International business environment MB-IB-01-MBA-IIIrd SEM-UPTU

International Business Environment
MB IB 01
1/29/2015 1Kartikeya Singh

Unit I – (10 sessions)
I. International Business and Environment:
An interface;
II. World Trade in Goods and Services – Major
trends and Developments;
III. Framework for Understanding International
Business Environment - Analysis of
Physical, Demographic, Economic, Socio-
cultural, Political, Legal and Technological
Environment of a Foreign Country,
IV. Legal Framework of International Business
- Nature and Complexities; code and
common laws and their implications to
Business;
V. International Business contract – Legal
Provisions; International Sales Agreements,
Rights and Duties of Agents and
Distributors.1/29/2015 2Kartikeya Singh

International Business and Environment
“A domestic transaction is the
selling of items produced in
the same country.”
“An international transaction
is the selling of items
produced in other countries.
These items contribute to the
global economy.”

 IB field is concerned with the issues
facing international companies and
governments in dealing with all types
of cross border transactions.
 IB involves all business
transactions that involve two or more
countries.
 IB consists of transactions that are
devised and carried out across
borders to satisfy the objectives of
individuals and organizations.
 IB consists of those activities
private and public enterprises that
involve the movement across national
boundaries of goods and services,
resources, knowledge or skills.1/29/2015 4Kartikeya Singh

Benefits of IB
Benefits for International Business
• Access to markets
• Cheaper labour
• Increased quality of goods
• Increased quantity of goods
• Access to resources

World Trade in Goods and Services – Major
• As trade flows have generally grown faster than
income since the Second World War, countries’
openness and their exposure to external
developments have increased;
• Global trade collapsed in the global crisis of
2008-2009, recovery remains unfinished and
uneven; the global crisis appears to have left a
marked impact on the dynamism of global
trade;
• The global crisis has also brought the long-run
trend of rising global integration through trade
to a halt, at least temporarily;
• The global crisis and uneven trade recovery
have reinforced the ongoing shift in balance in
the world economy, featuring the relative
decline of developed countries;
1/29/2015 Kartikeya Singh 6

World Trade in Goods and Services – Major trends
and Developments;
• The shifting global balance is also visible in the
changing distribution of exports by destination,
featuring the rising importance of trade among
developing countries;
• The rise in South-South trade has been
especially pronounced in East Asia;
• LDCs have generally participated in these
trends to a lesser extent but recovered some
lost ground in recent years;
• Related to commodity price developments;
many countries have experienced sizeable
terms-of-trade changes since 2002, with both
winners (especially oil and metal exporters) and
losers (especially food-deficit countries) among
developing countries including LDCs;
• Global governance reform needs to make
further progress.1/29/2015 Kartikeya Singh 7

World Trade in Goods and Services – Major
• Removal of Tariff and Non-Tariff barriers
• Transfer of technology leads to increased
production
• Increase in interdependence of countries.
• International trade after WWII entered a long
period of record expansion with world
merchandise exports rising by more than 8%
during 1950-70
• Trade growth slowed down after two oil shocks
• 1990s trade expanded again more rapidly, partly
driven by innovations in the information
technology(IT) sector.
• Despite the small contraction of trade caused by
the dotcom crisis in 2001, the average expansion
of world merchandise exports continued to be
high.1/29/2015 Kartikeya Singh 8

World Trade in Goods and Services – Major trends
and Developments;
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Development
Time Economic Political Technological
1940 •GATT 1947
•Bretton Woods
System – IMF and
World Bank 1945
•United Nation
1945
•Decolonisation
Started(1948-1962)
•First nylon Stalking
•Discovery of Large
oil field in middle
east
1950 •European Commission
1957
•European Free Trade
Association
•Major Currency
became convertible
•Koreon War 1950
•Suez Crisis 1956
•Decolonisation of
Africa Started
•Increased Oil use
from middle east,
•‘Just in Time’
production
implemented in
Toyota
•Increased use of jet
engines

Development
1960 •Foundation of OPEC-Oil
producing and Exporting
Countries – 1960
•Kennedy round – 1964-
1969
•More emphasis on
export development in
European region
•Erection of Berlin
Wall(1961)
•Green Revolution
•First high speed train
system
•Increased use of
containerization in
ocean transport.
1970 and
80s
•Tokyo round GATT-
1973
•Oil price shocks
•China Economic Reform
1978
EU was enlarged
to 9 members and
then to
12members
•IBM introduced first
personal computer
1981
•Microsoft Windows
Introduced 1985

Development
1990s •Indian Economic
reforms 1991
•NAFTA – 1994
•Asian Financial
Crisis
•WTO – 1995
•Adoption of Euro
11 countries
•Dissolution of
Soviet Union 1991
leads to 13
independent states
•Mobile usage on
surge
2000 •China joins WTO
2001
•Enlargement of
EU to 27 members
•Sea transport
increase multifold.

Framework for Understanding International
Business Environment
Micro Environment
• Customer
• Competitor
• Suppliers
• Marketing
Intermediaries
• Democratic
Macro Environment
• Economic
• Political and Legal
• Socio Cultural
• Demographic
• Natural
• Physical and
Technological
• International

Legal Framework of International Business -
• Ex -----
• Media advertising is not permitted in Libya
• European countries restrain the use of
children in commercial advertisements
• In a number of countries, including India, the
advertisement of alcoholic liquor is prohibited
• “cigarette smoking is injurious to health”
• In countries like Germany, product
comparison advertisements and the use of
superlatives like ‘best’ or ‘excellent’ in
advertisements is not allowed
• ‘caveat emptor’ or ‘let the buyer beware’
• MRTP act

Legal Framework of International Business - Nature and Complexities;
code and common laws and their implications to Business;
• There is no comprehensive system of laws or regulations
for guiding business transactions between two countries.
• The legal environment consists of laws and policies from all
countries engaged in international commercial activity.
• Early trade customs centered around the law of the sea and
provided, among other things, for rights of shipping in
foreign ports, salvage rights, and freedom of passage.
• During the Middle Ages, international principles embodied
in the lex mercatoria (law merchant) governed
commercial transactions throughout Europe.
• Although laws governing international transactions were
more extensive in some countries than others, the customs
and codes of conduct created a workable legal structure for
the protection and encouragement of international
transactions.
• The international commerce codes in use today in much of
Europe and in the United States are derived in part from
those old codes.1/29/2015 Kartikeya Singh 15

Sources of International Law -
• The main sources of international
commercial law are the laws of
individual countries, the laws embodied
in trade agreements between or among
countries, and the rules enacted by a
worldwide or regional organization—
such as the United Nations or the
European Union
• The International Court of Justice,
• International arbitration, or
• The courts of an individual country

Sources of International Law
• UNO
• WTO
• Import policy
• Taxes on Import
• Import control
– The Department of Commerce, the
International Trade Administration
(ITA),and the International Trade
Commission (ITC) have certain abilities
to restrict foreign imports.
• Export Regulation and Promotion

International Contract
• The basis for any
international
agreement is the
contract between
parties. International
contracts often
involve parties from
differing cultural
backgrounds who do
not know each other
well at the outset of
negotiations
a) Cultural Aspect
b) Financial Aspect
c) Exchange Market
d) Financial
Instruments
Used in
International
Contracts
e) Movement of
Monetary Profits

Financial Instruments Used in International Contracts
• Bill of exchange
– sight bill
– time bill
• Letter of credit
(Revocable/Irrevocable)
– certificate of origin,
– an export license,
– a certificate of inspection,
– a bill of lading,
– a commercial invoice

International Contract
I. Payment clauses
II. Choice of Language Clause
III. Force Majeure Clause
IV. Forum Selection and Choice-of-Law
Clauses.
V. UN Convention on Contracts
VI. Loss of Investment
VII. Nationalization.
VIII.Insuring against Risk of Loss

International Sales Agreements
Content of the pro-forma
Parties to the contract
 Write the exact references of contracting
parties along with, if posible, the name of
respective representatives of the two
companies.
The aim
 To prepare a detailed description of the
product or service, with all the technical
aspects and the details of packing
(volume, weight, and packing)
Transport Modalities
 To determine the Incoterm, transport mode
and the precised period required for
delivery
Price
 The price must be detailled (unit price,
etc), fime, final, in order to avoid
misunderstanding. The buyer and the
seller must define at this point of time the
mode and period of settlement of bills.

General Condition of Sales
CLAUSES
Parties to the contract
 Identifying parties to the contract (buyer/seller) : Name of the
companyies their Head Offices addresses detailed addresses and the
name of respective representatives.
Nature of the contract
 Defining aim of the contract (product or service)
 Describing technical aspects, quantity, volume, weight and eventually
mode of packing, as the buyer can communicate his requirements.
Prices and modes of payment
 Specifying price in Dinar or foreign exchange (risk of exchange rate
being included)
 Price is accompanied by the term determining distribution of
expenses on transport, custom duty, insurance and the time of
transfer of property.
 The price of merchandise will be defined (unit price and total price).
 Provide for a code of settlement which gives a maximum security to
the seller.
 Down payment of advances guaranteeing the order.
 In case of documentary credit, the seller notes the opening demand
 In fine, if law permits, a cause for reservation of propriety can be
inserted into the contract.

General Condition of Sales
CLAUSES
Modalities of transport
 Specifying the mode of transport consistant with nature of merchandise,
destination and security.
 Depending on the Incoterm, respective obligations of the contracting
parties are stated.
Modalities of delivery
 Specifying date, place of loading and delivery.
 Defining details according to the date of contract coming into force :
respect for delivery period is one of the major obligations of the seller.
One must provide and impose in advance penulties for delay.
Force majeure
 Indicating the force majeure for unforeseeable events. In principle, one
should avoid accepting the case of force majeure resorted to by the
seller to the extent to which he does not impose it.
Guarantees
 Defining the obligations of the two parties in regard to guarantee. Eg :
guarantee of restoring advance for the seller.
Jurisdiction in case of legal
dispute  Specifying the law applicable to the settlement of legal disputes.
Language
 Specifying language of the contract, which must be mastered by both the
parties. However, attention has to be paid to the problems of
translations.

Unit –II
( 8 sessions)

Unit II
1. Global Trading Environment:
2. Liberalization of World Trade. FDI and
their Impact on the Economy,
3. Multinationals and their Economic
Impact;
4. Political and Legal Impact of Multinational
Corporations;
5. Strategies for Dealing with Multinationals;
6. Technology Transfer – Importance and
Types,
7. Issues in Transfer of Technology to
Developing Countries.

1.Global Trading Environment
• Economic Integration is proceeding across the
world at an unprecedented pace.
• Globalization has brought enormous benefits
to many countries and citizens.
• The first part of Globalization process started
around mid 19th century and ended with the
commencement of World war 1st.
• The second part began in the aftermath of
World war II and continues today.
• In both these episodes of Globalization, rapid
trade and output growth went together with
major shifts in the relative size of economies
involved.
• One valuable lesson from history is that
globalization has not been a smooth process.

World 1850-1913 1913-1950 1950-73 1974-2007
Population
Growth
0.8 1.7 1.9 1.6
GDP Growth 2.1 3.8 5.1 2.9
Per capita 1.3 2.0 3.1 1.2
Trade Growth 6.2 8.2 5
Migration 17.9 50.1 12.7 37.4
FDI as % of
GDP(World)
5.2 25.6(2006)

Value
Annual
Percentage
2007(Billion Dollars)
2007(annual
percentage change)
Merchandise 13570 15
Commercial
Services
3260 18

• Regional Integration Agreement and
Trade(RIAs)
– Regional Trading Blocks – Free trade
zone. External tariff policy remains.
– Custom Unions – common external
Tariffs.
– Elimination of tariffs on trade between
the member states,
– Different trade partners receive different
treatment.
– Members of RTA liberalize trade on
reciprocal and preferential basis.

• Economic Effects of RIAs
– Try to eliminate preferential trade
arrangement
– Trade Creation
• Import from country A increases with member
country B without reducing it import with other
countries.
– Trade Diversion
• Preferably imports expensive goods.
– Transfers.
• Occurs between the members country
• Positive transfer and negative transfer.

Round Participants Key Achievements
1947 23 Tariff reduction
1960-61, “Dillon Round” 26 Tariff reduction
1964-67,”Kennedy Round” 62
Tariff reduction, agreement on anti-
dumping practices
1973-79,”Tokyo Round” 102
Tariff reduction, elimination of non-tariff barriers,
“framework”agreements
1986-94,”Uruguay Round” 123
Tariff reduction, agreement to
eliminate quotas in agriculture, agreement
on intellectual property, agreement on dispute
settlement, integration of textile and apparel
products into the agreement, creation of
the World Trade Organization (WTO)
2001-present “Doha Round” 146
Dubbed the “Development Round,” these
negotiations focus on agriculture, trade of
services, market access, intellectual
property rights, investment, competition,
transparency in government procurement, trade
facilitation, and WTO rules, and have so far been
characterized by conflict between developed and
developing countries

Foreign Direct Investment
• Why is FDI increasing?
• Why do firms choose FDI over exporting or
licensing to enter a foreign market?
• Why are certain locations attractive for
FDI?
• How does political ideology influence
government policy over FDI?
• From a host or source country perspective,
what are FDI’s costs and benefits?
• How can governments restrict/encourage
FDI?

FDI
• Foreign direct investment (FDI)
happens when a firm invests
directly in facilities in a foreign
country
• A firm that engages in FDI
becomes a multinational
enterprise (MNE)
– Multinational = “more than one
country”

FDI
• Involves ownership of entity abroad for
– production
– Marketing/service
– R&D
– Raw materials or other resource access
• Parent has direct managerial control
– The degree of direct managerial control
depends on the extent of ownership of the
foreign entity and on other contractual
terms of the FDI
– No managerial involvement = portfolio
investment

FDI
• FDI forms
– Purchase of existing assets
• Quick entry, local market know-how, local
financing may be possible, eliminate
competitor,
– New investment
• No local entity exists or is available for sale,
local financial incentives may encourage, no
inherited problems, long lead time to
generation of sales or other desired outcome
– Participation in an international joint-
venture
• Shared ownership with local and/or other non-
local partner

FDI
• FDI
– FDI - 100% ownership
– FDI < 100% ownership, International Joint
Venture
• Majority, Equal Share, Minority Participation
• Strategic Alliances (non-equity)
• Franchising
• Licensing
• Exports
– Direct vs Indirect

Franchising Licensing
Governed by: Securities law Contract law
Registration: Required Not required
Territorial rights: Offered to franchisee
Not offered; licensee can sell
similar licenses and products in
same area
Support and
training: Provided by franchiser Not provided
Royalty
payments: Yes Yes
Use of
trademark/logo:
Logo and trademark retained by
franchiser and used by franchisee Can be licensed
Examples: McDonalds, Subway, 7-11, Dunkin
Donuts Microsoft Office
control: Franchiser exercise control over
franchisee.
licensor does not have control over
licensee

Why FDI?
• FDI over exporting
– High transportation costs, trade
barriers
• FDI over licensing or franchising
– Need to retain strategic control
– Need to protect technological
know-how
– Capabilities not suitable for
licensing/franchising

Multinational Organization and its
Impact
• A multinational corporation (MNC)
or multinational enterprise (MNE) is
a corporation that is registered in more
than one country or that has operations
in more than one country. It is a large
corporation which both produces and
sells goods or services in various
countries. It can also be referred to as
an international corporation.

Multinational Organization and its
Impact
Advantages
• Improving the balance
of payments
• Providing employment
• Source of tax revenue
• Technology transfer
• Increasing choice
• National reputation
• Technology transfer
Disadvantages
• Environmental impact
• Uncertainty
• Increased competition
• Crowding out
• Influence and political
pressure
• Transfer pricing
• Low-skilled employment
• Health and safety
• Export of Profits
• Cultural and social impact

Acquisition
• Acquisition refers to the process
of acquiring a company at a
price called the acquisition price
or acquisition premium. The
price is paid in terms of cash or
acquiring company's shares or
both.
–friendly acquisition and
–hostile acquisition

Merger
• The combining of two or more
companies, generally by offering the
stockholders of one company
securities in the acquiring company
in exchange for the surrender of
their stock.
• Basically, when two companies
become one. This decision is
usually mutual between both firms.

Joint Venture
• Joint venture, commonly known as JV, is a
contractual arrangement between two or more
parties who agree to come together to undertake a
business project. All the parties contribute capital
and share profits and losses in a decided ratio.
• Joint ventures are a type of partnership that is
always executed through a written contract known
as a joint venture agreement (JVA). These
contracts are registered and are legally binding on
the parties.
• Moreover, they are temporary in nature because
they are executed for a definite period of time to
accomplish a specific purpose. The contract
automatically dissolves after the expiry of the
decided time period.

Amalgamation
• Amalgamation is an arrangement where
two or more companies consolidate their
business to form a new firm, or become a
subsidiary of any one of the company.
• For practical purposes, the terms
amalgamation and merger are used
interchangeably.
• Merger involves the fusion of two or more
companies into a single company where
the identity of some of the companies gets
dissolved. On the other hand,
amalgamation involves dissolving the
entities of amalgamating companies and
forming a new company having a separate
legal entity.

Merger vs Acquisition
Merger Acquisition
Merger is considered to be a process
when two or more companies come
together to expand their business
operations. In such a case the deal gets
finalized on friendly terms and both the
companies share equal profits in the
newly created entity.
When one company takes over the other
and rules all its business operations, it is
known as acquisitions.
merger two companies of same size
combine to increase their strength and
financial gains along with breaking the
trade barriers
in an acquisition usually two companies
of different sizes come together to
combat the challenges of downturn

• Tata Steel’s mega takeover of European steel major Corus for $12.2 billion. The biggest
ever for an Indian company. This is the first big thing which marked the arrival of India
Inc on the global stage. The next big thing everyone is talking about is Tata Nano.
• Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still
holds 32% in the Joint venture.
• Hindalco of Aditya Birla group’s acquisition of Novellis for $6 billion.
• Ranbaxy’s sale to Japan’s Daiichi for $4.5 billion. Sing brothers sold the company to
Daiichi and since then there is no real good news coming out of Ranbaxy.
• ONGC acquisition of Russia based Imperial Energy for $2.8 billion. This marked the turn
around of India’s hunt for natural reserves to compete with China.
• NTT DoCoMo-Tata Tele services deal for $2.7 billion. The second biggest telecom deal
after the Vodafone. Reliance MTN deal if went through would have been a good addition
to the list.
• HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion.
• Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3 billion. This
could probably the most ambitious deal after the Ranbaxy one. It certainly landed Tata
Motors into lot of trouble.
• Wind Energy premier Suzlon Energy’s acquistion of RePower for $1.7 billion.
• Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crores or $1.6
billion.

5. Political and Legal Impact of Multinational
• They integrate the economy
• Try to give a unified platform for the trade
• Integral part of World economy.
• After WTO and different Regional Outfits countries
started making rules and regulations to suit multinational
organization
• Regional blocks also started merging with each other so
that entire world may become a uniform platform for the
trade.
• Funds move majorly moves from developed to
developed countries but due to its importance political
and legal framework are changing with a fast pace.
• Open Gate policy in case of India is a practical example
for it.
• Barriers (tariff and non tariff) are being reduced in phase
wise manner to give more benefit to the multinationals

SWOT Analysis of MNC
Strengths
• Low Cost
• Well Developed Infrastructure
Weakness
• Location is often very distant
• Lack of Transportation facilities
• Relative Inflexibility
Opportunities
• Leverage Government
• Create the necessary infrastructure
• Attract new industries
Threats
• Emergence of Private companies
• Establishment of monopoly

6. Strategies for Dealing with Multinationals

EXHIBIT 6.1 MULTINATIONAL STRATEGY CONTENT
Content Transnational International Multidomestic Regional
Worldwide
markets
Yes Yes No No
Worldwide
location of
separate
value chain
activities
Yes No No No
Global
products
Yes Yes No No
Global
marketing
Yes Yes No No
Global
competitive
moves
Resources
from any
country used
to attack or
defend
Attacks and
defenses in all
countries -
resources HQ
No,
competitive
moves planned
and financed
by country
units
No, but
resources from
region can be
used

7. Technology Transfer – Importance and Types,
• … is composed of a
systematically developed set of
information, skills, and processes
that are needed to create,
develop, and innovate products
and services

• Product-embodied technologies are
transferred by transferring the physical
product itself
• Process-embodied technology is
concerned with blueprint or patent rights of
the actual scientific processes and
engineering details from the developer to
another
• Person-embodied technology is
concerned with creating continuous
dialogue between the supplier and the
recipient organizations pertaining to the
intrinsic nature,

• Factors Influencing Technology
Transfer
– Similar language
– Common ancestry and shared
history
– Physical proximity
– Technical competence of the
workforce
– The complexity of the technology at
the time of transfer
– The number of successful prior
transfers1/29/2015 Kartikeya Singh 53

• Factors Causing Difficulty in Technology
Transfer.
– Differences in strategic thinking
– Characteristics of the technology
involved
– Differences in organizational and
corporate cultures
– Differences in societal cultures

End of Unit II

Unit III
(8 Sessions)

Unit III
1. International Financial Environment:
a) Foreign Investment – Types and
Flows;
2. Monetary System-
a) Exchange Rate Mechanism and
Arrangements,
b) Movements in Foreign Exchange
Rates and Impact on Trade and
Investment Flows, Global Capital
Markets.

1.International Financial Environment:
a). Foreign Investment – Types and Flows;
• New market access is also another major
reason to invest in a foreign country. At
some stage, export of product or service
reaches a critical mass of amount and cost
where foreign production or location begins
to be more cost effective. Any decision on
investing is thus a combination of a number
of key factors including:
• assessment of internal resources,
• competitiveness,
• market analysis
• market expectations.

– Resources: Availability and therefore exploitation of resources
in the host country.
– Markets: FDI largely flows to the countries which have large
markets with comparatively good infrastructure and political
stability.
– Efficiency: Low cost of production, derived from cheap labor is
the driving force of many FDIs in developing countries.
– Rate of interest: Difference in the rate of interest acts as a
stimuli to attracting foreign investment. Capital has a tendency
to move from a country with a low rate of interest to a country
where interest rate is higher.
– Profitability: Private foreign capital is largely influenced by the
profit motive. It is attracted to countries where the return on
investment is higher.
– Economic conditions: Economic conditions particularly
market potential and infrastructural facilities influence foreign
investment.
– Government Policies and Political Factors: Policies
encouraging FIIS and FDIs and a stable Government largely
encourages the movement of foreign capital into the country

• Why is FDI important for any consideration of
going global?
• The simple answer is that making a direct foreign
investment allows companies to accomplish
several tasks:
• Avoiding foreign government pressure for local
production.
• Circumventing trade barriers, hidden and
otherwise.
• Making the move from domestic export sales to a
locally-based national sales office.
• Capability to increase total production capacity.
• Opportunities for co-production, joint ventures with
local partners, joint marketing arrangements,
licensing, etc;

• Licensing and technology transfer.
• Reciprocal distribution agreements.
• Joint venture and other hybrid
strategic alliances.
• Portfolio investment.

• Significance of Foreign Investment
• Foreign capital facilitates essential imports required for
carrying out development programmes, like capital goods,
know-how, raw materials and other inputs and even
consumer goods which might not be indigenously available.
• When export earnings are insufficient to finance vital
imports, foreign capital could reduce the foreign exchange
gap.
• Foreign investment may also increase the country’s exports
and reduce the import requirements if such investments
take place in export oriented and import competing
industries.
• As long as foreign investment raises productivity, it would
benefit domestic labor in the form of increased real wages,
consumers in case if foreign investment is cost reducing in
a particular industry, the consumers might gain through
lower product prices; government if the increase in
production and foreign trade increases the fiscal revenue of
the government.

• Helps increase the investment level and thereby the
income and employment in the host country.
• It facilitates transfer of technology to the recipient country,
• It may kindle a managerial revolution in the recipient
country through professional management and employment
of highly sophisticated management techniques.
• Foreign capital may enable the country to increase its
exports and reduce import requirements.
• Foreign investment might stimulate domestic enterprises to
perform better and increase competition and break
domestic monopolies.

• Criticism against Foreign Capital
• Foreign capital tends to flow to the high profit areas rather
than to the priority sectors.
• Technology imported might not be adapted to the needs of
the customers.
• MNCs could undermine economic autonomy and control
and their activities might not be in favor of national
interests.
• Foreign investment could have unfavorable effect on the
Balance of Payments of a country if the outflow is higher
due to payment of royalty etc.
• Foreign investors at times engage in unfair practices and
unethical trade practices.
• Foreign investment could result in minimizing / eliminating
competition and facilitate creation of monopolistic structure

2. Monetary System-
International monetary systems over two centuries
Date System Reserve assets Leaders
1803–1873 Bimetallism Gold, silver France, UK
1873–1914 Gold standard Gold, pound UK
1914–1924 Anchored dollar standard Gold, dollar US, UK, France
1924–1933 Gold standard Gold, dollar, pound US, UK, France
1933–1971 Anchored dollar standard Gold, dollar US, G-10
1971–1973 Dollar standard Dollar US
1973–1985 Flexible exchange rates Dollar, mark, pound US, Germany, Japan
1985–1999 Managed exchange rates Dollar, mark, yen US, G7, IMF
1999- Dollar, euro Dollar, euro, yen US, Eurozone, IMF1/29/2015 Kartikeya Singh 65

2. Monetary System-
Competing ideas for the next international monetary system
System Reserve assets Leaders
Flexible exchange rates Dollar, euro, renminbi US, Eurozone, China
Special drawing rights standard SDR US, G-20, IMF
Gold standard Gold, dollar US
Delhi Declaration Currency basket BRICS

2. Monetary System-
a. Exchange Rate Mechanism and Arrangements
 What is Exchange Rate ?
 Exchange Rate is a rate at which one
currency can be exchanged into another
currency. In other words it is value one
currency in terms of other.
say:
US $ 1 = Rs.61.5
This rate is the conversion rate of every
US $ 1 to Rs. 61.5

History
• In 1821-1914Most of the World's currencies were redeemable into gold. (i.e. you could
"cash in" your paper notes for predefined weights of gold coin).
• Britain was the first to officially adopt this system in 1821 and was followed by other
key countries during 1870s.
• The result was a global economy connected by the common use of gold as money.
• Close to the end of World War II, the Bretton Woods Agreement was signed. Since the
impact of the Great Depression was still fresh in the minds of the policymakers, they
wanted to shun all possibilities of a similar fiasco. The Bretton Woods Agreement
founded a system of fixed exchange rates in which the currencies of all countries were
pegged to the US dollar, which in turn was based on the gold standard.
• By 1970, the existing exchange rate system was already under threat. The Nixon-led
US government suspended the convertibility of the national currency into gold. The
supply of the US dollar had exceeded its demand.
• In 1971, the Smithsonian Agreement was signed. For the first time in exchange rate
history, the market forces of supply and demand began to determine the exchange
rate.

Three main categories of exchange
rate regimes
1. Flexible Exchange Rate Systems
2. Managed Floating
3. Fixed Exchange-rate System

Flexible Exchange Rate Systems
• The value of the currency is determined by the
market, ex. by the interactions of thousands of
banks, firms and other institutions seeking to buy
and sell currency for purposes of transactions
• So higher demand for a currency, all else equal,
would lead to an appreciation of the currency.
Lower demand, all else equal, would lead to a
depreciation of the currency. An increase in the
supply of a currency, all else equal, will lead to a
depreciation of that currency while a decrease in
supply, all else equal, will lead to an appreciation.
• Most countries have flexible exchange rate systems:
the U.S., Canada, Australia, Britain, and the
European Monetary Union.

Managed Floating
• A floating exchange rate in which a government intervenes
at some frequency to change the direction of the float
by buying or selling currencies. Often, the local government
makes this intervention, but this is not always the case. For
example, in 1994, the American government bought large
quantities of Mexican pesos to stop the rapid loss of the
peso's value.
• The central bank does not have an explicit set value for the
currency; it also doesn’t allow the market to freely
determine the value of the currency.
• Example: Suppose that Thailand had a managed floating
rate system and that the Thai central bank wants to keep
the value of the Baht close to 25 Baht/$. In a managed
floating regime, the Thai central bank is willing to tolerate
small fluctuations in the exchange rate (say from 24.75 to
25.25) without getting involved in the market.

Fixed Exchange-rate System
• A system whereby the exchange rates of the
member countries were fixed against the U.S.
dollar, with the dollar in turn worth a fixed
amount of gold.
• Governments try to keep the value of their
currencies constant against one another.
• A country’s government decides the worth of its
currency in terms of either a fixed weight of gold,
a fixed amount of another currency or a basket
of other currencies.
• The central bank of a country remains committed
at all times to buy and sell its currency at a fixed
price.
• The central bank provides foreign currency
needed to finance payments imbalances.

De Facto Classification of Exchange Rate Regimes
and Monetary Policy Frameworks (IMF, 2008)
1. Exchange Arrangements with No Separate Legal
Tender
2. Currency Board Arrangements
3. Other Conventional Fixed Peg Arrangements
4. Pegged Exchange Rates within Horizontal Bands
5. Crawling Pegs
6. Exchange Rates within Crawling Bands
7. Managed Floating with No Predetermined Path for
the Exchange Rate
8. Independently Floating

Exchange Arrangements with No Separate
Legal Tender
• The currency of another country
circulates as the sole legal tender
(formal dollarization)
• The member belongs to a monetary
or currency union in which the same
legal tender is shared by the
members of the union.
• It implies the complete surrender of
the monetary authorities'
independent control over domestic
monetary policy.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
3. Other Conventional
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Currency Board Arrangements
• Based on an explicit legislative commitment
to exchange domestic currency for a
specified foreign currency at a fixed
exchange rate, combined with restrictions
on the issuing authority to ensure the
fulfillment of its legal obligation.
• Domestic currency will be issued only
against foreign exchange and that it remains
fully backed by foreign assets, eliminating
traditional central bank functions, such as
monetary control and lender-of-last-resort,
and leaving little scope for discretionary
monetary policy.
• Some flexibility may still be afforded,
depending on how strict the banking rules of
the currency board arrangement.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Other Conventional Fixed Peg Arrangements
• The country (formally or de facto) pegs its currency at a fixed rate to
another currency or a basket of currencies, where the basket is
formed from the currencies of major trading or financial partners
and weights reflect the geographical distribution of trade, services,
or capital flows.
• The currency composites can also be standardized, as in the case of
the SDR. There is no commitment to keep the parity irrevocably.
The exchange rate may fluctuate within narrow margins of less than
±1 percent around a central rate-or the maximum and minimum
value of the exchange rate may remain within a narrow margin of 2
percent-for at least three months.
• The monetary authority stands ready to maintain the fixed parity
through direct intervention (i.e., via sale/purchase of foreign
exchange in the market) or indirect intervention (e.g., via aggressive
use of interest rate policy, imposition of foreign exchange
regulations, exercise of moral suasion that constrains foreign
exchange activity, or through intervention by other public
institutions).
• Flexibility of monetary policy, though limited, is greater than in the
case of exchange arrangements with no separate legal tender and
currency boards because traditional central banking functions are
still possible, and the monetary authority can adjust the level of the
exchange rate, although relatively infrequently.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Pegged Exchange Rates within Horizontal Bands
• The value of the currency is maintained
within certain margins of fluctuation of at
least ±1 percent around a fixed central rate
or the margin between the maximum and
minimum value of the exchange rate
exceeds 2 percent.
• It also includes arrangements of countries in
the exchange rate mechanism (ERM) of the
European Monetary System (EMS) that was
replaced with the ERM II on January 1, 1999.
• There is a limited degree of monetary policy
discretion, depending on the band width.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Crawling Pegs
• The currency is adjusted periodically in small
amounts at a fixed rate or in response to changes
in selective quantitative indicators, such as past
inflation differentials vis-à-vis major trading
partners, differentials between the inflation
target and expected inflation in major trading
partners, and so forth.
• The rate of crawl can be set to generate inflation-
adjusted changes in the exchange rate (backward
looking), or set at a preannounced fixed rate
and/or below the projected inflation differentials
(forward looking).
• Maintaining a crawling peg imposes constraints
on monetary policy in a manner similar to a fixed
peg system.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Exchange Rates within Crawling Bands
• The currency is maintained within certain fluctuation
margins of at least ±1 percent around a central rate-or
the margin between the maximum and minimum value of
the exchange rate exceeds 2 percent-and the central rate
or margins are adjusted periodically at a fixed rate or in
response to changes in selective quantitative indicators.
• The degree of exchange rate flexibility is a function of the
band width. Bands are either symmetric around a
crawling central parity or widen gradually with an
asymmetric choice of the crawl of upper and lower bands
(in the latter case, there may be no preannounced central
rate).
• The commitment to maintain the exchange rate within
the band imposes constraints on monetary policy, with
the degree of policy independence being a function of the
band width.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Managed Floating with No Predetermined Path for
the Exchange Rate
• The monetary authority attempts to
influence the exchange rate without
having a specific exchange rate path or
target.
• Indicators for managing the rate are
broadly judgmental (e.g., balance of
payments position, international
reserves, parallel market
developments), and adjustments may
not be automatic. Intervention may be
direct or indirect.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined
Path for the
Exchange Rate
8. Independently
Floating

Independently Floating
The exchange rate is market-determined,
with any official foreign exchange
market intervention aimed at
moderating the rate of change and
preventing undue fluctuations in the
exchange rate, rather than at
establishing a level for it.
1. Exchange
Arrangements with
No Separate Legal
Tender
2. Currency Board
Arrangements
Fixed Peg
Arrangements
4. Pegged Exchange
Rates within
Horizontal Bands
5. Crawling Pegs
6. Exchange Rates
within Crawling
Bands
7. Managed Floating
with No
Predetermined Path
for the Exchange
Rate
8. Independently
Floating

Movements in Foreign Exchange Rates and Impact on Trade
and Investment Flows, Global Capital Markets
• Foreign exchange trading increased by 20% between April
2007 and April 2010 and has more than doubled since 2004.
• The increase in turnover is due to a number of factors: the
growing importance of foreign exchange as an asset class, the
increased trading activity of high-frequency traders, and the
emergence of retail investors as an important market segment.
• The growth of electronic execution and the diverse selection of
execution venues has lowered transaction costs, increased
market liquidity, and attracted greater participation from many
customer types.
• In particular, electronic trading via online portals has made it
easier for retail traders to trade in the foreign exchange market.
By 2010, retail trading is estimated to account for up to 10% of
spot turnover, or $150 billion per day (see retail foreign
exchange platform).

•End of Unit
III

Syllabus Unit III
• International Economic Institutions:
– IMF,
– World Bank,
– MIGA,
– UNCTAD and
– WTO;
– ATC,
– GSP and
– International Commodity
Agreements.

a.IMF
• The International Monetary Fund (IMF)
is an international organization that
was initiated in 1944 at the Breton
Woods Conference and formally
created in 1945 by 29 member
countries
• Countries contribute money to a pool
through a quota system from which
countries with payment imbalances
can borrow funds temporarily.
• Members – 188 countries
• Head quarter – Washington DC.
• Managing Director - Christine Lagarde

a.IMF
• Promote international monetary cooperation through a
permanent institution
• Provides the machinery for consultation and collaboration
on international monetary problems
• To facilitate the expansion and balanced growth of
international trade
• To contribute to the promotion and maintenance of high
levels of employment and real income and to the
development of the productive resources of all members
as primary objectives of economic policy
• To promote exchange stability
• To maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation

a.IMF
• The Functions of the IMF
a) Surveillance (like a doctor)
– Gathering data and assessing economic
policies of countries
b) Technical Assistance (like a teacher)
– Strengthening human skills and
institutional capacity of countries
c) Financial Assistance (like a banker)
– Lending to countries to support reforms

a.IMF
a) Surveillance
• Surveillance over Members’ Economic Policies
• countries agree to pursue economic policies that
are consistent with the objectives of the IMF.
• The Articles of Agreement confer on the IMF the
legal authority to oversee compliance by members
with this obligation
• IMF is “the only organization that has a mandate to
examine on a regular basis the economic
• circumstances of virtually every country in the
world.”

a.IMF
b) Technical Assistance
• Strengthening human skills and
institutional capacity of countries
• Helps members in strengthening their
policy formulation and implementation,
and the legal, institutional, and market
frameworks within which they operate.
• It also constitutes an important
complement to IMF surveillance and
lending operations in member
countries.

a.IMF
c) Financial Assistance (like a banker)
• Lending to countries to support reforms
• Improving financial sector surveillance.
• Development of standards and codes of
good practice.
• Enhancement of transparency in the IMF
and its member countries.
• Involvement of the private sector in crisis
resolution

a.IMF
Organization of IMF
• The Board of Governors, the highest decision-
making body of the IMF, consists of one
governor and one alternate governor for each
member country.
• The governor is appointed by the member
country and is usually the minister of finance
or the governor of the central bank.
• Board of Governors decide on major policy
issues
• All powers of the IMF are vested in the Board
of Governors.
• Day-to-day decision making is taken by –
Executive Governors

a.IMF
Quotas & subscriptions
• Quota subscriptions generate most of
the IMF's financial resources.
• Each member country of the IMF is
assigned a quota, based broadly on its
relative size in the world economy.
• A member's quota determines its
maximum financial commitment to the
IMF and its voting power, and has a
bearing on its access to IMF financing.

• A new country is assigned an initial quota in the same
range as the quotas of existing members
• The quota formula is a weighted average of GDP (weight
of 50 percent), openness (30 percent), economic
variability (15 percent), and international reserves (5
percent )
• For this purpose, GDP is measured as a blend of GDP
based on a market exchange rates (weight of 60 percent)
and on PPP exchange rates (40 percent).
• Quotas are denominated in Special Drawing Rights
(SDRs)
• The formula also includes a “compression factor” that
reduces the dispersion in calculated quota shares across
members.

a.IMF
Quotas & subscriptions
• A new country is assigned an initial quota in the
same range as the quotas of existing members
• The quota formula is a weighted average of GDP
(weight of 50 percent), openness (30 percent),
economic variability (15 percent), and international
reserves (5 percent )
• Quotas are denominated in Special Drawing
Rights (SDRs)

a.IMF
Special Drawing Rights
• The SDR is an international reserve
asset, created by the IMF in 1969 to
supplement its member countries'
official reserves.
• Its value is based on a basket of
four key international currencies,
and SDRs can be exchanged for
freely usable currencies.
• With a general SDR allocation that
took effect on August 28 and a
special allocation on September 9,
2009, the amount of SDRs
increased from SDR 21.4 billion to
SDR 204.1 billion (currently
equivalent to about $324 billion).1/29/2015 Kartikeya Singh 96
1st January 1, 2011 the weigtage
to these currencies in SDR
Euro 37.4%
Japanese yen 9.4%
Pound Sterling 11.3%
US dollar 41.9%
100%

a.IMF
Special Drawing Rights
• The value of the SDR was initially defined as
equivalent to 0.888671 grams of fine gold.
• the SDR was redefined as a basket of
currencies, today consisting of the euro,
Japanese yen, pound sterling, and U.S.
dollar.
• The U.S. dollar-value of the SDR is posted
daily on the IMF's website.
• It is calculated as the sum of specific amounts
of the four currencies valued in U.S. dollars,
on the basis of exchange rates quoted at noon
each day in the London market.

The World Bank
• IBRD & IDA
: Working
for a World
Free of
Poverty

Bretton Woods
• In response to post-war
reconstruction and to discuss the
future of international economic
cooperation
• In July of 1944, representatives from
countries met at Bretton Woods,
New Hampshire.
• Creation of two institutions,
1.International Monetary Fund (IMF)
2.International Bank for Reconstruction and
Development;
a.k.a. the “World Bank.”

The World Bank
• The Bank’s initial goal was to assist in the
reconstruction of post-war Europe
• Now, the Bank makes development loans
to developing countries
– Goal is to reduce poverty by financing
and assisting in numerous projects
such as healthcare, education,
infrastructure, communications, and
other like projects

The World Bank Group
1. International Bank for Reconstruction and Development
(IBRD)
– Est. 1946, “aims to reduce poverty in middle-income and
creditworthy poorer countries by promoting sustainable
development through loans, guarantees, risk management
products, and analytical and advisory services”
2. International Development Association (IDA)
– Est.1960, interest free loans and grants
3. International Finance Corporation (IFC)
– Est.1956, Private sector arm of the World Bank
4. Multilateral Investment Guarantee Agency (MIGA)
– Est.1988, Promotes Foreign Direct Investment in developing
countries
5. International Centre for Settlement of Investment Disputes
(ICSID)
– Est. 1966, facilitate the settlement of investment disputes
between governments and foreign investors
www.worldbank.org

Structure of the World Bank
• Headquartered in Washington D.C.
• Over 100 offices all over the world
• 185 member countries
• Membership of the IMF is required
• 5 Largest shareholders: France,
Germany, Japan, UK, and US

Board of Governors
• Made of up representatives from
member countries
– Typically, the representatives are
ministers of finance or ministers
of development
• Meet annually to review policies and
review membership
• Ultimate policy makers
• Elect a Board of Directors every 2
years

Board of Directors
• 24 members of the Board (5 from
the largest shareholders, 19 to cover
the remaining geography)
• President of the World Bank serves
as the Chairman of the Board
• General operations
• Meet twice a week
• According to the Charter, the
member with the greatest # of
shares, chooses the president.
• The president is, traditionally, a U.S.
citizen and is the chairman of the
Board.

1. Increasing Political
Accountability
• Political accountability refers to the constraints
placed on the behavior of public officials by
organizations and constituencies with the power to
apply sanctions on them. As political accountability
increases, the costs to public officials of taking
decisions that benefit their private interests at the
expense of the broader public interest also
increase, thus working as a deterrent/disincentive
to corrupt practices. Accountability rests largely on
the effectiveness of the sanctions and the capacity
of accountability institutions to monitor the actions,
decisions, and private interests of public officials.

2. Strengthening Civil Society
Participation
• As stakeholders in good governance and
institutions mediating between the state
and the public, the organizations that
comprise “civil society” – citizen groups,
nongovernmental organizations, trade
unions, business associations, think tanks,
academia, religious organizations and last
but not least media – can have an
important role to play in constraining
corruption. This is true at the country level
as well as internationally.

3. Creating a Competitive Private
Sector
• The degree to which powerful elites influence
decisions
and policy-making of the state (state capture) constraints
the implementation of a fair, competitive, honest and
transparent private sector and thus hinders broad-based
economic
development. The ability of powerful economic interests
to capture the
state can be constrained by:
– Economic policy liberalization
– Enhancing greater competition
– Regulatory reform
– Good corporate governance
– Promoting business associations, trade unions, and
concerned parties
– Transnational cooperation

4. Institutional Restraints on
Power
• The institutional design of the state can
be an important mechanism in
checking corruption. Of particular
importance is the effective
development of institutional restraints
within the state which is most
effectively achieved through some
degree of separation of powers and
establishment of cross cutting oversight
responsibilities among state
institutions. Effective constraints by
state institutions on each other can
diminish opportunities for the abuse of
power and penalize abuses if they
occur.

5. Improving Public Sector
Management
• The fifth building block of an anti-corruption strategy
consists of reforms in the internal management of public
resources and administration to reduce opportunities and
incentives for corruption. Reforming public sector
management and public finance requires:
– A meritoric civil service with monetized, adequate pay
– Enhancing transparency and accountability in budget
management.
– Enhancing transparency and accountability in tax and
customs
– Policy reforms in sectoral service delivery
– Decentralization with accountability

The Wolfowitz Scandal
• In 2005, Paul Wolfowitz was appointed
by the Bush administration to head the
World Bank Group.
• “0% tolerance for corruption
• On May 18, 2007, Paul Wolfowitz, the
president of the World Bank retired.
• Prior to his appointment as president of
the World Bank, Wolfowitz had dated
Shaha Riza, a World Bank employee.

What’s Next for the World Bank?

Millennium Development Goals
Targets and Goals set for 2015
1. Reducing Poverty and Hunger—global poverty is
projected to fall to 12 percent
2. Educating All Children—ensure that all children
complete primary education.
3. Empowering Women—eliminate gender disparity
in primary and secondary education.
4. Saving Children—reduce the under 5 mortality
rate.
www.web.worldbank.org “Millennium Development Goals”

Millennium Development Goals
5. Caring for Mothers—reduce the maternal mortality
rate.
6. Combating Diseases—such as AIDS/HIV,
Tuberculosis, malaria, and other major diseases.
7. Using Resources Wisely—improvements in slum
dwellings, create sustainable access to drinking water,
and sustainable access to basic sanitation.
8. Working Together—make available technological
advancements in information and communication.
Allow affordable access to essential drugs in
developing countries. Address the particular need of
developing countries.
www.web.worldbank.org “Millennium Development Goals”

The International Monetary Fund and the World Bank at a Glance
•International Monetary Fund
oversees the international monetary system
•promotes exchange stability and orderly
exchange relations among its member
countries
•assists all members--both industrial and
developing countries--that find themselves in
temporary balance of payments difficulties by
providing short- to medium-term credits
•supplements the currency reserves of its
members through the allocation of SDRs
(special drawing rights); to date SDR 21.4
billion has been issued to member countries in
proportion to their quotas
•draws its financial resources principally from
the quota subscriptions of its member countries
•has at its disposal fully paid-in quotas now
totaling SDR 145 billion (about $215 billion)
•has a staff of 2,300 drawn from 188 member
countries
•World Bank
seeks to promote the economic development of
the world's poorer countries
•assists developing countries through long-term
financing of development projects and
programs
•provides to the poorest developing countries
whose per capita GNP is less than $865 a year
special financial assistance through the
International Development Association (IDA)
•encourages private enterprises in developing
countries through its affiliate, the International
Finance Corporation (IFC)
•acquires most of its financial resources by
borrowing on the international bond market
•has an authorized capital of $184 billion, of
which members pay in about 10 percent
•has a staff of 7,000 drawn from 188 member
countries

1.c.MIGA
• The Multilateral Investment Guarantee
Agency (MIGA) is an international
financial institution which offers political
risk insurance guarantees. Such
guarantees help investors
protect foreign direct
investments against political and non-
commercial risks in developing
countries

Governance
• MIGA is governed by its Council of Governors which
represents its member countries.
• The Council of Governors holds corporate authority, but
primarily delegates such powers to MIGA's Board of
Directors.
• The Board of Directors consists of 25 directors and votes on
matters brought before MIGA.
• Each director's vote is weighted in accordance with the total
share capital of the member nations that director represents.
• MIGA's board is stationed at its Washington, D.C.
headquarters where it meets regularly and oversees the
agency's activities.
• The agency's Executive Vice President directs its overall
strategy and manages its daily operations.
• As of 15 July 2013, Keiko Hondai serves as Executive Vice
President of MIGA.

Membership
• MIGA is owned by its 179 member governments,
consisting of 152 developing and 25 industrialized
countries.
• The members are composed of 178 United Nations
member states plus Kosovo. Membership in MIGA
is available only to countries who are members of
the World Bank, particularly the International Bank
for Reconstruction and Development.
• As of 2013, the nine World Bank member states
that are not MIGA members
are Bhutan, Brunei, Burma, Kiribati,Marshall
Islands, San Marino, Somalia, Tonga, and Tuvalu.
(The UN states that are non-members of the World
Bank, and thus MIGA,
are Andorra, Cuba, Liechtenstein, Monaco, Nauru,
and North Korea.) The Holy See and Palestineare
also non-MIGA members.

Investment guarantees
• MIGA offers insurance to cover five
types of non-commercial risks:
– Currency inconvertibility and transfer
restriction;
– Government expropriation;
– War,
– Terrorism, and
– Civil disturbance;
– Breaches of contract;

UNCTAD(United Nations Conference on Trade and
Development)
• The United Nations Conference on Trade and
Development (UNCTAD) was established in 1964 as
a permanent intergovernmental body. It is the
principal organ of the United Nations General
Assembly dealing with trade, investment, and
development issues.
• The organization's goals are to "maximize
the trade, investment and development opportunities
of developing countries and assist them in their efforts
to integrate into the world economy on an equitable
basis.”
• The creation of the conference was based on
concerns of developing countries over the
international market, multi-national corporations, and
great disparity between developed nations and
developing nations.1/29/2015 Kartikeya Singh 119

Development)
• Acronyms UNCTAD
• Established1964
• Headquarters
Geneva, Switzerland
• Website :
www.unctad.org
• In the 1970s and
1980s, UNCTAD was
closely associated
with the idea of a New
International
Economic
Order (NIEO).
• Currently 194
members.

Development)
• The primary objective of the UNCTAD is to formulate
policies relating to all aspects of development including
trade, aid, transport, finance and technology.
• The conference ordinarily meets once in four years.
• The first conference took place in Geneva in 1964,
• second in New Delhi in 1968,
• the third in Santiago in 1972,
• fourth in Nairobi in 1976,
• the fifth in Manila in 1979,
• the sixth in Belgrade in 1983,
• the seventh in Geneva in 1987,
• the eighth in Cartagena in 1992 and
• the ninth at Johannesburg (South Africa) in 1996. The
permanent secretariat is in Geneva.

UNCTAD
• Currently, UNCTAD has 194 member
states and is headquartered
in Geneva, Switzerland.
• UNCTAD has 400 staff members and an
bi-annual (2010–2011) regular budget of
$138 million in core expenditures and $72
million in extra-budgetary technical
assistance funds.
• It is a member of the United Nations
Development Group. There are non-
governmental organizations participating
in the activities of UNCTAD.

GATT – General agreement on Tariff and Trade.
• The prolonged recession before
the World war II in the west was
due to the decades of
protectionism followed by the
industrialized countries. This led
to conduct of negotiations in 1947
among 23 countries in order to
prevent the protectionist policies
and to revive the economies from
the recession. These negotiations
of the conferences resulted in the
General Agreement on Tariffs
and Trade (GATT) among the
participating countries. Thus
GATT has its origin in 1947 at
the conference of Geneva.
1/29/2015 Kartikeya Singh

GATT – General agreement on
Tariff and Trade.
• The birth of GATT
• 30th October 1947, the General
Agreement of Tariffs and Trade was
signed by 23 countries.
1947
• 1st January 1948
• GAAT Came into force1948
• Second Round at Annecy, France.
• Exchanged some 5000 tariff
concessions.1949

Tariff and Trade.
• Third Round at Torquay U K
• The contracting parties exchanged
some 8700 concessions.
1950
• Fourth Round at Geneva,
Switzerland.
• Got some $ 2.5 billion worth of tariff
reduction.
195 6
• Fifth Round, Dillon round
• Tariff concessions worth $4.9 billion
of world trade
19 6 0

Tariff and Trade.
• Short term arrangement
• Covering cotton textile(Exception)19 6 1
• Kennedy round, Fifth round.
• Trade negotiation was formally
opened.
19 6 4
• A new chapter, Sixth round.
• Many newly independent countries
participated in the agreement.
19 6 5

Tariff and Trade.
• The Tokyo round, Seventh round
• Comprehensive body covering
tariff and non tariff matter
1973
• The arrangement regarding
International Trade in textile.
• Known as Multifibre
arrangement(MFA)
1974
• Uruguay Round, Eighth round.
• Went upto 7 and half years.
1986

Tariff and Trade.
• Successful conclusion of the
Uruguay round
• 15th December 1993. Geneva,
Switzerland
1993
• The final act of U rugway round
signed
• Marrakesh, Morocco, 15 April
1994
1994
• World Trade Organisation came
into force. 1st January 1995.
• Geneva was accepted as
headquarter.
1995

URUGUAY ROUND AND ARTHUR
DUNKEL PROPOSAL

Uruguay Round Package
• The draft proposals proposed by Arthur
Dunkel in the Uruguay Round of GATT
include
1. Market Access.
2. Agriculture.
3. Trade Related Intellectual Property
Rights(TRIPs).
4. Trade Related Investment Measures
(TRIMs)
5. Trade in Services.
6. Textile.
7. Institutional Matter.

Uruguay Round Package – 1.Market
Access
– Arthur Dunkel suggested that the Government
control in marketing activities and operation will
have to be slackened. The member Governments
will have to abolish the barriers related to the
market access.
– First, Both developing and developed countries
agreed to significantly increase their share of
industrial product imports.
– Second, The average tariff on developed countries’
imports of industrial products was cut by 40 per
cent on imports from all sources, and by 37 per
cent on imports from developing countries.
– Third, substantial progress was made with regard
to non-tariff barriers

Uruguay Round Package – 2.
Agriculture
 Member Government are suggested to reduce the
subsidy on fertilizers, seeds and other inputs and
eliminate the administered pricing in respect to
agricultural sector.
 The proposal include :-
 How a country can remove his subsidy in different phases.
 A supplementary agreement on the modalities by which
subsidy would be removed.
 A decision on application of sanitary and phycosanitary
measures and
 A declaration on measures to assist for food importing
countries.

Agriculture
Amber box
Blue box
Green box
Total Aggregate Measurement of
Support (AMS)
De Minimis –Minimum Limit
5% - Developed Countries
10% - Developing Countries

Uruguay Round Package - 3. TRIPs Trade
Related Intellectual Property Rights
• Dunkel proposal regarding trade
intellectual property rights (TRIPs) in
respect of business and commerce
include :
– Protection of patents – 20 years
– Copy rights – 50 years
– Design – 10 years
– Trade Marks – 7 years
– Trade Secrets -

Uruguay Round Package – 4. TRIMS - Trade
Related Investment Measures
– Abolition of Restrictions imposed on foreign
capital.
– Offering equal rights to the foreign investor
equal to those of the domestic investor.
– No restriction on investment
– No limitations or ceiling on the quantum of
foreign investment.
– Granting of permission without restrictions
to import raw materials and other
companies.
– No force on the foreign investors to use
total products or materials.

Trade in Services.
• Trade in services like, insurance,
travel, tourism, hotel, banking,
maritime, transportation, mobility of
human resources etc. have been
included in the proposal
• GATS – General agreement in
Trade in services provides a
multilateral framework of principles
and services.
• GATS governs trade in services.

Textile.
• An attempt was made
to re-integrate textile
into GATT in order to
do away with Multi
Fiber
Arrangement.(MBA).
• Textile was included in
Dunkel Proposal
• Developed countries
dismantled the import
quotas on garment
and textile from 1st
January, 2005.
• Strategies for Textile
firms.
– Product Specialization
– Cross-border
cooperation
– Improve sourcing
skills
– Focus on higher value
products
– More flexible rules of
origin
– Interregional
Cooperation
– Creation of Conducive
Environment.

Institutional Matter.
• It handles the grievances of two
participating nations.
• Try to remove barriers to trade
• Try to implement guidelines of the
WTO/GATT.
• Takes care of the breach of the law.

Ministerial Conference
General Council
Dispute Settlement
Body
CT in Goods CT in Services
CT in Intellectual
rights
Director General
Secretariat of
the WTO
Trade Policy Review
Body
Committee for
trade and
development
Committee on
balance of
payment
C. On Budget
Finance

WTO – 1st Ministerial Conference
• Singapore, 9th
December, 1996.(128
countries)
• Reaffirmation of
International labour
organisation work.
• Rejected the use of
labour standards for
projectionist
purposes.
• Understanding of
dispute settlement
procedure.
• Work group for conducting a
study on transparency in
government procurement
practices,
• Establish a working group to
examine the relation between
trade and investment.
• Organise a meeting with
UNCTAD(UN conference on
trade development), to help
developing countries.
• Talks related to TRIMs

WTO – 2nd Ministerial
Conference
• Geneva, 18th May, 1998 (132
countries)
– Setting up of a mechanism to
ensure full and faithful
implementation of existing
multilateral agreements.
– Rejection of projectionist
measures and accepting for
open and transparent rule-
based trading system.

WTO – 3rd Ministerial
Conference
• Seattle, 3rd December, 1999, (135 countries).
– This meeting was a failure.
– Dispute erupted on transparency and
imposition of the views of the rich
countries.
– Major contention was of exploitation.
– Protestors called it a “wrong trade
organisation”.
– Reason for the failure:-
• American reluctance on inclusion of labour
standards
• European Union was reluctant to liberalise
agriculture.

WTO – 4th Ministerial Conference
• Doha, Qatar, 9-13 November, 2001,(142
countries).
• Declaration included :
– Reduction in Industrial tariffs
– Phasing out of agriculture export subsidies.
– Promoting the trade in services
– Providing special and differential treatment
for developing countries.
– Negotiations on setting up a multilateral
agreement on transparency in government
procurement.
– Negotiations to further expedite movement,
release and clearance of goods.

• Cancun, Mexico,
10 to 14 September 2003,
– TRIPS and public health
– Geographical indications in general
– Geographical indications: the
multilateral register for wines and
spirits
– Geographical indications: extending
the “higher level of protection”
beyond wines and spirits
– Reviews of TRIPS provisions.
– Non-violation complaints.
– Technology transfer

• Hong Kong on December – 13-18,
2005.

WTO and the India.
• A growth Story….
• Please see the text
box…..

WTO and India
• Favorable Impact :-
a) Increase in export earnings
• Growth in merchandise
exports.
• Growth in Service exports.
b) Agricultural Export
c) Textile and clothing
d) Foreign Direct Investment
e) Multilateral rule and
discipline.

WTO and India
• Unfavorable Impact :-
I. TRIPS
 Pharma companies
 Agricultural output.
 Micro ornanism
II. TRIMS
III. GATS.
IV. Trade and Non-Tariff Barrier
V. LDC Exports..

WTO and Anti Dumping
Measures.
• Dumping :- The sale of goods
abroad at a price which is lower than
the selling price of same goods at
the same time in the same
circumstances at home, taking
account of difference in transport
costs.
• Dumping means selling the product
at below the on going market price
and or at the price below the cost of
production.1/29/2015 Kartikeya Singh

Impact of Globalisation
• See the text box….

WTO members..
• List of WTO Members(see the text
box).

List of developing countries
1. Afghanistan
2. Albania
3. Algeria
4. American Samoa
5. Angola
6. Antigua and Barbuda
7. Argentina
8. Armenia
9. Azerbaijan
10. Bangladesh
11. Belarus
12. Belize
13. Benin
14. Bhutan
15. Bolivia
16. Bosnia-Herzegovina
17. Botswana
18. Brazil
19. Bulgaria
20. Burkina Faso
21. Burundi
22. Cambodia
23. Cameroon
24. Cape Verde
25. Central African Republic
26. Chad
27. Chile
28. China
29. Colombia
30. Comoros
1. Congo, Dem. Rep.
2. Congo, Rep.
3. Costa Rica
4. Cote d'Ivoire
5. Croatia
6. Cuba
7. Djibouti
8. Dominica
9. Dominican Republic
10. Ecuador
11. Egypt
12. El Salvador
13. Eritrea
14. Ethiopia
15. Fiji
16. Gabon
17. Gambia
18. Georgia Republic
19. Ghana
20. Grenada
21. Guatemala
22. Guinea
23. Guinea-Bissau
24. Guyana
25. Haiti
26. Honduras
27. India
28. Indonesia
29. Iran
30. Iraq
1. Jamaica
2. Jordan
3. Kazakhstan
4. Kenya
5. Kiribati
6. Korea, Dem. Rep.
7. Kyrgyzstan
8. Laos
9. Latvia
10. Lebanon
11. Lesotho
12. Liberia
13. Libya
14. Lithuania
15. Macedonia
16. Madagascar
17. Malawi
18. Malaysia
19. Maldives
20. Mali
21. Marshall Islands
22. Mauritania
23. Mauritius
24. Mayotte
25. Mexico
26. Micronesia
27. Moldova
28. Mongolia
29. Montenegro
30. Morocco
1. Mozambique
2. Myanmar
3. Namibia
4. Nepal
5. Nicaragua
6. Niger
7. Nigeria
8. Pakistan
9. Palau
10. Panama
11. Papua New Guinea
12. Paraguay
13. Peru
14. Philippines
15. Poland
16. Romania
17. Russia
18. Rwanda
19. Saint Kitts and Nevis
20. Saint Lucia
21. Saint Vincent
22. Samoa
23. Sao Tome and Principe
24. Senegal
25. Serbia
26. Seychelles
27. Sierra Leone
28. Solomon Islands
29. Somalia
30. South Africa
31. Sri-Lanka
32. Sudan
33. Suriname
34. Swaziland
35. Syria
36. Tajikistan
37. Tanzania
38. Thailand
39. Timor
40. Togo
41. Tonga
42. Trinidad and Tobago
43. Tunisia
44. Turkey
45. Turkmenistan
46. Tuvalu
47. Uganda
48. Ukraine
49. Uruguay
50. Uzbekistan
51. Vanuatu
52. Venezuela
53. Vietnam
54. Yemen
55. Zambia
56. Zimbabwe

Generalized System of Preferences
• The Generalized System of Preferences, or GSP, is a
formal system of exemption from the more general
rules of the World Trade Organization (WTO),
(formerly, the General Agreement on Tariffs and
Trade or GATT).
• Specifically, it's a system of exemption from the most
favored nation principle (MFN) that obliges WTO
member countries to treat the imports of all other
WTO member countries no worse than they treat the
imports of their "most favored" trading partner.
• In essence, MFN requires WTO member countries to
treat imports coming from all other WTO member
countries equally, that is, by imposing equal tariffs on
them, etc.

h.International commodity agreement
• An international commodity agreement is an
undertaking by a group of countries to stabilize
trade, supplies, and prices of a commodity for the
benefit of participating countries.
• An agreement usually involves a consensus on
quantities traded, prices, and stock management. A
number of international commodity agreements
serve solely as forums for information
exchange, analysis, and policy discussion.
• USTR leads United States participation in two
commodity trade agreements:
– the International Tropical Timber Agreement and
– the International Coffee Agreement (ICA). Both
agreements establish inter governmental
organizations with governing councils .

•End of Unit IV

Syllabus of Unit V
• Regional Economic Groups
– EU,
– NAFTA,
– ASEAN,
– SAFTA and other Regional
Economic Groupings.

The European Union (EU)
The World’s Strongest
Supranational Organization

What is it?
• The European Union (EU) is a family of
democratic European countries, committed to
working together for peace and prosperity.
• It is not a State intended to replace existing states,
but it does represent a greater compromise of
sovereignty than any other international
organization.
• The EU is unique; its Member States have set up
common institutions to which they delegate some
of their sovereignty so that decisions on specific
matters of joint interest can be made democratically
at European level.
• This pooling of sovereignty is also called
"European integration"

European Coal and Steel
Community
• Founded in 1951
(Treaty of Paris)
• Purpose was to
reduce potential
for conflict
between the
member states
by pooling vital
resources
• Fore-runner of
the EEC, EC,
and EU

History of the EU
• The historical roots of the European
Union lie in the Second World War.
– Idea of European integration
conceived to prevent such killing and
destruction from ever happening again
– First proposed by the French Foreign
Minister Robert Schuman in a speech
on May 9, 1950. This date, the
"birthday" of what is now the EU, is
celebrated annually as Europe Day
• Phases of growth
– Initially, the European Economic
Community (EEC) consisted of
just six countries: Belgium,
Germany, France, Italy,
Luxembourg and the Netherlands
(1958)
– European Communities (EC)
(1967)
– Denmark, Ireland and the United
Kingdom joined in 1973
– Greece in 1981
– Spain and Portugal in 1986
– European Union (EU) (after 1992)
(Maastricht Treaty)
– Austria, Finland and Sweden in
1995
– Largest enlargement took place
with 10 new countries joining May
9, 2004

GROWTH OF THE EU
Admission
of Romania
and
Bulgaria
2007
Major
debates
about
Turkey
Croatia and
Macedonia
are new
candidates

CONFIRMATION OF CORE-DOMAIN MODEL

How does it work?
• There are five EU institutions,
each playing a specific role:
– European Parliament (one of two
legislative bodies in the EU;
elected by the peoples of the
Member States)
– Council of the European Union
(EU’s highest Legislative Body;
has legislative initiative; is made
up of representatives appointed
by member states according to a
population-based allotment)
– European Commission (EU’s
executive body; one
commissioner per country
appointed by each government)
– Court of Justice (ensures
compliance with the EU laws)
– Court of Auditors (manages the
EU budget)
• These are flanked by five other
important bodies:
– European Economic and Social
Committee (expresses the
opinions of organized civil society
on economic and social issues)
– Committee of the Regions
(expresses the opinions of
regional and local authorities)
– European Central Bank
(responsible for monetary policy
and managing the euro)
– European Ombudsman (deals
with citizens' complaints about
maladministration by any EU
institution or body)
– European Investment Bank
(helps achieve EU objectives by
financing investment projects)

The Euro
• The Treaty of Rome (1957)
– Declared a common market as a European
objective
– Aim: increase economic prosperity and
contribute to "an ever closer union among the
peoples of Europe"
• The Single European Act (1986) and the
Treaty on European Union (1992) built on
this
– introduced Economic and Monetary Union
(EMU)
– laid the foundations for a single currency
– name “Euro” was selected in 1995
– in January 1999, the exchange rates of the
participating currencies were irrevocably set
and Euro area Member States began
implementing a common monetary policy
– in January 2002, 12 States in the EU introduced

The Eurozone
• Coins and banknotes 1st used
Jan 1, 2002
• Cyprus sheduled to join in 2008
• Slovakia scheduled to join in
2009
• Estonia scheduled to join in
2010
• Sweden is technically obliged
to join but the EU has made
public that they will not enforce
this with regard to Sweden
• Britain and Denmark have a
“derogation” releasing them
from having to join

Impact of the Eurozone
• What impact do you think the
Eurozone has on cultural diffusion?
• What impact do you think the
Eurozone has on economic
development?
• Why are some countries avoiding
joining?

Why have bills different sizes &
colors?
What values are
reflected in these
“artifacts” that are not
found in American
money?

What about Switzerland?
• Swiss are traditionally suspicious of other
countries
• Swiss tradition of neutrality (WWI & WWII)
– self-imposed
– permanent
– armed
• In some ways Switzerland is like the US
– Nationalistic government not interested in
ceding sovereignty
– Economic policies are currently designed to
protect local industries (esp. agriculture) from
foreign competition
• Initial cost of joining EU (progressive
financial redistribution policy would cost
the Swiss)
• Switzerland has embarked on a policy of
building bilateral agreements with the EU

Costs of staying out
• Export problems
– Access to EU markets is not guaranteed
• Inflation problems
– Europeans nervous about the Euro due to expansion of the EU invest in Swiss
Francs, inflating the value of the currency and inhibiting Swiss exports
• Capital flight
– High construction costs, expensive labor, and skill shortages already make
investment in Switzerland unattractive
– Several multinational corporations, such as Roche, Sulzer and Alusuisse, have
frozen planned investment projects in Switzerland
– Large Swiss companies, including Nestle, are shifting activities out of Switzerland
in fear of discrimination by other nations
– Already four out of five employees of the top 15 Swiss companies work in other
countries
• Scientific information lag
– EU scientific exchange programs accept Swiss citizens only if they fail to fill such
exchanges with persons from EU countries
• Accumulated bilateral agreements and cooperation may create de-facto
incorporation in the EU for Switzerland

The EU in comparative
perspective

US dominates entertainment
industry in Europe
Cultural hegemony?

SUMMARY
• The European Union is the strongest supranational
organization in the world
– shared currency & financial management
– legislative, judicial, and executive bodies
– regulatory and planning bodies
• The EU is growing geographically, and its growth
suggests a core-domain model
– core and domain are borne out by distribution of income
• The EU does not appeal to all Europeans (at least not
yet)
– small states in particular seem skeptical
• Roughly comparable to the US in some ways
– population slightly larger than that of the US
– somewhat more densely settled than the US
– economy is at least as strong as the American economy
– other social statistics (e.g. literacy, infant mortality &
homicide) are as good or better than the US

NAFTA, the North American Free Trade Agreement,
was signed by the United States, Canada, and
Mexico.
•NAFTA was signed in
1993 and went into
effect on January 1,
1994.
•While some tariffs were
eliminated immediately,
others would take
anywhere from 5-15
years to be eliminated.

NAFTA was written to create a Free Trade Area
in North America.
• “Free Trade” means that countries may freely
trade goods with each other without having to
pay a tariff (tax) on those goods.
• In other words, “free trade” means no trade
barriers.

The purpose of the agreement is to:
 Allow free movement of goods and services
among the countries.
 Promote competition in the free trade areas.
 Protect the property rights of people and
businesses in each country.
 Be able to resolve problems that arise among
the countries.
 Encourage cooperation among countries.

Most economists agree that the agreement has
been good for the countries involved.

• Free trade increases sales and profits for Mexico,
Canada and the U.S.A., thus strengthening their
economies.
• Lack of tariffs has allowed Mexico to sell its goods in
the USA and Canada at lower prices. This makes
Mexican products more competitive in these
markets and increases Mexico’s profits as it tries to
develop its economy.
• Free trade is an opportunity for the U.S. to provide
financial help to Mexico by making jobs available in
factories located there.

a. “NAFTA Members
Prepare for Picnic!”
b. “NAFTA Members
Graciously Share
Business Ventures!”
c. “NAFTA Members
Cover Up
Conspiracy!”
d. “NAFTA Members
Vie For Business!”

• Free trade has caused more U.S. jobs losses
than gains, especially for higher-wage jobs.
›Factories, called
Maquiladoras, are
built on the Mexican
border and workers
are hired there to
make goods at a much
lower wage than
workers would be paid
in the U.S.A.

• Minimum Wage
Mexico - $3.40 per day vs. US - $5.15 per hour
• Example: Hourly compensation costs for
production workers in manufacturing
Mexico - $1.21 vs US - $17.70
• (Global Trade Watch, The NAFTA Index,
October 1, 1998)

• These factories make many types of products.

• 3 Day Blinds
• 20th Century Plastics
• Acer Peripherals
• Bali Company, Inc.
• Bayer Corp./Medsep
• BMW
• Canon Business Machines
• Casio Manufacturing
• Chrysler
• Daewoo
• Eastman Kodak/Verbatim
• Eberhard-Faber
• Eli Lilly Corporation
• Ericsson
• Fisher Price
• Ford
• Foster Grant Corporation
• General Electric Company
• JVC
• GM
• Hasbro
• Hewlett Packard
• Hitachi Home Electronics
•Honda
•Honeywell, Inc.
•Hughes Aircraft
•Hyundai Precision America
•IBM
•Matsushita
•Mattel
•Maxell Corporation
•Mercedes Benz
•Mitsubishi Electronics Corp.
•Motorola
•Nissan
•Philips
•Pioneer Speakers
•Samsonite Corporation
•Samsung
•Sanyo North America
•Sony Electronics
•Tiffany
•Toshiba
•VW
•Xerox
•Zenith

United States
• They can move their factories to
Mexico and ship the goods to the US
with no tariffs.
• They would not have to pay the
workers in Mexico as much as in the
United States.
• They would be able to sell their
product for cheaper, but still make a
good profit
• Many American factory workers lose
their jobs because the owners move
the factories to Mexico. American
factory workers cannot move to
Mexico to keep their jobs.
• Goods made in Mexico would cost a
lot less because labor is cheaper
there.
Mexico
• They would not like foreign owned
factories because they would create
competition and hurt Mexican owned
businesses.
• Maquiladoras would provide jobs for
Mexicans, but the profit made by
maquiladoras would go back into the
US economy, not into Mexico’s
• It would provide a job in a country
where there are not enough jobs
• However, the wages are very low and
the working conditions are not good
• Building factories creates pollution. An
environmentalist would want to make
sure that Mexico had laws to protect
the environment.
Good or Bad?

Disadvantages
• Some economists argue that NAFTA
has been beneficial to business
owners and elites in all three
countries, but has had negative
impacts on farmers in Mexico who
saw food prices fall based on cheap
imports from U.S. agribusiness and
negative impacts on U.S. workers in
manufacturing and assembly
industries who lost jobs.

Disadvantages
 Other economists believe that NAFTA has
not been sufficient (or worked fast enough)
to produce economic convergence, nor to
substantially reduce poverty rates.
 In addition, some have suggested that in
order to fully benefit from the agreement,
Mexico must invest more in education and
promote innovation in infrastructure and
agriculture.

Disadvantages
• Since labor is cheaper in Mexico,
many U.S. manufacturing industries
moved part of their production from
high-cost states to Mexico.
• Between 1994 and 2002, the U.S.
lost approximately 1.7 million jobs
while gaining only 794,000 for a net
loss of 879,000 jobs.
• These industries included, but were
not limited to Agri-businesses.

Disadvantages
• NAFTA expanded the maquiladora
program, in which U.S.-owned
companies employed Mexican
workers near the border to cheaply
assemble products for export to the
U.S.
• According to The Continental Social
Alliance, these workers have; “no
labor rights or health protections,
workdays can stretch 12 hours or
more, and if you are a woman, you
could be forced to take a pregnancy

Advantages
• In 2007, Canada and Mexico were,
respectively, the first and second
largest export markets for U.S.
agricultural products.
• Exports to the two markets
combined were greater than exports
to the next six largest markets
combined.

Advantages
• Agricultural trade increased in both
directions(U.S.-Mexico) under
NAFTA from $7.3 billion in 1994 to
$20.1 billion in 2006.
• This was an approximately 300%
increase in economic activity: Or
25% year over year growth (12
years).

Advantages
• From 1992-2007, the value of U.S.
agricultural exports worldwide
climbed 65%.
• Over that same period, U.S. farm
and food exports to Mexico and
Canada grew by 156%.

Advantages
• NAFTA expanded the maquiladora
program, which enabled U.S.-owned
companies to employ Mexican workers
near the border.
• This allowed for more efficient assembly of
manufactured goods and in turn,
increased exports to the U.S.
• This increased Mexico’s labor force by
30%

Association of Southeast Asian
Nations

ESTABLISHMENT AND
MEMBERSHIP
The Association of Southeast Asian Nations or ASEAN was
established on 8 August 1967 in Bangkok by the five original
Member Countries, namely, Indonesia, Malaysia, Philippines,
Singapore, and Thailand.
Brunei Darussalam joined on 8 January 1984
Vietnam on 28 July 1995
Laos and Myanmar on 23 July 1997
Cambodia on 30 April 1999
The ASEAN region has a population of about 500 million,
A total area of 4.5 million square kilometers
A combined gross domestic product of US$737 billion
A total trade of US$ 720 billion.

The Establishment of ASEAN
Bangkok, 8 August 1967

Goals of ASEAN
• To accelerate the economic growth,
social progress and cultural
development in the region through
joint endeavors; and
• To promote regional peace and
stability through abiding respect for
justice and the rule of law.

Political Objective :
Promoting Peace
& Stability
• Through political dialogue and confidence
building, no tension has escalated into armed
confrontation among ASEAN members since
its establishment more than three decades
ago.

ECONOMIC AND FUNCTIONAL
COOPERATION
• When ASEAN was established, trade among the
Member Countries was insignificant
• Thus, some of the earliest economic cooperation
schemes of ASEAN were aimed at addressing this
situation
• The Framework Agreement on Enhancing Economic
Cooperation was adopted at the Fourth ASEAN Summit
in Singapore in 1992, which included the launching of a
scheme toward an ASEAN Free Trade Area or AFTA.

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