, borrowings from overseas
Net foreign equity: (ownership in Australia of assets can sell those assets, shares, outflow of money back into the owners
country)

Accumulation of foreign investment (borrowings, equity) must be paid back (loans)

A problem as a % of GDP, money has to be paid for debts slowing our economy. Budget constraints.
Current flow, debt servicing ratio (interest payments) more money is paid out of Australia to pay for this debt
Debt servicing ratio proportion of export income.