Chapter 2

International Trade Frameworks and Policy

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The Historical Dimension

The rise and fall of the Roman Empire and
the emergence of feudalism can be
attributed to trade
The Romans placed primary emphasis on
encouraging international business
activities

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The Historical Dimension

The principal approaches used to
implement this emphasis was the Pax
Romana, or the Roman Peace, and the
common coinage

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The Historical Dimension

The Smoot-Hawley Act raised import
duties to reduce the volume of imports
into the United States to help restore
domestic employment
This resulted in raising of duties and
imposition of barriers to imports by other
nations
Led to worldwide depression and the collapse
of the world financial system
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The Historical Dimension

Global division
After 1945, the world was split into West and
East
With Soviet Union as the leader of the Eastern bloc
and the United States for the Western world

The Soviet Union focused on developing

strong linkages among the members of the
Soviet bloc
The United States created the Pax Americana
driven by the belief that international trade
was a key to worldwide prosperity
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The Historical Dimension

Global division
The charter for an International Trade
Organization (ITO), a series of agreements
among 53 countries, was signed in 1948
It was designed to cover:

International commercial policies

Domestic business practices
Commodity agreements
Employment and reconstruction

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The Historical Dimension

Economic development and international investment
A constitution for a new United Nations agency to
administer the whole

Global division
The General Agreement on Tariffs and Trade
(GATT) was initiated in 1947
The World Bank and the International
Monetary Fund were created

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Transnational Institutions
Affecting World Trade
General Agreement on Tariffs and Trade
(GATT)
Set of rules for nondiscrimination, transparent
procedures and settlement of disputes in
international trade
Emphasized on tariff reduction
Reduced trade barriers and developed
provisions for dealing with subsidies, and a
more explicit definition of rules for import
controls
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Transnational Institutions
Affecting World Trade
Developed improved dispute-settlement
mechanisms
Was designed to operate by consensus
Became less effective over a period of time

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Transnational Institutions
Affecting World Trade
World Trade Organization (WTO)
Created in January 1995
GAAT has now become a part of the WTO
Responsible for general agreement on trade in
Services (GATS), agreements on trade related
aspects of intellectual property rights (TRIPS),
and trade related investment measures
(TRIMS)
Administered international trade and
investment accords
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Transnational Institutions
Affecting World Trade
World Trade Organization (WTO)
Developed speedier trade dispute settlement
procedures and streamlined the decision
making process
Makes major contributions to improve trade
and investment flows around the world

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Transnational Institutions
Affecting World Trade
The Doha Round was initiated to:
Further hasten implementation of liberalization,
particularly to help impoverished and developing
nations
Expand the role of the WTO to encompass more of
the trade activities in which there were insufficient
rules for their definition and structure

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Transnational Institutions
Affecting World Trade
International Monetary Fund (IMF)
Developed in 1944
Designed to provide stability for the
international monetary framework
Provide for fixed exchange rates between
countries
With the changing global financial needs, the
future role of the IMF may be very different

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Transnational Institutions
Affecting World Trade
World Bank
Also recognized as the International Bank for
Reconstruction and Development, was formed
in 1944
Key functions:
Provides economic assistance for the reconstruction
of war-torn countries
Assists fledging economies to participate in modern
economic trade

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Transnational Institutions
Affecting World Trade
Participates with the IMF to resolve debt problems
of the developing nations
Bring a market economy to the former members of
the Eastern bloc

World Bank
Current areas of focus:
Capacity building
Development of human capital through investments
into education and health

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Transnational Institutions
Affecting World Trade

Promoting sustainable growth and development

Addressing higher commodity prices
Agricultural assistance in times of higher food prices
Liberalization of world trade
Greater participation of rising economic powers and
developing nations in the banks governance

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Transnational Institutions
Affecting World Trade
World Bank
Major challenge - reduce global poverty
Delivers technical, financial and other assistance to
those most in need
Promotes growth to the poorest countries, fragile
states, the Arab world, middle income countries
Solves global public goods issues
Delivers knowledge and learning services

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Transnational Institutions
Affecting World Trade
Regional institutions
European Coal and Steel Community
designed to create a common market among
six countries in coal, steel and iron
Customs unions - Common external tariff
European Union (EU) - Free movement of
capital, services, and people across national
borders and the joint development of common
international policies

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Transnational Institutions
Affecting World Trade
Regional institutions
North American Free Trade Agreement
(NAFTA), MERCOSUR - Latin America, and
Gulf Cooperation Council (GCC) - focus on
issues such as forming a customs union, a
common market, an economic union, or a
political union
Private sectors have begun to develop
international trade institutions of their own
Transatlantic Business Dialogue (TBD)
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Trade Positions Compared

International trade positions have
changed substantially when measured in
terms of world market share
The U.S. share of total world export has
declined precipitously since 1950s
An important development is the rise of
Chinas trade position

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Exhibit 2.1: Merchandise Exports and Imports

as a Percentage of World Total, 20082011

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Trade Positions Compared

Factors behind the decline in U.S.
international competitiveness:
Attitude of the American policy makers
Ignoring domestic firms in an attempt to
boost the development of foreign economies
Perception within the U.S. private sector
about international marketing being risky and
complicated

Lack of global interest

Inadequacy of information
Unfamiliarity with international market conditions
Complicated trade regulations

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The Impact of Trade and

Investment
The effect of trade Export is important
as it:
Creates a trade balance by reducing trade
deficits
Affects the currency values and fiscal and
monetary policies of the government
Shapes public perception about
competitiveness
Determines the affordable levels of imports
for a country
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The Impact of Trade and

Investment
Can be instrumental in creating jobs
Helps to achieve economies of scale
Firms benefit from market diversification

The effect of trade Importance of

imports:
Firms are exposed to new competition

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The Impact of Trade and

Investment
Gives rise to new marketing approaches,
better processes or better products and
services
Competitive pressures keep quality high and
price low

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The Impact of Trade and

Investment
The effect of international investment
Foreign direct investment is extensive in
many U.S. industries
Almost one in seven U.S. manufacturing employees
works for a foreign affiliate

To some extent, foreign direct investments

substitute for trade activities

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The Impact of Trade and

Investment
Even though theory suggests an open
investment policy that welcomes foreign
corporations, some degree of uneasiness exists
about the rapid growth of such investment

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The Impact of Trade and

Investment
Restriction on investments may:
Serve national security or policy goals
Permit more domestic control over industries
Deny access to foreign capital and often
innovation
Tighten up of credit markets, higher interest
rates, and decrease the willingness to adapt
to changing world market conditions

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Policy Responses to Trade

Problems
Have consisted mainly of political ad hoc
reactions, which over the years have
changed to protectionism
Voluntary import restrictions
Aid domestic industries to reorganize,
restructure, and recapture their trade
prominence of years past

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Policy Responses to Trade

Problems
Non-tariff barriers
Providing preferential treatment to domestic
bidders
Using national standards
Placing emphasis on design rather than
performance
Preventing the market entry of foreign
products

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Policy Responses to Trade

Problems
Export promotion efforts
Earn foreign currency, encourage domestic
employment, and increase domestic economic
activity
Offering mixed aid credits
Take the form of loans composed partially of
commercial interest rates and partially of highly
subsidized developmental aid interest rates

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Policy Responses to Trade

Problems
Formation of export consortia
To provide the foreign buyer with a one-stop
shopping center for a variety of complementary and
competitive products

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A Strategic Outlook for Trade and

Investment Policies
A U.S. perspective
Improve the quality and amount of
information government and business share
to facilitate competitiveness
Encourage collaboration among companies in
such areas as goods and process technologies
Overcome its export reluctance and its shortterm financial orientation
Invest in its people, providing education and
training suited to the competitive challenges
Renewal of trade promotion authority
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A Strategic Outlook for Trade and

Investment Policies
Closer governmentbusiness collaboration is
seen as one key to enhanced competitiveness
It will make both business and government more
responsive to each others needs
It will reduce the failures that can result from a lack
of collaboration and insufficient understanding of
linkages

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A Strategic Outlook for Trade and

Investment Policies
An international perspective:
Bilateral or multilateral trade and investment
negotiations must continue
Policy makers must be willing to trade off
short-term achievements for long-term goals
Design new mechanisms to evaluate restraint
measures
Assess the cost of policy measures which
affect trade and investment flow
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