Globalization Lecture 2: Economic Perspectives - Trade and International Financial Flow Flashcards
What is Balance of Payments BP?
The accounting record of all money transactions between a country and the rest of the world. They must sum to zero
BP= Current (Export-Imports)/Trade Accounts + Capital Account (Foreign Direct Investment, Portfolio Investment, aid and Remittances)
Foreign Direct Investment: long term capital investment Ex. The purchase of construction of machinery, buildings or manufacturing plants.
Why is there international Trade?
- For Domestic Producers: Stimulates economic growth through comparative advantage: to produce a good at a relatively more efficiently than the others.
- For Domestic Consumers: enjoy a wider variety of domestic and imported goods at lower prices – we export because we want to import
What determines Trading Patterns?
Free Trade and Trade restrictions
Free trade: international trade made without any restrictions.
- Trade restrictions might include:
- Tariffs – Tax levied on imports
- Quotas – quantitative restrictions on imports
- Export subsidy – Payment to a firm or individual that ships a good abroad
- Exchange rate policies
- Over and under valuation
Trade restrictions are generally harmful except in the case of a large economy or where one has market power.
Why do we want trade strategies in developing countries?
To achieve sustainable economic development or at least growth
This means moving countries efficiently and rapidly the stages of growth – from a rural agricultural based economy to an industrialized economy and onwards.
It also helps countries accumulate of foreign exchange, which they can use to import.
What are some trade strategies in developing countries?
- Import substitution industrialization (ISI)
- Export oriented or outward looking development policies
What is Import substitution industrialization (ISI)?
Import substitution industrialization is a trade and economic policy that advocates replacing foreign imports with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products
- It was the result of long history of exploitation of post-colonial countries. There was hostility towards external links, and dependence on other countries for sustainability. Alternative was to figure out a way to produce goods internally ‘independently’ so that each country can produce for their own people.
- Should initially support domestic production of previously imported simple consumer goods (first stage ISI) followed by production of more sophisticated manufactured items (second-stage ISI) - all behind the protection of high tariffs and quotas.
- Tools: State owned enterprises. Protectionism, subsidies, preferential treatment State owned enterprises
Why did ISI fail?
- Became unsustainable over time with high economic and social costs, given limited market size.
- The comfort of state ownership and protection created inefficient economic institutions.
- corruption: many ISI tools like import licence, investment and government permits created rent sharing opportunities.
- Agriculture was neglected weakening food security
- ISI was not a complete failure, it did help crete efficient private sector in countries like India, South Korea, and other South-East Asian countries
What are export oriented policies?
- Countries exported to take advantage of the efficiency and growth benefits of free trade and competition, producing for larger markets and avoiding the distorting effects of protection.
- However, once you become export-oriented, you are sensitive to international market fluctuations.
What are international Trade Agreements?
- Trade between countries
- Can include preferential trade agreement and Free trade agreements
- They created a common platform between large and small nations to easy out the unequal relationships that exist between them.
- Agreements can be bilateral or multilateral.
- GATT is the defacto international organization as a semi-institutional multilateral treaty regime
Preferential Trade Agreement
tariffs applied to each other are lower than the rates on the goods coming from other countries. One such arrangement is the customs union (members of the agreement) set up common external tariffs.
Free Trade Agreement
members do not charge tariffs on each other’s products, but set their own tariff rates against the outside world. It is not clear whether these arrangements lead to welfare increases. If they lead to replacement of high cost domestic productions by lower cost imports, there is a gain. This is trade creation. However, if there is trade diversion that is, replacement of low cost imports from outside the zone with higher cost goods from within – there is a loss.
- Its inherently discriminatory. Often, the weakest countries are excluded (because these agreements are based on mutual advantage and the poorest countries do not offer any). It was estimated that as many as half of the regional trading arrangements were discriminatory – they divert trade and end up depriving countries of income.
What is the role of WTO in trade?
- To administer the multilateral trade agreements and prepare the grounds for further liberalization. - The purpose of these institutions is mainly to liberalize and increase the flow of international commerce.
- Trade agreements and their implementation are expected to increase market access for goods, services and investment.
- Another important purpose is to reduce volatility and trade policy and trade flows.
- International institutions constrain their member countries from introducing new trade barriers and foster trade transparency.
- disagreements continue over several key areas. The major area is the agricultural subsidies
