Econ 340. Lecture 2 Institutions of the International Economy

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1 Econ 340 Lecture 2 Institutions of the International Economy

2 Announcements We will start discussing news next week, on Monday Jan 15. You should be watching for international economic news. Lecture 2: Institutions 2

3 Lecture Outline: Institutions of the International Economy The Three Main Institutions (IMF, World Bank, WTO) Why They Were Created, and When How They Have Changed Their Reputations Today Other Institutions United Nations OECD = Organization for Economic Cooperation and Development Preferential Trading Arrangements What s Happening Now? The World Financial Crisis The Euro-Zone Crisis The Doha Round PTAs Trade Disputes Lecture 2: Institutions 3

4 The Three Main Institutions Functions IMF (International Monetary Fund): Financial Assistance World Bank: Development Assistance WTO (World Trade Organization): Trade Policy Regulation and Negotiation Lecture 2: Institutions 4

5 The Three Main Institutions History Before World War II Great Depression High Tariffs on trade Competitive Devaluations of Currencies Beggar Thy Neighbor Policies (we ll see why later) Lecture 2: Institutions 5

6 The Three Main Institutions History End of World War II Bretton Woods Meeting (Bretton Woods, NH) IMF World Bank ITO (International Trade Organization)» Never ratified» Instead: GATT (General Agreement on Tariffs and Trade) Lecture 2: Institutions 6

7 The Three Main Institutions History Changes since 1940s IMF Originally enforced pegged exchange rates Purpose: To prevent beggar-thy-neighbor exchangerate policies Major currencies switched to floating in 1970s IMF still provides financial assistance» Until recently, mostly to developing countries» Subject to conditionality = required policy changes» In 21 st 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. Lecture 2: Institutions 7

8 The Three Main Institutions History Changes since 1940s World Bank =IBRD (International Bank for Reconstruction and Development) Originally intended for reconstruction from war Now mainly assists development Much of it by funding and assisting with projects Lecture 2: Institutions 8

9 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, Qatar Failed & abandoned, December 2015 Finally reached more limited agreements in 2013 & 2015 Lecture 2: Institutions 9

10 The Three Main Institutions Reputation today, among some: Lecture 2: Institutions 10

11 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 Lecture 2: Institutions 11

12 The Three Main Institutions Reputation Today: Criticized by Scholars for institutional flaws IMF: Has sometimes imposed misguided policies World Bank: Wastes resources on corrupt elites WTO: Dominated by rich countries, corporations Lecture 2: Institutions 12

13 Clicker Question Which institution also goes by the acronym IBRD? a) International Monetary Fund b) World Bank c) World Trade Organization IBRD = International Bank for Reconstruction and Development 13

14 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 Lecture 2: Institutions 14

15 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 ( ) Heads of state met annually, for a few years G-20 = G-8 + Australia & EU, + 10 major EMEs (Emerging Market Economies) = 19 Countries + EU Lecture 2: Institutions 15

16 G-20 Other Institutions Used to meet regularly, but only the finance ministers First G-20 summit (i.e., heads of state) met November 2008, London, in response to Financial Crisis Now G-20 summits are the main regular meeting, once a year Most recent Jul 7, 2017, in Hamburg, Germany Finance Ministers still meet more than once a year, as needed Lecture 2: Institutions 16

17 G-20 Lecture 2: Institutions 17

18 Other Institutions UN = United Nations UNCTAD (United Nations Conference on Trade and Development) ILO (International Labor Organization) WIPO (World Intellectual Property Organization) Lecture 2: Institutions 18

19 Other Institutions EU = European Union NAFTA = North American Free Trade Area (or Agreement) OECD = Organization for Economic Cooperation and Development Club of mostly high-income countries Does research, collects data, drafts policies Does not have any direct power Lecture 2: Institutions 19

20 Clicker Question What continent has no member of the G-20? a) Africa b) Asia c) Europe d) South America e) None of the above (all have G-20 members) (South Africa is part of G-20) 20

21 Lecture Outline: Institutions of the International Economy The Three Main Institutions (IMF, World Bank, WTO) Other Institutions What s Happening Now? The World Financial Crisis The Euro-Zone Crisis The Doha Round PTAs Trade Disputes Lecture 2: Institutions 21

22 What s Happening Now? Recovery from The World Financial Crisis Crisis started in US with burst of housing bubble in 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 Lecture 2: Institutions 22

23 What s Happening Now? Recovery from The World Financial Crisis Crisis spread To most other developed countries through financial institutions To some developing countries too Income and expenditure fell, causing world-wide recession Falling house prices alone reduced wealth Failures in financial markets made it worse Banks stopped lending Lecture 2: Institutions 23

24 What s Happening Now? Recovery from The World Financial Crisis Recession caused immediate drop in international trade This made matters worse It spread the recession to countries that had not been exposed to financial markets Lecture 2: Institutions 24

25 World GDP, annual, 2005= Source: IMF (but not available more recently) Lecture 2: Institutions 25

26 World Goods Exports, monthly, $billion July 2008 Feb 2009 Down 43% 2006 Jan 2006 May 2006 Sep 2007 Jan 2007 May 2007 Sep 2008 Jan 2008 May 2008 Sep 2009 Jan 2009 May 2009 Sep 2010 Jan 2010 May 2010 Sep 2011 Jan 2011 May 2011 Sep 2012 Jan 2012 May 2012 Sep 2013 Jan 2013 May 2013 Sep Lecture 2: Institutions 26

27 World Recession Recent Slowdown Lecture 1: Overview 27

28 What s Happening Now? Recovery from The World Financial Crisis What was done about it? Central banks, cut interest rates and extended credit. Banks were rescued. Countries used Stimulus Packages (tax cuts and spending increases) to stimulate economies. G-20 began meeting in summits, first in London Lecture 2: Institutions 28

29 What s Happening Now? Recovery from The World Financial Crisis What was done about it? G-20 promised more funds to IMF IMF is back in business making loans. FCL = Flexible Credit Line PLL = Precautionary and Liquidity Line SBA = Standing Borrowing Arrangements Concessional (zero or low interest) Lecture 2: Institutions 29

30 Lecture 2: Institutions 30

31 What s Happening Now? Recovery from The World Financial Crisis What will prevent future problems? Financial regulation restraints on bank lending reform of credit rating agencies Managed currency policies? (US concern with China s currency.) Lecture 2: Institutions 31

32 Clicker Question By how much did world exports fall during the World Recession? a) They didn t b) 1-20% c) 20-40% d) More than 40% (They fell by 43%) 32

33 What s Happening Now? Debt Problems of EU In 2010, starting with Greece, countries in the Eurozone found themselves with unmanageable debts Markets feared default; interest rates rose EU and IMF stepped in with loans Similar things happened later to Ireland, Portugal, and Spain Lecture 2: Institutions 33

34 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. Lecture 2: Institutions 34

35 What s Happening Now? - Doha Round? Doha Round: See Donnan Doha Round ended in failure in December 2015, after negotiations that began 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 Did not do one in Buenos Aires in 2017 There is likely instead to be increased move toward PTAs/RTAs among pairs and groups of countries Lecture 2: Institutions 35

36 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 Lecture 2: Institutions 36

37 What s Happening Now? - PTAs Recent United States Free Trade Agreements Withdrawn Completed since 2001 Being Negotiated by Trump Australia, Bahrain, Chile, Trans-Pacific Partnership Costa Rica, Dominican (TPP) Republic, El Salvador, Agreed late in 2015 Guatemala, Honduras, Not yet approved Jordan, Morocco, Nicaragua, Singapore Trans-Atlantic Trade & Investment Partnership Went into effect in 2012: S. Korea, Colombia, Panama (TTIP)? On hold Lecture 2: Institutions 37

38 What s Happening Now? - PTAs US FTAs include Israel NAFTA with Canada & Mexico Currently being renegotiated, at Trump s insistence We ll look at it, and the renegotiation, later South Korea ( KORUS ) 2012 Trump threated to renegotiate But have agreed to amend instead Lecture 2: Institutions 38

39 Source: WTO Lecture 2: Institutions 39

40 What s Happening Now? - PTAs Most recently, in : November 2016: India-UK FTA in negotiation February 2017: Canada-EU FTA ratified May 2017: Ukraine-EU FTA approved November 2017: EU-Mercosur (Brazil, Argentina, Uruguay, Paraguay) FTA in negotiation November 2017: Vietnam-EU FTA in negotiation December 2017: Canada-China FTA in negotiation December 2017: Japan-EU FTA completed December 2017: 55 African countries negotiating to combine several FTAs Lecture 2: Institutions 40

41 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 Lecture 2: Institutions 41

42 What s Happening Now? - Disputes 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. US may extend tariffs beyond China Lecture 2: Institutions 42

43 What s Happening Now? - Disputes Trade Disputes US-EU beer dispute US taxes beer: Big brewers: $18 per barrel Small brewers: $7 per barrel on their first 60,000 barrels Purpose of the lower tax on small brewers is to encourage small craft brewers. But EU brewers, even if small, are not eligible for the lower rate. EU complains. Lecture 2: Institutions 43

44 What s Happening Now? - Disputes Trade Disputes China s currency (the yuan, aka renminbi) Was pegged to US $ at /$ and considered undervalued Allowed to rise as of July 21, It rose 2.1% Rose steadily until July 2008, to /$ about 20% Lecture 2: Institutions 44

45 What s Happening Now? - Disputes Trade Disputes China s currency (the yuan) In July 2008, dollar itself started to rise, and yuan went back to being fixed to dollar Many, in US and especially in EU, 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 Lecture 2: Institutions 45

46 What s Happening Now? - Disputes Trade Disputes China s currency (the yuan) Until recently market forces were pushing the yuan down China s central bank was spending reserves trying to keep it up (we ll see later how that works) The US government under Obama was not complaining about the Chinese currency But Donald Trump did: Promised to declare China a Currency Manipulator on day one of his presidency. He didn t. Lecture 2: Institutions 46

47 Source: IMF How China s Exchange Rate Has Behaved US$/yuan Exchange Rate 2000 Jan 2000 Oct 2001 Jul 2002 Apr 2003 Jan 2003 Oct 2004 Jul 2005 Apr 2006 Jan 2006 Oct 2007 Jul 2008 Apr 2009 Jan 2009 Oct 2010 Jul 2011 Apr 2012 Jan 2012 Oct 2013 Jul 2014 Apr 2015 Jan 2015 Oct 2016 Jul 2017 Apr Lecture 2: Institutions 47

48 Recent Movements of the Yuan: % Source: X-Rates.com Lecture 2: Institutions 48

49 Recent Movements of the Yuan: % Source: X-Rates.com Lecture 2: Institutions 49

50 What s Happening Now? - Disputes Other Trade Disputes Steel: Glut of steel produced in China is prompting Complaints from EU, US, and others Threatened tariffs on China exports US accuses China of stealing technology China seeks market-economy status; US & EU decline Trump may put tariffs on washing machines and solar panels from China Trump initiated an anti-dumping investigation against China s exports of aluminum Lecture 2: Institutions 50

51 What s Happening Now? - TPP Trans-Pacific Partnership (TPP) Was to be Free Trade Agreement among 12 countries Including US, Japan, and 10 others Not including China Negotiations completed November 5, 2015 US Congress delayed approval until after election Trump pulled out Recently, other 11 countries are trying to revive it as: Comprehensive and Progressive Agreement for Trans- Pacific Partnership (CPTPP) Lecture 2: Institutions 51

52 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 was encouraged to complete this by 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. Lecture 2: Institutions 52

53 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 is good? To prevent wars in Europe To free up movement of people, goods, services, and capital Why UK wanted to leave the EU? Need to bail out countries in trouble Influx of migrants EU regulations perceived as invasive Lecture 2: Institutions 53

54 What s Happening Now? - Brexit Results of vote UK Prime Minister Cameron resigned UK informed EU on March 29, 2017, starting clock on two years for EU & UK to negotiate terms Issues (among many) to resolve Price UK must pay to EU Status of Brits in EU and others in UK Border between Ireland (still member of EU) and Northern Ireland (part of UK) Trade relations of UK & EU Lecture 2: Institutions 54

55 Clicker Question Which of the following is not currently engaged in negotiations to form a new Free Trade Agreement? a) Canada b) China c) India d) European Union e) United States 55

56 Clicker Question Which of the following is not negotiating to be part of the Regional Comprehensive Economic Partnership? a) China b) India c) Japan d) United Kingdom 56

57 Clicker Question During the time that Donald Trump has been President, how has the dollar value of the Chinese currency changed? a) Fallen by more than 10% b) Fallen by less than 10% c) Not changed d) Risen by less than 10% e) Risen by more than 10% 57

58 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 58

59 Lecture 2: Institutions 59

Econ 340. Outline: Current Tensions in the International Economy NAFTA NAFTA NAFTA NAFTA. Lecture 1 Current Tensions in the International Economy

Econ 340. Outline: Current Tensions in the International Economy NAFTA NAFTA NAFTA NAFTA. Lecture 1 Current Tensions in the International Economy Econ 340 Lecture 1 Current Tensions in the Lecture 1: Overview 2 NAFTA What is it? North American Free Trade Agreement Does many things but most important: Zero tariffs on most trade between US, Canada,