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ASSIGNMENT ON INTERNATIONAL BUSINESS
SUBMITTED TO, Prof. MAMTA SUBMITTED BY, Name: Hinal N. Tejani Roll No.: 01077 Class: MBA- Finance (I)
International Business
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FREE TRADE
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from those which would emerge under deregulation. These governed prices are the result of government intervention in the market through price adjustments or supply restrictions, including protectionist policies. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers. Since the mid-20th century, nations have increasingly reduced tariff barriers and currency restrictions on international trade. Other barriers, however, that may be equally effective in hindering trade include import quotas, taxes, and diverse means of subsidizing domestic industries. Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements such as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary to their formal titles) and any governmental market intervention resulting in artificial prices. Free Trade Features: 1. Trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers)
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2. Trade in services without taxes or other trade barriers 3. The absence of trade- distorting policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others 4. Free access to markets 5. Free access to market information 6. Inability to distort markets through government- imposed monopoly or oligopoly power 7. The free movement of labor between and within countries 8. The free movement of capital between and within countries Current Status: Most of the worlds are members of the World Trade Organization which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas which lower trade barriers among participating countries. Most states conduct trade policies that are to a lesser or greater degree protectionist. One ubiquitous protectionist policy employed by states comes in the form of agricultural subsidies whereby countries attempt to protect their agricultural industries from outside competition by creating artificial low prices for their agricultural goods. Free trade agreements are a key element of customs unions and free trade areas. Most countries also prohibit foreign airlines from sabotage (transporting passengers between two domestic locations), and foreign landing rights are generally restricted, but open skies agreements have become more common. In literature: The value of free trade was first observed and documented by Adam Smith in The Wealth of Nations, in 1776. He wrote, "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy... If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."
This statement uses the concept of absolute advantage to present an argument in opposition to mercantilism, the dominant view surrounding trade at the time, which held that a country should aim to export more than it imports, and thus amass wealth. Instead, Smith argues, countries could gain from each producing exclusively the good(s) in which they are most suited to, trading between each other as required for the purposes of consumption. In this vein, it is not the value of exports relative to that of imports that is important, but the value of the goods produced by a nation. The concept of absolute advantage however does not address a situation where a country has no advantage in the production of a particular good or type of good. This theoretical shortcoming was addressed by the theory of comparative advantage. Generally attributed to David Ricardo who expanded on it in his 1817 book On the Principles of Political Economy and Taxation, it makes a case for free trade based not on absolute advantage in production of a good, but on the relative opportunity costs of production. A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. While their gains from trade might not be equal to those of a country which is more productive in all goods, they will still be better off economically from trade than they would be under a state of autarky. History of free trade: Before the appearance of Free Trade doctrine, and continuing in opposition to it to this day, the policy of mercantilism had developed in Europe in the 16th century. Two early British economists who were opposed to mercantilism were Adam Smith and David Ricardo. Economists that advocated free trade believed trade was the reason why certain civilizations prospered economically. Adam Smith, for example, pointed to increased trading as being the reason for the flourishing of not just Mediterranean cultures such as Egypt, Greece, and Rome, but also of Bengal (East India) and China. Free trade policies have battled with mercantilist, protectionist, isolationist, communist, populist, and other policies over the centuries. All developed countries have used protectionism due to an interest in raising revenues, protecting infant
industries, special interest pressure, and, prior to the 19th century, a belief in mercantilism The removal, so far as possible, of all economic barriers and the establishment of equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance. Some degree of protectionism is nevertheless the norm throughout the world. Most developed nations maintain controversial agricultural tariffs. From 1820 to 1980, the average tariffs on manufactures in twelve industrial countries ranged from 11 to 32%. In the developing world, average tariffs on manufactured goods are approximately 34%. Currently, the World Bank believes that, at most, rates of 20% can be allowed by developing nations. Counter arguments to this point of view are that the developing countries are able to adopt technologies from abroad, whereas developed nations had to create new technologies themselves, and that developing countries have far richer markets to which to export than was the case in the 19th century.) If the main defense of tariffs is to stimulate infant industries, a tariff must be high enough to allow domestic manufactured goods to compete for the tariff to be possibly successful. This theory, known as import substitution industrialization, is largely considered to be ineffective for currently developing nations. Studies by the World Bank have determined that export-oriented industrialization policies correlate with higher economic growth as observed with the Four Asian Tigers. These assessments are based mainly on theory and observational study of correlations, and thus suffer from a number of weaknesses such as small sample size and numerous confounding variables Economics of free trade: Two simple ways to understand the proposed benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade
Advantages of Free Trade: Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows.
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Increased production
Free trade enables countries to specialize in the production of those commodities in which they have a comparative advantage. With specialization countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firms market, resulting in lower average costs and increased productivity, ultimately leading to increased production.
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Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.
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Benefits to consumers
Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures that goods and services, as well as inputs, are supplied at the lowest prices. For example in Australia imported motor vehicles would cost 35% more if the 1998 tariff levels still applied. Clothing and footwear would also cost around 24% more.
4.
Foreign exchange gains
When Australia sells exports overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas.
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Employment
Trade liberalization creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment. With free trade many jobs have been created in Australia, especially in manufacturing and service industries, which can absorb the un-employment, created through restructuring as firms close down or downsize their workforce. When tariffs were increased substantially in the period 19741984 for textiles and footwear - employment in the sector actually fell by 50 000, adding to overall unemployment.
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Economic growth
The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, efficiency and production levels. Disadvantages of Free Trade: Although free trade has benefits, there are a number of arguments put forward by lobby groups and protestors who oppose free trade and trade liberalization. These include:
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With the removal of trade barriers, structural unemployment may occur in the short term.
This can impact upon large numbers of workers, their families and local economies. Often it can be difficult for these workers to find employment in growth industries and government assistance is necessary.
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Increased domestic economic instability from international trade cycles, as economies become dependent on global markets.
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This means that businesses, employees and consumers are more vulnerable to downturns in the economies of our trading partners, e.g. Recession in the USA leads to decreased demand for Australian exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and rising unemployment.
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International markets are not a level playing field
This is because the countries with surplus products may dump them on world markets at below cost. Some efficient industries may find it difficult to compete for long periods under such conditions. Further, countries whose economies are largely agricultural face unfavorable terms of trade (ratio of export prices to import prices) whereby their export income is much smaller than the import payments they make for high value added imports, leading to large CADs and subsequently large foreign debt levels.
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Developing or new industries may find it difficult to become established in a competitive environment
The reason is that with no short-term protection policies by governments, according to the infant industries argument. It is difficult to develop economies of scale in the face of competition from large foreign TNCs. This can be applied to infant industries or infant economies (developing economies).
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Free trade can lead to pollution and other environmental problems
This is because the companies fail to include these costs in the price of goods in trying to compete with companies operating under weaker environmental legislation in some countries.
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Pressure to increase protection during the GFC
During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries. In New South Wales, for example, the state government was criticized for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies. Similar pressures were faced by governments in the United States, Britain and other European countries.
Opinion of advocacy groups: The Freedom to Trade coalition argues that: "Protectionism creates poverty, not prosperity. Protectionism doesn't even "protect" domestic jobs or industries; it destroys them, by harming export industries and industries that rely on imports to make their goods. Raising local prices of steel by "protecting" local steel companies just raises the cost of producing cars and the many other goods made with steel. Protectionism is a fool's game." Opinion of economists: The literature analyzing the economics of free trade is extremely rich with extensive work having been done on the theoretical and empirical effects. Though it creates winners and losers, the broad consensus among members of the economics profession in the U.S. is that free trade is a large and unambiguous net gain for society. In a 2006 survey of American economists (83 responders), "87.5% agree that the U.S. should eliminate remaining tariffs and other barriers to trade" and "90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries." Most free traders would agree that although increasing returns to scale might mean that certain industry could settle in a geographical area without any strong economic reason derived from comparative advantage, this is not a reason to argue against free trade because the absolute level of output enjoyed by both "winner" and "loser" will increase with the "winner" gaining more than the "loser" but both gaining more than before in an absolute level. Despite this, some economists do exist who dispute the benefits of free trade, or question their extent. One long-standing economic critique of free trade is the infant industry argument. The argument advances that protectionism is frequently required in order to allow the growth of nascent industries, as their competitors will already be employing significant economies of scale by virtue of their size or other factors after a long period of growth. Reliant on this critique is the import substitution industrialization form of protectionism.
Opposition: The relative costs, benefits and beneficiaries of free trade are debated by academics, governments and interest groups. Arguments for protectionism fall into the economic category (trade hurts the economy) or the moral category (the effects of trade might help the economy, but have ill effects in other areas); a general argument against free trade is that it is colonialism or imperialism in disguise. The moral category is wide, including concerns of income inequality, environmental degradation, supporting child labor and sweatshops, race to the bottom, wage slavery, accentuating poverty in poor countries, harming national defense, and forcing cultural change. Free trade" is opposed by many anti-globalization groups, based on their assertion that free trade agreements generally do not increase the economic freedom of the poor or the working class, and frequently makes them poorer. Where the foreign supplier allows de facto exploitation of labor, domestic freelabor is unfairly forced to compete with the foreign exploited labor, and thus the domestic "working class would gradually be forced down to the level of helotry." To this extent, free trade is seen as nothing more than an end-run around laws that protect individual liberty. Alternatives: The following alternatives for free trade are proposed: balanced trade, fair trade, protectionism and Tobin tax.
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TRADE BLOC
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states. Description: One of the first economic blocs was the German Customs Union (Zollverein) initiated in 1834, formed on the basis of the German Confederation and subsequently German Empire from 1871. Surges of trade bloc formation were seen in the 1960s and 1970s, as well as in the 1990s after the collapse of Communism. By 1997, more than 50% of all world commerce was conducted under the auspices of regional trade blocs. Economist Jeffrey J. Scott of the Peterson Institute for
International Economics notes that members of successful trade blocs usually share four common traits: similar levels of per capita GNP, geographic proximity, similar or compatible trading regimes, and political commitment to regional organization. Advocates of worldwide free trade are generally opposed to trading blocs, which, they argue, encourage regional as opposed to global free trade. Scholars and economists continue to debate whether regional trade blocs are leading to a more fragmented world economy or encouraging the extension of the existing global multilateral trading system. Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade Agreement (NAFTA) or part of a regional organization (such as the European Union). Depending on the level of economic integration, trade blocs can fall into different categories, such as: preferential trading areas, free trade areas, customs unions, common markets and economic and monetary unions. Lists of trade blocs: 1. List of preferential trade areas 2. List of free trade areas (bilateral, multilateral) 3. List of customs unions 4. List of common markets 5. List of economic unions 6. List of monetary unions 7. List of customs and monetary unions Some well known trading blocs include the EU (European Union), NAFTA (North American Free Trade Agreement), MERCOSUR (Mercado Comun del Cono Sur, also known as Southern Common Markets SCCM), and ASEAN (Association of Southeast Asian Nations). Trade blocs have a range of reasons to protect the trade interests of their region: (1) To establish some form of regional control regarding trade that fulfills the interests of nations within that region
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(2) To establish tariffs that protect intra-regional trade from outside forces (3) To promote regional security and political concerns or to develop trade in such as way as to enhance the security in the region (4) To promote South-to-South trade, e.g., between Africa and Asia, and between Latin American countries (5) To promote economic and technical cooperation among developing countries (Malaysiaexports.com); They also use several measures to restrain global competition: (1) Import quotas (limiting the amount of imports into the country so that domestic consumers buy products made by their countries in their region) (2) Customs delays (establishing bureaucratic formalities that slow down the ability for the imported product from abroad to enter the domestic market (3) Subsidies (government financial assistances toward sectors of the home economy so that they have an influx of capital) (4) Boycotts and technical barriers (5) Bribes and voluntary restraints.
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TRADE AGREEMENTS
What is a trade agreement? A trade agreement is a contract/agreement/pact between two or more nations that outlines how they will work together to ensure mutual benefit in the field of trade and investment. Such trade agreements may involve co-operation in the field of R&D, the lowering of import duties to be levied on the other partners exports, guaranteeing any investments made by the partner(s) in the home market, cooperation on the tax front, etc.
Bilateral and multilateral agreements Trade agreements (also sometimes referred to as trade pacts) are usually bilateral or multilateral. Bilateral trade agreements as the name suggests is an agreement between two nations, while a multilateral trade agreement involves more than two nations. Trade agreements and trading blocs These two concepts are close related. A trade agreement general leads to a trading bloc being formed. A trading bloc is generally defined as two or more countries bound by a specific agreement which determines some or all of their international trade practices and which usually provides for common import tariffs on certain, if not all, imported products. Some economists argue that although trading blocs are seen as a means of reducing trade restrictions (between the countries involved), they themselves represent a form of trade barrier as they exclude non-members.
Different types of trade agreements/trading blocs Trade agreements/trading blocs also come in different forms, involving increasing levels of co-operation. Examples include: 1. Free Trade Areas (FTA) This is the simplest kind of trading bloc and incorporates a two or more countries that have agreed to eliminate tariffs and other barriers to trade amongst members, but individually each country retains its own tariffs on imports from other non-member countries. Perhaps the best example of a FTA is the North American Free trade Area (NAFTA).Click hereto read more about NAFTA. 2. Common Monetary Area (CMA) A Common Monetary Area is when countries usually geographically closely located to each other agree to accept one dominant currency as legal tender. South Africa has had such an agreement in
place with Swaziland and Lesotho. We discuss the SA Common Monetary Area in more detail below. 3. Customs Union A Customs Union goes one step further than an FTA in that it abolishes all tariffs amongst member countries, while members agree to a single, external tariff on goods imported from outside the Customs Union. Revenue generated by the Customs Union is shared amongst members based on a specific formula. The South African Customs Union (SACU) is one of the oldest Customs Unions still in place. We discuss the SACU in more detail below. 4. Common Market In a Common Market, like with a Customs Union, a common tariff is placed on imports from other non-member countries, while no tariffs are exist on goods produced by one member country and sold in the other member countries. The main additional difference between a Customs Union and a Common Market is that with the latter, the free movement of labour and is capital is also permitted. In other words, any restrictions on immigration, emigration and cross-border investment (amongst member countries) are abolished. The current European Union developed from the European Economic Community, a form of Common Market. The Common Market for Eastern and Southern Africa (COMESA) and the Caribbean Community formerly the Caribbean Community and Common Market (CARICOM) are perhaps the two best examples of Common Markets. 5. Monetary Union In the case of a Monetary Union, member countries agree to use a single currency or to fix their rates of exchange for the respective currencies. Essentially, a Monetary Union includes a Common Market Area (discussed above), the difference being, that a Monetary Union involves far greater integration and co-operation amongst member countries. The best example of a monetary union is European Union in which member countries have agreed to use a new, single currency the euro! There are many other Monetary Unions in place click hereto learn more. 6. Economic Union Beyond the free movement of labour and capital, an economic union incorporates the harmonization of economic policies amongst member states, including the integration of monetary policies, economic policies, taxation and other regulatory requirements. European Union is perhaps the only true Economic Union in place today.
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INTERNATIONAL MONETARY FUND (IMF)
About the IMF: The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. What IMF does? With its near-global membership of 187 countries, the IMF is uniquely placed to help member governments take advantage of the opportunitiesand manage the challengesposed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties. The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping countries benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in todays world economy.
Key IMF activities: The IMF supports its membership by providing policy advice to governments and central banks based on analysis of economic trends and cross-country experiences research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets loans to help countries overcome economic difficulties concessional loans to help fight poverty in developing countries technical assistance and training to help countries improve the management of their economies. Original aims:
The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purposeto provide the global public good of financial stability is the same today as it was when the organization was established. More specifically, the IMF continues to; provide a forum for cooperation on international monetary problems facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction promote exchange rate stability and an open system of international payments lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems An adapting IMF: The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization to retain its central role within the international financial architecture As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross-country experience to advice on policy solutions, supported global policy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune with the needs of its 187 member countries.
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Stepping up crisis lending: The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase
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in concessional lending (thats to say, subsidized lending at rates below those being charged by the market) to the worlds poorest nations.
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Greater lending flexibility: The IMF has overhauled its lending framework to make it better suited to countries individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises. Providing analysis and advice: The IMFs monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G20. Drawing lessons from the crisis: The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture. Historic reform of governance: The IMFs member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.
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How IMF do it? The IMF's main goal is to ensure the stability of the international monetary and financial system. It helps resolve crises, and works with its member countries to promote growth and alleviate poverty. It has three main tools at its disposal to carry out its mandate: surveillance, technical assistance and training, and lending. These functions are underpinned by the IMF's research and statistics.
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Surveillance:
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The IMF promotes economic stability and global growth by encouraging countries to adopt sound economic and financial policies. To do this, it regularly monitors global, regional, and national economic developments. It also seeks to assess the impact of the policies of individual countries on other economies. This process of monitoring and discussing countries economic and financial policies is known as bilateral surveillance. On a regular basisusually once each yearthe IMF conducts in depth appraisals of each member country's economic situation. It discusses with the country's authorities the policies that are most conducive to a stable and prosperous economy. Consistent with the decision on bilateral surveillance adopted in June 2007, the main focus of the discussions is whether there are risks to the economys domestic and external stability that would argue for adjustments in economic or financial policies. Member countries may agree to publish the IMF's assessment of their economies, with the vast majority of countries opting to do so. The IMF also has the option to bring together, on an as-needed basis, groups of systemically relevant economies to address issues of broad importance to the global economy. These meetings are called multilateral consultations. A consultation on how to reduce global imbalances took place in 2006-07. The IMF's work on individual countries informs its work on regional economies and the global economy. These views, along with timely analysis of important economic and financial issues, are published twice a year in the World Economic Outlook, various Regional Economic Outlook reports, and the Global Financial Stability Report. The IMF works with the World Bank to promote resilient financial systems around the world through the joint Financial Sector Assessment Program (FSAP). Supported by experts from a range of national agencies and standard-setting bodies, IMF and World Bank staff assesses the stability of a countrys financial system by identifying its strengths and vulnerabilities, determine how key sources of risks are being managed, ascertain the sector's developmental needs, and help prioritize policy responses.
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Technical assistance and training:

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IMF offers technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including fiscal policy, monetary and exchange rate policies, banking and financial system supervision and regulation, and statistics. The IMF provides technical assistance and training mainly in four areas: Monetary and financial policies (monetary policy instruments, banking system supervision and restructuring, foreign management and operations, clearing settlement systems for payments, and structural development of central banks) Fiscal policy and management (tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and management of domestic and foreign debt) Compilation, management, dissemination, and improvement of statistical data Economic and financial legislation.
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Lending:
In the event that member countries experience difficulties financing their balance of payments, the IMF is also a fund that can be tapped to facilitate recovery. A policy program supported by financing is designed by the national authorities in close cooperation with the IMF. Continued financial support is conditional on the effective implementation of this program. The IMF also provides low-income countries with loans at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). For more on different types of IMF lending, go to Lending in the Our Work section.
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Research and data:
Supporting all three of these activities is the IMF's economic and financial research and statistics. In recent years, the IMF has applied both its surveillance and technical assistance work to the development of standards and codes of good practice in its areas of responsibility, and to the strengthening of financial sectors. These are part of the IMF's continuing
efforts to strengthen the international financial system and improve its ability to prevent and resolve crises. Membership: The IMF currently has a near-global membership of 187 countries. To become a member, a country must apply and then be accepted by a majority of the existing members. In June 2009, the former Yugoslav republic of Kosovo joined the IMF, becoming the institution's 186th member. Upon joining, each member of the IMF is assigned a quota, based broadly on its relative size in the world economy. The IMF's membership agreed in May 2008 on a rebalancing of its quota system to reflect the changing global economic realities, especially the increased weight of major emerging markets in the global economy. For more on the quota and voice reform, please go to the section on Country Representation in the Governance section). A member's quota delineates basic aspects of its financial and organizational relationship with the IMF, including: 1. Subscriptions: A member's quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency. 2. Voting power: The quota largely determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Accordingly, the United States has 371,743 votes (16.77 percent of the total), and Palau has 281 votes (0.01 percent of the total). The newly agreed quota and voice reform will result in a significant shift in the representation of dynamic economies, many of which are emerging market countries, through a quota increase for 54 member countries. A tripling of the number of basic votes is also envisaged as a means to give poorer countries a greater say in running the institution.
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3. Access to financing: The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. Under Stand-By and Extended Arrangements, which are types of loans, a member can borrow up to 200 percent of its quota annually and 600 percent cumulatively. However, access may be higher in exceptional circumstances. 4. SDR allocations: Allocations of SDRs, the IMF's unit of account, is used as an international reserve asset. A member's share of general SDR allocations is established in proportion to its quota. The most recent general allocation of SDRs took place in 2009. Collaborating with others: The IMF collaborates with the World Bank, the regional development banks, the World Trade Organization (WTO), UN agencies, and other international bodies. While all of these organizations are involved in global economic issues, each has its own unique areas of responsibility and specialization. The IMF also interacts with think tanks, civil society, and the media on a daily basis. 1. Working with the World Bank: The IMF and the World Bank are different, but complement each other's work. Whereas the IMF's focus is chiefly on macroeconomic and financial sector issues, the World Bank is concerned mainly with longer-term development and poverty reduction. Its loans finance infrastructure projects, the reform of particular sectors of the economy, and broader structural reforms. Countries must join the IMF to be eligible for World Bank membership. Given the World Bank's focus on antipoverty issues, the IMF collaborates closely with the Bank in the area of poverty reduction and helping countries draw up poverty reduction strategies. Other areas of collaboration include assessments of member countries' financial sectors, development of standards and codes, and improvement of the quality, availability, and coverage of data on external debt.
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An external review committee on World Bank and IMF collaboration was formed in March 2006 to assess the working relationship between the two sister agencies, known collectively as the Bretton Woods institutions. In its February 2007 report, the six-member Malan committee offered recommendations for closer collaboration between the two institutions. This led to the institutions adoption of a Joint Management Action Plan, under which, IMF and World Bank country teams discuss their country-level work programs, the division of labor, and the work needed from each insititution in the coming year. Also the Bank and Fund have improved their information sharing at the country level, including technical assistance reports. 2. Cooperating with other international organizations: The IMF is a member of the Switzerland-based Financial Stability Board, which brings together government officials responsible for financial stability in the major international financial centers, international regulatory and supervisory bodies, committees of central bank experts, and international financial institutions. It also works with standard-setting bodies such as the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The IMF collaborates with the World Trade Organization (WTO) both formally and informally. The IMF has observer status at WTO meetings and IMF staff contributes to the work of the WTO Working Group on Trade, Debt, and Finance. And the IMF is involved in the WTO-led Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries, whose other members are the International Trade Commission, UNCTAD, UNDP, and the World Bank. The IMF has a Special Representative to the United Nations, located at the UN Headquarters in New York. The Special Representative facilitates the liaison between the IMF and the UN system. The general arrangements for collaboration and consultations between the IMF and the UN include areas of mutual interest, such as cooperation between the statistical services of the two organizations, and reciprocal attendance and participation at events. 3. Engaging with think tanks, civil society, and the media: The IMF also engages on a regular basis with the academic community, civil society organizations (CSOs), and the media. IMF staffs at all levels
frequently meet with members of the academic community to exchange ideas and receive new input. The IMF also has an active outreach program involving CSOs. IMF management and senior staff communicate with the media on a daily basis. Additionally, a biweekly press briefing is held at the IMF headquarters, during which a spokesperson takes live questions from journalists.
WORLD BANK
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The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank's official goal is the reduction of poverty. By law, all of its decisions must be guided by a commitment to promote foreign investment, international trade and facilitate capital investment. The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more: International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID). History: The World Bank is one of five institutions created at the Bretton Woods Conference in 1944. The International Monetary Fund, a related institution, is the second. Delegates from many countries attended the Bretton Woods Conference. The most powerful countries in attendance were the United States and United Kingdom, which dominated negotiations. Although both are based in Washington, D.C., the World Bank is, by custom, headed by an American, while the IMF is led by a European. 19441968: From its conception until 1967 the bank undertook a relatively low level of lending. Fiscal conservatism and careful screening of loan applications was common. Bank staff attempted to balance the priorities of providing loans for reconstruction and development with the need to instill confidence in the bank.
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Bank president John McCloy selected France to be first recipient of World Bank aid; two other applications from Poland and Chile were rejected. The loan was for US$250 million, half the amount requested and came with strict conditions. Staff from the World Bank monitored the use of the funds, ensuring that the French government would present a balanced budget and give priority of debt repayment to the World Bank over other governments. The United States State Department told the French government that communist elements within the Cabinet needed to be removed. The French Government complied with this diktat and removed the Communist coalition government. Within hours the loan to France was approved. The Marshall Plan of 1947 caused lending by the bank to change as many European countries received aid that competed with World Bank loans. Emphasis was shifted to non-European countries and until 1968; loans were earmarked for projects that would enable a borrower country to repay loans (such projects as ports, highway systems, and power plants). 19681980: From 1968 to 1980, the bank concentrated on meeting the basic needs of people in the developing world. The size and number of loans to borrowers was greatly increased as loan targets expanded from infrastructure into social services and other sectors. These changes can be attributed to Robert McNamara who was appointed to the presidency in 1968 by Lyndon B. Johnson. McNamara imported a technocratic managerial style to the Bank that he had used as United States Secretary of Defense and President of the Ford Motor Company. McNamara shifted bank policy toward measures such as building schools and hospitals, improving literacy and agricultural reform. McNamara created a new system of gathering information from potential borrower nations that enabled the bank to process loan applications much faster. To finance more loans, McNamara told bank treasurer Eugene Rotberg to seek out new sources of capital outside of the northern banks that had been the primary sources of bank funding. Rotberg used the global bond market to increase the capital available to the bank. One consequence of the period of poverty alleviation lending was the rapid rise of third world debt. From 1976 to 1980 developing world debt rose at an average annual rate of 20%.
In 1980, the World Bank Administrative Tribunal was established to decide on disputes between the World Bank Group and its staff where allegation of nonobservance of contracts of employment or terms of appointment had not been honored. 19801989: In 1980, A.W. Clausen replaced McNamara after being nominated by US President Jimmy Carter. Clausen replaced a large number of bank staffers from the McNamara era and instituted a new ideological focus in the bank. The replacement of Chief Economist Hollis B. Chenery by Anne Krueger in 1982 marked a notable policy shift at the bank. Krueger was known for her criticism of development funding, as well as of third world governments as rent-seeking states. Lending to service third world debt marked the period of 19801989. Structural adjustment policies aimed at streamlining the economies of developing nations were also a large part of World Bank policy during this period. UNICEF reported in the late 1980s that the structural adjustment programs of the World Bank were responsible for the "reduced health, nutritional and educational levels for tens of millions of children in Asia, Latin America, and Africa". 1989present: From 1989, World Bank policy changed in response to criticism from many groups. Environmental groups and NGOs were incorporated in the lending of the bank in order to mitigate the effects of the past that prompted such harsh criticism. Leadership: The President of the Bank, currently Robert B. Zoellick, is responsible for chairing the meetings of the Boards of Directors and for overall management of the Bank. Traditionally, the Bank President has always been a US citizen nominated by the United States, the largest shareholder in the bank. The nominee is subject to confirmation by the Board of Executive Directors, to serve for a five-year, renewable term.
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The Executive Directors, representing the Bank's member countries, make up the Board of Directors, usually meeting twice a week to oversee activities such as the approval of loans and guarantees, new policies, the administrative budget, country assistance strategies and borrowing and financing decisions. The Vice Presidents of the Bank are its principal managers, in charge of regions, sectors, networks and functions. There are 24 Vice-Presidents, three Senior Vice Presidents and two Executive Vice Presidents. List of Presidents: Not all World Bank Presidents have banking experience with some as political appointments. Name Eugene Meyer John J. McCloy Dates Nationality Field
19461946
United States
Newspaper publisher
19471949
United States
Lawyer and US Assistant Secretary of War Bank executive with Chase and executive director with the World Bank Bank executive with First Boston Corporation US Defense Secretary, business executive with Ford Motor Company
Eugene R. Black, Sr.
19491963
United States
George Woods
19631968
United States
Robert 19681981 McNamara
United States
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Alden W. Clausen Barber Conable Lewis T. Preston
19811986
United States
Lawyer, bank executive with Bank of America New York State Senator and US Congressman
19861991
United States
19911995
United States
Bank executive with J.P. Morgan
Sir James 19952005 Wolfensohn
United States Australia[note 1]
Corporate lawyer and banker
Paul 20052007 Wolfowitz
United States
Various cabinet and government positions; US Ambassador to Indonesia, US Deputy Secretary of Defense Bank executive with Goldman Sachs, Deputy Secretary of State and US Trade Representative
Robert B. Zoellick
2007 present
United States
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List of chief economists: Hollis B. Chenery (19721982) Anne Osborn Krueger (19821986) Stanley Fischer (19881990) Lawrence Summers (19911993) Michael Bruno (19931996) Joseph E. Stiglitz (19972000) Nicholas Stern (20002003) Franois Bourguignon (20032007) Justin Yifu Lin (June 2008 present)
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Members: The International Bank for Reconstruction and Development (IBRD) has 187 member countries, while the International Development Association (IDA) has 171 members. Each member state of IBRD should be also a member of the International Monetary Fund (IMF) and only members of IBRD are allowed to join other institutions within the Bank (such as IDA). Voting power: In 2010, voting powers at the World Bank were revised to increase the voice of developing countries, notably China. The countries with most voting power are now the United States(15.85%), Japan (6.84%), China (4.42%), Germany (4.00%), the United Kingdom (3.75%), France (3.75%), and India (2.91%). Under the changes, known as 'Voice Reform - Phase 2', countries other than China that saw significant gains included South Korea, Turkey, Mexico, Singapore, Greece, Brazil, India, and Spain. Most developed countries' voting power was reduced, along with a few poor countries such as Nigeria. United States', Russia's and Saudi Arabia's voting power was unchanged. The changes were brought about with the goal of making voting more universal in regards to standards, rule-based with objective indicators, and transparent among other things. Now, developing countries have an increased voice in the "Pool Model," backed especially by Europe. Additionally, voting power is based on economic size in addition to International Development Association contributions. Poverty reduction strategies: For the poorest developing countries in the world, the bank's assistance plans are based on poverty reduction strategies; by combining a cross-section of local groups with an extensive analysis of the country's financial and economic situation the World Bank develops a strategy pertaining uniquely to the country in question. The government then identifies the country's priorities and targets for the reduction of poverty, and the World Bank aligns its aid efforts correspondingly.
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Forty-five countries pledged US$25.1 billion in "aid for the world's poorest countries", aid that goes to the World Bank International Development Association (IDA) which distributes the loans to eighty poorer countries. While wealthier nations sometimes fund their own aid projects, including those for diseases, and although IDA is the recipient of criticism, Robert B. Zoellick, the president of the World Bank, said when the loans were announced on December 15, 2007, that IDA money "is the core funding that the poorest developing countries rely on". Clean Technology Fund management: The World Bank has been assigned temporary management responsibility of the Clean Technology Fund (CTF), focused on making renewable energy costcompetitive with coal-fired power as quickly as possible, but this may not continue after UN's Copenhagen climate change conference in December, 2009, because of the Bank's continued investment in coal-fired power plants. Clean Air Initiative: Clean Air Initiative (CAI) is a World Bank initiative to advance innovative ways to improve air quality in cities through partnerships in selected regions of the world by sharing knowledge and experiences. It includes electric vehicles. United Nations Development Business: Based on an agreement between the United Nations and the World Bank in 1981, Development Business became the official source for World Bank Procurement Notices, Contract Awards, and Project Approvals. In 1998, the agreement was re-negotiated, and included in this agreement was a joint venture to create an electronic version of the publication via the World Wide Web. Today, Development Business is the primary publication for all major multilateral development banks, United Nations agencies, and several national governments, many of whom have made the publication of their tenders and contracts in Development Business a mandatory requirement. Currently, the subscription to "online version only" is not free, but costs US$ 550. The World Bank or the World Bank Group is also a sitting observer in the United Nations Development Group.
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Criticisms: The World Bank has long been criticized by non-governmental organizations, such as the indigenous rights group Survival International, and academics, including its former Chief Economist Joseph Stiglitz who is equally critical of the International Monetary Fund, the US Treasury Department, US and other developed country trade negotiators. Critics argue that the so-called free market reform policies which the Bank advocates are often harmful to economic development if implemented badly, too quickly ("shock therapy"), in the wrong sequence or in weak, uncompetitive economies. One of the strongest criticisms of the World Bank has been the way in which it is governed. While the World Bank represents 186 countries, it is run by a small number of economically powerful countries. These countries choose the leadership and senior management of the World Bank, and so their interests dominate the bank. The World Bank has dual roles that are contradictory: that of a political organization and that of a practical organization. As a political organization, the World Bank must meet the demands of donor and borrowing governments, private capital markets, and other international organizations. As an action-oriented organization, it must be neutral, specializing in development aid, technical assistance, and loans. The World Bank's obligations to donor countries and private capital markets have caused it to adopt policies which dictate that poverty is best alleviated by the implementation of "market" policies. In the 1990s, the World Bank and the IMF forged the Washington Consensus, policies which included deregulation and liberalization of markets, privatization and the downscaling of government. Though the Washington Consensus was conceived as a policy that would best promote development, it was criticized for ignoring equity, employment and how reforms like privatization were carried out. Many now agree that the Washington Consensus placed too much emphasis on the growth of GDP, and not enough on the permanence of growth or on whether growth contributed to better living standards. Some analysis shows that the World Bank has increased poverty and been detrimental to the environment, public health and cultural diversity. Some critics also claim that the World Bank has consistently pushed a neoliberal agenda, imposing policies on developing countries which have been damaging, destructive and anti-developmental.
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It has also been suggested that the World Bank is an instrument for the promotion of US or Western interests in certain regions of the world. South American nations have even established the Bank of the South in order to reduce US influence in the region. One criticism of the bank is that the President is always a citizen of the United States, nominated by the President of the United States (though subject to the "approval" of the other member countries). There have been accusations that the decision-making structure is undemocratic as the US has a veto on some constitutional decisions with just over 16% of the shares in the bank; Decisions can only be passed with votes from countries whose shares total more than 85% of the bank's shares. A further criticism concerns internal management and the manner in which the World Bank is said to lack accountability. Criticism of the World Bank often takes the form of protesting as seen in recent events such as the World Bank Oslo 2002 Protests, the October Rebellion, and the Battle of Seattle. Such demonstrations have occurred all over the world, even amongst the Brazilian Kayapo people. In 2008, a World Bank report which found that bio-fuels had driven food prices up 75% was not published. Officials confided that they believed it was suppressed to avoid embarrassing the then-President of the United States, George W. Bush. Knowledge production: The World Bank has been criticized for the manner in which it engages in "the production, accumulation, circulation and functioning" of knowledge. The Bank's production of knowledge has become integral to the funding and justification of large capital projects. The Bank relies on "a growing network of trans-local scientists, technocrats, NGOs, and empowered citizens to help generate data and construct discursive strategies". Its capacity to produce authoritative knowledge is a response to intense scrutiny of Bank projects resulting from the successes of growing anti-Bank and alternative-development movements. "Development has relied exclusively on one knowledge system, namely, the modern Western one. The dominance of this knowledge system has dictated the marginalization and disqualification of non-Western knowledge systems". It has been remarked that in these alternative knowledge systems, researchers and activists might find alternative rationales to guide interventionist action away from Western (Bankproduced) ways of thinking. Knowledge production has become an asset to the Bank, and "it is generated and used in highly strategic ways" to provide justifications for development.
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Structural adjustment: The effect of structural adjustment policies on poor countries has been one of the most significant criticisms of the World Bank. The 1979 energy crisis plunged many countries into economic crises. The World Bank responded with structural adjustment loans which distributed aid to struggling countries while enforcing policy changes in order to reduce inflation and fiscal imbalance. Some of these policies included encouraging production, investment and labour-intensive manufacturing, changing real exchange rates and altering the distribution of government resources. Structural adjustment policies were most effective in countries with an institutional framework that allowed these policies to be implemented easily. For some countries, particularly in Sub-Saharan Africa, economic growth regressed and inflation worsened. The alleviation of poverty was not a goal of structural adjustment loans, and the circumstances of the poor often worsened, due to a reduction in social spending and an increase in the price of food, as subsidies were lifted. By the late 1980s, international organizations began to admit that structural adjustment policies were worsening life for the world's poor. The World Bank changed structural adjustment loans, allowing for social spending to be maintained and encouraging a slower change to policies such as transfer of subsidies and price rises. In 1999, the World Bank and the IMF introduced the Poverty Reduction Strategy Paper approach to replace structural adjustment loans. The Poverty Reduction Strategy Paper approach has been interpreted as an extension of structural adjustment policies as it continues to reinforce and legitimize global inequities. Neither approach has addressed the inherent flaws within the global economy that contribute to economic and social inequities within developing countries. By reinforcing the relationship between lending and client states, many believe that the World Bank has usurped indebted countries' power to determine their own economic policy. Water privatization:
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Sociologist Michael Goldman has argued that "Industry analysts predict that private water will soon be a capitalized market as precious, and as war-provoking, as oil". Goldman says "These days, an indebted country cannot borrow capital from the World Bank or IMF without a domestic water privatization policy as a precondition". The Bank is utilizing "the 'Washington Consensus' model of "development" to promote water privatization. Following this model, the World Bank is forcing many countries to commodity their water resources, rather than using their expertise in the public sector to acknowledge water as a universal human right and an essential public service". The push for water privatization development plays upon "the shocking tragedy that much of the world lacks affordable clean water". This image creates "new opportunities in development, though it may have little to do with ultimately quenching" the needs of impoverished countries. "The problem of water scarcity for the world's poor has been analyzed by the World Bank as one in which the public sector has failed to deliver, and has therefore prevented development from "taking off", and the economy from modernizing. If the state cannot deliver something as basic as water and sanitation, the argument goes; it is a strong indication of a general failure of public-sector capacity". However, "with the sale or lease of a public good comes more than simply a privatized service; alongside it comes a wide set of postcolonial institutional forces that intervene in state-citizen relations and North-South dynamics". One notable example is the privatization of water forced upon Bolivians by the World Bank which led to multiple protests including the 2000 Cochabamba protests. Sovereign immunity: Despite claiming goals of "good governance and anti-corruption the World Bank requires sovereign immunity from countries it deals with. Sovereign immunity waives a holder from all legal liability for their actions. It is proposed that this immunity from responsibility is a "shield which [The World Bank] wants resort to, for escaping accountability and security by the people."As the United States has veto power, it can prevent the World Bank from taking action against its interests. Environmental strategy:
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The World Bank's ongoing work to develop a strategy on climate change and environmental threats has been criticized for (i) lacking of a proper overall vision and purpose, (ii) having a limited focus on its own role in global and regional governance, and (iii) having limited recognition of specific regional issues, e.g. issues of rights to food and land, and sustainable land use. Critics have also commented that only 1% of the World Bank's lending goes to the environmental sector, narrowly defined. Environmentalists are urging the Bank to stop worldwide support for the development of coal plants and other large emitters of greenhouse gas and operations that are proven to pollute or damage the environment. For instance, protesters in South Africa and abroad have criticized the 2010 decision of the World Bank's approval for a US$3.75 billion loan to build the world's 4th largest coal-fired power plant in South Africa. The plant will greatly increase the demand for coal mining and corresponding harmful environmental effects of coal.
PROTECTIONISM
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically. This policy contrasts with free trade, where government barriers to trade and movement of capital are kept to a minimum. In recent years, it has become closely aligned with anti-globalization. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.
History: Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the 'interested sophistry' of industry, seeking to gain advantage at the cost of the consumers. Most modern economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth. Economics Nobel Prize winner and trade theorist Paul Krugman once famously stated that, "If there were an Economists Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'." Recent examples of protectionism in developed countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly mostly blue-collar jobs were being lost from developed countries to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing and the loss of whitecollar jobs. Protectionist policies: A variety of policies have been used to achieve protectionist goals. These include: 1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often perceived as 'hurting' local industries, while import tariffs are perceived as 'helping' local industries, export tariffs are seldom implemented. 2. Import quotas: To reduce the quantity and therefore increase the market price of imported goods. The economic effect of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff.
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3. Administrative barriers: Countries are sometimes accused of using their various administrative rules (e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports. 4. Anti-dumping legislation: Supporters of anti-dumping laws argue that they prevent "dumping" of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters. 5. Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against imports. These subsidies are purported to "protect" local jobs, and to help local firms adjust to the world markets. 6. Export subsidies: Export subsidies are often used by governments to increase exports. Export subsidies are the opposite of export tariffs; exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies. 7. Exchange rate manipulation: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports. 8. International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level. Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers "good citizenship" status despite 'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius...knowing all the while that one's domestic intellectual property system was a handy protectionist weapon."
De facto protectionism: In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in imposing their own labor or environmental standards as protectionism. Also, the impositions of restrictive certification procedures on imports are seen in this light. Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero. Arguments for protectionism: Protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their countrys economy and its peoples standard of living. Infant industry argument: Protectionists believe that infant industries must be protected in order to allow them to grow to a point where they can fairly compete with the larger mature industries established in foreign countries. They believe that without this protection, infant industries will die before they reach a size and age where economies of scale, industrial infrastructure, and skill in manufacturing have progressed sufficiently allow the industry to compete in the global market. Unrestricted trade undercuts domestic policies for social good: Most industrialized governments have long held that laissez-faire capitalism creates social evils that harm its citizens. To protect those citizens, these governments have enacted laws that restrict what companies can and cannot do in pursuit of profit. Examples are laws regarding: Child labor Collective bargaining Competition (antitrust) Environmental protection
Equal opportunity Intellectual property Minimum wage Occupational safety and health Protectionists argue that these laws place an economic burden on domestic companies bound by them that put those companies at a disadvantage when they compete, both domestically and abroad, with goods and services produced by companies unfettered by such restrictions. They argue that governments have a responsibility to protect their corporations as well as their citizens when putting its companies at a competitive disadvantage by enacting laws for social good. Otherwise, they believe that these laws end up destroying domestic companies and ultimately hurting the citizens these laws were designed to protect.
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Arguments against protectionism: Protectionism is frequently criticized by mainstream economists as harming the people it is meant to help. Most mainstream economists instead support free trade. Economic theory, under the principle of comparative advantage, shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Protectionism results in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market, where there is no such total loss. According to economist Stephen P. Magee, the benefits of free trade outweigh the losses by as much as 100 to 1. Most economists, including Nobel Prize winners Milton Friedman and Paul Krugman, believe that free trade helps workers in developing countries, even though they are not subject to the stringent health and labour standards of developed countries. This is because "the growth of manufacturing and of the myriad other jobs that the new export sector creates has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions. Economists have suggested that those who support protectionism ostensibly to further the interests of workers in least developed countries are in fact being disingenuous, seeking only to protect jobs in developed countries. Additionally, workers in the least developed countries only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides, else they wouldn't be entered into freely. That they accept low-paying jobs from companies in developed countries shows that their other employment prospects are worse. A letter reprinted in the May 2010 edition of Econ Journal Watch identifies a similar sentiment against protectionism from sixteen British economists at the beginning of the 20th century. Current world trends: Since the end of World War II, it has been the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization[. Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy in the European Union, longstanding agricultural subsidies and proposed "Buy American" provisions[20] in economic recovery packages in the United States .
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The current round of trade talks by the World Trade Organization is the Doha Development Round and the last session of talks in Geneva, Switzerland led to an impasse. The leaders' statement in the G20 meeting in London in early 2009 included a promise to continue the Doha Round. Protectionism after the 2008 financial crisis: Heads of the G20 at their recent London summit pledged to abstain from imposing any trade protectionist measures. Although they were reiterating what they had already committed to, last November in Washington, 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. In its report, the World Bank says most of the world's major economies are resorting to protectionist measures as the global economic slowdown begins to bite. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken through late 2009 were distorting global merchandise trade by 1/4 to 1/2 percent (about $50 billion a year).
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WTO TRIPS & TRIMS
World Trade Organization is the only international organization dealing with the
global rules of trade between nations. It is main function is to ensure that trade flows as smoothly, predictably & freely as possible. The result is assurance. Consumers and producers know that they can enjoy secure supplies and greater choice of the finished products, components, raw materials and services that they use. Producers and exporters know that foreign markets will remain open to them. The result is also a more prosperous, peaceful and accountable economic world. Decisions in the WTO are typically taken by consensus among all member countries and they are ratified by members parliaments. Trade friction is channeled into the WTOs dispute settlement process where the focus is on interpreting agreements and commitments, and how to ensure that countries trade policies conform to them. That way, the risk of disputes spilling over into political or military conflict is reduced. By lowering trade barriers, the WTOs system also breaks down other barriers between peoples and nations. At the heart of the system known as the multilateral trading system are the WTOs agreements, negotiated and signed by a large majority of the worlds trading nations, and ratified in their parliaments. These agreements are the legal ground-rules for international commerce. Essentially, they are contracts, guaranteeing member countries important trade rights. They also bind governments to keep their trade policies within agreed limits to everybodys benefit. The agreements were negotiated and signed by governments. But their purpose is to help producers of goods and services, exporters, and importers conduct their business.
The goal is to improve the welfare of the peoples of the member countries.
The multilateral trading system- past, present & future The World Trade Organization came into being in 1995. One of the youngest of the international organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War. So while the WTO is still young, the multilateral trading system that was originally set up under GATT is well over 50 years old. The past 50 years have seen an exceptional growth in world trade. Merchandise exports grew on average by 6% annually. Total trade in 2000 was 22-times the level of 1950. GATT and the WTO have helped to create a strong and prosperous trading system contributing to unprecedented growth. The system was developed through a series of trade negotiations, or rounds, held under GATT. The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping and non-tariff measures. The last round the 1986-94 Uruguay Round led to the WTOs creation. The negotiations did not end there. Some continued after the end of the Uruguay Round. In February 1997 an agreement was reached on telecommunications services, with 69 governments agreeing to wide-ranging liberalization measures that went beyond those agreed in the Uruguay Round. In the same year, 40 governments successfully concluded negotiations for tarifffree trade in information technology products, and 70 members concluded a financial services deal covering more than 95% of trade in banking, insurance, securities and financial information. In 2000, new talks started on agriculture and services. These have now been incorporated into a broader work programme, the Doha Development Agenda (DDA), launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001.
The agenda adds negotiations and other work on non-agricultural tariffs, trade and environment, WTO rules such as anti-dumping and subsidies, investment, competition policy, trade facilitation, transparency in government procurement, intellectual property, and a range of issues raised by developing countries as difficulties as difficulties they face in implementing the present WTO agreement. WTO Agreement How can you ensure that trade is as fair as possible, and as free as is practical? By negotiating rules and abiding by them. The WTOs rules the agreements are the result of negotiations between the members. The current set were the outcome of the 1986-94 Uruguay Round negotiations which included a major revision of the original General Agreement on Tariffs and Trade (GATT). GATT is now the WTOs principal rule-book for trade in goods. The Uruguay Round also created new rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement, and trade policy reviews. The complete set runs to some 30,000 pages consisting of about 30 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening. Through these agreements, WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. Each country receives guarantees that its exports will be treated fairly and consistently in other countries markets. Each promises to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitments. Goods It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly non-discrimination. Since 1995, the updated GATT has become the WTOs umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping. Services
Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport companies looking to do business abroad can now enjoy the same principles of freer and fairer trade that originally only applied to trade in goods. These principles appear in the new General Agreement on Trade in Services (GATS). WTO members have also made individual commitments under GATS stating which of their services sectors they are willing to open to foreign competition & how open those market. Intellectual Property The WTOs Intellectual Property Agreement amounts to rules for trade and investment in ideas and creativity. The rules state how copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-designs and undisclosed information such as trade secrets intellectual property should be protected when trade is involved. Dispute Settlement The WTOs procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgments by specially-appointed independent experts are based on interpretations of the agreements and individual countries commitments. The system encourages countries to settle their differences through consultation. Failing that, they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of a ruling by a panel of experts, and the chance to appeal the ruling on legal grounds. Confidence in the system is borne out by the number of cases brought to the WTO more than 300 cases in ten years compared to the 300 disputes dealt with during the entire life of GATT (1947-94). Trade Policy Review The Trade Policy Review Mechanisms purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting, and to assess their impact. Many members also see the reviews as constructive feedback on their policies. All WTO members must undergo periodic scrutiny, each review containing reports by the country concerned and the WTO Secretariat.
WTO with Developing Countries Development & Trade Over three-quarters of WTO members are developing or least developed countries. All WTO agreements contain special provision for them, including longer time periods to implement agreements and commitments, measures to increase their trading opportunities, provisions requiring all WTO members to safeguard their trade interests, and support to help them build the infrastructure for WTO work, handle disputes, and implement technical standards. The 2001 Ministerial Conference in Doha set out tasks, including negotiations, for a wide range of issues concerning developing countries. Some people call the new negotiations the Doha Development Round. Before that, in 1997, a high-level meeting on trade initiatives and technical assistance for least-developed countries resulted in an integrated framework involving six intergovernmental agencies, to help leastdeveloped countries increase their ability to trade, and some additional preferential market access agreements. A WTO Committee on Trade and Development, assisted by a Sub-Committee on Least-Developed Countries, looks at developing countries special needs. Its responsibility includes implementation of the agreements, technical cooperation, and the increased participation of developing countries in the global trading system. Technical Assistance & Training The WTO organizes hundreds of technical cooperation missions to developing countries annually. It holds on average three trade policy courses each year in Geneva for government officials. Regional seminars are held regularly in all regions of the world with a special emphasis on African countries. Training courses are also organized in Geneva for officials from countries in transition from central planning to market economies. The WTO has set up reference centers in over 100 trade ministries and regional organizations in capitals of developing and least-developed countries. These centers provide computers and internet access to enable ministry officials to keep abreast of events in the WTO through online access to the WTOs immense database of official documents and other material. Efforts are also being made to help countries that do not have permanent representatives in Geneva. The Organization
Functions Predictably it does this by: Administering trade agreements acting as a forum for trade negotiations Settling trade disputes reviewing national trade policies
Structure The WTO has 153 members, accounting for almost 95% of world trade. Around 30others is negotiating membership. Decisions are made by the entire membership. This is typically by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTOs predecessor, the General Agreement on Taris and Trade (GATT). The WTOs top level decision-making body is the Ministerial Conference which meets at least once every two years. Below this is the General Council (normally ambassadors and heads of delegation in year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property TRIPS Council report to the General Council numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as the environment, development, membership applications and regional trade agreements. Secretariat The WTO Secretariat, based in Geneva, has around 625 states and is headed by a director- Members themselves; the Secretariat does not have the decision-making role that other international bureaucracies are given. The Secretariats main duties are to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and media. The Secretariat also provides some forms of legal assistance in the dispute settlement
process and advises governments wishing to become members of the WTO. The annual budget is roughly 189 million Swiss francs. Advantages of WTO World Trade Organization helps member states in various ways and this enables them to reap benefits such as:
1.
Helps promote peace within nations: Peace is partly an outcome of two of the most fundamental principle of the trading system; helping trade flow smoothly and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. Peace creates international confidence and cooperation that the WTO creates and reinforces.
2.
Disputes are handled constructively: As trade expands in volume, in the numbers of products traded and in the number of countries and company trading, there is a greater chance that disputes will arise. WTO helps resolve these disputes peacefully and constructively. If this could be left to the member states, the dispute may lead to serious conflict, but lot of trade tension is reduced by organizations such as WTO.
3.
Rules make life easier for all: WTO system is based on rules rather than power and this makes life easier for all trading nations. WTO reduces some inequalities giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of the member states.
4.
Free trade cuts the cost of living:
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Protectionism is expensive, it raises prices, WTO lowers trade barriers through negotiation and applies the principle of non-discrimination. The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services, and ultimately a lower cost of living.
5.
It provides more choice of products and qualities: It gives consumer more choice and a broader range of qualities to choose from.
6.
Trade raises income: Through WTO trade barriers are lowered and this increases imports and exports thus earning the country foreign exchange thus raising the country's income.
7.
Trade stimulates economic growth: With upward trend economic growth, jobs can be created and this can be enhanced by WTO through careful policy making and powers of freer trade.
8.
Basic principles make life more efficient: The basic principles make the system economically more efficient and they cut costs. Many benefits of the trading system are as a result of essential principle at the heart of the WTO system and they make life simpler for the enterprises directly involved in international trade and for the producers of goods/services. Such principles include; nondiscrimination, transparency, increased certainty about trading conditions etc. together they make trading simpler, cutting company costs and increasing confidence in the future and this in turn means more job opportunities and better goods and services for consumers.
9.
Governments are shielded from lobbying:
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WTO system shields the government from narrow interest. Government is better placed to defend themselves against lobbying from narrow interest groups by focusing on trade-offs that are made in the interests of everyone in the economy.
10. The
system encourages good governance:
The WTO system encourages good government. The WTO rules discourage a range of unwise policies and the commitment made to liberalize a sector of trade becomes difficult to reverse. These rules reduce opportunities for corruption.
Disadvantages of WTO
1. The WTO Is Fundamentally Undemocratic The policies of the WTO impact all aspects of society and the planet, but it is not a democratic, transparent institution. The WTO rules are written by and for corporations with inside access to the negotiations. For example, the US Trade Representative gets heavy input for negotiations from 17 "Industry Sector Advisory Committees." Citizen input by consumer, environmental, human rights and labor organizations is consistently ignored. Even simple requests for information are denied, and the proceedings are held in secret. Who elected this secret global government? 2. The WTO Will Not Make Us Safer The WTO would like you to believe that creating a world of "free trade" will promote global understanding and peace. On the contrary, the domination of international trade by rich countries for the benefit of their individual interests fuels anger and resentment that make us less safe. To build real global security, we need international agreements that respect people's rights to democracy and trade systems that promote global justice.
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ASSIGNMENT ON INTERNATIONAL BUSINESS

Foreign exchange gains

International markets are not a level playing field

Free trade can lead to pollution and other environmental problems

Pressure to increase protection during the GFC

INTERNATIONAL MONETARY FUND (IMF)

Technical assistance and training:

Research and data:

Eugene R. Black, Sr.

Robert 19681981 McNamara

Alden W. Clausen Barber Conable Lewis T. Preston

Bank executive with J.P. Morgan

Sir James 19952005 Wolfensohn

United States Australia[note 1]

Corporate lawyer and banker

Paul 20052007 Wolfowitz

WTO TRIPS & TRIMS

Free trade cuts the cost of living:

Governments are shielded from lobbying:

system encourages good governance:

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