Transcript Econ 340 Lecture 2 Institutions of the International Economy Announcements • No class on Monday 1/19 – MLKJr Day • Economics at Work – Econ-Major Alums.

Econ 340
Lecture 2
Institutions of the
International Economy
Announcements
• No class on Monday 1/19 – MLKJr Day
• Economics at Work
– Econ-Major Alums tell about their jobs
– Fridays 1-2:30 PM, 140 Lorch
(Askwith Auditorium)
Lecture 2: Institutions
2
Lecture 2: Institutions
3
Lecture Outline: Institutions of the
International Economy
• The Three Main Institutions (IMF, World Bank, WTO)
– Why They Were Created, and When
– How They Have Changed
– Their Reputations Today
• Other Institutions
– United Nations
– OECD = Organization for Economic Cooperation and
Development
– Preferential Trading Arrangements
• What’s Happening Now?
–
–
–
–
–
The World Financial Crisis
The Euro-Zone Crisis
The Doha Round
PTAs
Lecture 2:
Trade Disputes
Institutions
4
The Three Main Institutions
• Functions
– IMF (International Monetary Fund): Financial
Assistance
– World Bank: Development Assistance
– WTO (World Trade Organization): Trade
Policy Regulation and Negotiation
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The Three Main Institutions
• History
– Before World War II
• Great Depression
• High Tariffs on trade
• Competitive Devaluations
of Currencies
Lecture 2: Institutions
“Beggar Thy
Neighbor Policies”
(we’ll see why later)
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The Three Main Institutions
• History
– End of World War II
• Bretton Woods Meeting (Bretton Woods, NH)
– IMF
– World Bank
– ITO (International Trade Organization)
» Never ratified
» Instead: GATT (General Agreement on Tariffs and
Trade)
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The Three Main Institutions
• History
– Changes since 1940s
• IMF
– Originally enforced pegged exchange rates
– Purpose: To prevent “beggar-thy-neighbor” exchangerate policies
– Major currencies switched to floating in 1970s
– IMF still provides financial assistance
» Until recently, mostly to developing countries
» Subject to “conditionality” = required policy changes
» In 21st century, many countries were paying off their
loans, until financial crisis.
– IMF was wondering about its income, but now is lending
to countries in crisis, such as Greece and Ireland.
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The Three Main Institutions
• History
– Changes since 1940s
• World Bank
=IBRD (International Bank for Reconstruction and
Development)
– Originally intended for reconstruction from war
– Now mainly assists development
– Much of it by funding and assisting with projects
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The Three Main Institutions
• History
– Changes since 1940s
• GATT
– Rules of international trade policy
– “Rounds” of negotiation
» Uruguay Round
» Created WTO in 1995
» Currently is/was doing the Doha Round
Begun 2001 in Doha, Qatar
Negotiations started and stopped several times
» Finally reached limited agreement in Bali,
Indonesia, December 2013
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The Three Main Institutions
• Reputation today, among some:
Lecture 2: Institutions
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The Three Main Institutions
• Reputation Today: Criticized by
– Opponents of globalization
– Opponents of corporations
– Some in Developing Countries for dominance
• by US
• by rich countries
• by corporations
– Some in US for undermining US power
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The Three Main Institutions
• Reputation Today: Criticized by
– Scholars for institutional flaws
• IMF: Has sometimes imposed misguided policies
• World Bank: Wastes resources on corrupt elites
• WTO: Dominated by rich countries, corporations
Lecture 2: Institutions
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Lecture Outline: Institutions of the
International Economy
• The Three Main Institutions (IMF, World Bank, WTO)
– Why They Were Created, and When
– How They Have Changed
– Their Reputations Today
• Other Institutions
– United Nations
– OECD = Organization for Economic Cooperation and
Development
– Preferential Trading Arrangements
• What’s Happening Now?
–
–
–
–
–
The World Financial Crisis
The Euro-Zone Crisis
The Doha Round
PTAs
Lecture 2:
Trade Disputes
Institutions
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Other Institutions
• G-7, G-8, G-20: These are Groups of
countries
– G-7 = US, Canada, Japan, Britain, France,
Germany, Italy
• Finance ministers meet regularly
• Heads of state meet annually
– G-8 = G-7 + Russia (1998-2014)
• Heads of state met annually, for a few years
– G-20 = G-8 + Australia & EU, + 10 major= 19
EMEs (Emerging Market Economies) Countries
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+ EU 15
Other Institutions
• G-20
– Used to meet regularly, but only the finance ministers
– First G-20 summit (i.e., heads of state) met November
2008, London
– Met again September 2009, Pittsburgh
– Now looks like G-20 summits will be the main regular
meeting, probably once a year
• Last, the 9th, was September 2014, in Brisbane, Australia
Next, Nov, 2015, will be in Antalya, Turkey
– Finance Ministers still meet, as needed
• 2014: Feb, Sep, Nov Australia; Apr, Oct Washington, DC
• 2015: Feb Turkey
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G-20
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Other Institutions
• UN = United Nations
– UNCTAD (United Nations Conference on
Trade and Development)
– ILO (International Labor Organization)
– WIPO (World Intellectual Property
Organization) Lecture 2: Institutions
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Other Institutions
• EU = European Union
• NAFTA = North American Free Trade Area
(or Agreement)
• OECD = Organization for Economic
Cooperation and Development
– Club of mostly high-income countries
– Does research, collects data, drafts policies
– Does not have any direct power
Lecture 2: Institutions
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Lecture Outline: Institutions of the
International Economy
• The Three Main Institutions (IMF, World Bank, WTO)
• Other Institutions
• What’s Happening Now?
–
–
–
–
–
The World Financial Crisis
The Euro-Zone Crisis
The Doha Round
PTAs
Trade Disputes
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What’s Happening Now?
– Recovery from The World Financial Crisis
• Crisis started in US with burst of housing
bubble in 2007-8
– Loans had been made, expecting that house
prices would rise
– With burst of bubble, loans went bad
– Banks and other institutions were interlinked
via
• Bad loans
• Complex financial instruments whose value fell
and/or was uncertain
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What’s Happening Now?
– Recovery from The World Financial Crisis
• Crisis spread
– To most other developed countries through
financial institutions
– To some developing countries too
• Income and expenditure fell, causing
world-wide recession
– Falling house prices alone reduced wealth
– Failures in financial markets made it worse
– Banks stopped lending
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What’s Happening Now?
– Recovery from The World Financial Crisis
• Recession caused immediate drop in
international trade
– This made matters worse
– It spread the recession to countries that had
not been exposed to financial markets
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World GDP, annual, 2005=100
140.000
120.000
100.000
80.000
60.000
40.000
20.000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0.000
Source: IMF
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1800
1400
600
400
200
2006 Jan
2006 May
2006 Sep
2007 Jan
2007 May
2007 Sep
2008 Jan
2008 May
2008 Sep
2009 Jan
2009 May
2009 Sep
2010 Jan
2010 May
2010 Sep
2011 Jan
2011 May
2011 Sep
2012 Jan
2012 May
2012 Sep
2013 Jan
2013 May
2013 Sep
World Goods Exports, monthly, $billion
July 2008
1600
Feb 2009
1200
1000
800
Down
43%
0
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Global Recession Status
January 10, 2010
In Recession
Moderating
Recovering
Expanding
Source: Dismal Scientist
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Global Recession Status
December 31, 2010
Source: Dismal Scientist
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Global Recession Status
January 8, 2012
Source: Dismal Scientist
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Global Recession Status
September 3, 2012
Source: Dismal Scientist
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Global Recession Status
January 13, 2013
Source: Dismal Scientist
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Global Recession Status
January 12, 2014
Source: Dismal Scientist
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Global Recession Status
January , 2015
Source: Dismal Scientist
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What’s Happening Now?
– Recovery from The World Financial Crisis
• What was done about it?
– Central banks, cut interest rates and extended
credit.
– Banks were rescued.
– Countries used “Stimulus Packages” (tax cuts
and spending increases) to stimulate
economies.
– G-20 began meeting in summits, first in
London
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What’s Happening Now?
– Recovery from The World Financial Crisis
• What was done about it?
– IMF is back in business making loans.
• Packages already in hand for
–
–
–
–
Iceland
Hungary
Ukraine.
Many more
• G-20 promised more funds to IMF
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What’s Happening Now?
– Recovery from The World Financial Crisis
• What will prevent future problems?
– Financial regulation
• restraints on bank lending
• reform of credit rating agencies
– Managed currency policies? (US concern
with China’s currency.)
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What’s Happening Now?
– Debt Problems of EU
• In 2010, starting with Greece, countries in
the Eurozone found themselves with
unmanageable debts
– Markets feared default; interest rates rose
– EU and IMF stepped in with loans
• Similar things happened later to Ireland,
Portugal, and Spain
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What’s Happening Now?
– Debt Problems of EU
• Leaders of the EU have met repeatedly
– They disagree over
• Who will pay for any bailout of Greece and others
• Whether the bond holders should bear some cost
– Result has been repeated “fixes” that don’t fix
– Some say this all threatens the euro.
– In July 2012, European Central Bank (ECB)
announced that it will “do whatever it takes” to
save the euro. That seems to have worked.
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What’s Happening Now?
- Doha Round?
• Doha Round: See Donnan
– Had ministerial meeting December 2013 in Bali,
Indonesia
– Doha Round was officially “at an impasse.” Not likely
to reach a full agreement on its objectives in the near
future (if ever)
– In Bali, they did agree on several things, largest being
“trade facilitation” – reducing impediments to trade at
the border (red tape, delays, etc.)
– Likely instead to be increased move toward
PTAs/RTAs among pairs and small groups of
countries
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What’s Happening Now? - PTAs
• PTAs (Preferential Trade Agreements)
– Most countries are in some of these and are
negotiating to form more
– Typical PTA is “Free Trade Area” (FTA) such
as
• NAFTA (North American Free Trade Area)
– We’ll study the effects of these later in the
course
• They are not necessarily economically beneficial
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What’s Happening Now? - PTAs
Recent United States Free Trade Agreements
Completed since 2001
Australia, Bahrain, Chile,
Costa Rica, Dominican
Republic, El Salvador,
Guatemala, Honduras,
Jordan, Morocco,
Nicaragua, Singapore
Went into effect in 2012:
S. Korea, Colombia,
Panama
Being Negotiated
Trans-Pacific Partnership
(TPP)
Trans-Atlantic Trade &
Investment Partnership
(TTIP)
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What’s Happening Now? - PTAs
• Trans-Pacific Partnership (TPP)
– Started in 2006 as Trans-Pacific Strategic Economic
Partnership: Singapore, Brunei, Chile and New
Zealand
– In 2008, US said it would negotiate to join, and this
brought in 4 more countries: Australia, Peru,
Malaysia, and Vietnam.
– Since then, Mexico, Canada, and in 2013, Japan
joined.
– The countries are extremely diverse.
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What’s Happening Now? - PTAs
• Objective of the TPP
– To negotiate a “state of the art” trade
agreement
• It would go beyond existing agreements
• It would permit additional countries to join
– US claims it will
• Enhance competitiveness
• Promote US employment
• Demand high standards for
– Labor, environment, intellectual property
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What’s Happening Now? - PTAs
• Objections to the TPP
– Rice farmers in Japan fear imports from US
– Auto workers in US (and Michigan
Congressman) fear Japanese exports
– Some in US oppose further trade opening
• Democrats in Congress
• Tea Party (See Mauldin)
• But most Republicans in US favor it (See
Politi)
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Regional Trade Agreements (RTAs) Notified to GATT/WTO
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What’s Happening Now? - PTAs
• Most recently, in 2013-14:
–
–
–
–
–
–
–
–
–
–
–
January 2013: US-EU FTA negotiations began
February 2013: India seeks FTA with EU
March 2013: EU-Japan FTA negotiations began
April 2013: China-Iceland FTA agreed
August 2013: Brazil sought FTA with EU
October 2013: Canada-EU FTA agreed
November 2013: Ukraine-EU FTA talks stalled
December 2013: China-EU FTA proposed
July 2014: China-S Korea FTA nearly done
September 2014: Ukraine-EU FTA agreed
November 2014: Australia-China FTA agreed
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What’s Happening Now? - Disputes
• Trade Disputes
– Boeing-Airbus: US vs EU over aircraft
subsidies
– This has been going on for many years, as
each has filed complaints against the other in
the WTO.
• Both have won!
• Yet nothing has been done
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What’s Happening Now? - Disputes
• Trade Disputes
– Solar panels
• Both US and EU complain that China’s solar
panels are both subsidized and dumped
• EU negotiated a settlement under which China
promises to sell for a minimum price
• US imposed tariffs of 24-36% on Chinese-made
solar panels
• Now Chinese manufacturers have moved
production to Taiwan to avoid the duties.
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What’s Happening Now? - Disputes
• Trade Disputes
– US-EU beer dispute
• US taxes beer:
– Big brewers: $18 per barrel
– Small brewers: $7 per barrel on their first 60,000 barrels
• Purpose of the lower tax on small brewers is to
encourage small “craft” brewers.
• But EU brewers, even if small, are not eligible for
the lower rate. EU complains.
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What’s Happening Now? - Disputes
• Trade Disputes
– China’s currency (the yuan)
• Was pegged to US $ at 8.2765 ¥/$ and considered
undervalued
• Allowed to rise as of July 21, 2005. It rose 2.1%
• Rose steadily until July 2008, to 6.8363 ¥/$ about
20%
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What’s Happening Now? - Disputes
• Trade Disputes
– China’s currency (the yuan)
• In July 2008, dollar itself started to rise, and yuan
went back to being fixed to dollar
• Many, in US and especially in EU, think yuan
should rise much more. China says no!
• Yuan did start to rise, a little in summer 2010 until
early 2012; then again in 2013.
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2000 Jan
2000 Jun
2000 Nov
2001 Apr
2001 Sep
2002 Feb
2002 Jul
2002 Dec
2003 May
2003 Oct
2004 Mar
2004 Aug
2005 Jan
2005 Jun
2005 Nov
2006 Apr
2006 Sep
2007 Feb
2007 Jul
2007 Dec
2008 May
2008 Oct
2009 Mar
2009 Aug
2010 Jan
2010 Jun
2010 Nov
2011 Apr
2011 Sep
2012 Feb
2012 Jul
2012 Dec
2013 May
2013 Oct
2014 Mar
2014 Aug
How China’s Exchange Rate Behaves
US$/yuan Exchange Rate
0.180
0.160
0.140
0.120
0.100
0.080
0.060
0.040
0.020
0.000
Source: IMF
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Recent Movements of the Yuan
0.7%
Source: X-Rates.com
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What’s Happening Now? - Disputes
• Other Trade Disputes
– EU vs. Brazil over 30% tax on imported vehicles
– US catfish farmers unhappy over catfish from
Vietnam, want harsher inspections
– EU vs. Russia over “recycling fee” on imported cars.
– US ban on some Samsung products due to patent
infringement
– Russia bans imports from some uncooperative former
Soviet-bloc countries, claiming health hazards
– Russia bans food imports in response to sanctions
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Next Time
• Comparative Advantage and the Gains
from Trade
– What causes countries to export and import?
– Why do they gain from trading?
– The “Ricardian Model” of International Trade
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