Trade

Global Financial Imbalances Essay – How the arrangements of global trade act as a driver of global imbalances
Abstract

This paper looks at the different factors causing trade imbalance on the global trade arena. This global financial imbalances essay identifies the different factors that affect the global trade imbalances of trade as envisioned in the global trade agreements. The findings reveal that there is need for countries to look into better ways of ensuring that a level playing field is provided for all and proper mechanisms enacted to ensure that no member state flouts the rules and policies.

Introduction

Pettis (2013, p. 65) claims that trade is a very controversial issue around the world because many people hold the perception that trade agreements and even trade itself undermines some human rights like labour rights, and even affordable medicine in some cases.

Many international institutions have emerged to act as a means for countries to foster new economic order. Some of the institutions include bodies like World Trade Organisation which has eventually replaced the General Agreement on Tariffs and Trade to help reduce trade tariffs; the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Asian Pacific Economic Cooperation Group (APEC). These trade agreements are being formed to help regions integrate and enable smooth trading among the trading partners. In addition to the aforementioned regional trade agreements, countries are still negotiating other bilateral trade agreements in all parts of the world. (Rebucci et al 2009, p.44).

All these efforts are being directed at liberalising the world economy in order to ensure smooth flow of goods and services in the global market. This liberalisation of trade and investment around the globe has made a large contribution to an increase in global trade volumes, portfolio investment and foreign direct investments, all of which have made significant impacts on the member countries. Despite all the advantages that accompany neoliberalism, it has flaws because it has created trade imbalances in the member states.

Liberalisation of trade has been appealing to states because of the logic of comparative advantage as it relocates the factors of production to areas where they would yield a greater advantage through subjection to international competition and trade. This is what guided the formation of associations like World Trade Organisation and the European Union. However, this is part of the causative agents for global trade imbalance because the international economy and the financial system are increasingly becoming vulnerable to the policies of the surplus countries as some countries intentionally refuse to play along the rules of liberalisation (Koo 2011, p. 77).

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Global Financial imbalances

Liberalisation of trade is pursued by states because it defends international mobility of investment in sites of production, free trade, trade and financial liberalisation in services. Therefore economic efficiency lies in the increase in specialisation in production and circulation of goods and services, and reallocation of capital in the global market. However, the recession being suffered by the developed states has leftthe future of trade liberalisation in the balance as these countries may decide to opt for protectionism in order to shield their economies from such adverse effects (Fardoust et al 2011, p. 54).

In contrast to the situation in 2008, countries now have some tools which they can use to mitigate the renewed economic downtown which increases the chances of it generating into a recessionIf the economic downtown continues then the protectionist pressure is likely to increase. However Koo (2011, p. 19) asserts that the first countries that will erect trade barriers to cushion themselves against economic downtown will obviously be blamed for the eventual damage that will be made to the global trading system. However, the countries that will be more responsible for this are the ones that skew their industrial structures, exchange rate policies and tax systems to gain competitive advantage.

The irony of this scenario is that the governments that are most dependent on the free trade i.e. the ones that produce more commodities than they can consume will be the biggest hindrance to the sustainable recovery of the global economy (Pettis 2013, p. 55). It is therefore advisable for these countries to change course before it is too late for them to act, or else they will suffer adversely if other governments decide to erect new trade barriers because it will affect their market segments.

The countries with surplus production have a tendency of exhorting the governments with deficits to live within their means, pay their debts and save more. However the real challenge facing the global economy is the acute lack of aggregate demand. The globe is already awash with savings but profitable investment opportunities are very minimal which manifests itself in the weakness of consumption (Morrison et al 2007, p. 31).

The implication for this is that saving more is not a solution to the countries with trade deficits. Indeed saving more will be extremely disastrous as it will reduce consumption. Reducing consumption will depress investment because households will no longer be buying more and as a consequence, aggravate the fiscal problems. If the governments with big trade deficits opt to save more, then those with surplus will be forced to spend more and save less.

Fund (2010, p. 66) claims that the weakness of domestic demand in the United Kingdom, United States and the rest of the Eurozone is grossly affecting the global demand but there is nothing to offset it. The governments with big surpluses like Japan, Germany and China are not doing anything to help ease the contraction in demand elsewhere. Such a situation is fraught with risks because for the world to continue enjoying the benefits of global trade and finance, then there must be a mechanism for unwinding the global trade imbalances. This then leads the discussion to the definition of trade imbalance in order to be able to identify its causes and effects.

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What is trade imbalance?

Duncan (2013, p.65) defines trade balance of a government as a reflection of what it spends less what it produces. A country has a trade surplus if its income exceeds its expenditure which enables it to lend the surplus to the countries where their expenditures exceed their income. In so doing these countries are able to accumulate international assets. The countries with a deficit on the other hand are on the flipside of this as they spend more than their income and have to borrow from the governments with surpluses to cover for the difference. However, in the process of covering their difference, they end up accumulating international debts or liabilities. Surplus economies are dependent on the deficit economies just like the deficit economies are dependent on the surplus economies which imply that there is a mutual relationship of dependency. Therefore it is not possible for all governments to run in surpluses or deficits as both must be in existence for the relationship to subsist. This then leads to the question of whether trade imbalances are sustainable or not.

Trade imbalances and the eventual capital flows between governments are not necessarily the problem. The fast ageing wealthy governments often have excess savings which enables them to make investments in economies with insufficient savings to meet their investment needs (Duncan 2013, p.90). Historically, this meant putting more investments in the rapidly developing economies.

As long as the current account deficits remain modest and governments invest the surplus in ways that promote economic growth, then such imbalances are sustainable. However, the current trade imbalances around the world are of a different type (Hall et al 2011, p. 70). They are much bigger than was ever anticipated. For instance the most serious is that between China and the United States where China is still maintaining a huge trade surplus with the United States. Most of the other trade imbalances are between economies with the same levels of development, for example Japan and the United States, and between the Eurozone members. Such imbalances are far from benign as they destabilize the flow of capital between economies. For instance the 2007 global financial crisis and the resultant Eurozone crisis were caused by capital flaws between countries (Haddad and, Shepherd 2011, p. 43).

The banks that were overleveraged made matters worse as they further amplified the crisis. However, the underlying reason for the capital outflows was economies with surpluses seeking higher returns. The surplus economies like the United Kingdom, United States and the rest of the Eurozone failed to find productive uses for their surpluses. Instead of boosting productivity, the inflow investments ended up raising assets prices leading to excessive borrowing by the households.

The trade imbalances survived both crisis and are even growing again at high levels. However, this is not sustainable. Unlike in the period preceding the 2007 crisis, the current deficit has nothing to do with excess demand in the economies with deficit. It is occurring against a backdrop of stagnation and a decrease in the living standards of these economies. Firms and households of the deficit economies are even saving more and there is no offsetting decline in savings in the private sector within the economies with surpluses (Chen et al 2012, p. 47). Against such kind of economic activities, the trade deficits constitute a major hindrance to economic activities as they reduce employment and demand and as a consequence forces governments to intervene by running huge fiscal deficits. The external demand that the surplus economies rely on is heavily dependent on unsustainable policies in the economies with deficits.

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Theoretical foundation – Unger: institutional arrangements and outcomes

Roberto Unger proposes an institutional arrangement for the organisation of civil societies, democracies and market economies. He claims that neo-liberalisation of trade is based on theory of comparative advantage that is too partial. It is this partiality that has created global trade imbalances. Roberto Unger argues that the current model of comparative advantage used for free trade arguments is not only partial but is also incomplete and empirically inaccurate to permit the formulation of global business policies. His major concern is the trade policies and designs of the global trading systems which he thinks are inherently designed to create trade imbalances (Claessens, et al 2010, p.81).

The theory of comparative advantage is incomplete because it has as a premise the existence of an established comparative advantage. The comparative advantage in the real world is a function of a complex array of economic, social, and political factors. As such it is not possible to determine a case for free trade until fully taking into account the manner in which these factors interact to create the regime of an economy. It is these differences relative to unit costs across countries that create comparative advantage.

Different trade agreements often have an effect on the patterns of advantage that an economy can develop and then eventual gains it can attain from free trade. In addition to this, the trade theories often find that multiple world equilibriums exists both in the presence of increasing returns and scale economies as well as the conventional return models (Unger 2005, p. 89). Whichever of these equilibriums the global economy leads a country into affects the aggregate efficiency and distribution of the gains from trade across nations.

In the process of selecting equilibrium, broader political and social processes are likely to play a significant role. Only once the effects of trade restrictions on social and political forces have been determined and the eventual selection of an equilibrium made, can a definitive case for or against liberal trade policies be made. This is the reason why Unger proposed the development of a more complex theory of trade premised on a set of basic ideas that play analogous role for labelling the assumptions of a formal model. Without the formal model that takes into account all the factors that affect equilibrium, then the trade imbalances will continue to exist.

Other Causes of Trade Imbalance

Some countries like China are fuelling imbalance in the global economy by devaluing the Yuan like the Japanese did 26 years ago (Aaronson & Zimmerman 2008, p.81). The country is accused of intentionally devaluing its exchange rates. Although it is not easy to accurately calculate the exchange rate of the Yuan, economists believe it is undervalued by up to 40% and consensus indicate that the policy of China of stockpiling foreign exchange reserves is responsible for this (Aaronson & Zimmerman 2008, p.33).

The country has been able to use its huge trade surplus to buy US currency and treasuries in order to maintain a high demand for the US Dollar and make the Yuan appear relatively cheap. This raises the price competitiveness of China against the United States. Acts of money intervention by China to create trade imbalance is deliberate as it spends a lot of money in the market to keep the Yuan undervalued.

This market interference by China is fuelling trade deficits in the United States because American companies are forced to outsource jobs to China in order to be able to enjoy cheap labour (Claessens, Evenett & Hoekman 2010, p. 64). The purchasing power of the Chinese is equally suppressed because they are less able to afford foreign products and increase their living standards. This makes it hard for foreign companies to sell their products in the country because the weak Yuan renders them expensive for the average Chinese consumer.

The manipulation of trade by China is also fuelling overconsumption in the United States by buying up government treasuries. The artificial suppression of the value of Yuan allows the treasury department to lower the long term interest rates. This fuels the western and American debt, over consumption and ensures that the demand for the Chinese exports is sustained. Although such a practice is not illegal, it creates imbalance in the global trade arena. Although the East and China have played a major role in the provision of attractively priced commodities and financing the western debts, the west has also been responsible for the creation of trade imbalance owing to their inability to control their over consumption (Berger and Nitsch 2010, p. 62).

Other than the manipulation of currency by China, the country also supresses labour rights thus lowering the costs of production in the country. The repression of labour by the Chinese government has lowered the manufacturing wages of the workers by approximately 47% to 86% (Chen et al 2012, p.86). The country also provides huge direct export subsidies to its major industries in order to boost production for the export market.

Finally, China maintains strict non-tariff barriers to imports. This has ensured that the country maintains trade imbalance with other countries and as at 2011 the Chinese exports to the US were more than four times what the United States exported to China. This trade imbalance from China was further enhanced partly when the country was accepted into the World Trade Organisation without inclusion of a clause to improve the environmental standards and the labour conditions. The entry of China into the economic playing field has further worsened things for the domestic workers in the United States in favour of the multinational companies working in China.

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Conclusion

This essay has identified the different factors affecting the balance of trade on the international arena. Some countries are deliberately carrying out actions to influence the balance of trade in their favour at the expense of the other partners. Although there are countries that are interfering with the global balance provided by the international market, there is need for countries to look into better ways of ensuring that a good business environment is provided for all and proper mechanisms enacted to ensure that no member state flouts the rules and policies

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References

Aaronson, S. A., & Zimmerman, J. M. (2008). Trade imbalance: The struggle to weigh human rights concerns in trade policymaking. New York, N.Y., : Cambridge University Press.
Berger, H., Nitsch, V., & International Monetary Fund. (2010). The Euro?s Effect on Trade Imbalances. Washington, D.C: International Monetary Fund.
Chen, R., Milesi-Ferretti, G.-M., Tressel, T., International Monetary Fund., & International Monetary Fund. (2012). External imbalances in the Euro area. Washington, D.C.: International Monetary Fund.
Claessens, S., Evenett, S. J., & Hoekman, B. M. (2010). Rebalancing the global economy: A primer for policymaking. London: Centre for Economic Policy Research.
Duncan, R. (2013). The dollar crisis: Causes, consequences, cures. Hoboken, N.J: Wiley.
Fund, I. M. (2010). European Financial Linkages. Washington: International Monetary Fund.
Haddad, M., Shepherd, B., & World Bank. (2011). Managing openness: Trade and outward-oriented growth after the crisis. Washington, D.C: World Bank.
Hall, P. V., McCalla, R. J., Comtois, C., & Slack, B. (2011). Integrating seaports and trade corridors. Farnham, Surrey: Ashgate.
Koo, R. C. (2011). The Holy Grail of Macroeconomics: Lessons from Japans Great Recession. Hoboken: John Wiley & Sons.
Korea-World Bank High Level Conference on Post-Crisis Growth and Development, Fardoust, S., Kim, Y., Sepulveda, C. P., World Bank., & Taeoe Kyo?ngje Cho?ngch’aek Yo?n’guwo?n (Korea). (2011). Postcrisis growth and development: A development agenda for the G-20. Washington, D.C: World Bank.
Morrison, C. E., Pedrosa, E., Pacific Economic Cooperation Council., APEC Business Advisory Council., & Institute of Southeast Asian Studies. (2007). An APEC trade agenda?: The political economy of a free trade area of the Asia-Pacific. Singapore: Institute of Southeast Asian Studies.
Pettis, M. (2013). The great rebalancing: Trade, conflict, and the perilous road ahead for the world economy. Princeton: Princeton University Press.
Rebucci, A., Batini, N., Cova, P., & Pisani, M. (2009). Global Imbalances. Washington: International Monetary Fund.
Unger, R. M. (2005). What should the Left propose?. London: Verso.

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        A contrast of the Practice of the U.S and Europe on Non-Tariff Trade Barriers

The number of non-tariff trade barriers aimed at restricting the free flow of goods in trade have increased considerably in the last few years.  This is despite this practice being widely criticized as it hampers trade and competition.  Non trade barrier have been defined as the “non science based sanitary and phyto sanitary (SPS) standards, customs procedures, government monopolies and lack of transparency in regulations (US. Consulate General Press Releases)

            The United state and the European Union have enjoyed a dynamic and fruitful trade and economic partnership in the recent past, making it the largest economic partnership globally and also the most crucial in the international economic system.  This interaction though has not been without its major hiccups and momentous tensions.  Such conflicts as the Doha Ronald Talks and the commercial aviation have helped heighten this tension.  The United States and the European have placed non tariff trade barriers against each other as well as the rest of the world putting a stiff restriction against market access.  It is such barriers that will remain the interest of this paper which will seek to contrast the non-tariff barriers of the United States with that of the Europe.

            The agriculture sector has been the most talked about in all economic conventions covering trade barriers, they have also been the source of conflict defining the transatlantic relations.  These revolves around the idea of the prospective governments shielding their “farmers from the full effect of market forces” (Raymond 10)

            One of the major culprits behind trade barriers to the United States agricultural goods entering the United States is the common Agricultural Policy (CAP) incepted in 1962 by the EU.  CAPS operations revolve around the need for free flows of agricultural goods across the countries that are members of EU, giving EU goods preferences over Imports and also the establishment of a system to oversea the “common financing of agricultural programs” (Raymond 11).  According to the United States Department of agriculture “the U.S may be losing $4.97 billion exports because of questionable regulations” (Silvia and Tian 235).  The barriers that hinder the entry of the United State agricultural goods to Europe have been identified by Sylvia and Tian (240) to be “market access, market expansion and market retention barriers.”  These would be import bans among others.  The most affected of agricultural products is the animal products, and processed foods which with most European countries demand regions inspection measures.  In 1996 for example such barriers included “the EU bans on hormone-treated beef, poultry and possible ban resulting from a dispute regarding US test procedures” (242).  The EU for example legislated against GMOs demanding that they be labeled as such; this has significantly reduced the amount of corn exported to Europe.

            The United State through congressional act has imposed legislative restrictions against agricultural products emanating from Europe.  At the turn of the century, the European Union outlined a number of questionable barriers erected by the United States that contravened the World Trade organization principles.  Unlike European countries that have been banning organic food the United States has been criticized largely for introducing barriers that specifically target the European farmers so as to protect its farmers.  It has for example banned products that use pesticide that have been linked to cancer.  It also causes delays that are unwarranted in the process of labeling imports, resulting to heavy losses in case of perishable goods.  The United States also has introduced labeling standards that do not conform to the usual International Standards, such inconsistencies result to increased extra cost to importers (O.E C.D. 24)

            Aerospace industry has also of late been embroiled in a row over the subsidies introduced by the prospective governments towards their companies.  This conflict centers on the subsidy growth to the Airbus Industries.  European countries such as France, Spain and the United Kingdom have been subsidizing the production of airbuses.  This hence has granted their companies undue advantage which is extended even to the airspace as they give preference to their own airlines discriminating against the competitors.  The European Union maintains that this has been necessary as their companies cannot compete on an equal ground with the US aviation industry that has benefited from years of immense research by the Military.  The European Union is accused of capital infusion and other forms of assistance that has helped it gain undue advantage over others.  Whereas the European Union members bails out their airlines whenever they land into financial crisis the United States has been extending subsidies to its key airline, Boeing, on the pretext that it’s a key company whose financial instability is likely to have wide and far reaching ramifications to its economy in terms of job losses (Petersmann 17).

            The United States has also resulted to protectionism in the steel industry just like most European countries do for agricultural products. President George Bush in 2003 introduced a 30% tariff on all steel imports apart from those of Canada and Mexico. Most European countries do not have non tariff trade barriers placed on steel but their companies on the receiving end from the unfair practices from the United States which has introduced punitive and restrictive legislations to protect its local companies (Joseph 13).

            The United States has placed a myriad of non-tariff trade barriers on most manufactured goods that emanate from the European Union.  Such barriers include the requirements that these goods have to conform to particular regulations and standards.  The American Automobile Labeling Act has been pointed out as a major impediment on the importation of cars to the United States by European companies.  The United States refuses to accept the certification of good by the European Union believing that it is not a valid customs union.  Such barriers are further aggravated by the existence of numerous institutions that are required to be satisfied for imported goods to be allowed access to the market.  States and municipal institutions have their own standards that have to be met before certification such requirements lack in clarity, uniformity and consistence.

            Indeed a contrast of the United States and Europe not tariff trade barriers reveals that both have varied restrictions to good entering their market. Europe targets agricultural goods emanating from third countries and such goods have to be appropriately labeled if they are organic. Animal products from third countries in Europe have to undergo a rigorous process that increases the cost of production and reduces competition with the local producers. On the other hand the United States has introduced restrictions through issuing standards and labeling requirements that do not conform to the usual international standards.

Works Cited

 Raymond J. Ahearn. Tariffs: Trade Conflict and the U.S.-European Union

Economic Relationship. April 11, 2007. retrieved on October 13, 2008 from

http://italy.usembassy.gov/pdf/other/RL30732.pdf.

Silvia Weyerbrock and Tian Xia, 2000. Technical Trade Barriers in US /Europe Agricultural Trade. University of Delaware. Agribusiness, Vol 16 No. 2, 235 -251.

Joseph M. Grieco. Cooperation Among Nations: Europe, America, and Non-tariff Barriers to Trade.Cornell University Press, 1990, 33-45

Organisation for Economic Co-operation and Development, Indicators of Tariff and Non-tariff Trade Barriers. Organization for Economic Co-operation and Development, 1997; 23-46

Ernst-Ulrich Petersmann, Mark A. Pollack. Transatlantic Economic Disputes: The EU, the US, and the WTO. Oxford University Press, 2003; 13-19

Abstract

There exists vast literature regarding the 1997 Asian financial crisis. Wade (1998) observed that:

Interpretations of the Asian crisis have coalesced around two rival stories: the “death throes of Asian state capitalism” story about internal, real economy causes; and the “panic triggering debt deflation in a basically sound but under-regulated system” story that gives more role to external and financial system causes (Wade 1998, p.1535).

Whereas Wade supports the latter narrative based on the chronology of the crisis, this short paper holds that the combination of both stories caused the 1997 Asian financial crisis, rather than one view point being more significant than the other. The major underlying reasons, which contributed to the crisis, are categorized using the criteria described by Wade. There are some overlaps in terms of the supporting evidence and these further support the paper’s stand. This paper also presents lessons learned and not learned from the experience.

View points on Financial CrisisSupporting Evidence
‘Death throes view’– ‘Excessive government intervention in markets’ and the state-directed Asian market system (Wade 1998, p.1536)– Structural and Policy Distortions- Rapid Liberalization and Deregulation of Financial Markets*- Moral Hazard**
‘Investor pullout/Debt deflation in a sound but under-regulated system’– ‘Self-fulfilling withdrawal of short-term loans, fuelled by each investor’s recognition that all other investors are withdrawing their claims’ due to short term debts exceeding foreign exchange reserves (Wade 1998, p. 1537)– Rapid Liberalization and Deregulation of Financial Markets*- Dependence on Exports- Pegging currencies to the U.S. dollar- Excessive Borrowing and Currency Speculation- Creditor Panic- Moral Hazard**

Introduction

The 1997 Asian financial crisis signalled the end of the Asian Tigers’ “economic miracle.” Prior to the crisis, these Asian Tigers (i.e. Hong Kong, Singapore, South Korea, Taiwan) and Tiger Cubs (i.e. Thailand, Malaysia, Indonesia, the Philippines) were held as role models to developing nations on how to achieve economic growth. Criticisms and doubts about their economic policies were disregarded in favour of their strong growth rates; while financial institutions, including the International Monetary Fund (IMF) and World Bank (WB), showered them with praise (Karunatilleka 1999).

The crisis was triggered on July 1997 due to speculative attacks on the Thai baht. Investors sold-off baht-denominated assets and withdrew dollar-denominated loans to Thai institutions. As a result, the Thai government was forced to float the baht and let go of its peg to the U.S. dollar because it did not have enough currency reserves to support its fixed exchange rate. In the succeeding months, other Southeast Asian countries followed suit as the financial crisis spread throughout the region (Hale, 2011).

By January 1998, the stock markets in many of the affected countries had lost more than 70% their pre-crisis values, their currencies had also largely depreciated against the U.S. dollar, and their governments had to seek substantial financial support from the IMF (Hill, 2003).

What caused the 1997 Asian Financial Crisis?

Many factors are believed to have contributed to the crisis. Some of the very components credited with spurring the region’s economic development were later acknowledged as having inadvertently played a part in the subsequent financial crisis. The following are the factors that merged together to create the perfect storm which resulted in the crisis.

Structural and Policy Distortions

The aftermath of the crisis brought to light several structural and policy inefficiencies that weakened the economic foundations of several Asian economies. Governments often undertook large infrastructure projects to promote economic growth and encouraged private businesses to invest in sectors that are in line with national industrialization goals. Corsetti et al (1999, p.306) pointed out this led to a ‘structure of incentives’ within the corporate and financial sectors and ‘close links between public and private institutions.’ Furthermore, the political pressures to maintain high growth rates, the absence of an effective regulatory business framework, and a culture of crony capitalism resulted in government guarantees for private projects (Karunetilleka, 1999; Corsetti et al 1999).

Rapid Liberalization and Deregulation of Financial Markets

In the years prior to the crisis, the Asian Tigers were praised for its efforts to open up its financial markets. However, on hindsight, experts believe that the development of financial systems had not kept pace with the rapid liberalization and deregulation of financial markets. Lending standards were lenient, government’s supervision and regulation of the financial sector were weak, there was a culture of inter-connected lending, some banks were undercapitalized, and financial safety nets were not in place (Nanto, 1998; Radelet and Sachs, 1999).

Vallorani (2009) gave some insights on the effect of deregulation on the financial sector by pointing out the concept of “hot money” and the high risk-taking that was prevalent in the years prior to the crisis.

Deregulation in the financial sector led to easy money, which caused many speculative and bad loans to be made. It also led to large debt burdens. Since hot money tends to follow hot money, a feeling of “euphoria”, and “I can’t lose” mentality, pumped money into already overvalued sectors, leading to valuations that could not be sustained. It also led to a misunderstanding of the risks involved with these investments.

Dependence on Exports

Export was the main engine that propelled Asian economies to grow. However, the excessive dependence on trade had made these countries vulnerable to currency movements. During the mid 1990s, real exchange appreciations made Asian companies less competitive, especially in terms of labour cost. Additionally, over production and excess capacity led to falling export prices. Rising competition from China and Mexico were also believed to have cast some doubts about the competitiveness, growth prospects, and ability to pay loans by Asian exporters (Radelet and Sachs, 1999; Hill 2003).

Pegging currencies to the U.S. dollar

Since the currencies of most Southeast Asian economies were pegged to the U.S. dollar, the appreciation of the dollar caused the exports of these countries to become more expensive and less competitive (Hale, 2011). At the onset of the crisis, the rising dollar caused these countries to run large deficits to fund their currencies and maintain the fixed dollar rate (Karunetilleka, 1999). As governments failed to maintain the dollar peg, their currencies depreciated sharply against the dollar and contributed to the financial panic (Hill, 2003; Radelet and Sachs, 1999).

Excessive Borrowing and Currency Speculation

The high economic growth of the early 1990s led to an attitude of excessive borrowing – most of which were used to fund real estate projects. The money loaned to domestic firms for these projects were funded by borrowing excessively from abroad. The influx of money to fund these assets caused an economic bubble as real estate prices increased dramatically (Vallorani, 2009).

In the boom years, speculative loans were awarded to firms which were not credit worthy (Vallorani, 2009). As the crisis unfolded, it became apparent that many companies had a huge mismatch between liabilities that were denominated in U.S. dollars and assets that were mostly denominated in domestic currency (Hale, 2011).

Realizing that many firms would be unable to repay their loans, currency speculation began. The Thai baht was the first to fall victim to speculative attacks, as speculators sold the baht based on the belief that the exchange rate could not be maintained (Vallorani, 2009). Other Asian countries experienced the same fate. And in what seems to be a self-fulfilling prophecy, the depreciation of domestic currencies ultimately caused many firms to default on their loan payments, thereby exacerbating the crisis.

Creditor Panic

Corsetti et al (1999) attributes the crisis to panic by domestic and international investors. Radelet and Sachs (1999, p.10) also support this claim. They argued that the expectation of each investor that other investors will pull out their funds caused them to panic and behave in a herd mentality. More importantly, the ‘high level of short-term foreign liabilities relative to short-term foreign assets’ spurred each creditor to leave the country ahead of other creditors because they knew that the last short-term creditor to withdraw funds will not be repaid on time.

Moral Hazard

Radelet and Sachs (1998, p.3) pointed out that ‘over-investment in dubious activities resulting from the moral hazard of implicit guarantees, corruption, and anticipated bailouts’ is one of the main culprits as to why huge amounts of capital suddenly left Asia. In a nutshell, creditors believed that they would be bailed out in the event of a crisis. They felt confident that they would be repaid for lending to companies with close ties to the government, especially for projects with public guarantees.

Prior to the crisis, international banks had poured out huge funds to Asian domestic financial institutions without regard for sensible credit standards. This over-lending practice may have been caused by the presumption that short-term credit liabilities would be implicitly guaranteed by government intervention or IMF bailout programs (Corsetti et al, 1999).

Conclusion: Lessons learned and yet to be learned

Fifteen years after the 1997 Asian financial crisis and the experience still resonates today, especially in the context of the current global financial crisis. Valuable lessons have been learned and continue to be applied to improve economic policies and structures. However, there still remains some important learning that have yet to be realized from the past.

Lessons Learned

Pitfalls of rapid financial liberalization– Rapid financial liberalization caused weaknesses in the financial systems. Well-functioning financial systems require strong legal and regulatory infrastructures (Radelet and Sachs, 1999).
Dangers of fixed exchange rates– Fixed rates make markets very vulnerable to huge shifts and fluctuations when they can no longer be maintained (Radelet and Sachs, 1999).
Mistaken policy interventions– The initial response of the IMF and U.S. treasury exacerbated the crisis in its early stages. This supports the need for a more formal mechanism for international private debt solutions rather than IMF bailouts (Radelet and Sachs, 1999).- ‘Swift government intervention with appropriate monetary policy’ will help to lessen the impact of a financial crisis (Vallorani, 2009, p.17).
Lack of effective mechanisms to stop financial panic– ‘The solution is to develop institutions that can provide more solid foundation for well-functioning capital markets’ (Radelet and Sachs 1999, p.18).
Improvements in market/financial regulations– Regulations are needed to guarantee a ‘level playing field’ and prevent the free market economy to ‘run amok’ (Vallorani 2009, p.17)- Bank regulators should require greater transparency and must have stricter regulations in supervising lending activities (Hale, 2011).
Implement policies to prevent market speculations – Suggest to have a ‘universal tax on currency transactions’ to discourage market speculations- Another option is a fee-based system, whereby private financial institutions create an insurance fund similar to the IMF.(Karunatilleka 1999, p.39)
Updating the policies of IMF and WB– Improving global regulations- Creating a process of active and transparent surveillance for borrowing nations- Creating a code of best practices on social policy issues- Reinforcing international and domestic financial systems- Promoting more widely available and transparent data on member countries economic situation and policies- Underscoring the central role of the IMF in crisis management- Increasing the involvement of the private sector in forestalling or resolving financial crises

(Karunatilleka 1999, p. 39)
Enhancing regional surveillance and participation– Regional organisations (i.e. ASEAN) could provide warning/advise to its member countries who are heading for trouble (Karunatilleka 1999, p. 40).

The current global financial crisis has some significant similarities with the 1997 Asian financial crisis. This is proof that there are still a few lessons yet to be learned to prevent future crisis from happening. The most important lesson that keeps recurring as a major “mistake” in almost every financial crisis is aptly expressed by Vallorani (2009).

The lesson that was not learned is that speculative spending, fuelled by risky loans, leads to asset bubbles, and bubbles always burst. The Asian bubble burst in 1997. The .com bubble burst in 2000. The US real estate bubble burst in 2008. It seems to be part of human nature to chase what is hot, to chase the next “I can’t lose” investment, to not want to be left out when everyone else is making easy money. When greed takes over, bubbles are built. Unfortunately, when they burst, they take everyone with them (Vallorani 2009, p.18).

References

1. Agenor, P-E, Miller, M, Vines, D, Weber, A (1999). The Asian Financial Crisis: Causes, Contagion and Consequences. Cambridge United Kingdom: Cambridge University Press. p9-28.
2. Corsetti, G, Pesenti P, Roubini, N. (1999). What caused the Asian currency and financial crisis?. Japan and the World Economy. 11 (1), 305-373.
3. Hale, G. (2011). Could We Have Learned from the Asian Financial Crisis of 1997–98?. Available: http://www.frbsf.org/publications/economics/letter/2011/el2011-06.pdf. Last accessed 17th Sep 2012.
4. Hill, C. (2003). The Asian Financial Crisis. Available: http://www.wright.edu/~tdung/asiancrisis-hill.htm. Last accessed 17th Sep 2012.
   Karunatilleka, E. (1999). The Asian Economic Crisis. Available: http://www.parliament.uk/documents/commons/lib/research/rp99/rp99-014.pdf. Last accessed 17th Sep 2012.
5. Moreno, R. (1998). What caused East Asia’s Financial Crisis?. Available: http://www.frbsf.org/econrsrch/wklyltr/wklyltr98/el98-24.html. Last accessed 17th Sep 2012.
6. Nanto, D. (1998). The 1997-98 Asian Financial Crisis. Available: http://www.fas.org/man/crs/crs-asia2.htm. Last accessed 17th Sep 2012.
   Radelet, S, Sachs, J. (1999). What Have We Learned, So Far, From the Asian Financial Crisis?. Available: http://www.cid.harvard.edu/archive/hiid/papers/aea122.pdf. Last accessed 17th Sep 2012.
7. Radelet, S, Sachs, J. (2000). The Onset of the East Asian Financial Crisis. In: Krugman, P Currency Crises. Chicago: University of Chicago Press. p105-162.
8. Wade, R. (1998). The Asian Debt-and-development Crisis of 1997: Causes and Consequences. World Development. 26 (8), 1535-1553.
   Vallorani, E. (2009). 1997 Financial Crisis. Available: http://www.avanti-is.com/PDF/1997%20Asian%20Financial%20Crisis.pdf. Last accessed 17th Sep 2012.

Introduction

This purpose of this document is to discuss the trade between McDaniel’s Commodities UK Ltd and Yamaha Koshimoto (YK) Impex Japan. The document specifies the seller’s conditions for the completion of the export of dried cassava chips to YK Impex Company. The transportation method, payment terms, required documentation and other important inputs, processes and terms needed to accomplish the trade between both parties would be discussed. Each of the clauses in the following sections contains discussions on the conditions and requirements for the trade between the two parties.

Clause No. 1: Commodity and Country of Origin.

The commodity concerned is processed dried cassava chip pellets used for the production of industrial starch, and the country of origin is the UK. According to Barbrow and Judson (1976) and the international system of units, the best way to measure commodities in international trade is through Metric Tonnes (MT). Metric tonne is equivalent of 1000kg. As a result therefore, all weight measurement concerning the trade shall be measured in metric tonnes.

Clause No. 2: Product Specification

The specifications of the Cassava chips referred to by the seller meets buyer’s requirements: the following are the criteria which specify the seller’s offer. As noted by WTO (2008) one of the challenges of global trade is meeting product specifications given the technicalities, barriers, standard problems and issues of safety, therefore for trade to be successful, seller’s must ensure that they meet adequate standards even where it is not stated in trade agreements.

The physical test:

(A)- The product is free from smell and other radioactive materials.

(B)- The chips are dried, cut into sizes and free from foreign matters.

(C)- It is free from any insects or Animals.

(D)- It is free from any solvents or chemicals used during extraction and processing.

The Product Specification

1. StarchMinimum 75%
2. Moisture:Maximum 11%
3. FibreMaximum Content 3%
4. SandMaximum 2%
5. SkinPeeled and Pelted
6. Crop year2010-2011
7. SizesIrregular

Shipment and Packaging

Given that the product would be required in hundreds of metric tonnes and in light of their fragile nature, all shipments are to be arranged in bulk bagging of 100 Kg each. It would be shipped in 40 ft containers provided by the shipping company.

To ensure that the shipment and packaging meets the international standards, the seller would ensure that it is accordance with (INCOTERMS 2000). Incoterms according to Morrissey et al (2000) are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) widely used in international commercial transactions.

Clause No.3: Transportation

Maersk, which is known as the foremost global shipping company will be used as the shipping commodity to handle the cargo and the shipment will be in ther the following order.

The commodity will be shipped via sea from the Felixstowe port of UK to the Port of Hakata in Japan. Further transportation upon clearance at the port shall be arranged from the port by the buyer.
SELLER and BUYER shall mutually appoint internationally recognized first class independent surveyor company SGS/CIQ at both the loading port and unloading port to assess and certify the quality and quantity of the cargo according to the provisions herein started. Costs of the inspection will be shared equally by the seller at loading port and by buyer at unloading port, as per surveyors invoice.

Clause No. 3: Payment Terms.

The payment shall be by irrevocable, transferable, confirmed, documentary letter of credit payable 100% not later than 60 days against presentation of shipping documents. To ensure safety in the payment arrangement it is commonplace as noted by Pierreand Stewart (2010) to comply with incoterms arrangement with regards to payment and as such the following must be ensured.
The Buyer shall open a non operative confirmable, irrevocable, transferable; auto revolving Letter of Credit (L/C) within 7 working days after final signing of agreed sales and purchase agreement by both parties. The LC shall be subject to UCP 2007 revision, ICC publication NO. 600 cover 100% of the total contract value in favour of the seller
Buyer’s letter of credit shall comply with other terms of uniform customs and practice (UCP 600) issued by (ICC).
The buyer’s letter of credit payment value shall be only for the net cassava quantity actually delivered to the discharge port and upon the shipping documents submitted by the seller to the buyer’s bank.
The buyer’s bank shall issue the operative Letter of credit only in favour of the seller’s company which signed the final contract with the buyer’s.
All official communications between the seller’s bank and the buyer’s bank shall be by:
Society for Worldwide Inter-bank Financial Telecommunications (known as S.W.I.F.T.).
Before the shipment of any part of the contract seller shall confirm that all forms of payment are satisfactory and conforms to legal standards.
In case the BUYER’s letter of credit is delayed and seller is not able to receive payment as a result of the buyer’s bank fault or the buyer or any of its agents. The BUYER will pay a penalty to the SELLER at rate of 0.1% for each day of delay but not more than 2% of unpaid amount.

Clause No. 4: Required Shipping Documents

All shipping documents shall be original and written in English language only.
The INCOTERMS does not permit that carbon copies of documents should be acceptable by the Seller as it might create dispute, therefore all documents must be original.
The sellers agrees to provide insurance certificate covering all shipment risks issued by the buyer’s favour through a known global insurance Company in the value of (110%) one hundred ten percent.
Analysis certificate of the shipment issued by seller: this would include all the technical specifications of the commodities produced by the party or an official party on the seller’s behalf.
Signed commercial invoices issued by the seller in the Buyer’s name with reference to commodity description, contract type buyer’s name (Letter of credit number & Issuance date as well as unit, price quantity, value and date.
2/2 of Bills of Lading (B/L) originals and copies) signed and stamped by the vessel’s captain and marked “clean on board”, indicating the vessel’s name and address of the vessel’s owner, vessel’s master name, loading port and date, contract number, buyer’s (letter of credit) Number and issuance date.
Certificate of Commodity Inspection and Quarantine issued by Defra UK
Two original and copies of certificate of origin issued and authenticated by the (Department for food, forestry and Agriculture: UK) or its representative.
Two original and 2 copies each of the inspection certificates issued at the loading port Confirming product specifications, quality, packing and that the shipment in line with the contracted specs in clause 2.
Insurance certificate covering all shipment risks issued in favour of EXW by prime insurance Company in the value of (110%) one hundred ten percent of the (letter of credit value issued in US dollars.
Two original and two copies each of certificate of origin issued and authenticated by the UK Defra at the port of origin
Two originals and two copies each of official shipping advice issued by the seller’s shipping company showing in-depth details about the shipment such as: vessel’s sailing date, vessel’s name / registration date & number / age/ nationality/ flag, name of Loading and Delivery port, name of shipped goods, (SGS) tests report at the loading port, name and address of the buyer’s company, name of the vessel’s captain, invoice date and value, oil country of origin, bill of lading date and number, contract number, net quantity loaded, voyage itinerary and vessel’s estimated time of arrival (ETA) to the delivery port.
Beneficiary’s certificate confirming that all original shipping documents were sent to the buyer’s bank by international courier services (as Fedex or any express courier).
Any other payment documents stated in the buyer’s letter of credit letter of credit
The original shipping documents shall be sent at seller’s account to the buyer and to the buyer’s bank via approved courier services (as DHL or equivalent) as soon as possible to match the vessel’s Final arrival date to the delivery port.
The original shipping documents for all shipments shall be presented to the buyer’s bank within the Validity period of the buyer’s operative (letter of credit).
The Seller shall notify the Buyer of the expected date of arrival at discharge port within 120 hours after the completion of the loading. The Seller shall require the tankers Master to advise the Buyer and ship Owners Agent at the port of discharge, the ships estimate time of arrival (ETA), its name, tonnage, flag, draughts, loaded quantity in every holed, etc. at least 144 hours before her arrival of the destination port.

Clause No. 5: Raising Finance

With respect to finance for accomplishing the trade, both parties will be under financial obligations to ensure that the trade is accomplished. This would require that each party must have available finance obtainable. On the Seller’s side, the payment required would be that to pay shippers, insurance, inspectors, local transportation, shipping documents, administration and shipment given that the arranged INCOTERMS is C.I.F. Similarly, the buyer will be under obligation to pay for transportation and the C.I.F cost. For the seller in particular the most feasible and preferable option would be through short term trade finance. According to Humphrey (2009) short term trade finance are always available to exporters when they have sufficient evidence to demonstrate that they can fulfil a particular order and has the capacity. Humphrey points out that although banks usually assess risks of the trade and the fitness of the exporter to fulfil the terms before granting short term finance. However, since such terms can be fulfilled by the Seller given the product availability, it is likely that such finance would be accessible from the bank. Usually, short trade finance must be paid within 6 months therefore, since the payment arrange with the buyer would be within 60 days L/C maturity, no problem with regard to raising such finance is anticipated. Failing this however, the UK trade and investment short term finance program would be tapped into for financing the trade while other Angel investors would be explored. For the buyer, the most feasible payment option is to finance the trade by lodging cash in the bank in order to be entitled to a sound and reliable letter of credit. Or otherwise, the buyer can set up a payment plan with its banks by giving proof of through its previous financial records that payment would be returned to the bank upon receiving and selling the product.

Clause No. 6: Business Procedure.

• The buyer signs, seals and sends the final contract to the seller as e-mail attachment.
• The seller signs, seals the final contract and sends it back to the buyer within (3) three days by fax or email attachment.
• The paper copy signed and sealed by both parties and sent by DHL or equivalent expedited courier shall be deemed the original contract.
• Within (3-7) Three to seven banking days from the signing of the final contract, the buyer’s bank shall send SWIFT a pre advice to the seller’s bank confirming the presence of a non-operative letter of credit covering the value of the quantity.
• The buyer and the seller are fully committed to execute the signed contract upon established terms.

Clause No. 7: Delivery Terms.

• The date of the bill of lading (B/L) shall be considered the date of shipment and shall be within fifty to sixty days.
• Discharge rate and demurrage charges shall be the buyer’s responsibility.
• The delivery port is Port of Hakata, Japan.
• The seller’s shipping agent shall notify the buyer and the buyer’s shipping agent at the delivery Port by e-mail attachment the information about the vessel’s position (7) seven days, (72) seventy two hours and (24) twenty four hours of the vessel’s final berthing.

References

1. Barbrow, L.E.; Judson, L.V. (1976). Weights and measures standards of the United States – A brief history
2. Humphrey, J. (2009). Trade financing: Available at: http://voxeu.org/index.php?q=node/3507 Accessed: 3rd of May, 2012
3. Morrissey, M. Joseph F.; Jack M. Graves, K. (2008). International Sales Law and Arbitration: problems, cases and commentary. Kluwer Law International. p. 23
4. Pierre D. Stewart, R. (2010). International Logistics: the management of international trade operations (3rd ed.). Cengage Learning. p. 113.
   The International System of Units (SI) (PDF), 8th Edition, 2006, Section 4.1

INTRODUCTION:

Textiles and Clothing (T&C) industry is one among the important industries and the major source for the trade in the both developed and developing nations. This sector is mainly depended on the skilled as well as unskilled labour with a highly innovative, design development with product quality and many competitive factors involved. To overcome the problems in the trade, an international organization which was developed named General Agreement on Tariffs and Trade (GATT)[1]. From early 1940’s it’s rooted for helping in the developing the trade between the countries and it adopted a Multifibre Arrangement (MFA) in 1974[2], especially as the textiles sector was out of the GATT rules. MFA was initiated for the development of the trade in textile and clothing and gave a chance to the restricted quota system. And it has gone through four refinements until 1994[3], after that the Uruguay-GATT negotiations leads to the end of the MFA by replacing with the Agreement on Textiles and clothing (ATC) in 1995 to eliminate the quota system with the 10 year transitional period.[4]The initiation of ATC is for the integration of GATT 1994 rules to the textile products, various products coverage and some of the implications like Anti-dumping, and rules of origin during the period of ATC to the member nations.[5]

This assignment aims critically evaluating the need of the special arrangements under the rules of WTO and the evaluation of the implications of both MFA and ATC to the member nations and the problems which arose after the phase-out of ATC.

1. ROLE OF GATT AND WTO IN TEXTILE SECTOR:

General Agreement on Tariffs and Trade (GATT) is formed in 1947 to create a platform to negotiate the world trade problems.[6] The main aim of the GATT is to promote the free trade without discrimination, reduction of trade barriers and elimination of all restrictive trade practices such as anti-dumping or counter-vialing duties.[7] Textile sector remained outside the GATT disciplines for many decades and from early 1960’s some of the rules were designed with the negotiations for the trade regulations on textile products.[8] Multilateral trading system under GATT which helps in development of economic, trade benefits and reducing trade barriers.

From the year of 1974, the world trade in textiles and clothing were under the control of Multifibre Arrangement (MFA) by which bilateral agreements or unilateral actions were initiated and the quota system on the exports and imports of the textile and clothing sector between the developed and developing nations were taken place.[9] Mainly the basic principle of GATT i.e. without discrimination which was discussed in the ‘Article 1 of GATT is Most-favoured nation (MFN)[10]’ which was not followed during the period of MFA[11].

After the GATT- Uruguay round meeting in 1994 leads to the initiation of the transitional instrument Agreement on Textiles and Clothing (ATC) were came into force for the demolition of the quotas on the restriction quantities[12].

“Textile and clothing was one among the important and economically gaining sectors in the South Asian Association for Regional Cooperation (SAARC) in terms of its contributions towards the nation’s Gross domestic product (GDP) by creating employment and the development in exports”.[13] Hence it can be said that Textiles and clothing can be eventually linked up with the technology and trade policy, as some of the developing countries like Vietnam, Bangladesh, Honk Kong, Sri lanka and India were experienced a high growth within this sector.[14]

2. Multifibre Arrangement (MFA):

The period after the world war – II was crucial and all the countries were more attentive towards the world economies. Textile and clothing sector is the path of helping some of the countries like Japan, United States and United Kingdom at the early stages of industrialization.[15] Because of its importance to the developing nations the international trade of Textiles and clothing products has been subjected to trade restrictions for many years. Japan and United States negotiated for the Voluntary export restraints (VER) in 1957 to control the quantity of textiles entering the United States markets in order to avoid the market disruption[16]. These Voluntary export restraints are developed outside the principles of GATT which was established in 1947.[17] VER’s are contrary to the principles of GATT which was mentioned in Articles XI[18] and XIII[19] which are against the export and import quotas.[20] Though these VER’s were successful for controlling the textile imports from Japan, but still United States were facing the problem of market disruptions by the exports from other countries like Taiwan, India and Honk Kong which were already in high textile production.[21]Hence these problems with some of these importing countries led to the negotiation of the Short-Term Arrangements (STA’s) under the arrangement of the GATT in 1961[22] and it was followed by a Long-Term Arrangement( LTA’s) on cotton textiles in 1962.[23]These Long-Term Arrangements was chosen to control the market disruption which was signed by 33 countries and was renewed two times for every five years up to 1973.[24] In the year of 1974, the trade in textiles and different types of apparels has been subjected to the international Trade in textiles leads to the formation of Multifibre Arrangement (MFA).[25]

3. IMPLICATIONS OF MULTIFIBRE ARRANGEMENT:

3.1. Exporting countries:

Multifibre Arrangement (MFA) was effective from 1974 to 1994 which was extended for 4 times, and which was taken chance of restricting the trade of bilateral quotas and prices of the Textile and Clothing sector (T&C)[26]. With these issues of the restriction of quotas has a strong impact on the developed and as well as developing countries[27]. Many of the negative and positive approaches were discussed whether about the loss and gain of the Arrangement. According to the argument of Keesing and Wolf is that the economies of the countries like Honk Kong, Korea and Taiwan were affected earliest by the quota restrictions as they have the major share of exports to the developed country markets, have relatively high per captia incomes and wage rates[28].With this issue, it can said that the developing countries would not seek to the termination of Multifibre Arrangement (MFA) because of they should have to face the loss of ‘quota rents’[29].

During the early stages of MFA the major share of the Textile exporting is mainly occupied by the developing countries and it was gradually increased until the final extension of the MFA in the year 1987[30]. J Goto explained that the developing countries occupy the share of 50 percent in the Textile and clothing exports and the 18 percent in manufacturing during the year of 1987.[31]From 1967-87 the exports of Textile and Clothing (T&C) were substantially lower than that of manufacturing exports[32].So, it can be argued that the MFA restrictions are the only cause for the decline of the Textile and clothing exports as the developing countries shift towards the consumer electronics and machinery.[33]Some of the arguments which said that the exporting countries under the free trade system or a global quota system, the new and small suppliers would be squeezed out of the international markets because of the size and higher productivity of the exporters.[34]Textiles and clothing imports from the developing countries are related to the Nontariff barriers (NTB’s), as that the MFA restrictions are imposed only on the low-cost suppliers rather than the industrially developed countries.[35] UNCTAD concluded that the developing countries can increase the export of Textile and clothing to the United States, European community (EC) and Japan by US $15 billion if all the Tariff and Non-tariff barriers were removed.[36]

Because of these discriminatory restrictions by the MFA on the exporting countries, it can be argued that it has a strong impact on forgone export revenue ,quota rents and also the it didn’t gave a chance for the new Textile and Clothing exports to grow into major suppliers.

3.2. Importing Countries:

Under the Multifibre Arrangement (MFA) there is a big impact on the domestic producer in the importing countries, as the quota restrictions may give the chance to sell their products at higher prices.[37] As per the report by Jenkins stating that Canada gained US $240 million during the year of 1979 which is equal to about half the cost to consumers.[38]Hence it can be stated that the quota protection of the Textile and Clothing affects the domestic markets of the importing countries. Goto.J explained that there is loss to the consumers in the price issues and the chance of creating jobs in the importing countries was very low.[39]

Mast Industries, INC., v United States (1987):[40]

Mast industries were exporting the fabric into the United States which was produced in the People Republic of China (P.R.C) in unfinished form and then they were processed in Hong Kong before the products reaching United States. Customs of the United States disagreed with the entry visa for the goods mentioned that the products of P.R.C, claiming the lack of proper visa from which the products of ‘country of origin’. And the Judge Carman noted, during the prior case law of Mast Industries, Inc. v. Regan (1984) ‘the regulation in issue was adopted to provide guidance in the absence of judicial or legislative direction’ on the subject of “country of origin” for textile quota purposes. And Mast challenged the validity of these regulations as, inter alia and opposite to prior case law. US stated that the case, Cardinal Glove Co. v. United States (1982), was considered a threat to the future administration of the trade agreements in the Federal Register[41]. And the outcome of this case is against the Mast Industries with the interpretation of the Cardinal Glove Co. v.

United States, as the dyeing and printing is the major steps involved in the production of textiles and they were held out of the exporting country.

Some of these case laws clearly says that the Multifibre Arrangement were out of the GATT rules as the primary aim of the GATT which was stated in Article 1 of GATT principles i.e. Non-discrimination were missing.

4. Agreement on Textiles and Clothing (ATC):

On January 1, 2005, the role of quantitative restrictions which had been limiting the Textiles and Clothing (T&C) has come to an end with the Uruguay round of negotiations which held in 1994 with the establishment of World Trade Organization (WTO)[42] and initiation of the Agreement on Textiles and Clothing (ATC).[43] MFA was replaced by the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC), which was setup a 10 year transitional period for the quota phasing out.[44] ‘Agreement on Textiles and Clothing (ATC) is not an extension of the MFA’.[45] Rather, it is a transitory regime between the MFA and the full integration of the Textile and Clothing into the multilateral trading system.[46] The stages of quota elimination were outlined in the Article 2 of Agreement and from then textile sector was fully integrated into the GATT rules, so that there is no scope for the discrimination between the exporters.[47]In order to monitor the implementations of the Agreement, Textile Monitoring Body (TMB) was set up with the panel of 10 members which was outlined in the Article 8 of the ATC.[48] TMB looks after all the functions and the consultations for the bilateral agreement reports between the member nations will be organized[49].

5. IMPLICATIONS OF AGREEMENT ON TEXTILES AND CLOTHING:

Agreement on Textiles and Clothing (ATC) was not effective during the initial stages of the quota elimination as the choice of products which they want to integrate into GATT rules were left to the choice of importing countries according to the Article 2[50] of ATC.[51]According to the Baughman it can be argued that the liberization of items such as dolls, clothes parachutes and seat belts were listed in the initial stages of ATC in USA.[52]So, that the high valuable products were kept on hold for the final stages. USA published the product details which they going to eliminate were listed in the final stage and after that they initiated the protective measures like Transitional Safe-guards, anti-dumping and the rules of origin.[53] During the early stages of ATC the textile trade in the developed countries was occurred from the specific countries through their regional trade agreements like Mexico (NAFTA) and Caribbean basin (CBI) by the United States.[54] According to the report of the 2002 World Bank, says ATC received great expectations from developing countries, especially from which the exports are restricted, and it was even expected that the transition period can create at least 20 million new jobs due to the trade liberization.[55]

5.1. Transitional Safe-guard measures:

According to the Article 6[56] of ATC and under the Article XIX[57] of GATT, members were allowed to use the Transitional safe-guard measures when they observe any serious damages in the importers domestic markets. During the early years of ATC, there is an evidence of abuse of Safe-guard mechanism by the United States and from then it was diverted to the Latin American countries.[58] And some of the cases which involved in the implementation of safe-guard provisions were between the India and United states regarding the measures implemented on the imports of women’s and Girl’s wool coats in 1996. This case reached the DSB for the settlement and the measures were been withdrawn on India by the mutual understanding (DS 32).[59]Case between India and United States regarding the measures implemented on woven woolen shirts and blouses from India. Consultations between both the countries were not successful leading case towards the Appellate Body and advised United States to withdraw the measures on India (DS 33).[60]In December 1998, United States requested for the consultation with Pakistan regarding the importing of combed cotton yarn and they fail to reach the final stage of mutual understanding. After the case was before the Textile monitoring body and after reviewing the case, they were no sources saying that the domestic markets were affected with the exports of Pakistan. United States were failed in demonstrating the affects and TMB advised United States to withdraw the measure Pakistan in June 1999. Even though, united States were still restricting the exports so that the Pakistan approached the Dispute Settlement Body of WTO. And the final conclusion of the panel was in favor of the Pakistan[61]. According to the Kim S, United States is the only abuser of Transitional safe-guard measures on the exporting countries which recorded 8 cases and 3 of them approached the Dispute Settlement Body.[62]Hence, it can be argued that the USA transitional safe-guard measures were violating the Article 2[63] and 6[64] of ATC.

5.2. Anti-Dumping:

The Agreement on implementation of Article 6 of GATT 1994 is said to be the Anti-dumping Agreement.[65] In the early stages of ATC, European commission has been the highest user of anti-dumping provision.[66] There are almost 72 investigations in between 1994-2004 which involved in restricting the exports from developing countries[67]. Case between India and European commission went to settlement to the Dispute settlement Body (DSB), challenging the bed linen from India causing the market disruptions with the prices. And the panel report was in supporting the India stating that the measure was illegal. By that time the export market in India had fallen from $127 million to $91 million during 1998-2002. According to the Oxfam report of 2004 stating that, It result in the 1000 jobless in the southern part of India, where the place of major production of Textiles.[68]

5.3. Rules of Origin:

‘Rules of Origin’ are laws, regulations and the administrative procedure which helps in finding out the origin of the imported products.[69] Some of the cases stating that the exports from different countries has been restricted due to the lack of proper origin place of textiles. During the early stages of ATC these cases were in between the developed countries and it came to developing countries gradually. First case on Rules of Origin was registered between European community and United States in 1997, stating that the European exports were affected by the rules of origin implementation by the United States. Both the countries accepted for the mutual consultation and they mutually agreed for the exports (DS 85).[70] ‘Rules of Origin’ are used as an instrument in protecting the domestic markets in the countries like United States it has been widely used.

6. PROBLEMS AFTER THE PHASE OUT OF ATC:

On January 1, 2005 the quantitative restrictions which had been limiting the trade in Textiles and Clothing (T&C) from the past 40 years has been eliminated. Trade liberization mostly took place in the beginning of 2005, which may helpful in gain of profits in the future.[71]

6.1 Flow of Global trade varies:

According to the statistics of the International Trade given by the WTO says that India and china will almost double their market share after the phase out of ATC and also stated that the china is the single largest exporter of Textiles to the European Union.[72] Turkey occupies the 13 percent market share in textiles before the ATC phase out and china with 12 percent in the European Union[73]. After that china occupies the first place with 12 percent in Textiles and 29 percent in Clothing.[74] Even the market share after in exporting of Textiles and Clothing (T&C) were occupied by china in the United States with 18 percent and 50 percent after the ATC phase out.[75] The list of exporters remained the same but the market share they occupied after the phased out have been changed. Factors which helping in taking the china to the top in Textiles and Clothing (T&C) is because of the low cost wages when compared with the labour costs in other countries and a strong productive capacity in man –made fibers.[76] WTO report of 2006 says that the Textile exports from Asia to Africa, Europe and North America increased by 14percent to 20 percent after the quota expiration. According to the Adhikari, numerous studies told that the re-imposition of quotas even after the quota system phasing out by some developed countries as well as some developing countries on the Textile and Clothing (T&C) on china by accessing the temporary safe guard measures during the accessing to WTO.[77] Some developing countries like Morocco, Dominican Republic, EI Salvador, Guatemala and Honduras which have the market access to the United States with some bilateral trade agreements have recorded the fall of export rate in 2005.[78]

6.2. Human development impacts:

During the period of 2006, small exporters from the Asia- pacific region were highly in deep troubles with the expiry of quotas. It can be argued that the readymade garment manufacturers in Fiji islands were hardly hit and it shows the negative impact on the employment of 6000 workers lost their jobs according to the report of Asian development bank in 2006. [79]Some of the countries like Maldives, Mongolia and Nepal were hardly hit by the quota phasing out as the investments form the foreign investors were decreased and the industries in those countries were closed.[80] According to the Adhikari and Yamamoto the closure of factories in small countries due to problems with supply and as a result thousands of jobs was lost in Fiji, Maldives and Mongolia.[81] Unemployment rates in the small countries were gradually increased especially in Maldives, as the flow of investments was sharply decreased according to the report of Ministry of Planning and National Development. In Bangladesh in the post ATC the working hours were gradually decreased in the Readymade garments industry and the demand was high which were in negative to the workers were the food supplements which they get during the working hours were reduced due to the legalization of the working hours with the pressure from the buyers.[82]

7. CONCLUSION:

The trade in Textile and Clothing (T&C) were being the major source for developing countries in the revenue generating for almost 40 years. Such trade of T&C plays a crucial role in developed and as well as developing countries. GATT rules were provided for the trade and then as the scope of textile sector has been observed and it gave a chance to ‘Multifibre Arrangement (MFA)’. Restriction of the Textile and Clothing (T&C) exports from developing countries were observed for almost 20 years by the way of quota system, and it was completely out of the GATT principles such as ‘Most favored nation (MFN)’. During the period of MFA both the developing as well as the developed countries suffered with the quota system of restrictions. After the Uruguay round of negotiations World Trade organization (WTO) adopted the Agreement on Textiles and Clothing (ATC) to fully integrate the GATT rules and the elimination of the quota system and for the purpose of Trade liberization. ATC was somehow successful as some of the important products were kept on hold until the last stage of elimination. Even though some measures like Transitional Safe guard provisions, Anti-dumping and rules of origin were in force at that time in order to protect the domestic market of importing countries.

During the period of ATC, European community is the highest user of ‘Anti- dumping’ measures, United States were the major user for ‘Safe-guard measures’ and ‘Rules of Origin’ to control the excessive flow of T&C products. After the phasing out of quota system, china became the world leader in T&C exports to different countries occupying the major share of markets. Some developed countries like United States and European community used the Safe guard measures on the China exports and even bilateral agreements have been taken place between china and developed countries. So, the way of discrimination can be seen even after the phase out of quota system with the china issues. With this it can be clearly observed that loopholes in the rules and regulations of the GATT and WTO which gave a chance for many countries to restrict trade of T&C products.

It can be argued that even some countries did well after the quota system elimination but some of the countries suffered a lot and should need to be improved in the human development prospective. WTO must revise all the rules and regulations and should make a path to fair trading system. Developed countries and the international systems should give a chance for the developing and least developed countries to grow in trade without discrimination.

9. BIBLIOGRAPHY:

Official materials:

Adhikari, R., and Y. Yamamoto, “Sewing thoughts: how to realise human development gains in the post-quota world”, (2006) Tracking report (April), UNDP RCC APTII, Colombo.
GATT (General Agreement on Tariffs and Trade).1984, Textiles and Clothing in the World Economy, Geneva, p 68.
India & the WTO, ‘Market access & meaningful integration – key issues for India’, (Aug 1999), Vol.1, No.8, Ministry of commerce (India).
Keesing, D.B., and Martin Wolf, ‘Textile Quotas against Developing countries’, (1980) Thames Essay No.23, London: Trade Policy Research Centre.
Oxfam, “Stitched up: how rich country protectionism in textiles and clothing prevents the poverty alleviation”, Briefing Paper 60(2004).
Training module on Trade and Textiles and clothing; ‘The post – ATC context’, United Nations Conference on Trade and Development (UNCTAD)(2008).

< http://www.unctad.org/en/docs/ditctncd200519_en.pdf > accessed on May 10 2011

UNTCAD (United Nations Commission on Trade and Development, 1986, Protectionism and Structural Adjustment, Geneva: United Nations.

Books:

1. Paul J, ‘International business’, 4th Edition (August 2008)

2.M Sharma, ‘Textile industry of India and Pakistan’, S.B Nangia and A.P.H, (2006, New Delhi)

Journal articles:

Baughman,L., R. Mirus, M. Morkre and D. Spinager, ‘Of tyre cords, ties and tents: window dressing in the ATC’, (1997) vol 20(4), World Economy: p 407-437.
J Goto, ‘The Multifibre arrangement and its effects on developing countries’, (1989) vol 4(2) World Bank Res Obs, p 203-227.
Kim, S.J, ‘Agreement on Textiles and clothing: safeguard actions from 1995 to 2001’, (2002), JIEL, 445.
McClenahan W, ‘The growth of Voluntary Export Restraints and American Foreign Economic Policy’, Business and Economic History, (1991) 2nd Series, vol 20, Business History Conference.
Malaga.J, Mohanty.s, ‘Agreement on textiles and Clothing: Is It a WTO failure’, (2003) vol 4 no1, The Estey centre JILTP, P 75-85.
Susan B. Hester, ‘The impact of international Textile Trade Agreements’, (2007), International Marketing Review, p 31-41.
Heron T, ‘the end of Multifibre arrangement: A development boon for the south’, (2006) vol 18 No1, EJDR.

Websites:

www.imf.org
www.unescap.org
www.wto.org
www.unctad.org

Introduction:

WTO (World Trade Organization) agreements consists of the rules and regulations and having fair trade practices framework with the developing countries of the world. In order to face multilateral negotiations and to cope up with the failure of Doha Round. The multilateral trade system was a great achievement that advanced a framework for the WTO/GATT international trading. However, the conflicts of member’s interests, RTAs have become the only remedy, where nations can seek to apply their views via direct negotiations. Ultimately the success depends on the success of Doha Round, developing countries fails to achieve their objectives under the RTAs framework and bilateral deals. Finally it has been analyzed that the rules set under the RTAs were proper but the regulation was on weaker side. The RTAs and WTO relationship has been controversial and much disputed as a matter of lack of regulation among the fair trade practices. Taking into consideration the proper valuation of the goods the amount of duties paid should also be counted. Lastly in this essay we look towards most beneficial acquisitions to promote unfair and equitable foreign trade practices.

Describing WTO:

A word WTO is known as the World Trade Organization which is very helpful to the trading business around the world. Nowadays most of the countries are being benefited by the trading agreements which are having their own different types of regions[1]. Earlier the regions and the international bodies were treated very softly with a view to have mutual cooperation to the financial business. But the time when RTA has been increased, it has put a competition with the trade structure. WTO came into practice from 1995 due to which agreements has been treated fairly and smoothly. It was formed so as to have track on all joint venture trade and agreements which were being done among the associates, side by side support was being given to the newest trades. As such many precautions have been taken care of so that any disputes should not come among the different nations. All the previous agreements which were formed by different countries were being continued with the new agreements also. World Trade Organization also plays an important role to keep a check on all regions so that there should not be any unfair trade practices being used with the agreements[2].

The agreements helps the other nations to remove the poverty line by taking different measures which helps the workers to benefit in terms of their health, family and also by providing good training so as to come out from their poverty line.

The WTO agreements consists of the rules and regulations and having fair trade practices framework with the developing countries of the world. Every country has different rules and regulations as such WTO takes care of all nations.

There are approx. 150 countries are the member of WTO and among them around 2/3 members are developing countries. Those developing countries play an important role in the WTO due to their strong economy and consider trade as a one of the key for the economy development. There are several difference as concern to their individual views exist among the developing countries. So followings are the special arrangement for the developing countries:

Existence of the special provision for the developing countries under WTO agreements.
There are special committees as concern to Trade and development, focus on those special provisions and there are other area like technology transfer, trade and debt, which are dealing with some other committee.
Technical assistance related training and development backed by Secretariat of WTO for the developing nations.

The obligation of procedural fairness of WTO has two different aspects. The first explained that the obligation imposed within dispute settlement system, which protects the fairness among the parties in the processing. The other, member of WTO are obliged to ensure the fairness practice in their country’s legal system; it could be referred to GATT Article X: 3(a), which state that all the norms and regulation mentioned under Article X: 1 should be strictly scrutinize in a proper manner. Although, the above mentioned obligations are very important and it could also be subject to WTO dispute settlement proceeding.

In this essay, there are some problems which are been faced when the rules and trade practices are being implemented on different nations. In this we cover all the briefs of WTO; all the problems which are related to the developing nations have been resolved through WTO rules and guidelines[3].

Review of World trade organization

For the development of the economy, international trade barriers are been incorporated to provide promotional support to the developing nations. During the formation of International Monetary Fund, a proposal was been submitted by United Nation[4] and formulation of plan was been done with economics and social council acknowledge so as to regulate the plan in International Trade Organization ,started just after World Bank and IMF in 1945. US and UK has got a very sophisticated picture towards the fair trade in the beginning, just after sometime United Nation have been settled for mixed and different rules and regulations, o the other hand United kingdom Government followed proper rules and regulations so as to run in an proper manner.

WTO and various trade agreements share the same rules and regulations as such they were regulated by strict policies. Mainly there were some clear exemptions of various trade agreements as compared to WTO. RTA and other agreements from the trading organization created a discriminatory issue for other members. The regional trade agreements moved very hastily just after article XXIV came through which other trade organizations has grown significantly.

Fifty four bodies signed the treaty that worked for the debate for various rounds held at Havana. As ITO does not come under the Trading agreements as states of UNO, it never participated while voting for ITO bodies, and ignores by few regulatory bodies[5].

The negotiation which took place in 1948 involved various rounds and at UN Conference in Havana(Cuba), 54 countries signed the negotiation. The main objective of ITO’s was to encourage more international economic growth and the flow of trade internationally, which also consider agreements of commodity, provisions for employment, investment opportunities and eliminating risky business practices. The major factors which ITO constitutes and concentrated was to increase the flow of international trade by performing trading of various goods and services and to boost up the global economic growth. Proper procedures were established to measure the performance of provisions made for employment, limiting trade practices, agreement of commodity and various methods of investment. Because of all this ITO was not in the minds of different bilateral participating nation in the trading[6].

The actual predictions on epigrammatic agreement and trade organization kept a regulatory check on it proved by General agreement on Trade and Tariffs. After the disintegration of the ITO, GATT has been emerged as a multilateral instrument for handling the international trade. Since, GATT transformed as an international body, which has been expected by UN system to function as a specialized agency[7].

Handling the issues over trade , trading was increased as well as the tariffs set were comparatively lower than the other trade practices, thus playing an important and pivotal role in forming a powerful and useful approach all over. Some set of rules and regulations was to be followed by the endorsed countries. A deep refurbishing was required by the system in 1980’s which gave rise to a Uruguay Round and further lead to the introduction of WTO7. InGeneva, The Uruguay round has been taken place with the basic idea of the ministerial meeting of GATT in November 1982.

Agriculture was strongly hindered from the beginning in this meeting, but all the ideas lead to the immense failure of all. The new globalization of the world economy was anxiously followed by the Uruguay Round.

Since the treaty has been signed by many nations, a large expansion in the trade was expected. Trading of agriculture and textiles in different segment also showed a increasing sign. A well planned cross-examination was held in order to give a review to all rules and regulations levied by GATT. Hence, the growth of international trade has been accelerated due lead taken by increased number of nations. In year 1993, some modifications were made in the rules and regulations which had been assigned to the existing signatory bodies. Perhaps same rules were to be followed with the same agreements as it was the high time but some changes lead to the higher side of foreign trade. The important benefit obtained from the act of Uruguay Round lead to the foundation of World Trade Organization. On 1st, January 1995, the term WTO came into existence in continuation with the GATT framework[8]. For all the countries agreement is not necessary, although it is related to the constitutional body of international law and represents the significant picture widely. Around 153 members took part in the foundation of WTO and maximum trade is being measured through this WTO framework. WTO is regarded as the only existing framework which focuses and deals in maintaining the healthy relationship between the co-countries which allow the trade expansion within liberal economy across the world. The co-members of WTO have the full right to arbitrate in the round table as per Article 2, many regulations deal while

posing provisions and restrictions for obligation among the internal environment[9].WTO describes various rules and regulations for promotional trade, but it does not represent the real picture as any appropriate meetings and procedures are not followed or have not been considered regarding the fairness of practices and which remains impartial. Because of all this some new areas has been taken into account and proper measures are drafted to make them as an economical advantage among labour and the environment because of different trading agreements. WTO works on the larger framework whereas the agreements are balanced when it considers the total number of states. Few assumptions are being framed while dealing with the developing countries. WTO’s basic principle is to see the limitation of rules and regulations which are open to the members, although a very limited discussion on trade barriers and proper procedures are followed to resolve the disputes between the trading countries.

WTO Regulatory Framework

The legal framework of WTO is to see the proper execution of fair trade practices and the extent up to which the rules and regulations should be taken into consideration while doing trade with different countries. The problem faced lies with the implementation of various rules and regulations, how to resolve the disputes among different traders and making decisions for the organization[10].

Under the Article 4.1 of the WTO agreement, the Conference among the ministry is the highest authority of WTO. The conference details the voluntary decision making all the members of WTO confined to the legislative body. The meeting of the Ministerial Conference must be done in every two years. These meetings explain the wide range of political interactions of the Conference held for through discussions and decisions.

It is not necessary that the Ministerial conference actually needs to deliver the proper influence over the obligatory feat over the WTO members. In contrary the General council calls for the general meet with all itsMemberState’s ambassadors apparently once in every subsequent month inGeneva, this meeting is done related to the economic condition in order to get investigated and possible amendments could be made on the decisions making. Its main objective is to frame and analyze the policies related to national trade and in order to run other authorities in the WTO such as the secretariat. Every member of the WTO was specified to participate in disputes settlements panels, committees exempting from the Appellate body, councils and Textiles Monitoring Body. The administrative and technical support was provided by the Secretariat among both the WTO and developing countries which were laid on different trade policies, resolutions of trade and advice of the governments.

To keep checks on the rules and regulation, the country’s voting system plays a very crucial role as each country can just vote one time, though it does not matter because they are not taken into account.

Dispute Settlement

The global economy prefers to do trade with the neighboring countries, reason being the low tariffs, and thus helping in creating and maintaining healthy environment and relation as transport costs also lowers down. Proper calculations and approximations are made in order to formulate and regulate proper agreement among the countries. As new trade theory opens the gate for the scale of economies giving rise to larger number of agreements and thus to more trading segments which can become more efficient towards exports and imports. Various agreements of Uruguay Round gave a helping hand in providing a clear picture of WTO framework towards planned rules and regulations. A proper framework to settle disputes was confined by WTO[11].

The dispute settlement is an integral system in the WTO, Which applies to all multilateral agreements with single set of all disputes but some specific rules in some cases.

The following bodies play an important role in the WTO:

Dispute Settlement Body (DSB)
Panel and Appellate Body
Parties: WTO Members
WTO Secretariat

Dispute Settlement in the WTO: Relationship of players

Source: Dispute Settlement in the WTO, www.wto.org/english/tratop_e/…/intro_wto_disput_settle.ppt

As the disputes arising between the trading countries, the regulations of the trade control the fluctuations affects, now a days the WTO dispute settlement as the most dynamic international adjudicative process in the worlds due to the previous experience of the Considered WTO director-general. Hence it was found that “aggressive unilateralism” of economically powerful nations have been replaced by mechanism of multilateral rules and remedies backed by WTO. Because of the separation of many members from the system, the transparency of WTO guideline fails to fulfill the decisions making process. As an example, certain conferences have not been attended by some of the delegates among the Seattleconference[12].

Thereafter, The Doha conference came into existence whose main objective was to focus on the individual people, thus showing a real picture to the framework. The main drawback is due to improper time management and negotiation done with the different rounds of conference. The difficulties arise due to the unclear language used in the various agreements of analyzing the treaties[13]. The increasing number of nation towards MFN treaty is more important aspect of the decision, from which other nation will get benefited and consequently banned discrimination state would be followed by WTO. The rate remains the same for all the other bodies no matter if any member provides some benefit at lower cost or lower custom duty; hence no discrimination is being followed. MFN also concerns about the GATT (article2) and Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (article4) 11. The main thing which is considered while selecting the method is that the method or the article must contain all the important aspects of WTO.

National treatment

The members of the different states could not be fully understood the actual relationship between the foreign products and services. The third article of GATT is being referred for the proper limelight of actual market principles of WTO. Thereafter proper proportion should be maintained between the regional and international products and services as per Article 17 of GATT and the TRIPS provisions. Making differentiation may very easy for the WTO regarding its local and overseas products.

National treatment firmly applies to the foreign goods, services or piece of logical property has already accessed the local market. It fails to achieve its main objective of finding out the proper and exact proportion of conflicts between the developed and developing countries. National treatment policy very easily accepts the changed proper tariffs for the neighboring products but thereafter if the product has been found radically they lose the position of being charged as an correspondent tax notions. For example the situation can be best put up into matter of fact that treatment can be found in Japan-Alcohol which can best explain: in order to get proper protection the national treatment is generally prohibited while using internal taxes and other internal treatment obligations. Article I of GATT and WTO owns a very significant role and have been described as “a keystone of the GATT and one of the main and important pillar of WTO trading system”. Though it is mainly accepted that WTO has been more successful in comparison to GATT for promoting the fairness and equality in the trading system as organization keeps a regular check on the liabilities possessed by its members.

WTO is referred to as a free trade institution which generally accepts tariffs and occasionally forms or follows different forms of protection[14]. Thus it s a open system of desired rules and regulations where there is truthful and fair competition. The rules governed to the Non-inequity-national treatment and MFN is centralized and can be opposed critically by the environment, human right action and medical. The international trade regime contains the factors that are so designed as to prevent the intervention in support of domestic stability. Generally basic concept and objective of the national treatment is to increase the fair competition between the members in terms of goods, intellectual property, agriculture, services and this has given a right to the government of breaching the trade agreements. The fairness and equality between the international trade has been threatened in many occasions in many ways but WTO proved successful in solving the matters and bringing out fairness and equality by using utilizing case laws. Anti-dumping agreements and relevant case laws are explained so that one can think of rules and regulations to be followed in the trade agreement.

WTO and the developing countries

The WTO membership consists of developing countries which formed the main framework and resulted in better trade flow of foreign products and services after the GATT. This was because the involvement of emerging countries increased immensely. The involvement of more developing countries roots WTO’s stem from classified system tailored by the World Bank on the basis of per capita income of the country. Since WTO does not contain any proper definition of developing countries, the term was defined in either economic or other measures[15]. These developing countries in the WTO framework had a disadvantage of lack of human and technical resources. WTO considered these countries to be weaker in keeping up proximity with the rapidity in meetings held in Geneva on the weekly basis. Thus developing countries under the framework rarely entered into the discussions as they were less prepared than the industrialized countries. Due to this, a decision making bloc was selected to make decisions on behalf of all members for US, EU, Canada and Japan. Therefore in spite of single vote structure for the WTO it was helpless to allege the decisions. The WTO is responsible for the promoting fair and equitable trade as an international organization. WTO in Seattle conference was accused to be the supporter of globalization because of favoring interest of developed countries and negative effects on developing countries[16]. There was a disagreement between the developing and developed countries regarding the agricultural subsidies given by the governments of developed countries. One must clarify that , most least developed and developing country’s economy depends on the tariffs on foreign products and services.

Since WTO focuses on reducing the tariffs on foreign goods and services under the principle of MFN the biggest disadvantage which developing countries faces being under WTO will be risk faced in terms of their budget and public payment responsibilities. As the gathering of most powerful countries under the WTO as well increase in the demand of the national treatment by the WTO, developing countries will be affected negatively and its local market and agriculture will be confronted by the tough competition. In year 2003 many developing countries rejected the EU proposal which focused on lowering the commitment of is agricultural subsidies. This gave the developed countries a greater access over the developing countries markets[17].

The WTO lies on the fact that even after the collapse of Doha round, WTO didn’t stopped performing its functions discussed under the past rounds, continued to manage and hold a stable position, even though it lacked some regulations in developing countries. The existing agreement detailed the planned set of rules and regulations for trading among important players includingEU,USA, Japan, China andIndiaas prevailing power. The WTO possessed a challenged against Doha deal as they undertook separate free trade agreements among themselves thus attracting the new acquisitions and working with the new countries like Russia and Vietnam, which worked very hard and did all possible efforts to be the part of the organization. The new policies were implemented taking into the consideration that the disputes are been settled and criticism is being hold n frequent basis. Solving the disparity among the member states provided the real benefit of no risk element.

As some important skills will be expected in next couple of year therefore the role of the Director General of WTO has to be re-evaluated for the future concern. In order to make a regulatory body WTO will be looking forward to leadership acknowledgement while addressing philosophical measures related to the impacts of the trade policy towards the employment which WTO’s most members are with. In this modern world today the developing countries which are the members with the WTO faces more problems in terms of employment. They offer very less jobs in agricultural and manufacturing sector. The relationship between economic growth and employment during the short p of time in dynamic economies like inChinahas been denied by the Asian development Bank and UNDP study. Thus the main problem faced by the members of the WTO is due to the trade affecting the jobs basically entitled to it. Providing employment can be placed as an important aspect with the new rising needs formulating a proper procedure to show some efforts in significant manner. Few adjustments are planned to be made to keep stress of job segment liberalized and flexible. The adjustments are posed to be flexible and wide executions are sequential as the present economy and trading system tends to change dramatically over the last few rounds of trade negotiations constituted in year 1994 summit.

The under developed and poor countries are making various efforts to gear up their spirits in order to overcome lost grounds in past few years in trade. So in nutshell it can be seen and framed out that many countries are gearing up the working on employment and other various possible factors for creating a environment beneficial for trade[18].

Conclusion

All the above mentioned information attempted to explain that how fair trade system is embodied in the WTO/GATT is to be taken care of and understood clearly. Both GATT and WTO got the benefited of international trade by framing and following various rules and regulations of trade. Different trade barriers and negotiation on tariffs were very seriously planned keeping in to the mind the rules and regulations of the trade. Since WTO came into existence first, it afforded the opportunity of gathering members and discussing the trade opportunities available, discussed issues and provided protection to their markets from unfair trade practices and anti-competition. Free of cost trading tends to be beneficial and free trade movement will be a helping hand towards the welfare of the organization. In order to save the free trading and free trade movement the GATT/WTO established some agreements (like anti-dumping agreement) which contained the rules to protect the Member’s economies, introduced some principles like MFN and national treatment. These organizations removed the key developmental tool for developing countries. The developing countries which do not joined the WTO was negatively affected. The only solution which was left with the developing countries was to organize their interest to achieve their objectives. The Doha development round clearly showed the way of fairness of focusing particularly on t he central issues of market access and thus ensuring all the members participation in the decision makes process.

The WTO helps in facing the unnecessary competition present in the members of the states. Delays in holding panels and increased management cost gave rise to more disputes among the members and breaches of WTO obligations. To settle these disputed developed and developing countries experienced proper disputer settling process. It has been initially made for the WTO to overcome the regulations speeded all over the equity between member States to boost world trade. By providing legal assistant to the developing countries, a fair trade can be considered best with the difference between developed and developing countries. The relevant aspect which is supported by the trade agreement is of competitive liberalization with the consent of moving toward free trade on the three levels that is multilateral, bilateral and regional. The reason for the improper regulation of obligations among the members may be due to the lack of decision making power. The conflict between household rules and its necessities was the major criticism faced by WTO. The identical apprehension applies to cut-throat liberalization. The general concept of liberalization is based in the concept of discriminatory view of RTAs. To develop good healthy competition among different levels having full benefit for well-off countries, a good competitive liberalization is must. Competitive liberalization in actual is regarded as political rather than economical.

The increasing operational trade barrier between groups of members has been removed by mutual agreement between the groups of countries. The members of the WTO predicted the need of RTAs after dealing withDoharound to be in harmony with the multilateral process in order to promote trade integration and facilitate the transactions between the nations. Thus ministers decided to launch a negotiation to address this subject of trade integration, in respect of RTAs systematic and legal aspect. The WTO reformed RTAs to be transparent ad fully regulated under its rules. For the regional trade agreement a Draft Decision on a transparency Mechanism was advanced in year 2006 but the conclusions are awaited from the Doha Round. A successful Conclusion by theDoharound will be expected to improve the CRTA and increase the WTO oversight of RTAs. The failure cost in the DDA will be substantial, as the trading system. The main analysis of the papers reveals the proper understanding of the rules and regulations mentioned therein. In respect of culture, there should be proper regulatory bodies to face multilateral negotiations, uncertain and unpredictable future, and the failure of Doha Round. The set up set by the multilateral trade system was a great achievement that advanced a framework for the WTO/GATT international trading. However, the conflicts of member’s interests, RTAs have become the only remedy, where nations can seek to apply their views via direct negotiations. Ultimately the success depends on the success of Doha Round. The developing countries are not able to achieve their objectives in the framework of RTAs and bilateral deals as in few situations local business is put to set aside from the competition under competitive liberalization. Finally it has been analyzed that the rules set under the RTAs were proper but the regulation was on weaker side. The RTAs and WTO relationship has been controversial and much disputed as a matter of lack of regulation among the fair trade practices. Taking into consideration the proper valuation of the goods the amount of duties paid should also be counted.

So in nutshell it can be pointed out that few goods do not have any problem during calculation of export duties or quota management, nor does it creates problem for the valuation of goods for internal taxation or foreign control. Hence WTO looks out for more beneficial acquisitions to promote unfair and equitable foreign trade practices.

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[3]Tobi Indyk,. Fair Trade Or Free Trade; http://EzineArticles.com/?expert=Tobi_Indyke.

[4] Agricultural Issues Centre vol. 17, No. 2 (2003), http://aic.ucdavis.edu/pub/quarter/q17.2.03.pdf

[5] Bhagwati & Krishna (1999), Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements, MIT Press

[6] Matsushita M, Schoenbaum T, &Mavroidis P (2006), The World Trade Organization Law, Practice and policy, Oxford University Press, 2nd Edition.

[7] The Uruguay Round, WTO; http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm

[8] Peter Van den Bossche, Denise Prevost & MarielleMatthee (2005/06), ‘WTO Rules on Technical Barriers to Trade’http://www.worldtradelaw.net/articles/vandenbosschetbt.pdf.

[9] Overview of the WTO: DTI’s Website for Europe & World Trade; The National Archives.

[10] Ten Years of WTO Dispute Settlement: Australian Perspectives (2006), Commonwealth ofAustralia

[11] Bhagwati J, Krishna P (1999), Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements, MIT(Press)

[12] Bhagwati J, Hugh T. Patrick (1990), Aggressive unilateralism: America’s 301 trade policy and the world trading system, University of Michigan Press, pp. xii + 268

[13] Brown, Andrew and Stern, Robert M. (2005), Achieving Fairness in the Doha Development Round,, Global Economy Journal: Vol. 5: Issue. 4.

[14] Folsom R. (2008), Bilateral Free Trade Agreements: A Critical Assessment and WTO Regulatory Reform, School of Law , San Diego Research Paper No. 08-070 2008.

[15] Mr. Carlos Carnero Gonzalez (European Parliament) (2008): LOOKING BEYOND DOHA, ANNUAL 2008 SESSION OF THE PARLIAMENTARY CONFERENCE ON THE WTO, Geneva, 11-12 September 2008

[16]Ross Korves (2005), Regional Trade Agreements Are Discriminatory, And That’s Good, http://www.truthabouttrade.org/index2.php?option=com_content&do_pdf=1&id=855

[17] Alan Matthews (2003), Agriculture After Cancun, Trinity Economic Paper No. 17, 2003

[18] Sandra Polaski, the Future of the WTO, Trade, Equity, and Development Project, Policy outlook 2006.

Balance of payments refers to sum of both the balance of visible and invisible items. The balance of Payment is a comprehensive annualrecord of economic relation of a country with the rest of the world during a given period of time. A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country’s exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items.

Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

1. Debit: The spending of foreign currency is debit and negative item.
2. Credit: If a transaction earns foreign exchange for nation it is a plus item and credit.
3. Favourable BOP: If the value of exports is greater than the value of imports, then the balance of trade is said to be favourable.
4. Unfavourable BOP: If value of imports is greater than value of exports, then the balance of trade is said to be unfavourable.
5. BOP must be in equilibrium: BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit.For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.

While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted.Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about.

Balance of payments in pakistan:

Pakistan’s payments problems have been chronic since the 1970s, with the cost of oil imports primarily responsible for the trade imbalance. The growth of exports and of remittances from Pakistanis working abroad (mostly in the Middle East) helped Pakistan to keep the payments deficit in check . Since the oil sector boom began subsiding in the early 1980s, however, remittances declined.The government took steps in the early 2000s to liberalize and deregulate the exchange and payments regime.

Pakistan moved to a dual exchange rate system in 2000. Export growth in 2000/01 was primarily due to higher exports of primary commodities such as rice, raw cotton, and fish, and other manufactures such as leather, carpets, sporting goods, and surgical instruments. Imports increased in 2000/01 primarily due to higher imports of petroleum and petroleum products, and machinery. Pakistan is suffering from balance of payment deficit because of increased reliance on mported goods as compared to its domestic production. In the year 2008, the import bill increased by almost 35% of which 4. 9 billion amount comprised of oil related imports. Pakistan is highly dependent on imported oil goods which it imports from foreign countries.

The rising prices of oil commodities was one of the cause to give a downward push to its balance of payments. In spite of the strong growth in remittances and exports (accounted for 7. 1 billion), it still had to suffer from negative balance of payments. Although Pakistan is an agricultural econonomy, but still it imports wheat, pulses, and basic necessity items from abroad. Depletion of pakistani rupee in the last year also posed a great problem for Pakistani economy. Causes of adverse Balance of Payments:

1. Increase in Imports: Pakistan is a developing country and has to import industrial raw material, machinery, instruments and capital goods while exports could not increase.

Besides above it has to spend a lot of foreign exchange on import of consumer goods, petrol, defence armaments etc. 2. Low Volume of Exports.Pakistan’s exports consist of agricultural raw material and primary goods. Due to unfavorable weather conditions crop production of rice and cotton remains low and due to political instability industrial production is also affected which decreases volume of exports.

3. Increase in Domestic Demand: Domestic demand for good and services has incredibly increased due to higher population growth rate.

Major portion of the goods and services produced in the country is consumed; therefore, a smaller portion is left for exports.

4. Increase in Defence Needs: Pakistan is surrounded by enemies.Pakistan has not good relations with India and ex-Soviet Union and its state. Our 38% of the budget is spent on defence needs.

5. Inflation: Price level in Pakistan has increased rapidly.

Cost of Production has increased due to increase in wages and prices of other factors of production. Due to increase in import prices.

6. Increase in Invisible Imports: Pakistan’s invisible imports are less than the invisible imports which makes the BOP position and terms of trade unfavorable. Increase in Foreign Debt: Pakistan’s total public debt stood at an estimated Rs. 8160 billion as of end –March 2010.At this level, public debt is equalent to 56% of GDP, and 379% of total budgeted revenue for the year.

7. Difference in Import and Export Prices: Pakistan mainly exports agricultural raw material and primary goods and imports industrial raw material and machinery. Export prices of agricultural raw material and primary goods are fluctuating while import price are either stable or increasing. The relative increase in import prices is greater than relative increase in export prices.

8. Food Imports: A number of food products e. g., wheat, sugar, edible oil, onion, potatoes are imported to meet shortages.

Changes in capital inflow:

If the capital inflow is unfavorable for a country it causes disequilibrium in balance of payments. Capital inflow is deficit of balance of payments. Measurements To Correct Balance Of Payments:

1. Stimulating exports and checking Imports: If total exports earning have fallen short then steps should be brought down and giving incentives to exporters, providing them information through trade delegations. The imports of luxuries and other unnecessary imports either prohibited or curtailed.

2. Industrial Development:Pakistan BOP is unfavorable because Pakistan exports primary goods and agricultural raw material and imports industrial goods and raw material whose prices are increasing rapidly. To avoid further increasing of balance of payments there must be industrial development.

3. Terms of trade: Terms of trade of Pakistan are unfavorable which is increasing deficit in our balance of trade and balance of payments so there is a need to improve terms for trade by exporting finished goods instead of raw material and primary goods.

4. Balanced growth: Balanced growth means development of various sectors of the economy simultaneously.

In Pakistan agriculture sector dominated in the earlier periods. The result was that other sectors of economy remained neglected and we have to import necessary goods to meet the shortage.

5. Protection of Local Industry: Government should protect local industries and package of incentives must be given and there should be trade restrictions on the import of goods competing with local goods.

6. Import Subtitution: Instead of import of consumer goods and capital goods we must import machinery for import substitution which will save foreign exchange on imports and make the balance of payments unfavorable.

7. Self-Reliance: Pakistan’s balance of payments is now worsening due to repayment of debt and debt servicing. To avoid further deficit we must follow the self reliance policy.

8. Exploring Export Markets: More emphasis should be laid on export survey and export market entry. It is paramount importance that our exporters should know more about operating in a foreign market. It must also be our export policy to make preparations for organizing our efforts to secure more export orders from abroad.

9. Fiscal and Financial Incentives: Fiscal and Financial Incentives are must to increase the quantum of exports. There are as follows:

a) Exports income should be exempted from income tax as is being done in India and other countries.

b) The procedure for receiving the export duty-drawback should be made simple and expeditious.

c) The rate of interest on export refinance should also be minimized and the loans granted liberally.

Conclusion:

Beggars are never given choices…. Leaders made us beggars, they have ‘kashkool’ in their hands and now they are begging in front of IMF, US, SAUDIA, CHINA, IRAN, GERMANY, NATO…!! ”