ECO 6716 POWERPOINT 0.50 Institutions Fall 2024.pdf

World Trade Organization (WTO) – The WTO “sets the rules” for international trade. World Bank – The World Bank makes loans to help develop less developed nations. International Monetary Fund (IMF) – The IMF helps nations with balance of payments difficulties. Export-Import Ba...

World Trade Organization (WTO) – The WTO “sets the rules” for international trade. World Bank – The World Bank makes loans to help develop less developed nations. International Monetary Fund (IMF) – The IMF helps nations with balance of payments difficulties. Export-Import Bank (EX-IM) – The Ex-Im helps finance U.S. international trade. The WTO, World Bank and IMF are international organizations; the Ex-Im is a US government agency I have lots of videos, especially for the WTO and EX-IM  Smoot- Hawley Tariff GATT Created WTO Created 1920 1930 1947 1986 Now Great World War 2 Uruguay Depression Round Smoot-Hawley Tariff ◦ Passed in 1930 ◦ Raised tariffs to highest level since 1828. ◦ Helped cut U.S. international trade by 60%. Reciprocal Trade Agreement Act (1934) 1. The President negotiated tariffs rather than Congress unilaterally setting them. 2. Tariff reductions were contingent upon the partner nation reducing its tariffs. 3. The Congress had to approve with a 51% majority rather than 67%. 1947 General Agreement on Tariffs and Trade (GATT), a set of trade rules, was signed in 1947 by 23 nations. GATT ◦ focused on lowering and eliminating tariffs. ◦ tried to eliminate quantitative restrictions on imports and exports. ◦ helped reduce trade costs. ◦ trade disputes among members were settled by negotiation ◦ conducted “rounds” of negotiations. – In 1986, the Uruguay Round created the WTO, the World Trade Organization ◦ https://www.youtube.com/watch?v=j04P3SBBfAw The WTO helps provide international rules governing trade. Carried over the GATT are five principles: ◦ 1. Non-discrimination. – Trade rules, regulations, and laws must embody two major components: the most favored nation (MFN) rule, and the national treatment policy. ◦ 2. Reciprocity. – Reciprocity means that a nation negotiating with another nation about cutting its tariff on, say, oranges expects that the other nation will cut its tariff on some other relevant good, say automobile tires ◦ 3. Binding and enforceable commitments. – The member nations negotiate their tariff commitments and set the maximum rates—“ceiling bindings”—in lists. ◦ 4. Transparency. – WTO members must publish their trade regulations, must notify the WTO of changes in trade policy, and must respond when other members request trade information. ◦ 5. Safety valves. – Three circumstances in which governments are legitimately able to restrict trade: a. allow for the use of trade measures to attain non-economic objectives (eg, environmental concerns); b. aim at ensuring "fair competition"; and c. permit intervention in trade for economic reasons. Dispute Settlement Body: The Dispute Settlement Body (DSB) hears disputes about policy violations that arise between member nations. – After a dispute is lodged, 60 days of consultations follow. – If mediation fails, a 3-to-5-person panel of experts is appointed and within 6 months a final report is sent to the DSB. – The disputants have 60 days to appeal, after which the DSB must adopt the decisions unless a consensus objects. – If a party appeals, at least 3 members of a 7 party Appellate Board hear an appeal. The decision must be reached within 90 days and must be adopted unless a consensus objects. The Dispute Settlement Body was designed to better enforce WTO trade policies than was the situation in the GATT. GATT } Official complaints were adjudicated by a panel of 3 arbiters. } To be enforced, the decision must be approved by consensus. } Because consensus was unlikely, disputes generally were negotiated. WTO } Disputes are litigated. } After appeal, the WTO must adopt the decision unless a consensus rejects it. Did this work? 2009/2010: Background http://www.youtube.com/watch?v=fUSaAJ7IVco https://www.youtube.com/watch?v=bLFYChw5c0Y 2012: Japan, the EU, and United States file a complaint https://www.youtube.com/watch?v=SA63FsUVBk4 2014: The WTO Outcome https://www.youtube.com/watch?v=ZHJ3G-yoet0 China appealed: https://www.youtube.com/watch?v=hYUcnMiDI_0 Basically as an FYI: After 2016, not much happened (possibly Covid, which decreased demand) until more recently, with a huge demand increase due to EVs  The United States has 3 general objections to the Appellate Board: – Rather than just consider the law, the Appellate Board has frequently overruled the factual conclusions reached by the Dispute Settlement Body. – The Appellate Board has issued advisory opinions that are not necessary to resolve the dispute but which then become law. – The Appellate Board looks to past decisions as near-binding precedent. The United States also has specific objections to the Appellate Board First some definitions: Countervailing duty: A tariff imposed when a domestic industry is harmed by subsidized imports. Voluntary export restraint (VER): A limit on the quantity of a good that will be exported, which is self-imposed by the exporting country. Antidumping duty: A tariff imposed when a foreign company exports a product and sells it at a price lower than the price it charges in its home market.  Countervailing Duty Countervailing duty: A tariff imposed when a domestic industry is harmed by subsidized imports. ◦ The WTO defines a subsidy as a financial contribution by a government or any public body which confers a benefit to the recipient. ◦ The WTO agreement allows other governments to impose countervailing duties where there is material injury to the competing domestic industry from a subsidy. The United States lost a countervailing duty case on tariffs imposed on Chinese firms that received financial contributions given to them by Chinese state-owned enterprises (SOEs).  Voluntary Export Restraint Voluntary export restraint (VER): A limit on the quantity of a good that will be exported, which is self-imposed by the exporting country. ◦ Prior to the WTO, the United States frequently used Voluntary Export Restraints to limit imports. ◦ But the 1994 WTO agreement prohibited VERs. ◦ Once prohibited, the United States switched to antidumping duties.  Antidumping Duty Dumping: A company exports a product at a price and sells it at a lower price than it charges in its home market. ◦ The WTO agreement allows governments to act against dumping when there is material injury to the competing domestic industry by imposing a tariff, called an “Antidumping Duty”. The amount of the antidumping duty depends on the difference between the foreign price and domestic price. WTO agreement said nothing about the policy of “zeroing” when calculating this difference. WTO rules on antidumping duties state that the adjudicators are to give deference to “domestic investigating authorities”. Example of zeroing: Dumping requires calculating the difference in prices: Without Zeroing With Zeroing Home Foreign Price Home Foreign Price Month price price difference Month price price difference 1 100 70 30 1 100 70 30 2 50 70 −20 2 50 70 0 3 90 70 20 3 90 70 20 4 60 70 −10 4 60 70 0 5 90 70 20 5 90 70 20 Total Price difference 40 Total Price difference 70 The home price is 8 above The home price is 14 above the foreign price. An 8 the foreign price. A 14 tariff can be imposed. tariff can be imposed. The United States has lost most of the more than 100 antidumping cases filed against it. ◦ What are the specific US objections? – The United States uses zeroing to calculate the price difference but the WTO ruled against the policy of zeroing. – The United States contends that the adjudicators were not giving deference (or credence) to the US investigating authority, the US Trade Representative.  US response: ◦ As members’ terms expired, the United States blocked appointments to the Appellate Board. ◦ Currently there are zero members of the Appellate Board. ◦ Consequently, any nation that loses a case in front of the Dispute Settlement Body simply appeals the decision to the Appellate Board … where it sits … undecided … History of the World Bank and IMF in a semi-dated video: ◦ https://www.youtube.com/watch?v=lN3qrFA4jXc Bretton Woods Objective The World Bank is an international financial institution that makes loans to developing nations. The World Bank has two major institutions: 1. International Bank for Reconstruction and Development: Its goal is to fight poverty by loaning to creditworthy middle-income and poor nations. IBRD borrows by issuing World Bank bonds. These bonds are rated AAA (they are guaranteed by the member governments) and can be bought and sold by private individuals. 2. International Development Association: The IDA was created in 1960 with the mission of providing long-term, zero interest rate (or very low interest rate) long-term loans to the world’s 75 poorest countries. The IDA is funded by donations from member countries every 3 years and by profits from the IBRD. Governance Board of Governors The Board of Governors, which meets once a year, has 189 members, each generally a member country’s minister of finance or minister of development. President The President manages the World Bank. As the largest shareholder, the United States nominates the President, who has always been an American citizen. Board of Directors There is a 25-member board of directors. The five largest shareholders appoint five members; the other twenty are elected by the Board of Governors. Five largest shareholders: The Board of Directors meets twice a week to1.approve Unitedloans, States new policies, the budget, and so forth. 2. Japan 3. China 4. Germany 5. United Kingdom  The IMF is an international financial institution with 190 member nations. Objectives EXAMPLE: Sri Lanka 2022 crisis Background and IMF role: – Promotes international monetary cooperation https://www.youtube.com/watch?v=Eh8aMOnYTaU – Makes resources available to member nations with balance of Result: payments difficulties; lender of last resort and loans are often https://www.youtube.com/watch?v=NSt6FRMkdPQ conditional IMF Conditions: https://www.youtube.com/watch?v=28OO294Zyfw – Aims to secure financial stability Results: Funding https://www.youtube.com/watch?v=uY_56-sPrpk IMF’s source of funding is from quotas. Each member pays an assigned quota, based largely on its GDP Governance Board of Governors The Board of Governors has 1 member from every member nation. The Board of Governors elects the members of the Executive Board. Executive Board The Executive Board has 24 members elected by the Board of Governors The Managing Director (traditionally from Europe and selected by the Executive Board) serves as Chair of the Executive Board. The Executive Board is in charge of the day-to-day operations of the IMF. The World Bank and IMF are controversial: ◦ https://www.youtube.com/watch?v=BKZGk0DN1Mg Objective The Export-Import Bank (EX-IM Bank), located in Washington DC, is an agency of the U.S. government whose mission it is “to assist in financing the export of U.S. goods and services to international markets.” Operations ◦ The EX-IM Bank provides: – working capital guarantees (pre-export financing for the U.S. exporter) – export credit insurance for the exporter (protects the exporter in case of non-payment by the buyers ) – loan guarantees and direct loans to the buyer (lowers the cost of loans to buyers) General Overview of the three operations: http://www.youtube.com/watch?v=ZemvZY1lzgU https://www.youtube.com/watch?v=5Ct7Ea_zmSU https://www.youtube.com/watch?v=pXmhoFuz1-8 Governance The EX-IM Bank is similar to a typical investment bank insofar as it is overseen and managed by a 5-member Board of Directors (of which the Chair runs the bank). Members must be approved by the US Senate. – A quorum (3 members) must approve loans exceeding $10 million. Unlike a typical investment bank, the EX-IM Bank obtains its funds by borrowing from the U.S. government. In 1945 the EX-IM Bank was made an independent government agency. As such it needs its charter renewed. The last renewal was in 2019 for 7 years.  Controversy (from previous renewal in 2015) https://www.youtube.com/watch?v=MfYnIsQBxP8 Winners – Exporters – Foreign Importer – https://www.youtube.com/watch?v=wUfDu-1Rq10 Losers – U.S. producers of competitive products – U.S. taxpayers – https://www.youtube.com/watch?v=z4KL0WUaaRI&t=79s Economists’ (conservative) view – https://www.youtube.com/watch?v=imciXW_LH9k Managerial Lesson Regardless of the controversy or the future, if you are exporting you ought to look into the Export-Import Bank’s programs.