Lecture 2 Institutions of the International Economy Econ 340

Lecture 2Institutions of the

International Economy

Econ 340

Lecture 2: Institutions 2

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 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– Trade Disputes


The Three Main Institutions

• Functions– IMF (International Monetary Fund): Financial

Assistance– World Bank: Development Assistance– WTO (World Trade Organization): Trade

Policy Regulation and Negotiation



• History– Before World War II

• Great Depression• High Tariffs on trade• Competitive Devaluations

of Currencies

“Beggar Thy Neighbor Policies”

(we’ll see why later)



• 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)


The Three Main Institutions• History

– Changes since 1940s• IMF

– Originally enforced pegged exchange rates– Purpose: To prevent “beggar-thy-neighbor” exchange-

rate 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.



• 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



• 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, QatarNegotiations started and stopped several

times» Finally reached limited agreement in Bali,

Indonesia, December 2013



• Reputation today, among some:



• 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



• 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



• 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– Trade Disputes


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 EMEs (Emerging Market Economies)

= 19 Countries

+ EU


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


G-20


Other Institutions

• UN = United Nations– UNCTAD (United Nations Conference on

Trade and Development)

– ILO (International Labor Organization)– WIPO (World Intellectual Property

Organization)


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



• 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


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


• 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



• 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


Lecture 2: Institutions 24Source: IMF

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

World GDP, annual, 2005=100


2006

Jan

2006

Jun

2006

Nov

2007

Apr

2007

Sep

2008

Feb

2008

Jul

2008

Dec

2009

May

2009

Oct

2010

Mar

2010

Aug

2011

Jan

2011

Jun

2011

Nov

2012

Apr

2012

Sep

2013

Feb

2013

Jul

0

200

400

600

800

1000

1200

1400

1600

1800World Goods Exports, monthly, $billion

July 2008

Feb 2009

Down43%


Global Recession StatusJanuary 10, 2010

In RecessionModeratingRecoveringExpanding

Source: Dismal Scientist


Global Recession StatusDecember 31, 2010






Global Recession StatusSeptember 3, 2012









Global Recession StatusJanuary , 2015



• 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



• 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



• 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.)



• 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

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.

What’s Happening Now? – Debt Problems of EU


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


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



Recent United States Free Trade Agreements

Completed since 2001 Being Negotiated

Australia, Bahrain, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Morocco, Nicaragua, Singapore

Went into effect in 2012: S. Korea, Colombia,

Panama

Trans-Pacific Partnership (TPP)

Trans-Atlantic Trade & Investment Partnership (TTIP)



• 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.



• 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



• 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)


Regional Trade Agreements (RTAs) Notified to GATT/WTO

45

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

Lecture 2: Institutions


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



• 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.



• 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.



• 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%



• 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.


How China’s Exchange Rate BehavesUS$/yuan Exchange Rate

Source: IMF

2000 Jan 2001 Jun 2002 Nov 2004 Apr 2005 Sep 2007 Feb 2008 Jul 2009 Dec 2011 May 2012 Oct 2014 Mar0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.160

0.180


Recent Movements of the Yuan

Source: X-Rates.com

0.7%



• 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


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


Documents

Lecture 2 Institutions of the International Economy Econ 340