The World Trade Organization
- The World Trade Organization was established in Geneva in 1995 to replace the GATT organization.
- It enforces trade agreements in goods, services, and agriculture.
- It also resolves most trade disputes among its members.
- Monitors and encourages free trade.
What are NICs?
- NICs = Newly Industrializing Countries
- These countries have undergone rapid economic development. Some examples include Brazil, Mexico, and South Korea.
- The difference between high and low income countries is, according to the World Bank, high income countries have a per capita income exceeding $11,000. Low income countries have a per capita income of under $1000.
- The underground economy is an untaxed unreported economic activity. This underreports national wealth and per capita income and is significant in such countries as Nigeria, Thailand, Russia, and Brazil.
U.S. Trade Patterns
- Although the US had a trade surplus before 1971, it has a trade deficit with all geographical regions, including South America and Africa.
- Canada is America's most important trading partner.
- On the other hand, the US usually has a trade surplus in services.
- Canada, Mexico, China, and Japan are the top recipients of US exports. China, Canada, Mexico, and Japan are the main sources of US imports.
- The US is the world's largest exporter and importer of services.
- PPP is purchasing power parity, and it is the number of units of currency required to buy the same amount of goods and services in a foreign country that one dollar would buy in the US.
- In terms of per capita GNP, the US at $41,000 ranks 4th in the world, behind Luxembourg ($80,000), Qatar, and Denmark.
- The European Union exports more goods and services than North America.
Reasons for Foreign Direct Investment
Some important reasons for FDI include a need to lower labor costs, lower environmental costs, and a need to gain access to natural resources and markets.
The Impact of Foreign Investment on the Host Country
FDI increases the GNP, reduces the balance of payments deficit, increases employment, improves product quality, and reduces domestic prices.
Trends in World Trade
- Brazil, Russia, India, and China are known as the BRIC nations. They are becoming an important economic and political force in the world.
- A small group of highly developed nations account for more than 70 percent of world trade.
- Free trade, which is supported by most of the world's major economists, is a major reason for the growth in world trade. But non-tariff barriers (NTBs) still remain a problem in world trade.
- Mercosur is an important regional trading group and common market in the southern part of South America. It includes Argentina, Chile, Uruguay, and Paraguay.
The General Agreement on Tariffs and Trade (GATT)
GATT emerged as a major force promoting free trade after nations failed to create the International Trade Organization in 1948. Although there was no significant reduction in industrial tariffs before 1967, GATT negotiations in Geneva reduced world tariffs from over 40% in 1945 to about 4% in 1995.
The Theory of Absolute Advantage
- Developed in 1776 by Adam Smith, a Scottish economist, in his book The Wealth of Nations.
- It explains why trade occurs when nations specialize in products where they have a natural advantage.
- For example, Columbia should sell coffee, and the US should sell airplanes.
- Free trade was a radical departure from mercantilism theory.
Why does the U.S. have a trade deficit?
- A significant increase in oil consumption and oil prices are major reasons for the trade deficit.
- Foreign oil imports now account for 70% of domestic consumption.
- Increased foreign competition, the high per capita income of US consumers, and the decline in the traditional trade surplus in services and agriculture are other reasons for the US trade deficit.
Regional Development Banks
- Appeared in the late 1950s to increase capital loans for regional development. Today, there are regional development banks for Asia, Latin America, and Africa.
- Although nations outside the region can belong, loans are made only to nations in the region. Capital is obtained voluntarily from members and interest from loans.
What are the most important products of world trade?
International Finance Corporation (IFC)
- Established in 1956 in Washington to lend money to private businesses in less developed countries.
- Part of the World Bank family, the IFC obtains capital from voluntary contributions by World Bank members.
How can a nation reduce its balance of payments deficit?
It can increase exports, reduce imports, reduce capital outflow, encourage capital inflow, and reduce the value of its currency to attract foreign investment.
What are terms of trade?
- It is the relationship between the value of what a nation imports and the amount of exports it needs to pay for imports.
- For example, how many tons of coffee does Costa Rica have to export to pay for the import of a Boeing 767 airplane? It suggests a need for developing nations to increase value added manufacturing.
- This theory explains why Nestle, an importer of coffee and cocoa beans, is richer than most African nations.
Theory of Factor Endowments
- This theory suggests that the goods a nation exports depends on the quantity and quality of land, labor, and capital it possesses.
- This would explain why the US is a major agricultural exporter (abundant land), and China is a major exporter of industrial products (abundant labor).
- Factor endowments explains the goods and patterns of world trade.
What is the role of international commodity agreements in international commerce?
- Although many commodity agreements developed after World War 2, very few remain today.
- OPEC and the International Coffee Agreement are two successful ones.
- The US and other developed nations do not like commodity agreements because they prefer free trade market prices.
- Most commodity agreements have failed because they were unable to overcome market prices.
International Economic Institutions
- The Bank for International Settlements in Basel, Switzerland is a place where the heads of the world's central banks meet to discuss global financial problems and trends.
- The World Trade Organization in Geneva enforces trade agreements and resolves trade disputes among its members.
- The OECD in Paris promotes economic cooperation among developed nations. It is primarily a research and consultative organization with no enforcement powers.
- The G-8 economic summits promote economic cooperation among the world's most developed countries.
- UNCTAD in Geneva promotes economic cooperation among developing countries.
Most Favored Nation (MFN) Status
- Developed during the 19th century, MFN means that a nation is entitled to the lowest tariff rate that a nation has without further negotiations.
- All members of the WTO must grant MFN status to other members. In the past, granting MFN status was used for political reasons. MFN helps promote free trade.
Factors Affecting the Value of a Nation's Currency
- Supply and demand, interest rates, and inflation affect the value of currency.
- High interest rates increase the value of a nation's currency as foreign investors buy dollars to profit from high interest rates.
- Inflation acts to reduce the value of currency, as lower-cost imports become more attractive.
- Composed of members from Western and Eastern Europe, the EU's headquarters are in Brussels.
- Its central bank is in Frankfurt, Germany. The Euro is a common currency for many but not all members.
The International Gold Exchange Standard
- Between 1945 and 1975, the gold exchange standard was the main exchange rate system for members of the IMF. The world's currencies were linked to the dollar at a fixed rate. The dollar was linked to gold at $35 an ounce.
- This system made exchange rates possible so that global trade and investment could increase. The gold exchange system ended because of prolonged and deep balance of payments deficits by the United States.
What are the four basic stages of economic development?
- Traditional economy
- Preconditions for take-off (education and transportation)
- Drive to a mature economy
- Per capita GNP, not total GNP, is the best measure of economic development. This is why Switzerland is more economically developed than China.
- Compared to the world's 190 nations, there are very few economically developed nations.
- Education and the development of transportation networks are preconditions to economic development.
- The North-South division of the world is used to explain the tendency of developed nations to be in the northern hemisphere, while developing nations are concentrated in the southern hemisphere.
- Established in Washington in 1945 (we were the rich Americans after WW2) to help finance the rebuilding of Western Europe.
- Its role changed in 1956 to help finance government infrastructure projects in developing nations.
- Its modest capital reserves are provided by member countries, interest on loans, and bond offerings.