Meeting 2 - International Balance of Payments & Trade Barriers

International FinanceInternational Finance

THE BALANCE OF THE BALANCE OF PAYMENTS AND PAYMENTS AND

INTERNATIONAL LINKAGESINTERNATIONAL LINKAGES

OVERVIEWOVERVIEW

I.I. BALANCE-OF-PAYMENT BALANCE-OF-PAYMENT CATEGORIESCATEGORIES

II.II. THE INTERNATIONAL THE INTERNATIONAL FLOW OF GOODS, FLOW OF GOODS, SERVICES,SERVICES, AND AND

CAPITALCAPITALIII.III. COPING WITH CURRENT COPING WITH CURRENT

ACCOUNT DEFICITSACCOUNT DEFICITS

THE BALANCE OF PAYMENTS THE BALANCE OF PAYMENTS (B-O-P) (B-O-P)1. PURPOSE:Measures all financial and economictransactions over a specified period

of time.

PART I. PART I. BALANCE-OF-PAYMENTBALANCE-OF-PAYMENT CATEGORIESCATEGORIES

2. Double-entry bookkeeping

a. Currency inflows = credits

earn foreign exchange

b. Currency outflows = debits

expend foreign exchange


3. Three Major Accounts:a. Currentb. Capitalc. Official Reserves4. Current Accountrecords net flow of goods, services, and unilateral transfers.


5. Capital Accounta. Function: records public & private investment and lending.b. Inflows = creditsc. Outflows = debitsd. Transactions classified as

1) portfolio

2) direct

3) short term



6. Official Reserves Accounta. Function: 1) measures changes in international

reserves owned by central banks.

2) reflects surplus/deficit ofa.) current accountb.) capital account

b. Reserves consist of 1.) gold2.) convertible securities

7. Net Effects:Sum of all transactions must be zero:

1.) current account2.) capital account3.) official reserves


8.The Balance-of-payment measures

a. Some Definitions:

1) Basic Balancea) consists of current account and longterm capital flows.b) emphasizes longterm

trends.c) excludes short-term capital flows that heavily depend

on temporary factors.




2) Net Liquidity Balance: measures the change in private domestic borrowing or lending

require to keep payments equal without adjusting official reserves.




3) Official Reserve Transactions Balance:

measures adjustments needed by

official reserves.


LINKS FROM INTERNATIONAL TO LINKS FROM INTERNATIONAL TO DOMESTICDOMESTIC

FLOWSFLOWSA. Global Linkagesset of basic macroeconomic identities which link:

domestic spending and production to current and capital accounts

PART II. THE INTERNATIONAL FLOW PART II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITALOF GOODS, SERVICES, AND CAPITAL


B. Domestic Savings and Investment and the Capital Account1. National Income Accounting a. National Income (NI) is either spent (C)

or saved (S) NI = C + SNI = C + Sb. National spending (NS) is divided into

personal spending (C) & investment (I) NS = C + INS = C + I

c. Subtracting (a)-(b) NI - NS = S - INI - NS = S - I…(c)

If NI > NS, S > I which implies that surplus capital spent overseas.

d. In a freely-floating system, excess saving = the capital account balancee. Implications:

1. A nation which produces more than it spends

will save more than it invests domestically witha net capital outflow producing a capital

accountdeficit.


2. A nation which spends more than it produces has a net capital inflow producing a capital account surplus.

3. A healthy economy will tend to run a current account deficit.


THE LINK BETWEEN THE CURRENT ANDTHE LINK BETWEEN THE CURRENT AND

CAPITAL ACCOUNTSCAPITAL ACCOUNTS1. Beginning identity

NI - NS = X - M (d)NI - NS = X - M (d)where X = exports

M = importsX-M =current account balance

(CA)


2. Combining (c) + (d)S - I = X - M (e)

3. If S - I = Net Foreign Investment (NFI)NFI = X - M (f)

4. Implications:a. If CA is in surplus, the nation must be

anet exporter of capital.

b. If CA is a deficit, the nation is a majorcapital importer.

c. When NS > NI, the excess must be acquired through foreign trade.


d. Solutions for Improving CA deficits:1.) Raise national income (output)

relative to domestic investment (I).

2.) Increase (S) relative to domestic investment (I).


GOVERNMENT BUDGETS AND CURRENT GOVERNMENT BUDGETS AND CURRENT ACCOUNTACCOUNT

DEFICITSDEFICITS

1. CURRENT ACCOUNT BALANCE

CA = Saving Surplus - Gov’t budget deficit.CA = Saving Surplus - Gov’t budget deficit.

2. CA Deficit means the nation is not saving enough to finance (I) and the deficit.

3. CA Surplus means the nation is saving more than needed to finance its (I) and deficit.


POSSIBLE SOLUTIONS UNLIKELY TO WORK:

A. Currency Depreciation

B. Protectionism

PART III. COPING WITH THE CURRENT PART III. COPING WITH THE CURRENT ACCOUNT DEFICITACCOUNT DEFICIT

AAadad. CURRENCY DEPRECIATION. CURRENCY DEPRECIATIONA. U.S. Experience: Does not improve the trade deficit.B. Depreciations are ineffective because

1. It takes time to affect trade.2. J-Curve Effect (states that a decline

incurrency value will initially worsenthe deficit before improvement.)


THE J - CURVETHE J - CURVE

TIMETIME

Net Net changechangein trade in trade balancebalance

00

Currency Currency depreciationdepreciation

Trade balance Trade balance initially deterioratesinitially deteriorates

Trade balanceTrade balanceimprovesimproves

BBadad.. PROTECTIONISMPROTECTIONISMA. Trade Barriers used:1. Tariffs2. QuotasB. Results:Most likely will reduce both X & M.C. FOREIGN OWNERSHIPone protectionist solution would placelimits on or eliminate foreign ownershipleading to capital inflows.D. STIMULATE NATIONAL SAVINGchange the tax regulations & rates.


SUMMARY: SUMMARY:

CURRENT-ACCOUNT DEFICITSCURRENT-ACCOUNT DEFICITS- neither bad nor good inherently

1.Since one country’s exports are another’s imports, it is not possible for all to run a surplus

2. Deficits may be a solution to the problem of different national propensities to save and invest.


16. Jill Holman, 2001, “Is The Large US Current Account Deficit Sustainable?” 2001, Economic Review

International Trade International Trade Barriers Barriers – Global – Global Borderless TradeBorderless Trade

Changing Business Perspectives Changing Business Perspectives

InternationalInternational implies an individual’s or organization’s nationality is held

strongly in consciousness

GlobalizationGlobalization implies the world is free from national boundaries andthat it is really a borderless world

Moveto

In multinational organizationsmultinational organizations,, the organization is recognized as

doing business with other countries

Moveto

Changing Business PerspectivesChanging Business Perspectives

In transnational organizationstransnational organizations, the global viewpoint supersedes

national issues.

Collapse of Eastern Europe Union of East and West Berlin Perestroika Expansion of business with China Guanxi –

The Chinese practice of building networks for social exchange Creation of the European Union Establishment of the North American Free

Trade Agreement

Changes in Global PerspectivesChanges in Global Perspectives

http://www.triconglobal.com/

World merchandise trade has grown faster than world production during the last 50 years

Top 5 exporting countriesTop 5 exporting countries Top 5 importing Top 5 importing

countriescountriesUnited States United StatesGermany GermanyJapan JapanChina United

KingdomFrance France

Trade PatternsTrade Patterns

Free Trade Area

Customs Union

Common Market

Economic Union

FORMS OF ECONOMIC INTEGRATIONFORMS OF ECONOMIC INTEGRATION

Member nations:Remove trade barriers amongst themselvesKeep their own external national trade barriers

Eg: Latin American Free Trade Area (LAFTA).

FREE TRADE AREA.FREE TRADE AREA.


Example:

Country DCountry A

Country B

Free Trade Area

Trade

barrier

Trade barrier


FREE TRADE AREA.FREE TRADE AREA.

Member nations:

Remove trade barriers amongst themselves

Have a common set of external trade barriers.

CUSTOMS UNION.


Example:

Country B

Country A

Country D

Customs union

Common barrier


CUSTOMS UNION.

Same as a customs union plus:Free flow of capital, technology & labour among member nations.Residents of nation A could work in nation D without a work permit.Marketing implications of this?


Common Market

Member nations fully unify their:

Economic policies & currencies.

Eg: common tax regimes, interest rates, etc.Eg: common tax regimes, interest rates, etc.

Eg: European Union.Eg: European Union.


Economic UNION.

Globalization of operations

Liberalization of trade

Facilitation of market access

Importance (relative) of technical barriers to trade

CURRENT FEATURES OF INTERNATIONAL TRADECURRENT FEATURES OF INTERNATIONAL TRADE

Quality requirements

Environmental requirements

Social and Labour requirements

Sustainable Development requirements

WHAT NEXT ?????

CERTIFICATION TODAYCERTIFICATION TODAY

ISO 14 000 standards37,000 certificates in 112 countries (ISO 9000 - 510,000 in 161 countries) Organic food and beveragesOrganic - 1% (Total agri-trade-15 billion US$)Timber “Certified” forests -0,08% -1.5% (total forest

area in UNECE region-1494 mln.ha)

MARKET - “GREEN” or still RIPENING?

ROLE OF “GREEN ECONOMY”ROLE OF “GREEN ECONOMY”

BENEFITS

Reward environmentally conscious producers by:

Creating new markets

Allowing to charge a price premium

Increasing sales

CONCERNS

Market entry barrier

Discrimination

Trade distortion effects

“Certify or Die”

Eco-SchemesEco-Schemes

Trade barriers regulation WTO dispute settlement WTO accession negotiations EU enlargement negotiations Implementation of existing bilateral agreements Negotiation of new free trade agreements Other trade consultations

What are the possible courses of action What are the possible courses of action for the elimination of barriers?for the elimination of barriers?

Formal complaint submitted to the European Commission by single companies, associations of companies or Member States on trade obstacles in non-EU countriesInvestigation and legal and factual analysis by the European CommissionIf allegation confirmed, consultations between the European Commission and the government concerned to remove the barrierIf talks fail, resort to WTO dispute settlement

How does the Trade Barrier How does the Trade Barrier Regulation (TBR) procedure work?Regulation (TBR) procedure work?

New round of negotiations includes ”trade and environment” linkage on agenda.Labor rights not on the agendaWhy is there a difference in treatment?

Externalities/sovereigntyStatus of international legal institutions with

competence in environmental/labor issues

Current SituationCurrent Situation

A clause in a trade agreement that ”aims at improving labour [or environmental] conditions in exporting countries by allowing sanctions to be taken against exporters who fail to observe minimum standards”

What is a social/environmental clauses What is a social/environmental clauses in International Trade Agreements?in International Trade Agreements?

GATT: ”General Agreement on Tariffs and Trade” – signed in 1947, in force 1948-1995WTO: World Trade Organisation - established 1 January 1995 – took over GATT's functions – GATT 1947 was incorporated into GATT 94, which is one of the WTO-agreements

GATT and WTOGATT and WTO

U.S./U.K. sponsored comprehensive plan for post-World War II reconstruction and development – trade liberalization was one of the basic elements3 international economic and financial institutions: World Bank, International Monetary Fund (IMF) and the International Trade Organization (ITO)GATT was supposed to be merely an interim agreement until ITO charter (the ”Havana charter”) approved

Historical background of theHistorical background of the GATT GATT

GATT’s basic functions: forum for negotiations on rules governing market access for goods, monitor implementation, and resolve disputesHow GATT worked: negotiation rounds.Who performed the organizational work: an elite group of economists specializing in trade issues.

How GATT workedHow GATT worked

Problems:Big tariff reductions in some areas, none

in othersProliferation of non-tariff trade barriersIneffective dispute settlement procedureGATT = Gentlemen’s Agreement to

Talk and TalkSolution:

Uruguay Round WTO

From GATT 1947 to WTO 1995From GATT 1947 to WTO 1995

Final ActAgreement establishing the WTOGATT 1994 – incorporates GATT 1947, main rule-book for trade in goods, plus appendices.General Agreement on Trade in Services (GATS)Trade Related Aspects of Intellectual Property Rights (TRIPS) AgreementDispute Settlement UnderstandingTrade Policy Review Mechanism

World Trade Organization AgreementsWorld Trade Organization Agreements

Adam Smith’s theory of absolute advantageAdam Smith’s theory of absolute advantage: ”If a foreign country can supply us with a commodity cheaper than we can make, better buy it of them with some part of the produce of our own industry.” Wealth of Nations (1776)

David Ricardo’s theory of comparative advantageDavid Ricardo’s theory of comparative advantage: mutual gains from free trade regardless of whether any country had an absolute advantage. All countries would specialize in the production of the good in which their opportunity cost was lowest.

Economic theoretical basis for trade Economic theoretical basis for trade liberalizationliberalization

Article I: “Most Favored Nation” obligation – same treatment to like products of contracting partiesArticle III: National Treatment obligation – non-discrimination between domestic ”like products” and imports from contracting partiesArticle XI: prohibits quantitative restrictions, GATT preamble/Article XXVIII: Binding commitments to reduce tariffs on imports

Essence of the GATT: Four core legal Essence of the GATT: Four core legal commitmentscommitments

Permit WTO tribunals to invalidate national health and product safety standards under legal standards such as “disguised restriction on trade” or “Unnecessary obstacles to trade”Encourage governments to use accepted international standardsGATT panel decisions could be enforced with trade sanctions--if unanimous approval by all GATT contracting parties--including the country found to be in violation of GATT rules.Permit higher standards if (1) there is a scientific justification or (2) the country has followed a prescribed risk assessment procedure.

TBT and SPS AgreementsTBT and SPS Agreements

Any GATT party could challenge another GATT party’s law as an illegal trade barrier before a GATT panel in Geneva.Enforcement of GATT panel decisions with trade sanctions only if unanimous approval by all GATT contracting parties--including the country found to be in violation of GATT rules.

GATT Dispute SettlementGATT Dispute Settlement

New possibility for appealNew: panel has the power to approve sanctions against countries that refuse to remove laws already found to be GATT-illegalNew: determinations by WTO tribunals are automatically binding; cannot be blocked unless all member countries vote to do so within 90 days of the decision.

WTO Dispute SettlementWTO Dispute Settlement

Poor record of GATT/WTO panels in environmentally relevant casesSovereignty issues related to effective protection of domestic environment, e.g., Reformulated Gasoline caseTrade restrictions are sometimes essential to promote/enforce international environmental agreements, e.g., Mexican Tuna and Shrimp-Turtle casesRecent developments in trade economics

Arguments for amending/adding to Arguments for amending/adding to existing environmental exceptions existing environmental exceptions

Social dumpingWide agreement on content of “fundamental labor rights”Weakness of ILO as compared with WTO, i.e. trade restrictions may sometimes be an effective means of promoting and enforcing fundamental labor rights.Recent developments in trade economics

Arguments for adding a social clauseArguments for adding a social clause

Art. XX exceptions are sufficientNew, tougher clause would mostly work to disadvantage of developing countriesInternational legal rights and principles: right to development; sovereignty over own resources.If the clause permits removing such disputes from WTO jurisdiction: no other effective alternative exists.

Arguments against an environmental Arguments against an environmental clauseclause

”social dumping” not empirically proven, contrary to theory of comparative advantageArticle XX exceptions are sufficientA social clause is a political instrument that does not belong in the multilateral trading system

Arguments against a social clauseArguments against a social clause

Neo-classical economists: models based on perfect markets and ”free” trade Neo-institutionalists: models include market distortions and interaction between negotiations over trade policy and determination of labor standards

Neo-institutionalists vs. Neo-classical Neo-institutionalists vs. Neo-classical economistseconomists

Examples of trade barrier eliminationExamples of trade barrier elimination

Country Course of action

IndiaWTO dispute settlement system - negotiated settlement

Korea WTO dispute settlement system - panel proceeding

Brazil TBR procedure

Taiwan Accession to the WTO

Ukraine

Consultations and the initiation of a dispute settlement procedure under the PCA

Mexico Free trade agreement negotiation

India: Balance of Payments Restrictions

Import prohibitions applied since 1960 to a wide range of consumer goods

The European Commission has received complaints from business

The European Commission raised the issue in the framework of the World Trade Organization (WTO)

Negotiations led to a progressive elimination of restrictions between 2000 (for priority products) and 2003

Expected additional turnover for EU industry: 2 Billion €


Korea: safeguard on dairy products

Korea had imposed safeguard measures taking the form of quotas on skimmed milk powder preparations

Negotiations and formal WTO consultations failed to find a solution

The subsequent WTO dispute settlement procedure found these measures in breach of the provisions applicable to safeguards

Korea informed the EU that it had revoked the illegal measure


Brazil: scope non automatic licensing

Brazil applies non-automatic licensing on a wide range of productsThis measure has also been used to implement minimum prices in certain sectorsIn the context of a Trade Barrier Regulation (TBR) procedure, the European Commission has obtained the removal of textile and certain steel products from the list subject to non automatic licensing and minimum prices


Chinese Taipei (Taiwan): discriminatory taxation of spirits

Taiwan joined the WTO as a customs territory called Chinese Taipei in 2001Taiwan has maintained over a long period a tax system discriminating EU spirits against similar US and Japanese products (taxes on EU products more than twice the level applicable to other products)In the context of its accession to the WTO Taiwan has agreed to eliminate this discriminationThis Taiwanese commitment was fully implemented in 1998/99 before accession


Ukraine: discriminatory fees for pharmaceuticals

In April 1998, Ukraine set up fees for the registration of imported pharmaceutical products at 100 times the level applicable for domestic products

This was in breach of the Agreement on Partnership and Cooperation (PCA) between the EU and Ukraine

This system significantly impeded market access for EU industry and was also detrimental for health policy in Ukraine

Following the initiation of a dispute settlement procedure under the PCA, the discriminatory fees were eventually removed in March 2000


Mexico: trade related investment measures in the car sector

Mexico’s investment regime hindered access for EU car producers which were not manufacturing locally

In the context of the negotiation of the free trade agreement with the EU, Mexico agreed to open substantial tariff quotas for these producers, pending the elimination of the regime in 2004 (in fact accelerated to 2002)

This will provide for a more equitable market access


Aims at removing trade barriers on a global scale

Aims at achieving the largest economic impact in terms of additional trade and investment opportunities

Aims at benefiting all sectors of industry

Market Access StrategyMarket Access Strategy

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. So far, 144 countries (as of 1 January 2002) as members.

On 1 January 1995, the WTO replaced GATT (General Agreement on Tariffs and Trade), which had been in existence since 1947, as the organization overseeing the multilateral trading system. The governments that had signed GATT were officially known as “GATT contracting parties”. Upon signing the new WTO agreements (which include the updated GATT, known as GATT 1994), they officially became known as “WTO members”.

World Trade OrganizationWorld Trade Organization

Cycle of Entry to WTO

Entry to WTO

•Reduced Tarriffs

•More Foreign Presence

•Lower Trade Barrier for Exports

Increase in Foreign and Domestic Enterprises

Increased Competition

More Efficient Industries

Larger Economy

•Economic Growth

•More Diversified Economy

•Integration into World Economy

•Capacity-Based Competition

•Better Infrastructure

World Trade OrganizationWorld Trade Organization

World Trade OrganizationWorld Trade OrganizationApplication ???Application ???

What about …

Information on “U.S. International Transactions, Third Quarter 2002” from Bureau of Economics Analysis.

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Meeting 2 - International Balance of Payments & Trade Barriers

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