Lecture 2 Institutions of the International Economy

Lecture 2Institutions of the

International Economy

Econ 340

Lecture 2: Institutions 2

Announcements• We will start discussing news next week, on

Monday Jan 16. You should be watching for international economic news.

• Access to files on Canvas?– “Canvas tells me I am unauthorized to see the

files uploaded.”


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 more recently

has lent to countries in crisis, e.g. 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


The Three Main Institutions• History

– Changes since 1940s• GATT

– Rules of international trade policy– “Rounds” of negotiation

» Uruguay Round» Created WTO in 1995

• WTO– Was doing the Doha Round

Begun 2001 in Doha, QatarFailed & abandoned, December 2015

– Finally reached more limited agreements in 2013 & 2015



• Reputation today, among some:


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• Trump on Meet the Press, July 2016:

– “World Trade Organization is a disaster”


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



• 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• Most recent Sep 4-5, 2016, in Hangzhou, China

– Finance Ministers still meet more than once a year, as needed


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 23Source: IMF (but not available more recently)

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

0200400600800

10001200140016001800

World Goods Exports, monthly, $billionJuly 2008

Feb 2009

Down43%

Lecture 1: Overview 25

World Recession

Recent Slowdown


Global Recession StatusJanuary, 2017

Source: Dismal Scientist

RecessionRecovery

ExpansionAt risk


• 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– Doha Round was ended in failure in December 2015,

after negotiations that began 2001.– WTO will now pursue smaller agreements on trade

reform• Did one in Bali 2013 on trade facilitation• Did one in Nairobi in 2015 on farm export subsidies

– There is likely instead to be increased move toward PTAs/RTAs among pairs and 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• But without the Doha Round, they are the best option

available


What’s Happening Now? - PTAsRecent United States Free Trade Agreements

Completed since 2001 Being NegotiatedAustralia, 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) Agreed late in 2015 Not yet approvedTrans-Atlantic Trade & Investment Partnership (TTIP)

?


What’s Happening Now? - PTAs• Trans-Pacific Partnership (TPP)

– More on it below


Regional Trade Agreements (RTAs) Notified to GATT/WTO


What’s Happening Now? - PTAs• Most recently, in 2015-16:

– July 2015: Brazil-EU FTA signed– August 2015: Vietnam-EU FTA signed – August 2015: Australia-China FTA being negotiated

but “faces hurdles”– July 2016: Canada-EU FTA pending approval in EU– November 2016: India-UK FTA in negotiation– December 2016: Japan-EU FTA close to being

negotiated

• [Compared to earlier times I’ve taught this course, new PTAs are now much fewer and more problematic.]


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

• US and EU complain that China’s solar panels are both subsidized and dumped

• EU negotiated a settlement under which China promised to sell for a minimum price

• US imposed tariffs of 24-36% on Chinese-made solar panels

• Chinese manufacturers then 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%




• In July 2008, dollar itself started to rise, and yuan went back to being fixed to dollar

• Many, in US and especially in EU, thought yuan should rise much more. China said no!

• Yuan did start to rise, a little in summer 2010 until early 2012; then again in 2013.




• Most recently market forces have been pushing the yuan down

• China’s central bank has been spending reserves trying to keep it up (we’ll see later how that works)

• The US government has lately not been complaining about the Chinese currency

• But Donald Trump has: Promised to declared China a “Currency Manipulator” on day one of his presidency


How China’s Exchange Rate Has BehavedUS$/yuan Exchange Rate

Source: IMF2000 Jan 2002 Apr 2004 Jul 2006 Oct 2009 Jan 2011 Apr 2013 Jul 2015 Oct

0.000

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

7.8%



• Other Trade Disputes– Zika: China added US to list of zika-affected countries, perhaps

leading to restrictions– Steel: Glut of steel produced in China is prompting

• Complaints from EU, US, and others• Threatened tariffs on China exports

– Steel: US accuses China of steeling technology– China seeks “market-economy status;” US & EU decline– US and S. Africa resolved dispute over US exports of beef, pork,

& poultry– US challenges China in WTO over mineral export restrictions– Russia stopped exports of wheat to Turkey in response to

military conflict


What’s Happening Now? - TPP• Trans-Pacific Partnership (TPP)

– Free Trade Agreement among 12 countries• Including US, Japan, and 10 others• Not including China

– Negotiations completed November 5, 2015– Approval by US Congress

• Delayed until after 2016 election• Opposed by Donald Trump• Now unlikely to be brought for a vote

– Without US, TPP will die


What’s Happening Now? - RCEP• Regional Comprehensive Economic Partnership (RCEP)

– Free Trade Agreement among 16 countries• Including China, Japan, and 14 others in Asia• Not including US

– Negotiations underway– China may be encouraged to complete this, given the failure of

the TPP• China is also pushing for a Free Trade Area of the Asia-

Pacific, to include countries in Latin America– See Mitchell et al.


What’s Happening Now? - Brexit

• Britain voted on June 23, 2016, to leave the EU– See the cartoon in Chang for explanation

• Why the EU?– To prevent wars in Europe– To free up movement of people, goods, services, and

capital • Why not the EU?

– Need to bail out countries in trouble– Influx of migrants– EU regulations perceived as invasive


What’s Happening Now? - Brexit

• Results of vote– UK Prime Minister Cameron resigned– Once UK “informs” EU under Article 50, EU & UK will

have two years to negotiate terms– May make it harder for UK to sell in EU– Status of Brits in EU and others in UK is unclear– US now has to talk to both EU and UK, not just EU


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

Lecture 2 Institutions of the International Economy

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Transcript of Lecture 2 Institutions of the International Economy