Econ Exam 3

Smoot Hawley Tariff Act (1930)

goal: economic recovery from depression -average tariff rates: 1929: 40% 1930: 47% 1932: 60% 1946: 25% result: world trade shrinks by 66% in 3 years response: reopening of trade (1934-1941)

globalization of institutions

goal: expansion of and response to globalization -international institutions provide public goods: 1. increased international economic stability 2. increased certainty about behavior of other nations

economic integration and post-war recovery

goal: internationalization of economic agreement -limitations of bilateral deals and MFN -bretton woods, 1944 -General agreement on tariffs and trade (GATT) -Generalized system of preferences (GSP) -US Trade Policy

in richer countries ____ capital is a larger share of total wealth

human

EOI Results

industrial growth? -competitive industries -1997 Asian financial crisis and bankruptcy economic growth? -rapid and sustainable growth -reduced inequality -macro stability -causality or correlation? 1. high savings and investment rates 2. investment in primary and secondary education 3. US financial support -rent seeking and corruption

FDI outflows

investment from a home country into the world

FDI inflows

investment from the world into a host country

cartels

multiple producers agree to price like a monopolist (above MC)

related party trade

products that have intermediate goods (WIP) in another country/across borders

international institutions provide ____

public goods -increased international economic stability -increased certainty about the behavior of other nations

reopening of trade (1934-1941)

reverse the impact of the smoot-hawley tariff of 1930 -by 1934 world trade was 1/3 of the value in 1929 reciprocal trade agreements act (RTAA) of 1934 -export promotion -bilateral agreements (21 countries-60% of trade by June 1940) -no multinational agreements in place -most favored nation (MFN) status

Global Value Chains

simple: product value added includes one border crossing complex: includes more than one border crossing

export oriented industrialization (EOI)

when: 1990s where: east asia and some Latin America motivation: industrialize (inadequate industrial structure) main goal: economic growth by targeting domestic industries (industrial policy) results: mixed

Import Substituting Industrialization (ISI)

when: 60s & 70s where: latin america and africa motivation: industrialize (commodity dependence) main goal: encourage economic growth by protecting domestic industries from competing imports (infant industry argument) result: slower than average growth

-provide economic development financing -economic development goals that undermine domestic economic policy

world bank

NAFTA benefits

-increased trade (1993-2006): Trade within NAFTA doubled, US goods exports increased -increased foreign direct investment: US FDI in Can and Mex tripled -US deficit in goods and surplus in services -bigger impact in Canada and Mexico than in US

Bretton Woods (1944)

-international monetary fund -international bank for reconstruction and development -international trade organization

USCMA Ratification

-leadership agreement 9/30/18, signatures planned for 11/30/18, -USTIC report: due 105 days after signature (4/20/19), legislative agreement pending in all three countries (steel tariffs)

primary products

-natural and raw materials -agriculture, mining, forestry, fishing

Industry-specific organizations

-oil producing and exporting countries (OPEC) -International Telecommunications Union (ITU) -World Steel Association

WB Functions

-original purpose: finance reconstruction of Europe after WWII -main function today: assisting development in non-industrial economies

Horizontal FDI

-parent and affiliate have parallel production processes -often between developed countries -locate near customer base -driven by trade and transportation costs

vertical FDI (outsourcing)

-parent and affiliate make different parts of the production process -often between developed and developing countries -global supply chains -driven by production cost differences

WTO functions

-permanent umbrella organization to administer agreements (GATT, GATS, TRIP, TRIMS) -continuing negotiations: the Doha round 2001-2005 (first round to fail) -dispute settlement mechanism (DSM)

Positive impact of RTAs on Free Trade (building blocks)

-reduction of trade barriers -externality of economic reforms -bargaining tool in multilateral negotiations -demonstration effect -trade creation

USCMA Key Modifications

-rules of origin for automotive trade: north American content (from 62.5% to 75%), wage based content (40-45% made by workers making $16/hr) -dairy trade: limits on Canadian exports, open access to 3.59% of Canadian dairy market, retaliatory dairy tariffs in Mexico and Canada remain -non-market economy deals prohibited: terminate agreement within 6 months (same as without reason)

negative impact of RTAs on free trade (stumbling blocks)

-second-best policy -policy making resource constraint -complexity (rules of origin) -trade diversion

Columbian Coffee Example

-soaring prices during 1975-77 -appreciation of Columbian peso -faster growth in non-tradable goods sector -slower growth in traditional traded goods sector

EOI policies

-stable macroeconomic conditions -promote exports (remain mostly open to imports) -shared growth through rising economic equality -private-public partnerships -targeted industrial policy

challenges for multilateral trade negotiations

-technical complexity of remaining issues -domestic economic effects -transition from reciprocity to fairness -rise of developing country power

US Trade Act of 1974

-trade promotion authority (aka fast track authority) -expand role (and name) for the US International Trade Commission -establishment of trade remedies (anti-dumping, countervailing duties, safeguards, etc)

rise of regional trade agreements

-violation of MFN principle -exceptions allows under two conditions: 1. lower tariffs to zero within agreement 2. cannot raise tariffs to other partners

economic populism (peru '85-'90)

1. 1983-84: recession and low growth -alan garcia is elected president -promises to promote growth and redistribute income 2. 1986-87: economic growth from expansionary policies -nationalized banking system -reduced payment on foreign debt 3. 1987: rising inflation and current account deficit -nationalized financial services -business subsidies -price controls 4. 1988-1990: deep recession and hyperinflation -real wages lower than when Garcia took office -Peru isolated from international banking and capital

net FDI

FDI inflows - FDI outflows

EOI countries

High performance Asian Economies (HPAE): Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand (designated by the world bank) The Four Tigers: two city-states of Hong Kong and Singapore, Korea and Taiwan Newly industrializing countries (NICs): -along with economies of east asia -also includes Argentina, Brazil, Chile, and Mexico

-serves as a lender of last resort -conditionality requirements that undermine domestic sovereignty

IMF

Which of the following is a nondiscrimination policy among trading partners? a. Generalized system of preferences b. Most favored nation status c. Dispute settlement mechanism d. Rules of origin

b. (Most favored nation status)

Although regional trading agreements violate the most favored nation principle of the World Trade Organization, exceptions are made if the proposed agreement: a. has the same tariff rate for participants as for non-participants. b. has an internal tariff rate of zero, and does not raise tariffs for non-participants. c. leads to trade creation rather than trade diversion. d. includes Rules of Origin.

b. (has an internal tariff rate of zero, and does not raise tariffs for non-participants.)

Suppose two countries, Winterfell and Stormborn, form a free trade agreement. After joining the agreement, Winterfell increases its imports of coats from Stormborn and decreases its imports of coats from Highgarden, a country that is not in the free trade agreement, even though coats from Highgarden cost less than coats from Stormborn. Which of the following has been an impact of the free trade agreement? a. trade creation b. trade diversion c. trade embargo d. trade lifting

b. (trade diversion)

Goods that are produced within the free trade agreement between Winterfell and Stormborn can be traded freely (without facing tariffs or other trade barriers) between the countries. How can the participants in the agreement determine which goods are produced within the free trade area? a. Establish national product standards. b. Establish trade bloc standards. c. Establish rules of origin. d. Establish rules of composition.

c. (Establish rules of origin.)

International Capital

foreign direct investment (FDI) -loan or purchase -management control or influence -minimum 10% ownership foreign portfolio Investment -loan or purchase -under 10% ownership investment direction -parent and affiliates -home (source) and host countries -outflows and inflows

customs union

free trade among members, common external tariffs

doha round (Sept. 2003 in Cancun)

-1996 Singapore working groups: trade and investment (including trade facilitation), competition policy and procurement -20 developing countries refuse to negotiate (create voting bloc): demand concessions on agricultural subsidies and other trade barriers - brings negotiations to a halt

expansion of Bretton Woods system

-GATT becomes World Trade Organization -IMF expands role -IBRD becomes world bank

Global organizations

-IMF -World Bank -World Trade Organization (WTO)

Shared resources

-International boundary and Water Commission -Indian Ocean Tuna Commission -Mekong River Commission

regional trade agreements

-North American free trade agreement (NAFTA) -MERCOSUR -EU -Trans-Pacific Partnership

economic populism

-form of economic nationalism -latin america (1970s) -four stages: 1.recession (rejection of traditional policies; blame for an elite, outsider group) 2.economic growth from government spending (indicates non-traditional approach is working) 3.unintended consequences (inflation, debt, overvalued currency) 4.economic growth collapses (real wages fall, debt crisis, investment declines)

Free trade area

-free trade among members

WB structure

-Washington DC and 120 global offices -over 10,000 staff -189 member countries -member's voting rights are proportional to number of shares owned -two separate institutions of the bank: IDA focuses on assistance to poorest nations; IBRD provides assistance to middle-income countries

Regional development funds and banks

-asian development bank -islamic development bank

WTO structure

-based in Geneva with 640 staff members -Perm164 members since July 2016 (account for over 95% of world trade) -funding provided by members, contributions weighted by share of trade

IMF structure

-based in Washington DC with 2700 staff -funded by membership fee or quota from 189 member nations -member's size and status determines the member's voting weight

US International Trade Commission (USITC)

-bi-partisan, independent agency -fact-finding and injury determinations

WB history

-bretton woods 1944 as IBRD -IBRD joined by the International development association (IDA)

Department of Homeland Security

-cabinet position -customs and border protection (CBP)

Office of the US Trade Representative (USTR)

-cabinet position -negotiating authority

department of commerce

-cabinet position -determines degree of unfairness in investigations -International trade administration (ITA) -Export-import bank

IMF functions

-charged with overseeing the international monetary system to ensure exchange rate stability -special drawing rights (basket of five currencies) -support of the creation of a stable, crisis free, system of international payments -lender of last resort: $1T available for members that cannot make payments on their debts or borrow elsewhere, interest often 0% (especially for developing countries), IMF conditionality: economic reforms

singer-prebisch contradictions

-constrained supply/scarcity, manufacturing innovation and cartels may increase the price of primary products over time -Px (increase)/Pm (decrease)

WTO history

-created during Uruguay round of the GATT -launched in 1995

Brexit

-deadline 3/29/19 -extended on 3/22/19 -issues to be resolved: border crossings tariffs standards labor mobility subsidies pensions

US trade expansion act of 1962

-establishes office of the US Trade Representative (USTR) -Establishes trade adjustment assistance

US Trade Expansion Act of 1962

-establishes office of the US Trade Representative (USTR) -establishes trade adjustment assistance

common market

-free trade among members -common external tariffs -free movement of FOP

economic union

-free trade among the members -common external tariffs -free movement of FOP -harmonization of all economic policies (fiscal, monetary, etc.)

development of international institutions

1. economic nationalism: great depression, smoot hawley tariff (1930), WWI & WWII 2. economic integration: post-war recovery, Bretton Woods 1944, key institutions: IMF, GATT. World Bank 3. globalization of institutions: WTO, international trade agreements and customs unions, controversy and backlash

key features of ISI

1. high tariffs 2. fixed exchange rates - with high inflation rates leads to overvalued currency - exports reduced 3. expansionary fiscal and monetary policy -economic populism

Suppose a specific tariff of $2 is imposed on shoes, which cost $20, in 1930. The ad valorem equivalent of the tariff is ___% (Note: round answer to one decimal place)

10

Historical events affecting China/India share of world GDP

1760-1840: industrial revolution 1858: British rule of India begins 1839-59: opium wars between UK and China

General agreement on tariffs and trade (GATT)

1947-1993 -replaces the International Trade Organization -signatories increase over time -not an institution -trade rounds -key principles: national treatment: foreign suppliers are treated the same as domestic nondiscriminatory: can't offer something to one partner and not the other

NAFTA Timeline

1965: US-Canada Auto Pact 1989: Canadian-US trade agreement (CUSTA): US exports to Canada grew 47%, Canadian exports to the US grew 55% 1994: NAFTA: Mexican tariffs on US goods fall from 10% to 2.9%; US tariffs on Mexican goods from 2% to 0.65% 2018: US Canada Mexico Agreement: NAFTA negotiated and renamed

Arab Oil Embargo

After the U.S. backed Israel in its war against Syria and Egypt, which had been trying to regain territory lost in the Six-Day War, the Arab nations imposed an oil embargo, which strictly limited oil in the U.S. and caused a crisis

special drawing rights

An international reserve asset established by the IMF -not a currency -not a claim on the IMF -mechanism for currency exchange among members

IMF history

Bretton woods 1944

Dispute Settlement Mechanism

Disputes in the WTO are essentially about broken promises. WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally. That means abiding by the agreed procedures, and respecting judgements.

ISI Results

Negative -industrial growth? 1. uncompetitive industries 2. inefficiently small industries -economic growth? 1. short-term and temporary -non-ISI countries had better growth 2. rising inequality (urban vs. rural) 3. macro instability (hyperinflation, overvalued currency) 4. large debt -rent seeking and corruption

12.5

Suppose the price of a pair of shoes falls to $16 in 1932. The ad valorem equivalent of the tariff is now ___% (Note: round answer to one decimal place.) (the tariff is $2)

-administer member agreements and settle disputes between the members -international regulations that undermine domestic regulatory goals

WTO

Generalized System of Preferences (GSP)

a U.S. trade program designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories

Which of the following is a controversy associated with the major international institutions (IMF, WTO, and World Bank)? a. Their decisions sometimes conflict with the national decisions of their members, raising questions about sovereignty. b. The cost of implementing their decisions and policies are too low and should be raised. c. Their decision-making process is too public and transparent and should protect classified information better. d. They do not allow the ideology of an member or group of members to impact their decisions.

a. (Their decisions sometimes conflict with the national decisions of their members, raising questions about sovereignty.)

Why are international institutions (such as the World Bank, the IMF, and the WTO) a public good? a. They support international economic stability, which is a nonrival and nonexcluable good. b. They support international economic stability, which would otherwise be a rival and excluable good. c. They improve the transparency of international public policies. d. They reduce the exclusionary nature of economic growth.

a. (They support international economic stability, which is a nonrival and nonexcluable good.)

The World Trade Organization was created in 1995 to: a. oversee the implementation of international trade agreements. b. provide a forum where trade disputes can be litigated and decided by a body that can directly enforce its decisions. c. encourage the imposition of nontariff barriers instead of imposition of tariffs. d. All of these are correct.

a. (oversee the implementation of international trade agreements.)

The Generalized System of Preferences enables developing countries to a. receive preferential access to markets in industrialized countries. b. join with a developed country to form a trade bloc and adopt trade barriers that protect the developed and the developing countries. c. raise trade barriers whenever they need to protect local industries. d. impose import quotas and import tariffs and offer export subsidies to control production and consumption within the country.

a. (receive preferential access to markets in industrialized countries.)

The World Bank was founded in 1944 as the International Bank for Reconstruction and Development for the purpose of financing: a. the reconstruction of Europe after World War II. b. the economic development of the poorest nations. c. the development of stable macroeconomic policy globally. d. bridge loans for large trade deals.

a. (the reconstruction of Europe after World War II.)

What was the effect of the Smoot-Hawley Act? a. It required that China limit exports of technology to the U.S. and contributed to the global financial crisis that began 2008. b. It repealed certain tariffs that were hindering the U.S. from recovering from the Great Depression. c. It increased tariffs on certain imports into the U.S. and contributed to the severity of the Great Depression. d. It prohibited the U.S. government from imposing a variety of nontariff barriers.

c. (It increased tariffs on certain imports into the U.S. and contributed to the severity of the Great Depression.)

Which of the following statements about a free trade agreement is accurate? a. The gains are shared equally by each member. b. Increased competition can result in higher commodity prices in the domestic markets of the member countries. c. Supplier firms might benefit from economies of scale that allow them to lower average costs. d. It can increase the opportunities for domestic business investments but will decrease foreign direct investment into the member countries.

c. (Supplier firms might benefit from economies of scale that allow them to lower average costs.)

Which US agency is responsible for negotiating trade agreements on behalf of the US government? a. US International Trade Commission b. The US Department of State c. The International Trade Administration d. The Office of the US Trade Representative

d. (The Office of the US Trade Representative)

Suppose that the WTO determines that one of the member countries has a trade policy that is violating a WTO rule and that country refuses to change the policy. What can the WTO do to encourage the country to change the policy? a. The WTO can expel the country from the WTO. b. The WTO can impose a fine against the country. c. The WTO can raise the membership fees for the country. d. The WTO can authorize other countries to impose retaliatory trade policies against the country that is in violation of the rules.

d. (The WTO can authorize other countries to impose retaliatory trade policies against the country that is in violation of the rules.)

Which of the following characterized the Doha Round of international trade negotiations? a. The creation of a global agreement regulating the trade of oil. b. The creation of the World Trade Organization to replace the General Agreement on Tariffs and Trade. c. It was the first round of the General Agreement on Tariffs and Trade. d. The rise of developing countries as a voting bloc.

d. (The rise of developing countries as a voting bloc.)

Fast Track Authority (aka Trade Promotion Authority) allows the U.S. president to: a. impose tariffs without Congressional approval. b. exempt specific trading partners or products from tariffs with Congressional approval. c. negotiate trade agreements without Congressional approval. d. negotiate trade agreements that will only be subject to a yes/no vote in Congress.

d. (negotiate trade agreements that will only be subject to a yes/no vote in Congress.)

erosion of pricing power (cartels)

decline in demand new competitors substitute products cheating by cartel members

make (internal production)

domestic: vertical integration, domestic division, insourcing foreign: offshoring, foreign affiliate, FDI

international debt (1974-1982)

economic conditions: 1. oil prices increase-recession and inflation 2. oil revenues increase: surplus loanable funds 3. interest rates: low in developed countries, high in developing countries debt conditions: 1.loanable funds flow to developing countries 2.global recession decreases exports and repayment funds debt crisis

The Washington Consensus

economic policy reforms of late 1980s: free markets with minimal government intervention key features: -debt restructuring (led by IMF and US) -implementation of stabilization plans to stop inflation and control budget deficits -privatization of state-owned enterprises -reduce trade barriers and encourage foreign direct investment results: slow growth and continued inequality

trade act of 1979

establishes ITA-USTIC structure for antidumping/countervailing duties

regional trading agreements (economic blocs)

southern common market (MERCOSUR): 1991, 4 central countries, $2.9T Association of Southeast Asian Nations Free Trade Area (AFTA): 1992, 10 countries, $2.3T NAFTA: 1994, 3 countries, $20T EU-Japan Partnership Agreement: 2017, 29 countries, $22T African Continental Free Trade Area: March 2018, 55 countries, $2T Trans-Pacific Partnership: March 2018, 11 countries, $13T

international institutions criticisms and controversies

sovereignty transparency ideology implementation effectiveness

Dutch disease

the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country's other products less price competitive on the export market. -price of non-commodity exports increase

Singer-Prebisch Thesis (1949)

the price of primary products will decline over time relative to price of manufactured goods -Px (decrease)/ Pm (increase) -inventions are replacing natural resources -food as a share of income