Study Guide History Final Exam

Public Health or Behavior 6. Bonus Army – veterans of WWW were given a $1,000 saving bond that matures in 1995 7. Wagner Act – Magna-Cart of labor law, rights for unions to exist protected by the law 8. Repatriation – With Jobs being scarce, In border lands regions, hostilities begin again toward Mexican-Americans Immigrants 9. Bracers Program – from 1942, government recruited Mexican-Americans Labors to come back over the border to help in war time Jobs 10. Rape of Nanking – Over 300,000 Shines men, woman, and children’s were slaughtered.

Beheaded, rape, bloody murder by Japanese 1 1 . Overhaul Patch ? Hitler tries to violently take over Germany government, his supposed to go to Jail for 5 years but got parole after 8 months 12. Battle of Britain – Between July and September 1940, the German Air Force launched a massive offensive In the sky of Great Britain 13. Doolittle Raid – the US, felt It needed to strike back dustpan after Pearl Harbor; Jimmy Doolittle propose a symbolic strike at the heart of Japan to get their population to question their invincibility 14.

IOW Jim – black volcano island 15. John Baseline – Medal of Honor Receipt at Guidance. 3 days without sleep kill 3,000 mans 16. Operation Bodyguard – Fake army that keep German guessing where US was going to attack 17. Lebensraum – living space, It was Hitler plan so the white blue eyes can have property where they could raise their kids 18. Hugging – small army fighting big army by been so close that they couldn’t use their guns 19. Complex – the aggregate of a notions armed forces and the industries that supply their equipment material and armaments 20.

Eisenhower ? also known as EKE, American General and the 34th president; oversaw the final defeat of Germany Essay: Explain how the role of the united States In the World changed after World War II? Prior to WI, the US was one of several Industrialized nations competing with each other? After WI, the US was the only industrialized nation whose manufacturing capacity was virtually untouched by the war. Even the Allied powers in Europe were devastated, as much of the continent had been occupied at one point r another, and Great Britain had been subjected to numerous bombing raids and rocket attacks.

This meant the US was the only country which had the means to rebuild the world after the war. They realized that the Allies who had forced Germany to accept the burden of debt of WWW helped set the stage for Hitter’s rise to power, and they resolved not to repeat the same mistake. They forgave the citizens of the country (hanged the leaders and Instead of demanding payment, provided financing for (west) Germany and Japan, which turned these two countries from bitter.

Read more

The Trade Relations Among Europe and Africa, Asia and America

Before 1500, Europeans had already established a trading network with Africa, Asia and America. The products that they traded during that time period included food clothing, weapons and other goods. Today their trading networks are very sophisticated and connect to every corner well to every other aspect of the planet. Trading became an essential part for our society to function and prosperous into what it has become today. Some might think that today’s trading landscape came from the Europeans around 1500, but they were just eager to establish trades with countries who were just as eager to purchase European goods.

However, this statement is incorrect. The reality was that not every country was willing to purchase their products, but many of the Europeans were eager to buy products from other countries. In this paper, I will show how the above statement and its flaws. European countries have a rich civilization. For example, they have a wide variety of food, a huge collection of art work and a number of different customs inlcuding multiple languages. Their possession of these qualities made them become the modern civilization popular at that time.

Therefore, if a country that was less civilized started using their products, that country might be modernized at a faster pace. Therefore, the Europeans were helping other countries when they traded with them. However, their good deeds were not accepted by other countries. Not every country was interested in European goods. For example, China resisted importing foreign goods to their country at that time. This was because the government did not want foreign culture to affect their already rich civilization, as China’s history could be traced back to 3000 years ago.

Also, African countries, although they were not civilized at all, were not receptive at buying European goods. Tribes from Africa were scattered everywhere. Most of these tribes were self-sufficient as in their advanced ability to produce their own goods as oppose to trading products between tribes. As a result, the economy in Africa was very weak and none of these tribes could afford the European products in order to better their society. Another big misconception about European trade is that we always think other countries had to yield to the terms set forth by the Europeans.

Although, Europeans had a powerful civilization and their weapons were more technology advance than many other nations, the term “trade” was not always in favor of the Europeans. For example, even though Portugal had a better naval and military technology, they had a very limited success when trading with China and Japan. Between 1521 and 1522, Portuguese had attempted to enforce trading with China. However, their aggressive movement ended with a decisive defeat of the Portuguese because they were unable to control all the maritime traffic in the region.

As a result, Portugal was expelled from China in 1523. Another example was the Mughal Empire. Mughal Empire was founded in the early 16th century and located in the Middle East region. According to the class note, although this empire was relatively new, they already had a better gunpowder technology than the Europeans. Of course, we cannot conclude that the Mughal Empire had a stronger military than the Europeans based on this fact. However, the gunpowder technology would definitely give the Mughal people a superior defense upon an attack by the Europeans in case of a trading issue arose.

As a result, we cannot conclude that a powerful civilization was a factor for the European to continue their trading network at around 1500. An underlying reason of the trade was that the Europeans wanted to be more superior. They wanted to spread their civilized cultures and religions to the “less civilized” countries in order to colonize them easier. The Americas was a great example to illustrate this influence. After Columbus discovered the new continent in 1400s, European powers began to flock and colonize the new world.

Despite the natives were resisting, they were soon adapted to their new dominating power. This was because many of the products that they used were imported from the European nations, including tea, clothing, religion etc. The success of the dominating European power was due to the fact that they took advantage of the trading system and method was unsuccessful for the empires in the old world. It is because the “less civilized” old world countries had already established their own cultures and religions and were not ready to change.

For example, Christianity did not find its way in China. Even in the mid 18th century, 200 years after the trading relationship began; only about 0. 08 percent of total Chinese population had converted from Buddhism to Christianity. Therefore, the explanation that trading system continued because of the European’s cohesive civilization was not well constructed, as it was true for the countries in the new world but not the old. Finally, European nations were ore interested in products made in other countries than those countries interested in their products. An example about the Chinese empire was illustrated in the previous paragraph. China refused the purchase foreign goods because they had already a rich culture by itself. In contrast, Europeans were very interested in silk, porcelains and food produced in China. In Africa, where people could not afford European products, European powers simply arrived, enslaved, and “trade” those indigent people.

Therefore, Europeans after 1500s continued their networks with other countries were more because they wanted to purchase foreign products rather than so sell their products. In conclusion, Europeans established ongoing trade networks in Africa, Asia and the Americas after 1500 because they wanted to trade with countries just as eager to trade with them does not sufficiently entail the trading landscape at that time. Some countries were uninterested in their products and some others simply cannot afford them. As a result, the statement is false and should be revised.

Read more

Summary on Globalization

Globalization describes an ongoing process by which regional economies, societies, and cultures have become integrated through a network of communication and execution. Globalization is often term or refers to economic globalization i. e. the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. The driving forces of globalization are a combination of Economic, Technological, Socio-cultural and Political factors.

Scholars indicate the increasing economic integration and interdependence of national economies across the world through a rapid increase in cross-border movement of goods, service, technology, and capital. It can be said that globalization is the door to global resources that opens up to the international market. Economic and financial globalization and the expansion of world trade have brought substantial benefits to countries around the world. But the current financial crisis has put globalization on hold, with capital flows reversing and global trade shrinking.

  • There are countless indicators that illustrate how goods, capital, and people, have become more globalized.
  • The value of trade (goods and services) as a percentage of world GDP increased from 42. 1 percent in 1980 to 62. 1 percent in 2007.
  • Foreign direct investment increased from 6. 5 percent of world GDP in 1980 to 31. 8 percent in 2006.
  • The stock of international claims (primarily bank loans), as a percentage of world GDP, increased from roughly 10 percent in 1980 to 48 percent in 2006. The number of minutes spent on cross-border telephone calls, on a per-capita basis, increased from 7. 3 in 1991 to 28. 8 in 2006.
  • The number of foreign workers has increased from 78 million people (2. 4 percent of the world population) in 1965 to 191 million people (3. 0 percent of the world population) in 2005. There is a long debate about the effects of globalization, as the most common phenomenon that we heard is the capitalizing the resources of developing countries by developed countries, brain drains as opportunities in richer countries droves talent away.

In many poorer nations globalization is actually the result of the foreign businesses investing in the country to take advantage of the lower wage rate, foreign resources and engraving more markets. The anti-globalization movement developed in opposition to the perceived negative aspects of globalization. The group represents a wide range of interests and issues. Opponents of globalization point out to its negative effects. Some of them are listed below.

  • Globalization has led to exploitation of labor.
  • Prisoners and child workers are used to work in inhumane conditions. Safety standards are ignored to produce cheap goods.
  • Job insecurity. Earlier people had stable, permanent jobs. Now people live in constant dread of losing their jobs to competition.
  • Terrorists have access to sophisticated weapons enhancing their ability to inflict damage.
  • Companies have set up industries causing pollution in countries with poor regulation of pollution.
  • Fast food chains like McDonalds and KFC are spreading in the developing world.
  • People are consuming more junk food from these joints which has an adverse impact on their health.
  • Local industries are being taken over by foreign multinationals.
  • The increase in prices has reduced the government’s ability to sustain social welfare schemes in developed countries.

Multinational Companies and corporations which were previously restricted to commercial activities are increasingly influencing political decisions. It is important to ensure that the gains from globalization are more broadly shared across the population.

For this purpose reforms to strengthen education and training would help ensure that workers have the appropriate skills for the evolving global economy. Policies that broaden the access of finance to the poor would also help, as would further trade liberalization that boosts agricultural exports from developing countries. Additional programs may include providing adequate income support to moderate, but not block, the process of change, and also making health care less dependent on continued employment and increasing the portability of pension benefits in some countries.

Read more

China trade performances and policies

Consumption Behavior China is the world’s largest car market. By the end of 2012 the number of motor icicles reached 109. 4 million in China. China produced 19. 3 million cars in 2012. China is the world’s largest mobile phone market, with over 1. 1 billion subscribers at the end of 2012. China is the second largest luxury goods market in the world, after Japan, and China is the second largest market for cinema, after the US. Between 1949 and 1979, a total of 280,000 Chinese traveled abroad. In 2012, 83 million Chinese citizens made Journeys abroad. Household consumption as a percentage of GAP is among the lowest of any major economy, at around 34% in 2011, which remained nearly unchanged since 2006.

Introduction on China Trade Policies China foreign trade in the past year The trade history of China is Important for how it has affected global production and earnings in poor and rich countries. Many analysts view China ‘s recent dominance primarily as the result of the post-1978 reforms. The overall economic system after 1949 was modeled after the Soviet Union, and raised savings from the rural sector in order to benefit industrial production. Foreign trade was generally conducted by state enterprises that had limited incentives to operate efficiently because their position was not contested by competition. The verbal regime adopted by China was geared towards self-sufficiency and import substitution, which as such was not atypical for a relatively poor country during this period.

Never the less, China ‘s own trade regime together with the trade liberalizing of the GATE member countries meant that China’s role in the world trade shrank after 1949. While before World War II China Accounted for around 2% of the world’s imports plus exports, estimates suggest that China’s share had fallen by the asses to around 1 . 7% and by the asses to around 0. 7%. The quantitative information on China’s foreign during the period 1949-1979 is very emitted and it corresponds to the small net gains that China was expecting to reap from participation in world trade. Foreign trade data of China was collected, as in most other countries, in the process of administrating trade taxes through customs.

China’s share in world trade did not change much between 1970 and 1978, while after 1978 China ‘s share increased substantially, consistent with a trade liberalizing impact of the 1978 reforms. Other breakpoints occurred around 1990 and around 2000, and in each case the rate at which China gains in terms of the world trades eave increased, with China ‘s rate of rate of trade growth increasing overall during this period. Between 1978 and 1990, trade growth is 7. 5%, between 1990 and 2000 it comes to 13. 5%, and between 2000 and 2007 it is 16. 2%. An important event that strengthened China ‘s foreign trade ties further is it accession to the World Trade Organization.

China foreign trade today On December from 2001, China became the 43rd member country of the World Trade Organization after 16 years of negotiations. To honor its commitments upon entry into the WTFO, China expanded its opening-up in the fields of industry, agriculture and the services trade, and accelerated trade and investment facilitation and liberalizing. Meanwhile, the state deepened the reform of its foreign trade administrative intervention, rationalized government responsibilities in foreign trade administration, made government behavior more open, more impartial and more transparent, and promoted the development of an open economy to a new stage. Expediting improvements to the legal system for foreign economic relations and trade.

After its entry into the WTFO, China reviewed over 2,300 laws and regulations, and departmental rules. Those that did not accord with WTFO rules and China’s commitments upon entry into the WTFO were abolished or revised. Administrative licensing procedures are reduced and regulated in the revised laws and regulations, and a legal system of trade promotion and remedy has been established and improved. In accordance with the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) administered by the WTFO, China revised its laws and regulations and Judicial interpretations related to intellectual property rights, and thereby constructed a complete legal system that conforms to China’s actual notations and international practices.

Taking further measures to lower tariffs and reduce non-tariff measures. During the transitional period following China’s entry into the WTFO, the general level of China’s import tariffs was lowered from 15. 3% in 2001 to 9. 9% in 2005. By January 2005, the majority of China’s tariff reduction commitments had been fulfilled; China had removed non-tariff barriers, including quota, licensing and designated bidding, measures concerning 424 tariff lines, and only retained licensing administration over imports that are controlled for the sake of public safety and the environment in line tit international conventions and WTFO rules. By 2010 China’s overall tariff level had dropped to 9. 8% – 15. % in the case of agricultural products and 8. 9% in the case of industrial products. Since 2005, China has completely maintained its bound tariff rate.

Read more

Chinese Yuan and Economic Balance

Introduction In the increasingly globalizes business environment, the foreign exchange market is playing a more and more important role. This essay firstly discusses the valuation of Chinese Yuan and the global economic balance with reference to the case “Chinese Yuan and Economic Balance” (Question 1). Secondly, it continues to focus on the situation of Japanese Yen, based on the article “The Yen and Exports: Japan’s Continued Recovery’ (Question 2). Finally, it discusses three questions about foreign exchange calculations. Question 3) Question 1 a) According to the article “Chinese Yuan and Economic Balance”, Chinese Yuan has en undervalued for years. The implications of such undervaluation are two-sided. To China, an undervalued Yuan largely benefits its exportation of goods and services. This is because when Yuan is cheaper, Chinese goods are cheaper, inducing foreign parties to import from the Chinese market. However, such a situation may not be beneficial for the whole global market. Imbalances in the world economy have occurred.

A number of critics claimed that the undervalued Yuan is an unfair subsidy to the Chinese exportation. China starts suffering from appreciation pressures room the outside, and the pressure is even stronger under the tough economic conditions today. To sterilize the Yuan from such appreciation pressures, China has pursued several policies. Historically, Chinese Yuan was pegged to the US dollar at 1. 5 Yuan to the dollar. After the “opening” in 1984, the pegging rate was adjusted to 8. 62 in order to improve the competitiveness of Chinese exports.

Recently, under the pressure, the central bank lifted the peg to 8. 11 Yuan to the dollar. In 2010, China switched the policy to a “managed unpinning” mechanism, under which Yuan is valued more rely against a basket of currencies. This mechanism will have various influences on China and the US. For China, there are both merits and defects. Although this policy tends to make exports less profitable, create massive unemployment and make displaced workers harder to find jobs, it also can cut the importation costs for China, liberate China’s interest-rate policy and give consumers more spending power.

Therefore, the consequences of a stronger Yuan are two-sided. There exist both challenges and opportunities. Chinese Yuan and Economic Balance By Hunter appreciation of Yuan depends on a basket of currencies, including the US dollar, the Euro, the Japanese yen, the Korean won and some other currencies, the relative exchange rate between Chinese Yuan and the US dollar does not have an obvious trend in the short-term. In addition, the basis of a basket of currencies itself can make the appreciation pace steady. Therefore, there may not be obvious influences for the US in the short term. ) In good times, an undervalued Yuan does not matter much to the US and Europe, because the unemployment rates were low and outsourcing was not considered problematic. However, in tough times, trade imbalances were created, causing worse unemployment. Problems are rising from large amount of exportation. As a result, some critics view this issue as problematic, stating that it may worsen the global crisis. Despite that some groups in the US and Europe suffer from an undervalued Yuan, some other parties do benefit from such exchange rates. For example, large manufacturing companies can outsource resources and labor at lower prices.

Their costs to purchase raw materials and pay for Chinese labor are comparably cheaper. Multinational companies are another example. They can build headquarters or subsidiary offices in China with lower investment costs, because the prices for lands, equipment, utilities and even some administrative costs are cheaper. Therefore, these companies can lower their input costs and enjoy higher profits. C) We think that Yuan will appreciate in the future. The reasons are as follows: Firstly, Yuan will ultimately appreciate under the pressure from the market.

China needs to cope with the high inflation with the exports rebound and domestic focus. As the appreciation of the exchange rate can be used to control inflation, there will e pressure on China to appreciate its currency versus the US dollar. Also, the US dollar has been losing its value rapidly so china may try to appreciate Yuan to show the flexibility in the context of the international pressure. Secondly, the appreciation of Yuan should take place gradually and it will good for the balance of global currency and the stabilization of the global economy.

It is because rapid appreciation may promote more speculative inflows which is not welcome in the market. Also, it eases the trade tension between the United States and China. This was essential as the world’s largest economies need to work cohesively in a feeble global economic environment. From China’s perspective, gradual Yuan appreciation would be positive for the economy. Industrial significant growth is still impending in the country, the pattern of imports is expected to remain the same. A stronger Yuan would increase the purchasing power of commodity importers. ) Strong yen would reduce the foreign demand for the Japanese goods. Japanese products become relatively expensive to foreign importers due to the high exchange rates. That deters the oversea customers from purchasing the products or sending sack the sales. In the long run, that would attributes to profit drop. Besides, comparatively the exchange rates in other countries are low. The products export from these countries would be cheaper and more attractive to the oversea sales. The profit gain would be maximized by the increase in quantity of sales.

Also, greater emergence in foreign market induces the expansion of scale for facilitating the development of the company. Sony has its revenue growth from the emerging market for about 40% and the sales in Brazil almost doubled during the second quarter of 2010. Similarly, merger and acquisition is cheaper for the high value of yen to other currencies. According to TOKYO Marketplace, 455 cases of merger and acquisition, which has been the largest numbers since 1996, was recorded in 2011 with the monetary value of *6. Trillion under the effect of strong yen. Also in view of this, the Japanese government established a credit line worth $43 billion between the Japan Bank for International Cooperation and the three biggest Japanese commercial banks demand reflected the charm of merger and acquisition during the appreciation. ) Before, Japan was experiencing the economic downturn during which yen was not that valued. Importing Japanese goods was of great profitable potential. Therefore, the export during that period increased significantly.

The economic has been recovered and the value of yen becomes higher. However, yen continues to appreciate and the prices of the domestic products become so high that threaten the sales demand. The companies therefore have the concern that the increase in export was due to the relative strength of yen to other currencies and may be short lived. Actually, their once is correct. The yen’s strength has eroded profits at Japanese exporters such as Sharp Corp.. And Honda Motor Co. As faltering global growth undermines demand. The yen averaged 77. 3 per dollar in the quarter ended December compared with 82. 50 a year earlier. (Bloomberg, 2012) However, they can barely rely on the government to dampen the currencies by selling the currencies for it would be hard and of temporary effect Also, the bank of Japan could not probably count on coordinated action from the European Central Bank and the United States Federal Reserve which have no interest n strengthening their currencies to combat the strong yen. Therefore they could resort to protect themselves by preparing for the risk with the hedging strategies.

As London, New York and Japan are the three most dominant countries in global foreign exchange market(London with 34% share, New York City with 16. 6% and Tokyo with 8% in 2008), the fluctuation of dollar or Euro would be most sensitive for caution of risk. So the hedging strategies based on the expectations on the relative value of the yen in relation to these two currencies would be more effective and appropriate Han other currencies. C) Other than the traditional hedging, the companies can strategically and operationally adapt to the foreign market for mitigating the risk of the strong yen. Acquisition. On the other hands, they could downscale some of the back production which would be redundant to minimize the cost. For example, to cope with the market trend, Lipid, a Japanese Electronic company, has reviewed its business plans and decided to cut production and postpone the second phase of Recipe’s facility expansion. In tandem with these cutbacks, Lipid intends to accelerate downscaling ND sharpen its focus on mobile DRAMs(Semiconductor, 2010). Also, exchanging yen- denominated assets into foreign currency would reduce the impact from the rising yen directly.

For the operational adaptation, the companies can develop offshore capabilities for reducing the cost of production. Panasonic has used foreign engineers to develop the products. It innovates and improves the products that cater most to the local’s need. Panasonic altered the configuration of its refrigerators for Indonesian need more space to accommodate large two-liter bottles of water. It is also developing energy- onscreen and quiet air conditioners because Indians tend to run the air conditioner for whole day, which generates great burden on the grid and noise.

These actions reversed the loss of 52 billion to a profit of 84 billion. Its revenue from the emerging markets was expected to increase from present 25% to 31% in 2012. These hedging strategies are consistent with some of the large issues implicit in globalization. For instance, average trading volume on the Tokyo Stock Exchange, which runs the world’s second-largest equity market, fell 8. 2 percent to 2. 12 billion shares a day in 2010 as the demand was very weak. Tokyo Stock Exchange Group Inc. Hence had merger discussions with Osaka Securities Exchange Co. s takeovers sweep exchanges around the world for garnering the higher valuation derivatives component of exchanges globally(Bloomberg, 2011). The Japanese companies are actually globalization in the course of combating strong yen. Question 3 a) It is important that international businesses understand the influence of exchange rates on the profitability of trade and investment deals. Adverse changes in exchange rates can make apparently profitable deals unprofitable. The risk introduced into international business transactions by changing exchange rate is referred to as foreign exchange risk.

This risk is usually divided into the three important types of exposure to currency exchange rate fluctuations which are transaction exposure, translation exposure and economic exposure. Is affected by fluctuations in foreign exchange values. This exposure includes the obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing and lending of funds in foreign currencies. This can lead too real monetary loss as well. Translation exposure is the impact of currency exchange rate changes on the ported financial statements of a company. It is concerned with the present measurement of past events. Gains and losses from translation exposure are reflected only on paper. The resulting accounting gains or losses are said to be realized are still important. Economic exposure is the extent to which a firm’s future international earning power is affected by changes in exchange rates. It concerned with the long-term effect of changes in exchange rates on future prices, sales, and costs. This is distinct from transaction exposure, which is concerned with the effect of exchange rate hanged on individual transactions, most of which are short-term affairs that will be executed with a few weeks or mouths. ) Suppose the unit price for pogo sticks is in North Pogo and $8 in South Pogo, while the current exchange rate is $1 = Explain how the current exchange rate between and $ will get adjusted by market forces through the Law of One Price. What will be the adjusted exchange rate between the two currencies? In competitive markets where transportation costs are assumed to negligible and there are no trade barriers, Law of One Price states that: Identical products sold in efferent countries must sell for the same price when their price is expressed in terms of the same currency.

If exchange rates are flexible in the market, then we will expect exchange rates to adjust in order to equalize prices. The current exchange rate is $1:%4. Therefore, when a pogo stick is sold for in North Pogo, South Pogo should be also sold for $10 because the exchange rate is $1: However, Pogo stick is $8 in South Pogo and in North Pogo now. People will convert to get $8 in order to buy a pogo stick in South Pogo and sell in North Pogo for *40. They can gain a profit of *8 per pogo stick. Due to this market force, it will be increased demand for $. It will raise the value of $.

On the other hands, increased supply for would lower its price. This exchange rate movement will continue until prices are equalized. Therefore, the exchange rate will change from $1 = to $1 = interest rate in South Pogo (is) by 4%. What would the Fisher effect imply about the expected difference in inflation rates between North Pogo and South Pogo, where we denote the expected inflation rates in North and South Pogo as In and Is respectively. What would you expect to be the effect on the exchange rate between and And $? Interest rates affect expectations about future exchange rates.

Fisher Effect states that: nominal interest rate (I) is the sum of real interest rate (r) and expected rate of inflation (l): I = r + l. In the long-run, real interest rates in different countries gets equalized over time. So, if the real interest rate is the same everywhere, any difference in interest rates between countries reflects differing expectations about inflation rates. Since real interest rate must be the same in all countries, the different is the inflation rate.

Read more

Impact Of WTO on Indian Economy

Table of contents

WTO GENESIS

  • The General Agreement on Trade and Tariff (GATT) came into existence in 1947
  • It sought substantial reduction in tariff and other barriers to trade and to eliminate discriminatory treatment in international commerce.
  • India became a signatory to GATT in 1947 along with twenty two other countries
  • Reasons for GATT to be carved into WTO

GATT faced many problems, with the world trade becoming more and more complex, GATT was unable to deal with it. Eg. In the agriculture sector, loopholes in the multilateral system were heavily exploited, and efforts at liberalizing agricultural trade met with little success. In the textiles and clothing sector, an exception to GATT’s normal disciplines was negotiated in the 1960s and early 1970s, leading to the Multifibre Arrangement. Even GATT’s dispute settlement systems were causing concern. The Uruguay round negotiations lasted for about seven and a half years, twice the time originally planned for.

But economists conclude that it was worth the trouble, basically all issues related to trade were discussed in these negotiations, GATT’s articles were reviewed and most importantly the Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed during the April 1994 ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.

WTO kept the basic objectives of GATT same, while worked on their implementation.

WTO

  • WTO on paper came into existence on 1-1-1995 with the conclusion of Uruguay Round Multilateral Trade Negotiations at Marrakesh. Finally, enforced on 1-1-2005: For Transparent, free and rule-based trading system
  • To provide common institutional framework for conduct of trade relations among members To facilitate the implementation, administration and operation of Multilateral Trade Agreements
  • Follow rules and Procedures Governing Dispute Settlement
  • Trade Policy Review Mechanism
  • Concern on Non-trade issues such as Food Security, environment, health, etc.

What INDIA seeks from WTO

Protecting our food and livelihood security by having sufficient flexibility for domestic policy measures. Protecting domestic producers from the surge in imports or significant decline in import prices. Substantial reduction in export subsidies to other countries and domestic support to agriculture in the developed countries for greater market access to products of India as a developing country. Finally, a more equitable & fair trading framework for agricultural commodities

India and its Non-Trade Concerns

The issue of non-trade concerns was articulated as under:

The Article of Association provides an enabling environment for the countries to address the concerns relating to food security and livelihoods. Non-trade concerns were adequately reflected in the decisions, particularly those related to market access and domestic support. The relevant decisions of the World Food Summit on food security and livelihoods were taken as the integral part of the negotiations.

IMPACT OF WTO ON WORLD ECONOMY

SYNTHESIS OF WTO – WORLD TRADE ORGANISATION

One of the most eventful time that the world witnessed was the culmination of GATT 1947 into WTO, which came into force on 1st January 2005. This WTO had
set very high expectations in various member countries regarding increase in world trade where India had insignificant share i.e. only 0.75% at the most. Even in IT exports the share of Indian exporters was just peanuts in view of overall world market.

PROBLEMS FACED BY INDIA IN WTO & ITS IMPLEMENTATION:

Predominance of developed nations in negotiations extracting more benefits from developing and least developed countries Resource and skill limitations of smaller countries to understand and negotiate under rules of various agreements under WTO – Incompatibility of developed and developing countries resource sizes thereby causing distortions in implementing various decisions

Questionable effectiveness in implementation of agreements reached in past and sincerity – Non-tariff barriers being created by developed nations.
Regional cooperation groups were posing threat to utility of WTO agreement itself, which is multilateral encompassing all member countries – Agriculture seemed to be the bone of contention for all types of countries where France, Japan and some countries were just not willing to budge downwards in matter of domestic support and export assistance to farmers and exporters of agriculture produce.

Implications for India

IMPACT OF W.T.O ON INDIAN AGRICULTURAL SECTOR

Trade is an engine of economic development. The establishment of W.T.O is an important landmark in the history of international trade. When developing countries were liberalizing their economies, they felt the need for better export opportunities. The W.T.O provides opportunities for countries to grow and realize their export potentials, with appropriate domestic policies in place. The issue of globalization in the Indian context has occurred in the patterns of trade and capital flow in recent years; unfortunately, so far we have not made much use of it. At one time a country’s trade pattern was determined by its natural resources and the productivity of its land. Leaving aside political and institutional factors, a country’s level of
income was also largely determined by the global demand for its natural resources and its relative efficiency in exploiting them. The importance of land as a source of comparative advantage, however, changed dramatically after the industrial revolution. Today, it is almost insignificant. After the industrial revolution, the availability of “capital” became the most dominant source of comparative advantage.

The concept of India being a member of WTO evolved with the objective of expanding its exports of agricultural products in which it had tremendous comparative advantage(i.e. ability of a country to produce a particular good or service at a lower opportunity cost than another) The provisions of W.T.O offered ample opportunities to India to expand its export market. Contrary to this, the price situation changed drastically after 1996, which was the first year after implementation of Urguay Round Agreement and formation of W.T.O. International price of agricultural commodities have since then plummeted(fallen drastically), because of which domestic price turned higher than international price, which made India an attractive market for import of most agricultural commodities. This situation resulted in a wide spread decline in agricultural export and had also pressurized domestic prices. The impact of W.T.O on agriculture was severely felt by India as cheap imports were frequently hitting the Indian market that caused shock waves among the agriculture producers. The changes in the agricultural sector reveal that during pre W.T.O period i.e. just before the culmination of GATT into WTO there was significant increase in the exports of India rendering it remarkable than the post W.T.O period which could not sustain the rising import trends whereas the exports rose steadily.

ANALYSIS – IMPACT OF WTO ON VARIOUS SECTORS

The global agriculture trade regime under the World Trade Organization (WTO), that came into force 10 years ago in 1995, has led to an increase in the import of farm products into India rather than boosting exports.

Barring the first three years after the enforcement of the agreement, (1995-1998) agriculture imports continued to grow faster than exports. Between 1998 and 2000-01, the average annual import of farm products rose by
about 64 per cent, while exports declined by 7 per cent. Though the years 2002-03 have seen some buoyancy in farm exports, imports have also continued to grow.

A study on this particular aspect reports that the annual import of agriculture goods rose from $1,190 million in the three years preceding the WTO to $1,996 million in the first triennium after the WTO. In the same period, exports increased from $3,725 million to $6,530 million. But, this favourable trend in the initial years of the WTO did not last long and the next three years witnessed a whopping rise in imports and a slight decline in exports.

This crash was due partly to the cyclical nature of international prices partly due to increased global competition in agro-export because of liberalising trade.

The situation was aggravated by an increase in the already high farm subsidies in the developed countries. The Indian non-Basmati rice and wheat could not face global competition. The export of oilmeal, the second biggest export item after marine products, also suffered a set back due to a decline in global prices.

The export earnings from traditional export commodities like tea, coffee, spice and tobacco suffered mainly due to a sharp fall in international prices, as the quantum of exports in most cases did not drop.

Exports of marine products, livestock and horticulture items maintained the tempo of growth that was build up in the pre-WTO period. This implies that the post-WTO situation was favourable for the export of high-value food products.

In case of imports, liberalisation of trade in the initial years after the WTO did not result in any perceptible spurt because global prices were high. But subsequently, when global prices began to fall, India’s imports started
rising. The level of imports nearly doubled in the three years between 1996-97 and 1999-2000. This downturn in global prices continued even in the subsequent years.

The international prices of cereals in the years 2000 and 2001 were almost half of what they were in the beginning of the WTO-era.

The composition of items in the import basket indicates that edible oils accounted for the bulk of the increase in total agro-imports. The other items clocking significant increase in imports include pulses, spices, cotton, wood and wood products.

The study has also revealed that the spurt in the imports vegetable oils, and wood and its products has depressed their domestic prices, adversely impacting indigenous production.

What India should do?

The agricultural products from India can be made competitive in international market and the prices of agricultural goods in the domestic market can be improved by taking serious steps of reform. It appears that India does not stand to gain much by shouting for agriculture reforms in developed countries because the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in India to make Agriculture globally competitive. In Pharma-sector there is need for major investments in Research ; Development and mergers and restructuring of companies to make them world class to take advantage. India has already amended patent Act and both product and Process are now patented in India. India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which should be tapped and further strengthened. It should rather focus on Textile industry modernization and developing international Marketing muscle and expertise, developing of Brand India image, use its traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities, and develop selective engineering sector industries like automobiles ; forgings ; castings, processed foods industry and the high end outsourcing services. It
wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western Europe, North Africa, Mexico and other such strategically located areas for large US and European markets. The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and entering into multinational contracts to source oil reserves.

General improvements required by all sections of economy

Our tariffs are still high compared to Developed countries and there will be pressure to reduce them further and faster. India must improve legal and administrative infrastructure, improve trade facilitation through cutting down bureaucracy and delays and further ease its financial markets. India has to downsize non-plan expenditure in Subsidies (which are highly ineffective and wrongly applied) and Government salaries and perquisites like pensions and administrative expenditures. Corruption will also have to be checked by bringing in fast remedial public grievance system, legal system and information dissemination by using e-governance. The most important things for India to address are speed up internal reforms in building up world-class infrastructure like roads, ports and electricity supply. The performance of India in attracting major FDI has also been poor and certainly needs boost up, if India has to develop globally competitive infrastructure and facilities in its sectors of interest for world trade.

The Objective of WTO Reiterated:

It is very clear that the intention of the negotiators was to use trade as an instrument for development, to raise standards of living, expand production, keeping in view, particularly, the needs of developing countries and least-developed countries. The WTO must never lose sight of this basic principle. Every act of implementation and of negotiation, every legal decision, has to be viewed in this context. Trade, as an instrument for development, should be the cornerstone of all our deliberations, decisions and actions. Besides, the system should be seen to be equitable and fair. It must be used in such a manner that the letter and spirit of the Agreements is fully observed. The WTO Members must mutually support and encourage each other to achieve the final goal. It must be recognized that all Members should assume a negotiating rather than an adversarial posture. It should also be recognized that different economies have different features and structures, different problems, different cultures. The pace of change must be carefully calibrated to take into account such differences. All Members should guard against unilateral action that cuts at the root of multilateral agreement and consensus. Developing countries have generally been apprehensive in particular about the implementation of special and differential treatment provisions (S;D) in various Uruguay Round Agreements. Full benefits of these provisions have not accrued to the developing countries, as clear guidelines have not been laid down on how these are to be implemented. ” The first Ministerial Conference held in 1996 in Singapore saw the commencement of pressures to enlarge the agenda of WTO. Pressures were generated to introduce new Agreements on Investment, Competition Policy, Transparency in Government Procurement and Trade Facilitation. The concept ofCore Labor Standards was also taken up for introduction. India and the developing countries, which were already under the burden of fulfilling the commitments undertaken through the Uruguay Round Agreements, and who also perceived many of the new issues to be non-trade issues, resisted the introduction of these new subjects into WTO. They were partly successful. The Singapore Ministerial Conference (SMC) set up open-ended Work Program to study the relationship between Trade and Investment; Trade and Competition Policy; to conduct a study on Transparency in Government Procurement practices; and do analytical work on simplification of trade procedures (Trade Facilitation).

Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: ” We reject the use of labor standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard we note that the WTO and ILO Secretariat will continue their existing collaboration”. Not many people in this country are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us and won these cases like in pharmaceutical patents. India too has complained against the US and Europe and it too has won its fair share of disputes in areas like textiles.

India must effectively use this mechanism to extract fair share in world markets. It would be advantageous for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN.

CONCLUSION

“Globalize or Perish” is now the buzzword synonymous to “Do or Die” which conveys that there is no alternative to globalization and everybody should learn to live with it. India, being a signatory to the agreement that led to W.T.O, can no way step backwards. This is not the time to curse the darkness but to work for making India emerge as a global market leader.

Read more

The Great Trade Collapse: What Caused It and What Does It Mean

Table of contents

World trade experienced a sudden, severe, and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. This ebook – written for the world’s trade ministers gathering for the WTO’s Trade Ministerial in Geneva – presents the economics profession’s received wisdom on the collapse. Two dozen chapters, written by leading economists from across the globe, summarise the latest research on the causes of the collapse as well as its consequences and the prospects for recovery.

According to the emerging consensus, the collapse was caused by the sudden, severe and globally synchronised postponement of purchases, especially of durable consumer and investment goods (and their parts and components). The impact was amplified by “compositional” and “synchronicity” effects in which international supply chains played a central role. The “great trade collapse” occurred between the third quarter of 2008 and the second quarter of 2009. Signs are that it has ended and recovery has begun, but it was huge – the steepest fall of world trade in recorded history and the deepest fall since the Great Depression.

Specifically:

  • The 1982 and 2001 drops were comparatively mild, with growth from the previous year’s quarter reaching -5% at the most.
  • The 1970s event was twice that size, with growth stumbling to -11%.
  • Today collapse is much worse; for two quarters in a row, world trade flows have been 15% below their previous year levels. The OECD has monthly data on its members’ real trade for the past 533 months; the 7 biggest month-on-month drops among the 533 all occurred since November 2008 (see the chapter by Sonia Araujo and Joaquim Oliveira).

The great trade collapses in historical perspective, 1965 – 2009 Source: OECD Quarterly real trade data. The great trade collapse is not as large as that of the Great Depression, but it is much steeper. It took 24 months in the Great Depression for world trade to fall as far as it fell in the 9 months from November 2008. The latest data in the figure (still somewhat preliminary) suggests a recovery is underway.

It was synchronised – all 104 nations on which the WTO reports data experienced a drop in both imports and exports during the second half of 2008 and the first half of 2009.

The drop in manufactures trade was also massive, but it involved mostly quantity reductions. Exporters specialising in durable goods manufactures saw a particularly sharp decline in their exports (see chapters on Japan by Ruyhei Wakasugi and by Kiyoyasu Tanaka). Mexico, which is both an oil exporter and a participant in the US’s manufacturing supply chain, experienced one of the world’s most severe trade slumps (see chapter by Ray Robertson).

The great trade collapse was triggered by – and helped spread – the global economic slump that has come to be called “The Great Recession. Why did trade fall so much more than GDP? Given the global recession, a drop in global trade is unsurprising. The question is: Why was it so big? The chapter by Caroline Freund shows that during the four large, postwar recessions (1975, 1982, 1991, and 2001) world trade dropped 4. 8 times more than GDP (also see Freund 2009). This time the drop was far, far larger. From a historical perspective, the drop is astonishing. The figure shows the trade-to-GDP ratio rising steeply in the late 1990s, before stagnating in the new century right up to the great trade collapse in 2008.

The rise in the 1990s is explained by a number of factors including trade liberalisation. A key driver, however, was the establishment of international supply chains (manufacturing was geographically unbundled with various slices of the value-added process being placed in nearby nations). This unbundling meant that the same value-added crossed borders several times. In a simple international supply chain, imported parts would be transformed into exported components which were in turn assembled into final goods and exported again, so the trade figures counted the final value added several times.

As we shall see, the presences of these highly integrated and tightly synchronised production networks plays an important role in the nature of the great trade collapse (see chapters by Rudolfs Bems, Robert Johnson, and Kei-Mu Yi, and by Andrei Levchenko, Logan Lewis, and Linda Tesar). Figure 8 World trade to world GDP ratio, 1980Q1 to 2009Q2 Source: World imports from OECD online data base; World GDP based on IMF data. Emerging consensus on the causes Economists around the world have been working hard to understand the causes of this unusually large and abrupt shut down of international trade.

The dozen chapters in Part II of this book summarise all the key research – most of it done by the authors themselves. They do not all agree on all points, but a consensus is emerging. When sales drop sharply – and the great trade collapse was a gigantic drop in international sales – economists look for demand shocks and/or supply shocks. The emerging consensus is that the great trade collapse was mostly a demand shock – although supply side factors played some role. The demand shock operated through two distinct but mutually reinforcing channels:

  • Commodity prices – which tumbled when the rice bubble burst in mid 2008 – continued to follow world demand in its downward spiral. The price movements and diminished demand sent the value and volume of commodities trade diving.
  • The production and exports of manufacturing collapsed as the Lehman’s-induced shock-and-awe caused consumers and firms to wait and see; private demand for all manner of ‘postpone-able’ consumption crashed. This second point was greatly amplified by the very particular nature of the demand shock that hit the world’s economy in September 2008.

Why so big? This consensus view, however, is incomplete.

It raises the question: If the trade drop was demand driven, why was the trade drop so much larger than the GDP drop? The answer provided by the emerging consensus is that the nature of the demand shock interacted with “compositional” and “synchronicity” effects to greatly exaggerate the movement of the trade-to-GDP ratio. Compositional effect The compositional effect turns on the peculiar nature of the demand shock. The demand shock was very large, but also focused on a narrow range of domestic value-added activities – the production of “postponeable” goods, consumer durables and investment goods.

This demand drop immediately, reducing demand for all related intermediate inputs (parts and components, chemicals, steel, etc). The compositional-effect argument is founded on the fact that postponeables make up a narrow slice of world GDP, but a very large slice of the world trade. In a nutshell, the common cause of the GDP and trade collapse – a sudden drop in the demand for postponeables – operated with full force on trade but diminished force on GDP due to the compositional difference.

The large demand shock applied to the near-totality of trade while only applying to a thin portion of GDP. Here is a simple example. 2 Suppose exports consisted of 90% “postponeable” (consumer and investment electronics, transport equipment, machinery and their parts and components). GDP, however, consists most of non-tradeables (services, etc). Taking postponeables’ share in US GDP to be 20%, the pre-crisis situation is: When the sales of postponeables slumps by, say, half, the numerator falls much more than the denominator.

Assuming that ”other” continues growth in trade and GDP by 2%, the post-crisis trade to GDP ratio is Exports have fallen 44. 8% in this example, while GDP has fallen only 8. 4%. In short, the different composition of trade and GDP, taken together with the specific nature of the demand shock, has resulted in trade falling more than 5 times as fast as GDP. See the chapter by Andrei Levchenko, Logan Lewis, and Linda Tesar for a careful investigation of this logic using detailed US production and trade data; they find that the compositional effect accounts for most of the US trade drop. The chapter by Joseph Francois and Julia Woerz uses US and Chinese data to argue that the compositional effect is key to understanding the trade collapse.

Synchronicity effect

The synchronicity effect helps explain why the great trade collapse was so great in an even more direct manner; almost every nation’s imports and exports fell at the same time. There was none of the averaging out that occurred in the three other postwar trade drops. But why was it so synchronised?

There are two leading explanations for the remarkable synchronicity. The first concerns international supply chains, the second concerns the ultimate cause of the Great Recession. The profound internationalisation of the supply chain that has occurred since the 1980s – specifically, the just-in-time nature of these vertically integrated production networks – served to coordinate, i. e. rapidly transmit, demand shocks. Even a decade ago, a drop in consumer sales in the US or Europe took months to be transmitted back to the factories and even longer to reach the suppliers of those factories.

Today, Factory Asia is online. Hesitation by US and European consumers is transmitted almost instantly to the entire supply chain, which reacts almost instantly by producing and buying less; trade drops in synch, both imports and exports. For example, during the 2001 trade collapse, monthly data for 52 nations shows that 39% of the month-nation pairs had negative growth for both imports and exports. In the 2008 crisis the figure is 83%. For details on this point, see Di Giovanni, Julian and Andrei Levchenko (2009), Yi (2009), and the chapters by Rudolfs Bems, Robert Johnson, and Kei-Mu Yi, and by Kiyoyasu Tanaka.

The second explanation requires a bit of background and a bit of conjecture (macroeconomists have not arrived at a consensus on the causes of the Great Recession). To understand the global shock to the demand for traded goods, we need a thumbnail sketch of the global crisis. How the subprime crisis became the global crisis The “Subprime Crisis” broke out in August 2007. For 13 months, the world viewed this as a financial crisis that was mainly restricted to the G7 nations who had mismanaged their monetary and regulatory policy – especially the US and the UK.

Figure 3 shows that world trade continued growing apace in 2007 and early 2008. The crisis metastasised from the “Subprime Crisis” to the global crisis in September 2008. The defining moment came when the US Treasury allowed the investment bank Lehman Brothers to go bankrupt. This shocked the global financial community since they had assumed no major financial institution would be allowed to go under. Many of the remaining financial institutions were essentially bankrupt in an accounting sense, so no one knew who might be next. Bankers stopped lending to each other and credit markets froze.

The Lehman bankruptcy, however, was just one of a half dozen “impossible events” that occurred at this time. Here is a short list of others:

  • All big investment banks disappeared.
  • The US Fed lent $85 billion to an insurance company (AIG), borrowing money from the US Treasury to cover the loan.
  • A US money market fund lost so much that it could not repay its depositors capital.
  • US Treasury Secretary Paulson asked the US Congress for three-quarters of a trillion dollars based on a 3-page proposal; he had difficulties in answering direct questions about how the money would fix the problem. The hereto laissez-faire US Securities and Exchange Commission banned short selling of bank stocks to slow the drop in financial institutions stock prices. It didn’t work.
  • Daniel Gros and Stephano Micossi (2009) pointed out that European banks were too big to fail and too big to save (their assets were often multiples of the their home nations’ GDPs);
  • Congress said “no” to Paulson’s ill-explained plan, promising its own version. As people around the world watched this unsteady and ill-explained behaviour of the US government, a massive feeling of insecurity formed.

Extensive research in behavioural economics shows that people tend to act in extremely risk averse ways when gripped by fears of the unknown (as opposed to when they are faced with risk, as in a game of cards, where all outcomes can be enumerated and assigned a probability). Fall 2008 was a time when people really had no idea what might happen. This is Ricardo Caballero’s hypothesis of “Knightian Uncertainty” (i. e. the fear of the unknown) which has been endorsed by the IMF’s chief economist Olivier Blanchard. Consumers, firms, and investors around the world decided to “wait and see” – to hold off on postponeable purchases and investments until they could determine how bad things would get. The delaying of purchases and investments, the redressing of balance sheets and the switching of wealth to the safest assets caused what Caballero has called “sudden financial arrest” (a conscious reference to the usually fatal medical condition “sudden cardiac arrest”). The “fear factor” spread across the globe at internet speed. Consumers, firms and investors all feared that they’d find out what capitalism without the capital would be like.

They independently, but simultaneously decided to shelf plans for buying durable consumer and investment goods and indeed anything that could be postponed, including expensive holidays and leisure travel. In previous episodes of declining world trade, there was no Lehman-like event to synchronise the wait-and-see stance on a global scale. The key points as concerns the trade and GDP collapse:

  • As the fear factor was propagating via the electronic press; the transmission was global and instantaneous.
  • The demand shock to GDP and the demand shock to trade occurred simultaneously.

“Postponeable” sector production and trade were hit first and hardest. There are a number of indications that this is the right story. First, global trade in services did not, in general, collapse (see the chapter by Aditya Mattoo and Ingo Borchert). Interestingly, one of the few categories of services trade that did collapse was tourism – the ultimate postponeable. Second, macroeconomists’ investigations into the transmission mechanisms operating in this crisis show that none of the usual transmission vectors – trade in goods, international capital flows, and financial crisis contagion – were esponsible for the synchronisation of the global income drop (Rose and Spiegel 2009). Supply-side effects The Lehman-link “sudden financial arrest” froze global credit markets and spilled over on the specialized financial instruments that help grease the gears of international trade – letters of credit and the like. From the earliest days of the great trade collapse, analysts suspected that a lack of trade-credit financing was a contributing factor (Auboin 2009). As the chapter by Jesse Mora and William Powers argues, such supply-side shocks have been important in the past.

Careful research on the 1997 Asian crisis (Amiti and Weinstein 2009) and historical bank crises (see the chapter by Leonardo Iacovone and Veronika Zavacka) provide convincing evidence that credit conditions can affect trade flows. The Mora and Powers chapter, however, finds that declines in global trade finance have not had a major impact on trade flows. While global credit markets in general did freeze up, trade finance declined only moderately in most cases. If anything, US cross-border bank financing bounced back earlier than bank financing from other sources.

In short, trade financing had at most a moderate role in reducing global trade. Internationalised supply chains are a second potential source of supply shocks. One could imagine that a big drop in demand combined with deteriorating credit conditions might produce widespread bankruptcies among trading firms. Since the supply chain is a chain, bankruptcy of even a few links could suppress trade along the whole chain. The chapters by Peter Schott (on US data), by Lionel Fontagne and Guillaume Gaulier (on French data), and by Ruyhei Wakasugi (on Japanese data) present evidence that such disruptions did not occur this time.

They do this by looking at very disaggregated data (firm-level data in the Fontagne-Gaulier chapter) and distinguishing between the so-called “intensive” and “extensive” margins of trade. These margins decompose changes in trade flows into changes in sales across existing trade relations (intensive) and changes in the number of such relations (extensive). If the supply-chain-disruption story were an important part of the great trade collapse, these authors should have found that the extensive margin was important.

The authors, however, find that the great trade collapse has been primarily driven by the intensive margin – by changes in pre-existing trade relationships. Trade fell because firms sold less of products that they were already selling; there was very little destruction of trade relationships as would be the case if the extensive margin had been found to be important. This findings may be due to the notion of ”hysteresis in trade” (Baldwin 1988), namely, that large and sunk market-entry costs imply that firms are reluctant to exit markets in the face of temporary shocks.

Instead of exiting, they merely scale back their operations, waiting for better times. Protectionism is the final supply shock commonly broached as a cause of the great trade collapse. The chapter by Simon Evenett documents the rise in crisis-linked protectionist measures. While many measures have been put in place – on average, one G20 government has broken its no-protection pledge every other day since November 2008 – they do not yet cover a substantial fraction of world trade. Protection, in short, has not been a major cause of the trade collapse so far.

Prospects The suddenness of the 2008 trade drop holds out the hope of an equally sudden recovery. If the fear-factor-demand-drop was the driver of the great trade collapse, a confidence-factor-demand-revival could equally drive a rapid restoration of trade to robust growth. If it was all a demand problem, after all, little long-lasting damage will have been done. See the chapter by Ruyhei Wakasugi on this. There are clear signs that trade is recovering, and it is absolutely clear that the drop has halted. Will the trade revival continue?

No one can know the future path of global economic recovery – and this is the key to the trade recovery. It is useful nonetheless to think of the global economic crisis as consisting of two very different crises: a banking-and-balance-sheet crisis in the over-indebted advanced nations (especially the US and UK), on one hand, and an expectations-crisis in most of the rest of the world on the other hand. In the US, UK and some other G7 nations, the damage done by the bursting subprime bubble is still being felt.

Their financial systems are still under severe strain. Bank lending is sluggish and corporate-debt issuances are problematic. Extraordinary direct interventions by central banks in the capital markets are underpinning the economic recovery. For these nations, the crisis – specifically the Subprime Crisis – has caused lasting damage. Banks, firms and individuals who over-leveraged during what they thought was the ”great moderation” are now holding back on consumption and investment in an attempt to redress their balance sheets (Bean 2009).

This could play itself out like the lost decade Japan experienced in the 1990s (Leijonhufvud 2009, Kobayashi 2008); also see the chapter by Michael Ferrantino and Aimee Larsen. For most nations in the world, however, this is not a financial crisis – it is a trade crisis. Many have reacted by instituting fiscal stimuli of historic proportions, but their banks and consumers are in relatively good shape, having avoided the overleveraging in the post tech-wreck period (2001-2007) that afflicted many of the G7 economies.

The critical question is whether the damage to the G7’s financial systems will prevent a rapid recovery of demand and a restoration of confidence that will re-start the investment engine. In absence of a crystal ball, the chapter by Baldwin and Taglioni undertakes simple simulations that assume trade this time recovers at the pace it did in the past three global trade contractions (1974, 1982 and 2001). In those episodes, trade recovered to its pre-crisis path 2 to 4 quarters after the nadir.

Assuming that 2009Q2 was the bottom of the great trade collapse – again an assumption that would require a crystal ball to confirm – this means trade would be back on track by mid 2010. Forecasts are never better than the assumptions on which they are built, so such calculations must be viewed as what-if scenarios rather than serious forecasts. Implications What does the great trade collapse mean for the world economy? The authors of this Ebook present a remarkable consensus on this.

Three points are repeatedly stressed:

  • Global trade imbalances are a problem that needs to be tackled. One group of authors (see the chapters by Fred Bergsten, by Anne Krueger, and by Jeff Frieden) sees them as one the root causes of the Subprime Crisis. They worry that allowing them to continue is setting up the world for another global economic crisis. Fred Bergsten in particular argues that the US must get its federal budget deficit in order to avoid laying the carpet for the next crisis.

Another group points to the combination of Asian trade surpluses and persistent high unemployment in the US and Europe as a source of protectionist pressures (see the chapters by Caroline Freund, by Simon Evenett, and by Richard Baldwin and Daria Taglioni). The chapter by O’Rourke notes that avoiding a protectionist backlash will require that the slump ends soon, and that severe exchange rate misalignments at a time of rising unemployment are avoided.

  • Governments should guard against compliancy in their vigil against protectionism.

Most authors mention the point that while new protectionism to date has had a modest trade effect, things need not stay that way. The chapter by Simon Evenett is particularly clear on this point. There is much work to be done before economists fully understand the great trade collapse, but the chapters in this Ebook constitute a first draft of the consensus that will undoubtedly emerge from the pages of scientific journals in two or three years’ time. Footnotes 1 See Di Giovanni and Levchenko (2009) for evidence on how the shock was transmitted via international production networks. This is drawn from Baldwin and Taglioni (2009). 3 Jon Eaton, Sam Kortum, Brent Neiman and John Romalis make similar arguments with data from many nations in an unpublished manuscript dated October 2009.

References

  1. Auboin, Marc (2009). “The challenges of trade financing”, VoxEU. org, 28 January 2009. Baldwin, Richard (1988). “Hysteresis in Import Prices: The Beachhead Effect”, American Economic Review, 78, 4, pp 773-785, 1988.
  2. Baldwin, Richard and Daria Taglioni (2009). “The illusion of improving global imbalances”, VoxEU. org, 14 November 2009.
  3. Bean, Charles (2009). “The Great Moderation, the Great Panic and the Great Contraction”, Schumpeter Lecture, European Economic Association, Barcelona, 25 August 2009.
  4. Blanchard, Olivier (2009). “(Nearly) nothing to fear but fear itself”, Economics Focus column, The Economist print edition, 29 January 2009.
  5. Caballero, Ricardo (2009a). “A global perspective on the great financial insurance run: Causes, consequences, and solutions (Part 2)”, VoxEU. rg, 23 January 2009.
  6. Caballero, Ricardo (2009b). “Sudden financial arrest”, VoxEU. org, 17 November 2009. Di Giovanni, Julian and Andrei Levchenko (2009). ”International trade, vertical production linkages, and the transmission of shocks”, VoxEU. org, 11 November 2009.
  7. Freund, Caroline (2009a). “The Trade Response to Global Crises: Historical Evidence”, World Bank working paper.
  8. Gros, Daniel and Stefano Micossi (2009). “The beginning of the end game…”, VoxEU. org, 20 September 2008.
  9. Kobayashi, Keiichiro (2008). Financial crisis management: Lessons from Japan’s failure”, VoxEU. org, 27 October 2008.
  10. Leijonhufvud, Axel (2009). “No ordinary recession”, VoxEU. org, 13 February 2009.
  11. Rose, Andrew and Mark Spiegel (2009). “Searching for international contagion in the 2008 financial crisis”, VoxEU. org, 3 October 2009.
  12. Yi, Kei-Mu (2009), “The collapse of global trade: The role of vertical specialisation”, in Baldwin and Evenett (eds), The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, a VoxEU publication.

Read more
OUR GIFT TO YOU
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat
Close

Sometimes it is hard to do all the work on your own

Let us help you get a good grade on your paper. Get professional help and free up your time for more important courses. Let us handle your;

  • Dissertations and Thesis
  • Essays
  • All Assignments

  • Research papers
  • Terms Papers
  • Online Classes
Live ChatWhatsApp