Research Topics: International Trade: Kyoto Protocol

International Trade Theory and Policy

International Trade Theory and Policy Introduction             The world economy is dependent on the individual economies of each countries participating in world trade relations. Similarly, world output is also dependent on the outcomes of trade and international specialization of each country. Due to the rapid increase of trade and specialization, it results to the increase in the world output, which fosters economic prosperity and global competitiveness of each nation. This economic prosperity leads to the increase in the trade relations, especially between Asia and the Western nations. Due also to the direct relationship of trade and world output, the decrease of the other can affect the decrease of the latter, as they are affected by severe economic recession and devaluation of money (2005).             This paper discusses the factors responsible for the Asian Financial Crisis of 1997, and its effects on the economy of the different Asian countries participating in the trade. It examines how the chain of reactions took place, the outcomes of the financial crisis, and how it affected the rest of the world economy and other countries.   The Asian Financial Crisis             It has been reported that for years, East-Asian countries were held up as economic icons, exhibiting an ideal recipe for strong economic growth of developing countries, for having a typical blend of high savings and investment rates, autocratic political systems, export-oriented businesses, restricted domestic market, government capital allocation, and controlled financial systems (2002). Furthermore, from 1945 to 1997, the Asian economic miracle fueled the greatest expansion of wealth, for the largest number of persons, in the history of mankind, as by the year 2020, Asians were expected to produce 40 percent of the world’s GDP while the U.S. and European shares would recede to 18 percent and 14 percent, respectively (1999).             However, in July 1997, a half century of economic progress came to a crashing halt, as several Asian economies previously praised for balanced budgets, high savings and investment rates, low inflation and openness to the world market, went into free fall (1999). The crisis started with Thailand, and affected other East Asian Tigers, namely Indonesia, South Korea, Hong Kong, Malaysia, Laos, Mainland China, Taiwan, Singapore, Vietnam and the Philippines, and in turn affected also some countries in Europe and the Americas, such as Russia, Brazil and the United States.             Moreover,  (1999) reports that stock markets and currencies plummeted, prompting central banks to mount expensive currency defenses through buying forwards, raising interest rates to unprecedented levels, or both (). He adds that the magnitude and volatility of the crisis dealt a sharp blow to fragile and overextended banking systems, while devastating those manufacturing establishments dependent on cheap capital and foreign inputs for their production. It shocked the confidence of foreign investors and domestic entrepreneurs, while decreasing the wealth of the newly emergent middle classes and impoverishing the non-agricultural labor force (1999).  In short, the financial crisis is creating havoc over the economy of the countries affected, and in turn creating a chain of reaction, leading to the continuous downfall of the economy.   The Causes of the Asian Financial Crisis             It has been reported that until 1997, Asia attracted almost half of total capital inflow to developing countries, as economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return ( 2006). Because of this, the economy of most of the Southeast Asian countries received a large inflow of dollars and experienced a rapid increase in asset prices, yielding an 8-12 percent increase in the GDP rates. This economic achievement or the so-called Asian economic miracle was attributed to the contributions of the International Monetary Fund (IMF) and the World Bank.              (2002) reports that the investors and policy makers failed to recognize a number of similarities between the period preceding the Asian crisis and the period leading up to the two previous developing country crises: the 1980s Latin American debt crisis and the 1994-95 Mexican financial crisis (). For example, most domestic borrowers were not cautious against exchange rate risk, making them increase their foreign debt load significantly. Another example is that Asian financial institutions borrowed a significant amount of external liquid liabilities that were not backed up by liquid assets, making them vulnerable to panics (2002).             (2002) enumerate several causes of the Asian Financial Crisis. These include the following: <li class="MsoNormal" style="text-align: justify; line-height: 200%"> the governments’ futile attempts to keep their currencies at artificially high levels;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> government-directed banking systems and lending decisions;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> crony capitalism;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> massive overinvestment by corporations funded by excessive borrowing;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> the lack of transparency that masked the extent of problems they developed;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> inadequate financial regulation and supervision;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> labor market “rigidities”;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> a pronounced mismatch in the duration of assets and liabilities in both the corporate and banking sectors;</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> the gross misallocation of capital and human resources.</li> The authors believe that the biggest contributor to the Asian financial crisis of 1997 is its gross misallocation of capital and human resources, combined with a flagrant disregard for the bottom line (2002). The mentioned misallocation of capital and human resources caused by the lack of corporate governance resulted in the widespread value destruction by Asian companies, which in turn led to a lower value for the overall economy and weakened the banking sector. In addition, underlying all of these weaknesses were pervasive moral hazards, for banks, investors, and business firms assumed that governments and international organizations would rescue them out in the event of financial catastrophe. The moral hazards created incentives for risky behavior on the part of the developing countries and international investors ( 2002). Furthermore, (1999) supports the idea that excessive borrowing abroad, primarily by the private sector, is the hallmark of the Asian financial crisis, resulting to a total external indebtedness reaching large proportions, exceeding 50 percent of GDP in Thailand, Indonesia and the Philippines (). In addition, although external aspects such as fixed exchanged rates, high interest rates, and excessive borrowing from abroad, are among the important causal factors in the Asian crisis, it would have not occurred without internal weaknesses as well, including inadequate supervisory institutions, traditional banking practices, and most of all, poor investment decisions made by the private sector of each country (1999). In addition, foreign borrowing led to a domestic lending boom across all of Asia, which generated multiple asset bubbles, especially in stock markets and real estate. This resulted to an overflow of foreign money chasing too few sound investments that were capable of earning foreign exchange sufficient to service the principal and interest on the debt. The author points out that instead of exercising restraint, local banks re-lent monies borrowed abroad to speculative investments in real estate or to protected and noncompetitive enterprises such as steel and petrochemicals ( 1999). It has been reported that the failure of the entire business sectors to meet global standards regarding financial regulation, auditing, and corporate governance became critical in undermining foreign confidence once earnings began to fall rapidly (1999). Moreover, domestic investors were the first to react to the downturn, being unable to meet payments to domestic bank creditors on stalled or unprofitable projects, and began pulling capital out of local stock markets. These factors became intensified by the capital flight in Indonesia, Thailand, Malaysia, Korea and the Philippines, once foreign and domestic investors sensed the deep-seated weakness of the financial sector in each country. Sharply falling stock and property markets reinforced one another in a downward spiral that devastated local financial systems (1999). In line with all of the causes of the Asian crisis mentioned, two theories emerged to cover the views regarding the crisis, namely, the Fundamentalist view, which focuses on how borrowing countries’ policies and practices fed the financial crises, and the Panic view, which focuses on the role lenders played ( 2002).  (2002) further explained the Fundamentalist view. The authors emphasized that the view holds that flawed financial systems were at the root of the crisis and its spread, and the seeds for the financial crisis were actually shown several years before currency pressures began (). Most East-Asian countries had tied their currencies to the dollar, which served them well until 1995 because it promoted low inflation, supported currency stability, and boosted their exports. However, its appreciation against the Japanese yen and other major currencies caused them to lose their competitiveness in the export market, being similar to the situation in the late 1970s and 1980s when increased interest rates contributed significantly to the Latin American debt crisis. The combination of the loss of export competitiveness and the moral hazard in lending helped explain the severity of the Asian financial crisis. The appreciation of the dollar and the depreciation of the yen slowed down Asian economic growth and hurt corporate profits, which turned investments in property developments and industrial complexes into financial disasters (2002). The financial crisis became much worse when investors dumped their own currencies for dollars and foreign lenders refused to renew their loans, for the politicians preferred to put the blame on the foreigners for their problems, instead of finding solutions and reforms for their economies. These worsen the economic conditions in the affected nations, which also affected the political and social conditions in the South East Asia. In contrast to the Fundamentalist view is the Panic view, which states several vulnerabilities in relation to the Asian financial crisis: increasing current account deficits, falling foreign exchange reserves, fragile financial systems, highly leveraged corporations, and overvaluation of the real exchange rate (2002). However, these vulnerabilities were not enough to explain the abruptness and depth of the crisis, instead, the view argues that economic fundamentals in Asia were essentially sound, and that public borrowing played a limited role in the crisis. The Mexican peso devaluation in 1994 and the Latin American debt crisis in the 1980s shared common macroeconomic imbalances (including large budget deficits, large public debt, high inflation caused by the central bank’s effort to finance the budget deficits by printing additional currencies, slow economic growth, low savings rates, and low investment rates), in contrast to what happened to the affected countries in Asia. This just means that it differs from the two other events in that private-sector financial decisions were the main sources of difficulties (2002). The absence of the macroeconomic imbalances in the Asian financial crisis led some to believe that it was not caused by problems with the economic fundamentals, but rather, it was triggered by the swift change in expectations and served as the catalyst for the massive capital outflows. The Panic view holds that problems in Thailand were turned into the Asian crisis because of international investors’ irrational behavior and the overly harsh fiscal and momentary policies prescribed by the International Monetary Fund (IMF) as the crisis broke (2002). Conclusion             Most would agree that the effects of the Asian financial crisis of 1997 have been severe. It has been reported that although it is initially only financial in nature, the crisis has led to significant real economic losses in these formerly fast-growing economies (2002). It has affected the majority of the countries in South East Asia and even the rest of the world, for the productivity and the output of one country is interdependent from other countries. The significant economic loss brought about by the financial crisis, in turn, affected the world output as a whole, through world trade relations.             By determining the different causes of the downfall of the economy of Asia during the financial crisis, somehow, the same event can be avoided and the effects of the dilemma will be alleviated as well. The determined causes can be very useful in terms of solving and providing solutions to the different economic problems faced by a nation, and probably will help to enlighten the leaders to be always careful with their decisions in participating in trade relations with other nations. It is a given fact that our currencies are dependent on the dollar, so spending the people’s money wisely for the benefit of the whole nation would be very helpful, just to lessen the arising economic problems.             In this kind of situation, it will also be very helpful if the leaders and the people would not be putting blames on others, instead, to become united in fighting off the crisis all together, by cooperation and sharing of ideas for the betterment of the nation. This would not only be beneficial to one country alone, but to the other countries as well, especially concerning the issue of global competitiveness, development, cultural relativism, trade relations and world output. Credit:ivythesis.typepad.com

International Trade Theory and Policy

International Trade Theory and Policy Introduction The world economy is dependent on the individual economies of each count...

WORLD TRADE ORGANIZATION

WORLD TRADE ORGANIZATION   Introduction             In order to maintain good trading relationship of different nations, World Trade Organization has been established. The World Trade Organisation (WTO) is the legal and institutional framework of the multilateral trading system. The World Trade Organisation exists to regulate international trade. Its key principle is non discrimination, ensuring that similar products from different countries must be treated the same way. The WTO is a member-driven organisation which nearly always works on a consensus basis. As an international organisation it has a sound and accountable legal basis because all WTO members have ratified the WTO Agreements. The WTO’s rules are set out in a range of international trade agreements covering trade in goods (the GATT), services, intellectual property and agriculture. The World Trade Organization (WTO) is the sole global association addressing the international decrees of trade involving countries. Its major purpose is to guarantee that trade runs as efficiently, predictably, and liberally as probable. The end result is reassurance. Consumers and producers are aware that they can take pleasure in safe supplies and superior alternative of the completed products, components, raw materials and services that they utilize. Producers and exporters are aware that foreign markets will continue to be open to them. The consequence is similarly a more affluent, nonviolent and responsible economic world. Decisions in the WTO are characteristically acquired by consensus among every member nations and they are approved by members’ legislative bodies. Trade hostility is directed into the WTO’s dispute settlement procedure where the center is on understanding agreements and pledges, and how to guarantee that nations’ trade policies stick to them. By lessening the trade obstructions, the WTO’s scheme similarly collapses other barricades involving peoples and nations. At the core of the organization recognized as the multilateral trading system are the WTO’s agreements, discussed and sanctioned by a great majority of the world’s trading countries, and approved in their legislative bodies. These agreements are the officially authorized essentials for global commerce. Fundamentally, they are contracts, promising member countries vital trade rights. They similarly compel governments to maintain their trade policies within established restrictions to everyone’s advantage. The agreements were discussed and ratified by governments, but their principle is to assist producers of goods and services, exporters, and importers carry out their business. The objective is to progress the wellbeing and interests of the citizens of the member countries. This study will take into consideration the discussed attributes of the WTO in different nations.   Impact of WTO in Different Nations According to WTO’s organizational statement, its objective is to “help trade flow smoothly, freely, fairly and predictably…It consists of 135 member nations that shared 90% of the world trade” (2002). In every areas of trade, the WTO promotes the removal of barriers to international competition, enabling countries to benefit from globalization.  (2002) states, “the Organization was to be the centre piece of a much consolidated and significantly widened regulatory framework designed not only to administer a series of legal agreements, covering trade in goods and services, intellectual property rights, and overseas the wherewithal to settle trade disputes, but to provide a permanent forum in which further liberalization could be pursued through periodic negotiation”. Furthermore, the WTO has a straightforward rationale: free trade ultimately benefits everyone, even if it means that some people must adjust when trade barriers are lowered (1999). As what (2003) beleives, “all WTO members were on an equal footing, as each one had to subscribe to all the agreements. Dispute settlement was given legal force: where judgement went against a country, it could no longer escape the obligation to correct its policies”. In this sense, it sounds almost perfect of having such a platform in dealing with international trade issues. With the increase in international trade and the expansion of the global market starting in the 1970s, one recognises a dramatic change in the international economic structure. Large multinational corporations with far-flung corporate networks and global factories dominate this new economic order. Rich and highly industrialised nations like the United States, Japan, Canada, members of the European Union and some newly industrialised countries have experienced unprecedented levels of economic growth and development. On the other side of the picture, a significant number of nations, those who belong to developing countries and least developed countries are not enjoying this unprecedented level of economic growth and development. Economic growth and development in the world have always been uneven. Since the end of World War II, many of the developing countries have been attempting to catch up economically with the developed countries by promoting industrialisation and using trade policy to cope with the disparate domestic economic development. Aiming to provide a ground for economic opportunities, the World Trade Organization (WTO) was established, following the conclusion of the Uruguay Round of the multilateral trade negotiation. WTO’s major mission is to make international trade flow as smoothly and freely as possible and to make the rules governing trade as transparent, fair and predictable as possible. Among the functions of the organisation include the administration and implementation of trade agreements, acting as a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training for developing countries, co-operation with other international agencies in trade-related matters. The World Trade Organisation (WTO), as the global apex trade body across the globe, provides a common institutional framework for the conduct of trade relations among its members, as well as the existing policies concerning trade margins and limitations (2000). WTO’s core mission is to remove both direct and indirect barriers to free trade. Direct barriers include import bans or quotas, customs duties, and government policies of buying from domestic producers; whereas indirect barriers include any government measure such as the regulation of products on environmental or health and safety grounds, or government support for domestic industries. Clearly, it is the grand mission of the WTO to advance the economic growth of developed countries, developing countries, and least developed countries. According to Hash, WTO system can make major contributions to economic development and rising standards of living in both developed and developing countries ( 2000). This is partly due to a steady liberalisation and widening of WTO rules which are enforced through a dispute settlement mechanism that respects both the sovereign rights of WTO member countries and the fundamental principles on which the multilateral trading system is based. Moreover, current trade regime helps the creation of the enabling conditions that contribute to economic growth. These conditions, when properly supplemented by appropriate domestic policies, accounts to the broader sustainable development objectives of society. According to  (1999), developing countries are pursuing an aggressive approach in their effort to effectively integrate their economies in the multilateral trading system (MTS). This is in the lieu of their continued marginalisation in the global trade and investment. As developing countries have faltered on their commitments towards their weaker trading partners, they have stepped up their efforts to an early launching of a new round of multilateral trade negotiation (MTN) and broadening its scope through inclusion of new issues. The creation of the WTO provided a challenge and an opportunity in encouraging developing countries to be a part of the multilateral trading system (MTS) (1999). WTO represents an institutionalised mandate to establish a global rule based trading regime evolving through various rounds of negotiations. Accordingly, implications of accession to the WTO, from the perspective of developing countries, is bound to be different in terms of coverage of the commitments, the degree of commitment, capacity required to face the challenges emerging from globalisation and the strength required to take advantage of the opportunities (2001).  It is implied that WTO membership benefits developing countries in terms of predictability of trading environment, transparency about rules and provisions, market access which allows market entry and export diversification, and multilaterality of approach which allows participation through multilateral trade negotiations rather than bilateral agreements with trading partners. Credit:ivythesis.typepad.com

WORLD TRADE ORGANIZATION

WORLD TRADE ORGANIZATION Introduction In order to maintain good trading relationship of different nations, World Trade O...

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