Economic Integration

Institutions and Practices

Part 1: Introduction
2-1

Things you already know!!

It makes little sense for a country or a
region to produce what it can buy from
another country or region at a lower cost
All countries can benefit if each country
specializes in production those goods it
can produce best and satisfy their other
wants and needs by trading for them

More, things you already know!!

Static Gains from trade are gains in
world output that result from
specialization and trade
Dynamic gains from trade are gains
from trade over time that occur
because trade induces greater
efficiency in the use of existing
resources

Even more, things you already know!!

A country engaging in international trade uses

its resources more efficiently
International trade increases not only the
quantity of the good we consume but, in many
instances, their quality
International trade can be a very effective way
to enhance competition in a countrys domestic
market

Well then why not Free Trade

Free trade is a policy by which a
government does not discriminate against
imports or interfere with exports by
applying tariffs (to imports) or subsidies (to
exports) or quotas.

THE WELFARE EFFECTS OF TRADE

IN AN INDIVIDUAL PRODUCT
From a public policy perspective, the gains to
society as a whole are greater than the losses that
occur within a particular industry
Consumers tend to benefit from free trade but firms and
workers in importing industry can be harmed
Special interest groups lobby for changes that benefit
them, though not necessarily society as a whole

Problem? The gains to consumers are diffused but

the losses to producers and workers who care are
concentrated

GLOBALIZATION
Globalization is the term used to convey
the idea that international factors are
becoming a more important part of the
world economy
The simplest measure of globalization is
the ratio of exports to GDP
Countries with a high ratio of exports to GDP
are generally more open to the world
economy than countries with a low ratio

GLOBALIZATION
Real World Exports of Goods as a Percentage of Real World
GDP
25%
20%
15%
10%
5%
0%
1975

1980

1985

1990

1995

Exports as a Percent of GDP

2000

2005

GLOBALIZATION
Globalization or the increasing
openness of an economy, means
changes that are not universally
positive
Globalization involves not only the
goods and service but the movement
of people and money as well

Economic Integration
Economic integration is concerned with:
The removal of trade barriers or impediments
between at least two participating nations
Thus boosting the free movement of trade,
investment, and services across national
boundaries

Economic Integration (Continued)

Integration creates high levels of
globalization and regionalization
Economic integration is best viewed as a
spectrum with the various integrative agreements
in effect today lying in the middle of this spectrum.
The level of integration defines the nature and
degree of economic links among countries

Economic Integration
economic & political agreements that give preference
to members within the agreement

Global
Regional (or Bilateral)

Some Types of International Economic

Institutions with Examples (Just for info)

More . Types of International Economic

Institutions with Examples

Our Focus

2-14

Economic Integration
Institutions and Practices
Part 2: Global Trade
Agreements
2-15

WTO
Three global organizations that play a
major role in international economic
relations are:
The International Monetary Fund (IMF)
The World Bank

The World Trade Organization

(WTO)
2-16

Global (past) General Agreement on Tariffs

and Trade (GATT)

Idea began with 23 nations in 1946 when the

International Trade Organization (ITO) was
established
The General Agreement on Trade and Tariffs
(GATT) followed in 1947 by 23 countries to
abolish quotas and reduce tariffs.

2-17

General Agreement on Tariffs and

Trade (GATT)
based on the following basic principles:

National treatment: Imports must be given similar

treatment on the domestic market as domestically
produced goods

Nondiscrimination: Enshrined in the concept of most

favored nation (MFN) every WTO member must treat

every other member as it treats its most favored trading
partner

However GATT could not enforce compliance

The GATT/WTO functions through trade rounds:

2-19

Kennedy Tokyo
During the Kennedy Round in the mid-1960s, and
the Tokyo Round in the 1970s, other issues
included:
- Problems with dumping
- Subsidies to industry
- Nontariff barriers to trade

2-20

The Uruguay Round

The Uruguay Round famously focused on
contentious issues such as:
non-tariff barriers
intellectual property rights
trade in services
agriculture.

However, the BIGGEST consequence

2-21

From GATT to . Global (now)

World Trade Organization (WTO)
The Uruguay Round established the WTO
WTO members meet every two years to set WTO
policy objectives
Membership now totals 155 (2012) 156 on
the pending inclusion of Russia 25+ more
applying
2-22

Who is the WTO?

Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round (1986-94)
Budget: 196 million Swiss francs for 2011 (163 million
Euros)
Secretariat staff: 640..
Head: Pascal Lamy (Director-General)
Chart

Members

2-23

What the WTO Stands for.

Non-discrimination
More open- ness
Predictability and transparency
More competitiveness
Benefits for less developed countries
(>75% are developing or LDCs)

Protection for the environment***

2-24

WTO: Primary Functions

Administering WTO trade agreements

Forum for trade negotiations (goods+)
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for
developing countries
Cooperation with other international
organizations
2-25

World Trade Organization (WTO)

** Has a more effective dispute settlement mechanism!! **
Monitors national trade practices more consistently

Governments bring charges of unfair trade practices to the WTO

(***300 300)
http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm

Countervailing Duty
WTO rulings are binding as they ultimately
permit countervailing duties
Countervailing Dutya tariff designed to
raise the price of an imported product to
its fair market value.
After permission countries may use them to
offset production or export subsidies. ***

World Trade Organization (WTO)

right now
The Doha Round/Doha Development Agenda (2001-)
Focused on trade issues of importance to developing countries
Key issues of Doha Development Agenda:
-Farm subsidies in high income countries of Europe, US, and
Japan
-Greater market access by developing countries and strong
farm sector high income countries
-Trade in services
-Problems poor countries face in implementation

The Doha Round

Talks were started in Doha, Qatar in November
2001.
Focus of the talks was on the links between economic
growth and trade liberalization.
Talks collapsed in July 2008.
The main point of contention is trade in agriculture
with major industrialized nations such as the U.S., EU
and Japan maintaining production subsidies and
import barriers.
Where are they now????

WTO and the Environment

WTO rules block a countrys use of trade
measures as environmental policy
Montreal Protocol multilateral agreement to
ban trade of products that deplete the ozone
layer

Kyoto Protocol to reduce emissions of

greenhouse gases to levels below 1990 levels

WTO website

http://www.wto.org/

2-31

Economic Integration
Institutions and Practices
Part 3: Regional Trade
Agreements
2-32

Regional Trade Agreements

Besides these Global Agreements
Regional Trade Agreements also form a
key part of the institutional structure of the
world economy

2-33

What are Regional Trade Agreements?

Regional Trade Agreement: preferential

economic arrangement among 2 or more
countries.
Such blocs have liberal rules for member
countries while a separate set of rules is laid for
non-members.

Types of Regional Trade Agreements

Partial trade agreement

Free trade areas
Customs Union
Common Market
Economic Union
Political Unions

Free Trade Areas

Simplest form of economic integration
which provides the internal free trade
between member nations.
Each member is allowed to determined its
own separate commercial policy with
respect to non-members.
Example: Latin American Free Trade
Association (LAFTA), North American Free
Trade Area (NAFTA)

Customs Union
More advanced form.
Internal free trade among the member
nations and they also adopt a uniform
commercial policy against the nonmembers. (eg. common external tariffs)
Example: EEC European Economic
Community

Common Market
There are no barriers to trade among
members and factors of production such
as capital, labor and technology are
mobile among them.
It also has a uniform policy in respect to
non-members.

Economic Union
Similar

to

Common

Market,

but

with
coordination
of
macroeconomic
policies
(including common currency, harmonization of
standards and regulations)

Example: EU members participating in the Euro

currency zone
.

Political Union
It is the ultimate type of economic
integration whereby member countries
achieve not only monetary and fiscal
integration but also political integration.
Example: the Europe Union (EU) has moved
towards a political union similar to one
created by 50 states of the United States of
America.

Regional Economic Integration (review)

Partial Trade

Free trade in select industries

Free Trade Area (FTA):

No internal tariffs at all

Customs union:

& common external tariffs

Common market:

& Factor (labor, capital, technology) mobility

Economic union:

& Common currency

Political union:

& Political integration

For and Against RTAs

The central economic question:
-Are RTAs supportive of gradual, long run
increases in world trade (building blocks),
or
-Do they tend to become obstacles to further
relaxation of trade barriers (stumbling blocks)?

2-42

For and Against RTAs (cont.)

Proponents of RTAs view them as building
blocks toward freer, more open, world trade
Opponents view RTAs as undermining
progress toward multilateral (worldwide)
agreements
2-43

Advantages of Regional Trade

Agreements
1. Access to larger markets leads to internal
economies of scale.
2. External economies of scale due to improved
infrastructure (e.g. transport and telecoms
links)
3. Greater international bargaining power.
4. Increased competition between members.
5. More rapid spread of technology.

Disadvantages of Regional Trade

Agreements
1. Country may lose resources to more efficient
members, or to geographical center, and
become depressed region.
2. Firms may co-operate, collude and merge,
leading to greater monopoly power.
3. Diseconomies of scale if firms become very
large.
4. High administrative costs of trading bloc.

Regional Trade AgreementsOpportunities

a.

Elimination of trade barriers within the region would encourage

the efficient firms to expand their business activities in all
countries within the region.

b.

Healthy competition within the region would help the less efficient
firms in acquiring competencies in order to challenge the efficient
firms.

c.

The overall business performance in 'terms of productivity,

quality, price,

d.

Delivery and customer service will improve.

e.

Consumers get better quality goods and services at competitive

price

f.

Employment opportunities in the region increase.

Regional Trade Agreements-Threats

a. The removal of trade barriers provides opportunities to the efficient
firms to enter the different markets within the region. This
endangers the survival of the less efficient firms.
b. The resources of the less efficient countries are exploited by the
firms from the advanced countries of the region.
c. The less developed countries of the region mostly become
consumption centers while the advanced countries of the region
become the production centers.
d. The less developed countries become still poorer whereas the
advanced countries of the region become still richer.
e. It discourages trade with non-members as trade with nonmembers is subject to strict rules and trade barriers.

Regional Trade Agreements and the

WTO
Since 1948, over 400 agreements have been listed with
the WTO; 75% of those since 1995
225 of these agreements are still active (2008)
The WTO and GATT allow RTAs, assuming they
create more new trade than they divert (destroy)

- trade creation > trade diversion

2-48

Trade Creation vs. Trade Diversion

Trade Creation an expansion in world
trade resulting from formation of an FTA
a welfare-increasing effect.

Trade Diversion a shift in the pattern of

trade from low-cost world producers to
higher-cost FTA members
a welfare-reducing effect.

Creation - Diversion
Example
Assume there are three countries (A, B, and C) in
the world
A is the worlds high-cost producer of beer
B is the medium-cost producer
C is the worlds low-cost producer
What happens if Country A is a closed economy
and then opens its economy up to trade???

Country A is NOT yet open, so there is no trade P= 18 , Q =7

Da

Sa

Pa =18

1st Country A Opens trade to Countries B & C

C is low-cost producer
So C exports amount Qd=12 minus Qs= 2 = 10
Da

Sa

Pa =18

Pb=$12
Pc=$10

12

Now Country A puts a $4 Tariff on BOTH countries goods

C is STILL the low-cost producer
C exports amount Qd=9 minus Qs=5 = 4
Da

Sa

Pa =18
Pb+T=$16
Pc+T=$14

Now Country A enters a Trade Agreement with B

As A removes the tariffs from Bs good, Bs price is back to its earlier level
B is now the low-cost producer
B exports amount Qd=10 minus Qs= 4 = 6

This agreement therefore CREATES trade from previous export level of 4

This trade creation is noted by triangles, e and f.

Pa =18

Pc+T=$14
e
Pb=$12

10

However by entering an agreement with B and not C who is really

the low-cost producer.. Country A has diverted trade away from C
This TRADE DIVERSION is noted by rectangle G.

If the area (e + f) is greater than the area of G, world welfare will increase
If the area of G is greater than the area (e + f), world welfare will decrease

Pa =18

Pc+T=$14
e
Pb=$12

f
G

Pc=$10

10

***This is one extra one, JUST so that you can see all numbers
and lines together. We have already completed the discussion
Da

Sa

Pa =18
Pb+T=$16
Pc+T=$14

Pb=$12

Pc=$10

10 12

THE STATIC EFFECTS

of a Regional Trade Agreement
One more time .
In this example, trade creation of the trade
agreement increases world welfare in triangles e
and f
But trade diversion occurs in box G
If the area of (e + f) is greater than the area of G,
world welfare will increase
If the area of G is greater than the area (e + f),
world welfare will decrease

Why Would A Form a FTA With B Instead of

With C?
Dynamic effects
Overall growth in market
Expanded production
Greater economies of scale

Maybe location issues

Political reasons

How does WTO react to this

GATT/WTO provides an exception to mostfavored-nation status for RTAs as, in general,
trade creation is larger than trade diversion
RTAs may create losses for some producers in
some countries outside the agreement
The number of RTAs is increasing thus
increasing the amount of trade diversion

European Union. EU

The European Union (EU) is an economic

and (partially) political union of 27 member
who are located primarily in Europe

Organization of EU

European Council
Heads of State & President of European Commission
Resolves major policy issues & sets direction 2x year

European Commission Brussels, Belgium

Proposing, implementing & monitoring compliance - EU laws
Commissioners appointed by each country 5 year renewable terms
Competition Commissioner regulator of competition and M&A

Council of the European Union

Ultimate controlling authority approves proposed laws
1 representative from each state varies with topic
Use majority voting rules rather than unanimous agreement

European Parliament Strasbourg, France

Directly elected by population 732 members
Debates legislation Consultative body

Court of Justice
Supreme appeals court for EU law
1 judge from each state required to act as independent officials

Functions of EEC/EU
Common Agricultural Policy (CAP).
Free movement from one nation to the other,
Imports allowed only when DD>SS,
Rich farmers became richer,

European Monetary Union (EMU).

Common Transport Policy.

Central European Free Trade

Agreement (CEFTA)
The members of the CEFTA agreement are: Albania,
Bosnia,
Herzegovina, Croatia, Macedonia, Moldova, Monten
egro, Serbia and UNMIK on behalf of Kosovo.
Former parties are Bulgaria, the Czech
Republic, Hungary, Poland, Romania, Slovakia
and Slovenia. Their CEFTA membership ended when
they joined the EU. Croatia is set to join the EU in
2013.

European Free Trade Association- EFTA

Formed in 1959.
Member nations: Iceland, Liechtenstein Norway,
and Switzerland.
Former members UK, Denmark
Ireland, Austria, Sweden and Finland joined the
EU in 1995 and thus ceased to be EFTA
members.

Free Regional Trade Agreements in the

Americas

North American Free Trade

Agreement-NAFTA
North American integration has an interest in purely
economic issues and there are no constituencies for
political integration.
Came into being in 1994

U.S.-Canada Free Trade Agreement

North American Free Trade Agreement (NAFTA)
Member Countries: US, Canada and Mexico

Other Aspects of NAFTA

Objectives
More business
opportunities in Mexico.
Enhance competitive
advantage.
Reduce prices
Enhance industrial
development.
Assist Mexico in earning
additional foreign
exchange.
Improve political
relations.

Measures:
Residents of NAFTA can
invest easily in other
member nations.
Protection of Intellectual
Property Rights.
Similar Product Standards
Free flow of FoP.
Pollution Control.

What are the drawbacks?

Many US industries shifted to Mexico
because Mexico offered less stringent
policies.
It was perhaps implemented without prior
preparations.

Association of South-East Asian

Nations (ASEAN)
The development in Asia has been different from that
in Europe and the Americas
Asian interest in regional integration is increasing for
pragmatic reasons
Asia accounts for 20% of world trade.
It has substantial trade liberalisation.
It has created numerous sub-regional economic trade
zones, which are named transnational export
processing zones, natural economic territories, or
growth triangles

Brief Background of ASEAN

A group of 6 Nations: Singapore, Brunei, Malaysia,
Philippines, Thailand and Indonesia
In 1992- established CEPT (Common Effective
Preferential Tariffs) Plan

Free trade area in 15 years.

Tariff cut from 0.50% to 20% beginning with 15 products.
Strength skilled and educated human resource.
Created Asean Free Trade Area (AFTA) in 1994.

About AFTA
Objectives:
To encourage inflow of foreign investments.
To establish free trade area.
To reduce tariff on the products produced in ASEAN
countries

South Asian Association for Regional

Cooperation (SAARC)
Member nations: India, Bangladesh, Bhutan, Pakistan,
Maldives and Sri Lanka.
Established in 1983.
Objectives:

To improve quality of life and welfare of the people.

To develop region economically, socially and culturally.
To enhance the self reliance,
To provide conducive environment
To enhance mutual assistance.
To extend co-operation to other regional trade agreements.

Andean Community
The Andean Community is a
customs union comprising
the South American countries
of Bolivia, Colombia, Ecuador and
Peru. The trade bloc was called
the Andean Pact until 1996

Mercosur
Mercosur is an economic and
political agreement
among Argentina, Brazil,
Paraguay and Uruguay. Its
purpose is to promote free
trade and the easy movement
of goods, people, and currency.
It has evolved into a full
customs union.

The Adean Community and Mercosur

merging??
In 2004 the Andean Community published a joint
letter of intention for future negotiations towards
integrating all of South America in a Union of South
American Nations (USAN), patterned after
the European Union.

There have been numerous

stalemates, however.

Prominent Regional Trade Blocs

2-76

(continued) Prominent Regional Trade Blocs

2-77

(continued) Prominent Regional Trade Blocs

2-78

Criticism of
International Institutions

International institutions receive three

types of criticism
1. Sovereignty and Transparency
-International institutions can violate national
sovereignty by imposing unwanted domestic
economic policies
-Transparency concerns are based on questions
about the mechanism with which decisions are
made within an international institution

2-79

Criticism of
International Institutions (cont.)
2. Ideology
-Critics argue that the advise and technical
assistance provided to developing countries are
often a reflection of the biases and wishes of
developed country wishes.
3. Implementation and adjustment costs
-When agreements are reached that combine
developed and developing countries, there are
often asymmetries in the ability to absorb the
costs associated with them that favor developed
nations.
2-80

Economic Integration
Institutions and Practices
Part 4: Common Justifications for
Protectionism
2-81

Commercial Policy and Jobs

It is important to compare the costs and

benefits of trade barriers and examine the
most common reasons given for protecting
specific industries

7-82

Direct Costs and Jobs Saved in Agriculture,

Clothing, and Textiles
Since the phase in of the Uruguay Round tariff cuts,
average tariffs have fallen 40%but few sectors are
average
For example, agriculture, clothing and textiles
experience much smaller reductions in tariffs and quotas
(12%, 14%, 14% respectively)
In addition, all of these sectors in the EU, Japan, and US
have significant non-tariff barriers applied to them
including large government subsidies in the case of
agriculture

7-83

EU, Japanese, and U.S. Protection in Three Sectors (Mid1990s, Millions of US$)

7-84

EU, Japanese, and U.S. Protection in Three Sectors (Mid1990s, Millions of US$)

7-85

Why Nations Protect Their Industries: The

Labor Argument

The Labor Argument: Protection must be

used against imports from countries where
wages are much lower
-Problem: Does not consider differences in
productivity between different workforces: As
productivity rises, so will wages

7-86

Jobs Saved through Tariffs and Quotas

7-87

Jobs Saved through Tariffs and Quotas

7-88

Saving Jobs?
Trade policy is a grossly inefficient mechanism
to create jobs
It relies on too many intervening variables, and does
not go directly to the heart of the problem

If job creation is the goal, tariffs and quotas are very

expensive
-Better job-creation tools: (1) sound
macroeconomic polices and (2) flexible labor
markets

7-89

Why Nations Protect Their Industries: The

Infant Industry Argument
Infant Industry Argument: Developing countries have
new industries that must be protected against
competition from industrial countries
-Problems:
(1) may increase inefficiency and result in negative linkage
effects and
(2) (2) technological externalities are difficult to measure
which industries should be protected?

7-90

Why Nations Protect Their Industries: The

National Security Argument

National Security Argument: Certain

industries must be protected in order to guard
national security (military security, cultural
values)

7-91

Why Nations Protect Their Industries: The

Retaliation Argument
Retaliation Argument: Another
country's trade barriers must be
countered with trade barriers
-Problems: Although retaliation can provide
an incentive for trade negotiations, it can
also lead to escalating trade wars

7-92

Economic Integration
Institutions and Practices

Part 5: Trade Labor and

Environmental Standards

Trade Laws and Standards

(We already know) - Since the end of WWII, many
of the formal barriers to trade have been removed...

However, unrestricted flow of trade (and increased

integration) are still hampered by differences in
National laws and regulations
National technical, health and safety, environmental,
labor standards, etc.
-These are very often good ... But often adopted for
domestic reasons without consideration of the effects
on trade

Setting Standards: Harmonization, Mutual

Recognition, or Separate?
Most trade agreements and WTO
commitments allow for the combination of:
Harmonization of standards: Two or more
countries adopt a common set of standards

Mutual recognition of standards: Countries

maintain their own standards, but accept the
standards of others as valid and sufficient
Separate standards: Countries maintain their
own standards and refuse to recognize the
standards of others

Setting Standards: Harmonization, Mutual

Recognition, or Separate?
No general rule determines which way of dealing
with the differences in standards is best for
international trade
Each of the three mechanisms has advantages
and disadvantages
-Harmonization of technical standards, for example,
leads to a larger market and greater efficiency, but
may also freeze inferior standards into place

Setting Standards: Harmonization, Mutual

Recognition, or Separate? (cont.)
However, differences in labor and environmental
standards, in particular, have generated concerns
High-income countries often fear that more relaxed
standards in other countries induce domestic firms to
adopt lower standards to remain internationally competitive... or
move to countries with lax standards

Countries are feared to engage in a race to the

bottom

adoption of the lowest level of standards possible, in order to

attract foreign firms

Income Levels, Society and the Environment

Labor Standards
The U.S., the EU and many other countries today want
labor and environmental standards be included in any
future trade agreements
Some parties want monetary fines against
violators
Some labor and environmental activists see fines as
inadequate ... demanding the use of trade sanctions

Defining Labor Standards

The International Labor Organization (ILO) proposed
eight core labor standards in four basic areas:
Freedom of association and recognition of the right to
collective bargaining
Elimination of all forms of forced labor
Effective abolition of child labor
Elimination of discrimination in employment and
occupations

Defining Labor Standards (cont.)

The four areas of standards are widely agreed upon, but
details are also ambiguous: for example, what is meant
by exploitation?
Many potential labor standards are contentious:

For example ...

universal minimum wage level, limits on the number of work
hours, workplace health and safety, etc.

For example ... Low-income countries are reluctant to pay much

higher minimum wages: higher wages would reduce firm profits, and
result in closing down of production and a rise in unemployment

Labor Standards and Trade

As we have said before ...
Low- and high-income countries face very different
sets of economic constraints; so harmonization of labor
standards is thus difficult
Should one country, then, use trade sanctions to enforce
certain labor standards in another?
Labor activists often favor the use of trade barriers
to enforce standards
Trade economists think such barriers are ineffective
as an enforcement mechanism and only spur
protectionism and other economic inefficiencies

Economists express four concerns over the

use of trade measures to enforce standards:
1. Effectiveness:
only large countries or coalitions of countries can use
trade barriers successfully to enforce standards

2. Hazy borderline between protectionism and concern:

special interests sometimes use the issue of foreign
labor standards in order to attain their real goal,
protection against foreign competition

Economists express four concerns over the

use of trade measures to enforce standards....

3. The specific content of labor standards: there is no

international agreement on the specific content and
language of labor standards
4. The potential to set off a trade war, thus an infraction
of WTO rules
-Sanctions may cause retaliation from the targeted country, thus
further hurting international trade rules

Evidence on Low Standards

as a Predatory Practice (?)
Low standards are generally not an effective
mechanism to enhance competitiveness and attract
foreign investment
1. There is very little evidence that countries that lower
labor standards succeed in obtaining a comparative
advantage in a new line of production
2. Low labor standards are not a successful means to
attract foreign investment: low labor standards are
correlated with unskilled, less-literate labor forces
and lack of economic development

Trade and the Environment:

There is considerable overlap in the debates on
labor and environmental standards ... Guess
what? ... The same concerns...
Proponents of including environmental standards in
trade agreements believe sanctions should be used
to enforce such standards
Critics of sanctions have concerns about the
ineffectiveness of sanctions, the hazy borderline
between protectionism and environmental concerns,
the lack of international definitions of environmental
standards, and the potential for trade wars

Non-Transboundary and Transboundary

Effects
Three arguments by proponents of trade barriers
to enforce environmental standards are:
1) Without adequate enforcement of standards,
countries engage in an environmental race to the
bottom to boost industrial competitiveness
2) Lack of enforcement of standards in developing
countries induce dirty rich country industries to
export pollution and thus create pollution havens
3) Poor enforcement leads to environmental problems
that spill over to another country

Environmental Race to the Bottom

Is there an environmental race to the
bottom?
Most countries have adopted tougher environmental
standards over time. In order for race to the bottom to
occur, sectional interests would have to be politically
powerful

Trans-boundary Environmental Problems

Do environmental spill-overs occur?
Trans-boundary spill over effects are frequent
However, a successful use of sanctions to
counter them is possible only by a large country
or a coalition of countries, and may lead to trade
wars

Alternatives to Trade Measures??

As long as there are large income gaps between
countries, differences in labor and environmental
standards are unlikely to disappear
Seeking enforcement of standards through sanctions,
however, is often futile and harms international trade

How, then, can we enjoy the benefits from world

trade while resolving the conflicts over
standards?

Alternatives to Trade Measures??

There are potentially three ways of enforcing
sanctions without hurting international trade
Labels for exports
Requiring home country standards
Increasing international negotiations

Labels for Exports

Labeling: A certification process whereby a label
is attached on an exported good to indicate to
consumers that the good was produced under
humane and environmentally sound conditions
The method is already in place in some instances:
Cambodian textile exports to the U.S., Starbucks
coffee imports, etc.
Problems: (1) Many countries resist labeling as an
infringement of their sovereignty and (2) consumers
must be convinced the label provides accurate
information

Requiring Home Country Standards

Requiring home country standards: Highstandard countries can require their firms to
follow home country standards when operating
abroad
Pros: impedes the race to the bottom; avoids the
problem of high-income countries dictating standards
Cons: addresses only firms of high-standard countries
-Low-country producers are not affected
-A high-standard country firm may outsource
production to a low-standard country producer

Increasing International Negotiations

Increasing international negotiations: Using
either existing international organizations or creating
new agreements and organizations
ILO could be given a greater role and start, for example,
publicizing lack of compliance with labor standards
New agreements and organizations could be created to
address environmental issues
The WTO is not an environmental organization;
however, it allows international environmental
agreements to develop their own enforcement
mechanism

Economic Integration
Institutions and Practices
Part 6: International Trade
and Economic Growth

Trade and Growth

We already know this.
Economic growth is shown graphically as an
outward shift of the countrys production
possibility frontier (PPF).
Since growth affects both production and
consumption, then it also affects international
trade.

Economic Growth
We already know this.
An economy is said to grow when its total real
output or gross domestic product (GDP) rises.
Per capita GDP is a measure of a countrys
standard of living. For standard of living to rise
over time, GDP must grow faster than the
population.

Economic Development
Economic Development the achievement of a quality of life
for the average citizen of a country that is comparable to the
average citizen of a country with a modern economy.
Characterized by:

High levels of consumption

Broad-based educational achievement
Adequate housing
Access to high-quality health care, etc.

Economic growth is essential for economic development.

Strategies for Economic

Development
Primary Export-led Development Strategy
Import-Substitution Development Strategy
Outward-looking Development Strategy

Primary Export-Led Development

Strategy
Policies designed to exploit natural
comparative advantage by increasing
production of a few current export goods
most closely related to the countrys resource
base.
Country examples include Columbia (coffee), Mexico and
Nigeria (petroleum), and Malaysia (rubber).

Advantages of Primary Export-led

Development Strategy
This strategy would encourage more intensive
use of existing or abundant resources.
It could help attract foreign investment.
It may provide linkage effects or benefits to
other industries as a result of one industry
expanding.

Arguments Against Primary Exportled Strategy

The world markets for primary products do
not grow fast enough to support this type of
development.
The prices of primary products relative to the
prices of manufactured goods may tend to fall
over time due to sluggish demand or
oversupply.

Import-Substitution Development
Strategy
Policies designed to promote rapid
industrialization and development by erecting
high barriers to foreign goods to encourage
local production.
What?????? Do we like this??????

Arguments Against Importsubstitution Strategy

The high barriers to trade rarely come down.

The strategy encourages citizens to spend scarce

resources to lobby or bribe government officials
to protect their industries.

Outward-Looking Development
Strategy
These policies involve government identifying
or targeting industries in which the country
has potential comparative advantage.
Successful country examples include Japan,
South Korea, Singapore, and Taiwan.
Refer to next slide for more examples

Trade Reforms
in Selected Developing
Countries

Technological Change
Technological (technical) change
occurs when the same amount of output can
be produced with fewer factor inputs, or when
the same amount of inputs can produce
greater amounts of output.
Our International Trade patterns enhance this
nowadays!

Direct Foreign Investment and

MNCs
Direct Foreign Investmenthappens when a
domestic firm acquires ownership or control
of the operations of a foreign firm.
Multinational Corporations (MNCs)
firms that own and operate capital in one or
more foreign countries.

Not exactly trade but can aid in spread of

Outsourcing

Outsourcingthe movement or shifting of

production by a firm to a foreign location.
Vilified in some circles, but often not a bad thing
Can lead to domestic growth!

Economic Integration
Institutions and Practices

Part 7: IMF and World Bank

The IMF, the World Bank,

and the WTO
The three global organizations that play a
major role in international economic
relations are:

The International Monetary Fund

(IMF)
The World Bank
The World Trade Organization (WTO) (We already met
them!)

The International Monetary Fund

(IMF) (Quick view)
The 188 member (2012) IMF is the central
monetary institution in todays international
economy... However it can greatly affect trade.
Funding for the IMF comes from its membership
fee, or quota (the price of membership)
depends on the members size and status
determines the members voting weight

IMF Background
Great Depression and WWII led to HIGH trade
barriers..
This led to devaluation of national currencies and
decrease in world trade.
So IMF founded by 29 nations (1944/1945) at the
Bretton Woods meetings between the Allies, to
help regulate monetary policy

IMF Functions
Functions of the IMF:
-Prevents crisis in a financial system by
promoting sound macroeconomic policy,
which includes
-Balanced expansion of trade
-Stable exchange rates
-Avoidance of competitive devaluations
-Orderly corrections of Balance of Payments
problems

IMF Member Requirements

Members must:
make periodic membership payments towards their quota
refrain from currency restrictions unless granted IMF
permission
abide by the Code of Conduct in the IMF Articles of
Agreement
and provide national economic information.

However BORROWERS have stricter

requirements!

IMF Borrowers
A Financial crisis occurs when a country runs out of foreign
exchange reserves, which are a major currency or gold that
can be used to pay for imports and international borrowings
In the event of a financial crisis,
Members borrow against IMF quotas

IMF conditionality: Requirement for the borrowing

member to carry out economic reforms in
exchange for a loan

The World Bank (A Quick view)

Founded in 1944 as the International Bank for
Reconstruction and Development (IBRD)
Has same membership and similar structure to
IMF
Members voting rights are proportional to
number of shares owned

The World Bank

Original purpose
To provide financing mechanisms to rebuild
Europe after World War II

Current Goal
- The reduction of poverty

World Bank goal

The method that the World Bank reduces poverty is
by providing loans to developing countries for capital
programs.

According to the World Bank's Articles of Agreement its

decisions must be guided by a commitment to
promote foreign investment, international trade and
facilitate capital investment.

World Bank vs. World Bank Group

http://www.worldbank.org/

World Bank

International Bank for Reconstruction and

Development (IBRD)
International Development Association (IDA)

World Bank GROUP

The two above PLUS

International Finance Corporation (IFC)

Multilateral Investment Guarantee Agency (MIGA)
International Centre for Settlement of Investment
Disputes (ICSID) http://www.worldbank.org/