Technical analysis focuses on patterns of price movements, trading signals, and various other analytical signals to inform trades, as opposed to fundamental analysis, which tries to find an asset's intrinsic value. Convergence The term convergence is the opposite of divergence. It is used to describe the phenomenon of the futures price and the cash price of the underlying commodity moving closer together over time. In most cases, traders refer to convergence as a way to describe the price action of a futures contract. Theoretically, convergence happens because an efficient market won't allow something to trade for two prices at the same time. The actual market value of a futures contract is lower than the contract price at issue because traders have to factor in the time value of the security. As the expiration date on the contract approaches, the premium on the time value shrinks, and the two prices converge. If the prices did not converge, traders would take advantage of the price difference to make a quick profit. This would continue until prices converged. When prices don't converge, there is an opportunity for arbitrage. Arbitrage is when an asset is bought and sold at the same time, in different markets, to take advantage of a temporary price difference. This situation takes advantage of inefficiencies in the market. Key Differences Technical traders are much more concerned with divergence than convergence, largely because convergence is assumed to occur in a normal market. Many technical indicators commonly use divergence as tools, primarily oscillators. They map out bands (both high and low ones) that occur between two extreme values. They then build trend indicators that flow within those boundaries. Divergence is a phenomenon that is commonly interpreted to mean that a trend is weak or potentially unsustainable. Traders who employ technical analysis as part of their trading strategies use divergence to read the underlying momentum of an asset. Convergence occurs when the price of an asset, indicator, or index moves in the same direction as a related asset, indicator, or index in technical analysis. For example, there is convergence when the Dow Jones Industrial Average (DJIA) shows gains at the same time that its accumulation/distribution line is increasing. 5.4 REASONS FOR TRADE BLOCKFORMATION In the second half of the 20th century, as a result of the unprecedented strengthening of the economic life internationalization, two main trends that determine the modern development of the world economy - globalization and regional integration were formed. 101 CU IDOL SELF LEARNING MATERIAL (SLM)
The diversity of integration models allows the majority of States, regardless of their position in the world, capacity and level of development to seek and find their place in these processes. The strengthening of economic interdependence of countries as a result of international regional integration and globalization of foreign economic relations gives a powerful impetus to the development of economic systems at the state, regional and global levels. One of the results of these factors is the formation of trading blocks. A Trading bloc is a group of countries that have reduced or removed trade barriers for its participants. Trade blocs are a form of economic integration and it increasingly forms the structure of world trade. To form a trade bloc, countries conclude international treaties. Typically, trade blocs have their own administrative and regulatory bodies. Some trading blocs also set political goals. The purpose of the trade blocs is to free trade from protectionist measures and to create an enabling environment for trade among members. The World Trade Organization (WTO) permits the existence of trading blocs, provided that they result in lower protection against outside countries than existed before the creation of the trading block. Like any other form of integration process, the trading bloc has its own advantages and disadvantages. Economists have identified fivereasons of establishing a trade block. The benefits include competition, market efficiency, trade effects, economies of scale, and foreign direct investment. Because trade blocks unite several international markets, the manufacturers, producers, and other businesses within member countries are also brought closer together. This puts them in direct competition with one another, which ultimately leads to increased efficiency as each try to increase their profit margins. Because trade blocks eliminate trade barriers, previously expensive or unavailable products become available in new markets at affordable prices. This changes consumer demand and behaviour as most customers turn to the lowest priced goods (known as trade effects). The manufacturers and businesses with the lowest prices are made more successful and able to increase production, resulting in market efficiency. As these economies become stronger, they encourage foreign direct investment. Many countries group together for different reasons- Trade - There are several trading blocs, such as the NAFTA (North American Free Trade Association), the African Union (AU), OPEC and the European Union Global Governance (economic)– such as other ECONOMIC groupings include the World Bank (An international organization dedicated to providing financing, advice and research to developing nations to aid their economic development), IMF (International Monetary Fund who…) and the World Trade Organization (WTO) who try to organize and make trade free. Global Governance (Social) - There are global organizations of countries too, including the United Nations who have a huge role to play in organizing the countries of the world 102 CU IDOL SELF LEARNING MATERIAL (SLM)
to combat environmental issues such as Global Warming, tackle poverty through the UNDP, and ensure safety of people in conflicts through the use of the UN’s peace keeping force Defence – There are defence groupings such as NATO (North Atlantic Treaty Organization) Social, Political and Economic Unions – the European Union is a great example of this, where various aspects of politics, law, society and the economy of member states are governed by the group of nations. 5.5 SUMMARY A trading block is a type of inter-governmental agreement, often part of a regional inter-governmental organization, where regional barriers to international trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating states, a common currency is sometimes used or taxes on products are increased which have been purchased from outside the trade block allowing trade with each other as easily as possible. Historically the first economic bloc was developed in Germany under the name of German Customs Union in 1834. It was formed on the basis of German Confederation and later on by the German Empire in 1871 A trade block that succeeds in reaping competition and scale effects will not only lower the prices of manufactures produced within the region. As a result, importers will be forced to lower their prices so the block will improve its terms of trade. If developing countries want to use trade blocks to improve their terms of trade, they should have collective increase in competition. When the value of an asset, indicator, or index moves, the related asset, indicator, or index moves in the other direction. This is what is referred to as divergence. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. The term convergence is the opposite of divergence. It is used to describe the phenomenon of the futures price and the cash price of the underlying commodity moving closer together over time. In most cases, traders refer to convergence as a way to describe the price action of a futures contract. The benefits of trade block include competition, market efficiency, trade effects, economies of scale, and foreign direct investment. Trade blocks unite several international markets, the manufacturers, producers, and other businesses within member countries are also brought closer together. This puts 103 CU IDOL SELF LEARNING MATERIAL (SLM)
them in direct competition with one another, which ultimately leads to increased efficiency as each try to increase their profit margins. Many countries group together for different reasons- Trade, economic global governance, social global governance, defence etc. Trade blocs can take different forms. The most enduring and successful trade bloc, as of the early twenty-first century, was the one binding 27 European countries under the European Union (EU). EU brought about wide-ranging economic, political, and social organization among its member countries, including the establishment of a common currency and many other unifying features usually imposed only by national governments. The United States, Canada, and Mexico established another of the world’s most significant trading blocs with the North American Free Trade Agreement (NAFTA) in 1992. Though NAFTA, by reducing most trade barriers between these three countries, had important and controversial economic consequences, it was not intended to erase national economic boundaries to the degree that the EU did, nor did it actively promote the elimination of social and political boundaries. The creation of trade blocs generally results in benefits to consumers, as high-quality goods and services can be produced at lower prices than they could with trade barriers in place. Effective trade blocs also tend to create stable political relations between countries and to increase total employment and income levels in all participating countries, at least over the long term. These benefits come at a cost, however. Inevitably some industries and companies eliminate large numbers of jobs in one member country in order to take advantage of cheaper labour in another member country. This can cause great pain to workers and communities. Likewise, trade blocs, by increasing the freedom of companies motivated only by profit, often threaten poorer member countries’ traditional ways of life and the environment. A belief in the beneficial effects of free trade is the foundation for trade blocs such as the EU and NAFTA. The early economists Adam Smith (1723–90) and David Ricardo (1772–1823) were the first thinkers to outline the case for free trade convincingly, and the arguments in favour of free trade have changed little since that time. Regional trade blocs represent a compromise between totally free trade and total protectionism of a country’s industries. 104 CU IDOL SELF LEARNING MATERIAL (SLM)
With decades of successful cooperation behind them, many EU countries in 1999 adopted a common currency, the euro, and ceased using individual national currencies. 5.6 KEYWORDS Bilateral trade agreement- Binding legal contract signed by two countries, two states, or two economic and/or political regions in order to regulate and facilitate trade between them. Such agreements may be reciprocal or nonreciprocal. Customs union- Merger of two or more customs territories. The members agree to apply the same customs duties (common external tariff) and trade regulations to territories outside of the Union. At the same time, they agree to eliminate such measures for trade between members of the Union. Economic integration-Harmonization and unification of the economic policies of a group, usually of States, that share a supranational institutional structure whose directives are binding. Before that stage is reached, normally there have been several degrees of economic integration. Free trade area- When two or more customs territories eliminate the tariff and non- tariff barriers to the commercial exports and imports of goods originating in the members (countries) of the area. Members set their own tariffs on imports from territories that do not belong to the area. GATT (General Agreement on Tariffs and Trade) - Superseded by the WTO as the international organization governing international trade. The updated General Agreement is now the WTO Agreement governing trade in goods. 5.7 LEARNING ACTIVITY 1. What is the future of globalization under COVID-19? ___________________________________________________________________________ ___________________________________________________________________________ 2. Technically is there any difference between policy implications and policy recommendations? ___________________________________________________________________________ ___________________________________________________________________________ 5.8 UNIT END QUESTIONS A. Descriptive Questions 105 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)
1. State the definition of trade blocks? 106 2. Explain the advantages of trade block. 3. List out the disadvantages of trade block. 4. Define free trade area. 5. What is a customs union? Long Questions 1. Enumerate the reasons for trade block formation. 2. Describe convergence. 3. Explain divergence. 4. Elucidate the competition and scale of trade block. 5. Discuss the history of trade blocks. B. Multiple Choice Questions 1. What does free trade means? a. The countries use the same currency b. No trade barrier c. There is a quota on some good d. Trade is quick and easy 2. What is the purpose of NAFTA? a. To increase the trade between the countries of North America. b. To help Canada become more independent nation. c. To eliminate environment issues between the nations involved. d. None of these. 3. Which of the country is not part of NAFTA? a. USA b. Great Britain c. Mexico d. Canada 4. Which of the following trade block is made from European countries? a. EU b. ASEAN c. Bretton Woods Agreement CU IDOL SELF LEARNING MATERIAL (SLM)
d. The Europe Coal and Steel community 5. Which of the below south-easternblock is ASEAN? a. African b. Australian c. Asian d. European Answers 1-b, 2-a, 3-b, 4- a, 5-c 5.9 REFERENCES References Lal, D. (1993). Trade Blocs and Multilateral Free Trade\". Journal of Common Market Studies. Mansfield, Edward D. and Milner, H. (2005). The new wave of Regionalism Boulder: Lynne Rienner Publishers. Schott, Jeffrey J. (1991). Trading blocs and the world trading system. World Economy. Textbooks Krishna, P. (2005). Trade blocs – Economics and Politics. Cambridge: Cambridge University Press. Abrego, L., Perroni, C., Whalley J. and Wigle, R. M. (2001). Trade and Environment: Bargaining Outcomes from Linked Negotiations. Review of International Economics. Alexandraki, K. and Lankes, H. P. (2004) Estimating the Impact of Preference Erosion on Middle-Income Countries. Washington, D.C: IMF. Websites https://en.wikipedia.org/wiki/Trade_bloc#:~:text=A%20trade%20bloc%20is%20a,eli minated%20among%20the%20participating%20states https://www.exportgenius.in/blog/10-major-regional-trading-blocs-of-the-world- 236.php https://www.bbc.co.uk/bitesize/guides/zh3847h/revision/5 107 CU IDOL SELF LEARNING MATERIAL (SLM)
https://wwg.eu.com/news-blog/what-is-a-trading-bloc-everything-you-need-to-know- in-2019/ https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and- maps/trade-bloc 108 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 6 – TYPES OF TRADE BLOCKS STRUCTURE 6.0 Learning Objectives 6.1 Introduction 6.2 Different Types of Trade Blocks 6.2.1 Preferential Trade Area 6.2.2 Free Trade Area 6.2.3 Customs Union 6.3 Member Countries and Economies Condition 6.3.1 The World Bank 6.3.2 International Monetary Fund 6.4 Summary 6.5 Keywords 6.6 Learning Activity 6.7 Unit End Questions 6.8References 6.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe different types of trading blocks. List the member countries of trading blocks. Describe the role of World Bank and IMF. 6.1 INTRODUCTION Trading blocks are usually groups of countries in specific regions that manage and promote trade activities. Trading blocs lead to trade liberalization and trade creation between members, since they are treated favourably in comparison to non-members. The World Trade Organization (WTO) permits the existence of trading blocs, provided that they result in lower protection against outside countries than existed before the creation of the trading block. WTO refers to unilateral ones as preferential trade arrangements and reciprocal ones as regional trade agreements. 109 CU IDOL SELF LEARNING MATERIAL (SLM)
Unilateral arrangements As mentioned above, these include arrangements whereby one country offers preferential tariffs to another country or to a group of countries on a unilateral basis. The country offering the preference removes or lowers import tariffs on imports from these countries without obtaining the same preferences in return. Such arrangements focus usually only on trade in goods. A key example here are the Generalised Scheme/ System of Preferences (GSP), a unilateral preference programmes offered by many developed countries (e.g. US, Switzerland, Japan and the EU) to a number of developing and least developed countries. Preferential rules of origin are applied in order to prevent third party countries from taking advantage of the preferential tariffs offered to the selected GSP countries. Reciprocal agreements The majority of the reciprocal agreements covered by the tool are free trade agreements. Free trade agreements (FTAs) remove barriers to trade between members and offer preferential access to markets on a reciprocal basis in addition to trade in goods. FTAs usually cover trade in services and investment provisions as well as remove both tariff and non-tariff barriers to trade. They can also include a range of provisions on customs cooperation and trade facilitation as well as harmonize standards and encourage regulatory cooperation in various areas. Each FTA is negotiated and agreed separately by participating countries. A country can be a member of several FTAs. Preferential rules of origin are applied in order to prevent third party countries from taking advantage of preferential tariffs under an FTA without offering reciprocal benefits. The way FTAs are named can differ as well. Most FTAs are named by listing the participating countries and adding the term FTA e.g. Canada-Korea FTA. However, some FTAs are called by different names. For example, the Canada-EU FTA is called the Comprehensive Economic and Trade Agreement. Other countries name their trade agreements Economic Partnership Agreements (EPAs) or Comprehensive Economic Partnerships (CEPs). Other variations are also used. All the above agreements are in fact FTAs but for various reasons members prefer to call them by a different name. In many cases, such names reflect the wider scope of the agreements: many newer FTAs exceed the scope of traditional trade treaties and cover areas such as government procurement, competition, intellectual property, sustainable development, labour and the environment etc. Regional trade agreements (RTAs) The WTO uses the term “regional trade agreements” as a generic name for all reciprocal agreements such as customs unions, FTAs and partial scope agreements. This can be 110 CU IDOL SELF LEARNING MATERIAL (SLM)
explained by the fact that, initially, such treaties were within the jurisdiction of the WTO’s Committee on Regional Trade Agreements. In reality, such trade agreements do not have to include members from the same region (e.g. the EU-Canada or Peru-South Korea FTAs). Preferential trade agreements (FTAs) Remove barriers to trade between members and offer preferential access to markets on a reciprocal basis. In addition to trade in goods, FTAs usually cover trade in services and investment provisions as well as remove both tariff and non-tariff barriers to trade. They can also include a range of provisions on customs cooperation and trade facilitation as well as harmonize standards and encourage regulatory cooperation in various areas. Preferential trade agreements can be used in two ways- i. It is one of the names sometimes used for FTAs to highlight their preferential character as opposed to trade liberalization under the WTO or unilateral reduction in tariffs. ii. The term “preferential trade agreements” can be used to refer to partial scope agreements. These agreements offer preferential market access by reducing import tariffs on a limited amount of goods. 6.2 DIFFERENT TYPES OF TRADE BLOCKS Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc- Preferential Trade Area Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc. Free Trade Area Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members.Members agree to reduce or abolish trade barriers such as tariffs and quotas between themselves. They maintain their own individual tariffs and quotas with respect to non-members. Customs Union A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff or quota against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO. 111 CU IDOL SELF LEARNING MATERIAL (SLM)
Common Market A ‘common market’ (or single market) is the first significant step towards full economic integration, and occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, and labour are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be a significant level of harmonization of micro-economic policies, and common rules regarding monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM). Economic Union An economic union is an agreement between two or more nations to allow goods, services, money and workers to move over borders freely. The countries may also coordinate social and financial policies to support this common market. The European Union (EU) is an example of an economic union. The countries of the EU coordinate their respective economic policies, laws and regulations so they can work together to address economic and financial issues. The EU also has a common currency, the Euro, used by 19 EU members. An economic union is different from a customs union. The members of a customs union enjoy free movement of goods but do not typically share currency or allow workers to move freely across borders. 6.2.1 Preferential Trade Area A preferential trade area (also preferential trade agreement, PTA) is a trading block that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. It is the first stage of economic integration. Preferential trade arrangements (PTAs) in the WTO are unilateral trade preferences. They include Generalized System of Preferences schemes (under which developed countries grant preferential tariffs to imports from developing countries), as well as other non-reciprocal preferential schemes granted a waiver by the General Council. In this type of agreement, two or more partners give preferential right of entry to certain products.This is done by reducing duties on an agreed number of tariff lines.A PTA is established through a trade pact, and is a stepping stone towards better economic relations with the concerned country.India enjoys PTAs with several countries, including Bangladesh, China, South Korea, and Sri Lanka. 112 CU IDOL SELF LEARNING MATERIAL (SLM)
The key difference between an FTA and a PTA is that in a PTA there is a positive list of products on which duty is to be reduced; in an FTA, there is a negative list on which duty is not reduced or eliminated. With the recent multiplication of bilateral PTAs and the emergence of Mega-PTAs (wide regional trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP) or Trans Pacific Partnership (TPP)), a global trade system exclusively managed within the framework of the WTO now seems unrealistic and the interactions between trade systems have to be taken into account. The increased complexity of the international trade system generated by the multiplication of PTAs should be taken into account in the study of the choice of fora used by countries or regions to promote their trade relations and environmental agenda. PTAs have seen rapid growth; in the 1990s, there were slightly more than 100 PTAs. By 2014, there were more than 700. In 2004, Scott Baier and Jeffrey Bergstrand published that there were three economic determinants critical to the formation of PTAs. Countries are more likely to participate in PTAs if they have low transportation costs and larger economies. Third, countries with similar economic sizes are likely to benefit the most by forming PTAs. Economic determinants like GDP, similarity of economic size, and distance between countries correctly predict over 80% of PTAs in effect as of 2020. The remaining PTAs can be attributed to political predictors. Countries under democratic rule are more likely to participate in PTAs than those under autocratic rule. Autocratic rulers are not elected, and thus do not have their power threatened by dissatisfied citizens. Democratic leaders are incentivized to keep their constituents satisfied, and PTAs can help lower the price of consumer goods. Advocating for PTAs also lets democratic leaders signal to voters that they are committed to policies that improve their welfare. Countries are also more likely to join PTAs if competitor countries have already done so. Examples of PTA A Regional Trade Agreement (RTA) is an example of a PTA. In the United States certain industries, such as automobile and electronics manufacturers, favour RTAs because such agreements allow these industries to exploit low manufacturing costs in other countries in the hemisphere, while avoiding the competition from European and Japanese producers that they would face in a multilateral agreement. Another controversy surrounding PTAs are their apparent contradiction with the principles of the World Trade Organization. The WTO is governed in part by a \"Most Favoured Nation\" mentality, which holds that no one should enjoy preferential treatment in international trade and that tariffs should be the same for everyone. However, despite this principle, PTAs are allowed under the Article XXIV exception of the charter of the WTO. 113 CU IDOL SELF LEARNING MATERIAL (SLM)
One final critique of PTAs holds that rich countries who enter into PTAs are forcing smaller countries to do the same, yielding trading blocks and hindering progress towards total free trade. Forms of Preferential Trade Agreements Free Trade Associations In Free Trade Associations, internal trade must be free from tariffs. Examples include the North American Free Trade Agreement and the ASEAN Free Trade Area. Customs Unions In Customs Unions, equal tariffs must be set by all members. The EU is an example of a Customs Union. 6.2.2 Free Trade Area Free trade agreements (FTAs) are arrangements between two or more countries, or between a country and a trading block to abolish or reduce tariffs, quotas, and preferences on goods and services traded.Countries often agree to FTAs if their economic structures are complementary, not competitive. FTAs also cover areas such as intellectual property rights (IPRs), investment, and government procurement and competition policies.At the regional level, every customs union, trade common market, economic union, and customs and monetary union negotiate free trade areas. India looks favourably upon regional trading arrangements (RTAs), such as FTAs, Preferential Trade Agreements (PTAs), Comprehensive Economic Partnership Agreements (CEPAs), and Comprehensive Economic Cooperation Agreements (CECAs). Understanding FTA A free trade area is a group of countries that have few or no barriers to trade in the form of tariffs or quotas between each other. Free trade areas tend to increase the volume of international trade among member countries and allow them to increase their specialization in their respective comparative advantages. To develop a free trade area, participating nations must develop rules for how the new free trade area will operate. What customs procedures will each country have to follow? What tariffs, if any, will be allowed and what will their costs be? How will participating countries resolve trade disputes? How will goods be transported for trade? How will intellectual property rights be protected and managed? How these questions are answered in a specific free trade agreement tends to be based on political influences within and power relations between countries. This shapes the scope and degree of how “free” trade will actually be. The goal is to create a trade policy that all countries in the free trade area can feasibly agree upon. 114 CU IDOL SELF LEARNING MATERIAL (SLM)
Free trade produces costs and benefits. Free trade areas can benefit consumers, who can have increased access to less expensive and/or higher quality foreign goods and who can see prices decrease as governments reduce or eliminate tariffs. Producers can struggle with increased competition, but they might also acquire a greatly expanded market of potential customers or suppliers. Workers in some countries and industries will lose jobs and face related hardships as production moves to areas where comparative advantage or home market effects make those industries more efficient overall. Some investments in fixed physical capital and human capital will end up losing value or as entirely sunk costs. Free trade areas can also encourage economic development in countries as a whole, benefiting some of the population who will see increased living standards. Proponents of free trade areas highlight the benefits, while those who oppose them focus on the costs. Free trade areas are favoured by some advocates of free market economics. Others argue instead that true free trade does not require any complicated treaties among governments or political entities and that the benefits of trade can be easily reaped by simply eliminating trade restrictions, even unilaterally. They sometimes argue that the outcomes of free trade agreements represent the influence of special interest pressure and rent-seeking as much as the results of free trade. Some free market advocates point out those free trade areas may actually distort patterns of international specialization and division of labour by biasing, or even explicitly limiting, trade toward trade blocs as opposed to allowing natural market forces to determine patterns of production and trade across countries. Free Trade Areas and the United States The United States participates in 14 free trade areas with 20 countries as of 2020. One of the most well-known and largest free trade areas was created by the signing of the North American Free Trade Agreement (NAFTA) on Jan. 1, 1994. This agreement between Canada, the United States, and Mexico encourages trade between these North American countries. This agreement between Canada, the United States, and Mexico encourages trade between these North American countries. In 2018, the U.S., Canada, and Mexico signed the United States-Mexico-Canada Agreement (USMCA) to replace NAFTA. The USMCA took effect on July 1, 2020, replacing NAFTA. In addition to USMCA, there is the Dominican Republic- Central American Free Trade Area (DR-CAFTA), which includes the Dominican Republic, Costa Rica, El Salvador, Nicaragua, Honduras, and Guatemala. The United States also has free trade agreements with Australia, Bahrain, Chile, Colombia, Panama, Peru, Singapore, Israel, Jordan, Korea, Oman, and Morocco. The United States recently pulled out of the Trans-Pacific Partnership (TPP), though the agreement will proceed without the United States as a participant. The United States has also been working on a European trade agreement, called the Transatlantic Trade and Investment Partnership (T- TIP), with the objective of shaping a \"high-standard, broad-based regional pact,\" according to the Office of U.S. Trade Representative. 115 CU IDOL SELF LEARNING MATERIAL (SLM)
Advantages of a Free Trade Area A free trade area offers several advantages, including- Increased efficiency The good thing about a free trade area is that it encourages competition, which consequently increases a country’s efficiency, in order to be on par with its competitors. Products and services then become of better quality at a lower cost. Specialization of countries When there is intense competition, countries will tend to produce the products or goods that they are most efficient at. Efficient use of resources means maximizing profit. No monopoly When there is free trade, and tariffs and quotas are eliminated, monopolies are also eliminated because more players can come in and join the market. Lowered prices When there is competition, especially on a global level, prices will surely go down, allowing consumers to enjoy a higher purchasing power. Increased variety With imports becoming available at a lower cost, consumers gain access to a variety of products that are inexpensive. Disadvantages of Free Trade Area Despite all the benefits brought about by a free trade area, there are also some corresponding disadvantages, including- Threat to intellectual property When imports are freely traded, domestic producers are often able to copy the products and sell them as knock-offs without fear of any legal repercussions. Therefore, unless the FTA includes provisions for intellectual property laws and enforcement there are no protections for exporting companies. Unhealthy working conditions Outsourcing jobs in developing countries can become a trend with a free trade area. Because many countries lack labour protection laws, workers may be forced to work in unhealthy and substandard work environments. Less tax revenue Since member countries are no longer subject to import taxes, they need to think of ways to compensate for the reduced tax revenue. 116 CU IDOL SELF LEARNING MATERIAL (SLM)
6.2.3 Customs Union A customs union is an agreement between two or more neighbouring countries to remove trade barriers, reduce or abolish customs duty, and eliminate quotas. Such unions were defined by the General Agreement on Tariffs and Trade (GATT) and are the third stage of economic integration. Unlike in free trade agreements, a common external tariff is imposed on non-members of the union. When countries outside the union trade with countries in the customs union, they need to make a single payment (duty fee) for the goods that have crossed the border. Once inside the union, they can trade freely with no added tariffs. Purpose of Customs Unions The purpose of a customs union is to make it easier for member countries to trade freely with each other. The union reduces the administrative and financial burden of barrier trading and fosters economic cooperation among nations. However, member countries are not given the freedom to form their own trade deals. The countries in the customs union usually restructure their domestic economy and economic policies in order to maximize their gain from membership in the union. The European Union is the largest customs union in the world in terms of the economic output of its members. A customs union generates trade creation and diversion that helps with economic integration. Below are the advantages and disadvantages of customs unions. Advantages of Custom Unions Customs unions offer the following benefits: Increase in trade flows and economic integration The main effect of a free-trade agreement is that it increases trade between member countries. It helps improve the allocation of scarce resources that satisfy the wants and needs of consumers and boosts foreign direct investment (FDI). Customs unions lead to better economic integration and political cooperation between nations and the creation of a common market, monetary union, and fiscal union. Trade creation and trade diversion The effectiveness of a customs union is measured in terms of trade creation and trade diversion. Trade creation occurs when the more efficient members of the union sell to less efficient members, leading to a better allocation of resources. Trade diversion occurs when efficient non-member countries sell fewer goods to member countries because of external tariffs. It gives less efficient countries in the union the opportunity to capitalize on their position and sell more goods within the union. 117 CU IDOL SELF LEARNING MATERIAL (SLM)
If the gains from trade creation exceed the losses from trade diversion, that leads to increased economic welfare among member countries. Reduces trade deflection One of the main reasons a customs union is favoured over a free trade agreement is because the former solves the problem of trade deflection. This occurs when a non- member country sells its goods to a low-tariff FTA (free trade agreement) country, which then resells to a high-tariff FTA country, leading to trade distortions. The presence of a common external tariff in customs unions helps avoid problems that arise from tariff differentials. Disadvantages of Customs Unions Along with the advantages, customs unions also come with a few drawbacks: Loss of economic sovereignty Members of a customs union are required to negotiate with non-member countries and organizations such as the WTO. This is necessary to maintain a customs union; however, it also means that individual member countries are not free to negotiate their own deals. If a country wants to protect an infant industry in its market, it is unable to do so by imposing tariffs or other protective barriers due to the liberal trading policies. Similarly, if a country wants to liberalize its trade outside the union, it is unable to do this due to the common external tariff. Distribution of tariff revenues Some countries in the union do not receive a fair share of tariff revenues. This is common among countries like the UK that trade relatively more with countries outside the union. Around 20%-25% of the tariff revenue is retained by the member who collects the revenue. It is estimated that the cost of collecting this revenue exceeds the actual revenue collected. Complexity of setting the tariff rate A common problem faced by customs unions is the complexity of setting the applicable tariff rate. The process is very costly and time-consuming. Member countries often find it hard to forgo the trade of certain goods or services because another country in the union is producing it more efficiently. The problem is usually faced by developing countries and is a major issue that the UK is dealing with during Brexit. 6.3 MEMBER COUNTRIES AND ECONOMIES CONDITION Let us look at the major trading block, their member countries and economic conditions within the block. 118 CU IDOL SELF LEARNING MATERIAL (SLM)
ASEAN ASEAN (Association of South East Asian Nations) was established on 8th August 1967 in Bangkok, Thailand. There are 10 member countries of ASEAN including Brunei, Malaysia, Singapore, Vietnam, Indonesia, Laos, Cambodia, Thailand, Philippines and Myanmar. The main goals of ASEAN are to increase economic growth, social progress and promote regional space and stability. It aims to transform ASEAN into a single entity. Singapore is the biggest trading market of ASEAN countries. As per the trade map, ASEAN exports of goods to the global market worth USD 890 billion and imports worth USD 846 billion in the year 2017. However, the exports were USD 1183 billion and imports were USD 1105 billion during 2016. APEC (Asia Pacific Economic Cooperation) APEC also referred to member economies and accounting approximately 60% of the world’s GDP. It is responsible for facilitating economic growth, cooperation, trade and investment in this region. APEC consists of 21 member countries including Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taipei, Thailand, United States and Vietnam. APEC exports of goods stood at USD 8021 billion and imports stood at USD 7997 billion during the year 2016. China and United States are the biggest trading countries. BRICS BRICS is an association of five national economies such as Brazil, Russia, India, China and South Africa. However, South Africa has joined this group in the year 2010 and earlier it was known as BRIC. The total exports of BRICS amounted to USD 2902 billion and imports amounted to USD 2339 billion during 2017. China is the largest trading country in terms of both imports and exports among these countries and recorded 70% of BRICS exports and 65% of BRICS imports. EU European Union is the most integrated trade block in the world and formed in the year 1951. It has built a single Europe-wide market and also launched Euro as a single currency for regional trading. European Union goods exports to the global market worth USD 5887 billion and imports worth USD 5785 billion during the year 2017.EU consists of 28 member countries which are Austria, Belgium, Bulgaria, Denmark, Finland, Germany, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Romania, Spain, Sweden, United Kingdom, Cyprus, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. European Union comprises five EU institutions namely European Parliament, Council of the EU, European Commission, Court of Justice and Court of Auditors. 119 CU IDOL SELF LEARNING MATERIAL (SLM)
NAFTA (North America Free Trade Agreement) NAFTA was established on 1st January 1994 and comprises three giant member countries which are Canada, United States and Mexico. USA and Canada provide highly industrialized environment for manufacturing & services growth while Mexico provides cheaper resources. NAFTA is responsible to eliminate trade barriers among its member countries, promote a free trade environment and to increase investment opportunities. NAFTA goods exports stood at USD 2376 billion and imports stood at USD 3262 billion during the year 2017. United States is the largest trading country among NAFTA countries. CIS (Commonwealth of Independent States) CIS group was founded in the year 1991 and it is a group of 12 member countries including Azerbaijan, Armenia, Russia, Ukraine, Kazakhstan, Belarus, Turkmenistan, Uzbekistan, Georgia, Moldova, Kyrgyzstan and Tajikistan. According to CIS countries trade data, the contribution of CIS nations in the world’s exports was 2.6% in 2016, which declined from 2015’s 3%. And in world’s imports, countries of CIS region contributed 2% in both the years. COMESA (Common Market for Eastern and Southern Africa) COMESA exists as an organization of independent sovereign states that have agreed to cooperate in developing the regional or global trade. It is an economic union of southern and eastern African countries. It consists of 19 member countries such as Burundi, Comoros, DR Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. COMESA exports recorded USD 65.93 billion and imports recorded USD 142.29 billion during the year 2016. Egypt is the largest trader among COMESA countries. SAARC (South Asian Association for Regional Cooperation) SAARC provides a platform for the people of South Asian countries to work together in a spirit of trust and understanding. It was founded on 8th December 1985 and its member states include Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka. SAARC exports of goods to the world worth USD 330 billion and imports worth USD 481 billion in the year 2016. India is the biggest trading country in both imports and exports among SAARC members. SAARC organize summits annually and the country hosting the summit holds the chair of the association. MERCOSUR MERCOSUR stands for Mercado Comun del Cono Sur which means Southern Common Market and it was established on 26th March 1991. It is tariff union of South American 120 CU IDOL SELF LEARNING MATERIAL (SLM)
countries covering the market of Brazil, Argentina, Venezuela, Paraguay and Uruguay. Its associate members include Bolivia, Chile, Colombia, Ecuador and Peru. Its main goals are to accelerate sustained economic development. MERCOSUR is one of the fastest growing trading blocks in the world. Spanish and Portuguese are the major languages spoken in this region. MERCOSUR global exports worth USD 292 billion and imports worth USD 237 billion during the year 2017. IOR-ARC (Indian Ocean Rim Association for Regional Cooperation) IOR-ARC comprises 21 member countries such as Australia, Bangladesh, Comoros, India, Indonesia, Iran, Kenya, Madagascar, Malaysia, Mauritius, Mozambique, Oman, Seychelles, Somalia, Singapore, South Africa, Sri Lanka, Tanzania, Thailand, UAE and Yemen. Initially IOR ARC consisted of 7 countries only but it has expanded to include other countries as well. It aims to promote sustainable growth and development of its members. IOR-ARC exports worth USD 1875 billion and imports worth USD 1847 billion during 2016. 6.3.1 The World Bank The World Bank is an international organization dedicated to providing financing, advice, and research to developing nations to aid their economic advancement. The bank predominantly acts as an organization that attempts to fight poverty by offering developmental assistance to middle- and low-income countries. Founded in 1944, the World Bank Group works with international institutions, regional banks and national governments to reduce poverty. The organization covers a wide range of sectors, from finance and education to climate change. Over the past 70 years, it has helped people in more than 100 developing countries. The role of the World Bank is to address failures in international markets and end poverty. It offers grants, zero interest credits and low-interest loans or investments as well as advice and training. Currently, it has over 10,000 employees and is comprised of five institutions, including the International Finance Corporation (IFC) and the International Bank for Reconstruction and Development (IBRD). The organization has been involved in more than 12,000 development projects since its inception. Currently, its primary goal is to reduce the global extreme poverty rate to no more than 3 percent by 2030. Another function of the World Bank is to promote environmental sustainability and green growth. Furthermore, its members sponsor and participate in conferences and other events that tackle the world's development challenges. The Role of the IBRD The World Bank offers loans, grants and other financial products through the International Bank of Reconstruction and Development (IBRD) and the International Development Association. The function of the IBRD is to promote financial growth in middle- and low- 121 CU IDOL SELF LEARNING MATERIAL (SLM)
income countries. In addition to loans, this institution provides advisory services, risk management products and technical support at each stage of a project. Middle-income countries, such as Thailand and Indonesia, have a lot of potential for growth and development. They attract foreign investment and receive a large share of exports. Yet, they’re home to more than 70 percent of the world's poorest people. The role of the World Bank and the IBRD is to invest in these countries and provide them with the best global expertise so they can grow and overcome challenges. Benefits of the World Bank Currently, the main function of the World Bank is to offer long-term loans and assistance to developing countries. These funds support a wide range of investments across all sectors, including education, energy, trade and urban development. The organization also facilitates regular interaction among donors and conducts studies on economic issues and social services systems. Over the past decades, the World Bank has been involved in various projects focused on social development and inclusion, private business development, improved health care and access to education. The number of out-of-school children and teens dropped from 196 million to 124 million between 2000 and 2013, largely due to its efforts. Other benefits of the World Bank include a better infrastructure in developing countries, more transparent services, tax reductions, free trade and socially sustainable development. The organization shares its knowledge and findings via reports, including social reviews and poverty assessments. Its policies aim to create a stable macroeconomic environment and promote liberal trade. 6.3.2 International Monetary Fund The International Monetary Fund (IMF) is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty. Quotas of member countries are a key determinant of the voting power in IMF decisions. Votes comprise one vote per 100,000 special drawing right (SDR) of quota plus basic votes. SDRS are an international type of monetary reserve currency created by the IMF as a supplement to the existing money reserves of member countries. History of IMF The IMF was originally created in 1945 as part of the Bretton Woods Agreement, which attempted to encourage international financial cooperation by introducing a system of convertible currencies at fixed exchange rates. The dollar was redeemable for gold at $35 per ounce at the time. The IMF oversaw the system: for example, a country was free to readjust its exchange rate by up to 10% in either direction, but larger changes required the IMF's permission. 122 CU IDOL SELF LEARNING MATERIAL (SLM)
The IMF also acted as a gatekeeper: Countries were not eligible for membership in the International Bank for Reconstruction and Development (IBRD)—a World Bank forerunner that the Bretton Woods agreement created in order to fund the reconstruction of Europe after World War II—unless they were members of the IMF. IMF Activities The IMF's primary methods for achieving these goals are monitoring capacity building and lending. Surveillance The IMF collects massive amounts of data on national economies, international trade, and the global economy in aggregate. The organization also provides regularly updated economic forecasts at the national and international levels. These forecasts, published in the World Economic Outlook, are accompanied by lengthy discussions on the effect of fiscal, monetary, and trade policies on growth prospects and financial stability. Capacity Building The IMF provides technical assistance, training, and policy advice to member countries through its capacity building programs. These programs include training in data collection and analysis, which feed into the IMF's project of monitoring national and global economies. Lending The IMF makes loans to countries that are experiencing economic distress to prevent or mitigate financial crises. Members contribute the funds for this lending to a pool based on a quota system. In 2019, loan resources in the amount of SDR 11.4 billion (SDR 0.4 billion above target) were secured to support the IMF’s concessional lending activities into the next decade. IMF funds are often conditional on recipients making reforms to increase their growth potential and financial stability. Structural adjustment programs, as these conditional loans are known, have attracted criticism for exacerbating poverty and reproducing the colonialist structures. 6.4 SUMMARY The World Trade Organization (WTO) permits the existence of trading blocs, provided that they result in lower protection against outside countries than existed before the creation of the trading block. WTO refers to unilateral ones as preferential trade arrangements and reciprocal ones as regional trade agreements. Preferential trade arrangements (PTAs) in the WTO are unilateral trade preferences. They include Generalized System of Preferences schemes (under which developed 123 CU IDOL SELF LEARNING MATERIAL (SLM)
countries grant preferential tariffs to imports from developing countries), as well as other non-reciprocal preferential schemes granted a waiver by the General Council. Free trade agreements (FTAs) remove barriers to trade between members and offer preferential access to markets on a reciprocal basis. In addition to trade in goods. Another thing about a free trade area is that imports from outside the area do not confer the benefit of the free trade agreement. For example, two countries that are members of a free trade area, such as the U.S. and Mexico, refrain from imposing tariffs on each other. However, if a U.S. company imports bananas from South America, they would be subject to tariffs. A customs union is an agreement between two or more neighbouring countries to remove trade barriers, reduce or abolish customs duty, and eliminate quotas. Such unions were defined by the General Agreement on Tariffs and Trade (GATT) and are the third stage of economic integration. The major trade blocks are EU (European Union), NAFTA (North American Free Trade Agreement), BRICS, SAARC, ASEAN etc. The establishment of customs unions is beneficial to economies in the long term. It helps small economies tap industries that may not have been accessible with domestic trade only. They can achieve large external economies of scale within the union from transport and infrastructure. Faced with competition from other economies, domestic markets will be more inclined to increase efficiency. Customs unions help foster growth and unite economies with liberal trade policies. The World Bank is an international organization dedicated to providing financing, advice, and research to developing nations to aid their economic advancement. The bank predominantly acts as an organization that attempts to fight poverty by offering developmental assistance to middle- and low-income countries. The World Bank is an international financial institution that provides loan and grant to the governments of low- and middle-income countries for the purpose of pursuing capital projects.] It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank is a component of the World Bank Group. The World Bank's most recently stated goal is the reduction of poverty. The organizations that make up the World Bank Group are owned by the governments of member nations, which have the ultimate decision-making power within the organizations on all matters, including policy, financial or membership issues. 124 CU IDOL SELF LEARNING MATERIAL (SLM)
The International Monetary Fund (IMF) is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty. Quotas of member countries are a key determinant of the voting power in IMF decisions. The World Bank Group offers a multitude of proprietary financial assistance, products, and solutions for international governments, as well as a range of research- based thought leadership for the global economy at large. The World Bank's Human Capital Project seeks to help nations invest in and develop their human capital to produce a better society and economy. No person, organization, government, or nation owns the World Bank. It is an organization made up of member countries, represented by a Board of Governors. This Board governs the organization, creates policies, and appoints executive directors. The executive directors govern the Bank's business and budget, and grant loan approvals. The president and managers manage the day-to-day operations. The World Bank is led by President David Malpass. The organization's Board of Directors is comprised of four separate Boards, one for each division of the World Bank. Each Board oversees the operations of their respective sector. For example, the Board for the International Bank for Reconstruction and Development (IBRD) oversees the operations for that segment, and the Board for the International Development Agency (IDA) oversees the operations for that segment. 6.5 KEYWORDS Free Trade Areas - A free trade area is a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members. The North American Free Trade Area (NAFTA) and the European Free Trade Association (EFTA) are examples of free trade areas. Customs Unions - a group of states that have agreed to charge the same import duties as each other and usually to allow free trade between themselves. Common Markets - a group of countries imposing few or no duties on trade with one another and a common tariff on trade with other countries (this last bit is the difference between a custom union and a common market). Economic Unions - An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy. 125 CU IDOL SELF LEARNING MATERIAL (SLM)
NAFTA – the North American Free Trade Agreement – came into place in 1994 to ensure free trade between the USA, Canada and Mexico. Over the first 20 years of its existed it resulted in a 400% increase in trade between member states, included developed and developing countries and created a market of 460million consumers. Financial development - Conceptually, financial development is a process of reducing the costs development of acquiring information, enforcing contracts, and making transactions. Empirically, measuring financial development directly is challenging. This report focuses on measuring four characteristics (depth, access, efficiency, and stability) for financial institutions and markets. Long term finance- Long-term finance comprises all types of financing (including loans, bonds, leasing, and public and private equity) with a maturity exceeding one year. Maturity refers to the length of time between origination of a financial claim (loan, bond, or other financial instrument) and the final payment date, at which point the remaining principal and interest are due to be paid. Equity, which has no final repayment date of a principal, can be seen as an instrument with non-finite maturity. 6.6 LEARNING ACTIVITY 1. Is there any data available on the quantity of bad or doubtful developing country debt owned by multi-lateral development banks and governments which has been written down? ___________________________________________________________________________ ___________________________________________________________________________ 2. Would MDBs be able to accurately estimate the difference in value to them of a loan they might make to a developing country in hard currency vs. local currency? ___________________________________________________________________________ ___________________________________________________________________________ 6.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List the disadvantages of custom unions. 2. Explain the meaning of PTA. 3. Describe Free trade agreement. 4. What is the full form of NAFTA? How many members are parts of this trade block? 5. Elucidate BRICS. 126 CU IDOL SELF LEARNING MATERIAL (SLM)
Long Questions 127 1. Discuss the role of IMF. 2. What are the advantages of custom unions? Discuss in detail? 3. Explain the role of World Bank. 4. Describe the history of IMF. 5. What is custom union and what is its purpose? B. Multiple Choice Questions 1. Which of the following countries is not a member of ASEAN? a. Burma b. Cambodia c. Brunei d. China 2. In the free market, which of the following apply? a. Freedom to choose political representatives b. Little or no personal liberty c. Little or no regulation of commercial activity d. A written constitution 3. Which of the following countries was a founding member of NATO? a. Iceland b. Germany c. Greece d. Spain 4. Which country joined the EU in 2004? a. Finland b. Malta c. Romania d. Turkey 5. Which of the following are members of the Commonwealth? a. Bahamas b. Bermuda c. Barbados CU IDOL SELF LEARNING MATERIAL (SLM)
d. Bahamas and Bermuda Answers 1-d, 2-c, 3-a, 4-b, 5-d 6.8 REFERENCES References Amiti, M. and Romalis, J. (2006).Will the Doha Round Lead to Preference Erosion. Washington, D.C.: IMF. Anderson, K. (2002). Peculiarities of Retaliation in WTO Dispute Settlement. World Trade Review. Anderson, R. and Jenny, F. (2005). Competition Policy, Economic Development and the Possible Role of a Multilateral Framework on Competition Policy: East Asia, Routledge. Textbooks Anderson, R. D. and Holmes P. (2002). Competition Policy and the Future of the Multilateral Trading System. Journal of International Economic Law. Augier, P., Gasiorek, M. and Lai Tong, C. (2005). The impact of rules of origin on trade flows. Economic Policy 20. Bacchetta, M. and Jansen, M. (2003). Adjusting to Trade Liberalization. Geneva: WTO. Websites https://en.wikipedia.org/wiki/Trade_bloc#:~:text=Depending%20on%20the%20level %20of,or%20economic%20and%20monetary%20unions. https://www.economicsonline.co.uk/Global_economics/Trading_blocs.html https://www.exportgenius.in/blog/10-major-regional-trading-blocs-of-the-world- 236.php 128 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7 – TRADE COMMODITIES I STRUCTURE 7.0 Learning Objectives 7.1 Introduction 7.2 Trade Commodities of LAFTA 7.3 SAFTA 7.4 NAFTA and EU 7.5 Summary 7.6 Keywords 7.7 Learning Activity 7.8 Unit End Questions 7.9 References 7.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the trade commodities of LAFTA. Describe the role of SAFTA. Discuss the role of European Union. 7.1 INTRODUCTION Commodities are an important aspect of most American's daily life. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Traditional examples of commodities include grains, gold, beef, oil, and natural gas. For investors, commodities can be an important way to diversify their portfolios beyond traditional securities. Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility. In the past, commodity trading required significant amount of time, money, and expertise, and was primarily limited to professional traders. Today, there are more options for participating in the commodity markets. Commodities that are traded are typically sorted into four categories broad categories: metal, energy, livestock and meat, and agricultural. 129 CU IDOL SELF LEARNING MATERIAL (SLM)
For investors, commodities can be an important way to diversify their portfolios beyond traditional securities. In the most basic sense, commodities are known to be risky investment propositions because their market (supply and demand) is impacted by uncertainties that are difficult or impossible to predict, such as unusual weather patterns, epidemics, and disasters both natural and human-made. There are a number of ways to invest in commodities, such as futures contracts, options, and exchange traded funds (ETFs). History Trading commodities is an ancient profession with a longer history than the trading of stocks and bonds. The rise of many empires can be directly linked to their ability to create complex trading systems and facilitate the exchange of commodities. In modern times, commodities are still exchanged throughout the world. A commodities exchange refers both to a physical location where the trading of commodities takes place and to legal entities that have been formed in order to enforce the rules for the trading of standardized commodity contracts and related investment products. Some commodities exchanges have merged or gone out of business in recent years. The majority of exchanges carry a few different commodities, although some specialize in a single group. In the U.S., there is the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), the Intercontinental Exchange (ICE) in Atlanta, Georgia, and the Kansas City Board of Trade. In Europe, there is the London Metal Exchange (LME). As its name implies, the London Metal Exchange only deals with metals. Both novice and experienced traders have a variety of different options for investing in financial instruments that give them access to the commodity markets. While commodity futures contracts provide the most direct way to participate in the price movements of the industry, there are additional types of investments with less risk that also provide sufficient opportunities for commodities exposure. In the most basic sense, commodities are known to be risky investment propositions because they can be affected by uncertainties that are difficult, if not impossible, to predict, such as unusual weather patterns, epidemics, and disasters both natural and human-made. 7.2 TRADE COMMODITIES OF LAFTA Latin American Free Trade Association (LAFTA), an organization comprised of eleven nations dedicated to furthering economic integration in Latin America. Established by a treaty signed in Montevideo, Uruguay, on February 18, 1960, the Latin American Free Trade Association (LAFTA) served as a forum for the creation of greater economic ties among Latin American nations. The Montevideo agreement was initially signed by representatives of 130 CU IDOL SELF LEARNING MATERIAL (SLM)
Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Uruguay. Bolivia, Paraguay, and Venezuela became members shortly thereafter. The treaty signed at Montevideo proposed the gradual easing of trade barriers between the member nations, culminating with completely free trade by 1973. A permanent body was created to facilitate periodic tariff reductions and regular negotiations between the members. LAFTA met with some early success, as these nations had traded very little in the years preceding the agreement. However, progress toward integration moved slowly throughout the 1960s as the disparities of the member nations became more apparent. Frustrated by the slow process of integration, the LAFTA nations signed the Caracas Protocol in 1969, thereby extending the deadline for free trade to 1980. The divisiveness and imbalance that had threatened LAFTA throughout the 1960s only increased during the 1970s. Many members, whose level of industrialization at this time might be described as intermediate, felt ill-equipped to compete with the large industrialized nations—Argentina, Brazil, and Mexico. The perceived inequity inherent in LAFTA led to the 1969 ratification of the Andean Pact by Bolivia, Chile, Colombia, Ecuador, Peru, and, later, Venezuela, which pursued their own agendas for integration independent of LAFTA, an action which further inhibited LAFTA's original goal of free trade throughout the hemisphere. In 1980, the year in which free trade in Latin America was to have occurred, the members of LAFTA formed the Latin-American Integration Association (LAIA), initiating a renewed effort toward integration. In the early 1990s, the United States began establishing free-trade agreements with individual countries. The most prominent among them was the North American Free Trade Agreement (NAFTA), which created a free-trade zone between Mexico, Canada, and the United States. This new trade again sparked interest in a larger free-trade area of the Americas. Consequently, in 1993 the Organization of American States proposed the Free Trade Area of the Americas (FTAA) to be implemented in 2005. However, as of 2007, political opposition in the United States and Latin America has prevented its adoption. Nevertheless, more Latin American countries have established free-trade agreements with the United States, and in 2004 the United States and Central America signed a free-trade pact. In 2007 the United States was still in the process of negotiating economic agreements with Peru and Colombia. Features of LAFTA The main features of the Agreement are- Establishment of bilateral lines of credit denominated in US dollars between each pair of central banks. Four-month paid multilateral compensation of balances accumulated in the bilateral accounts and the outstanding balances paid in US dollars usually through the Federal Reserve Bank of New York; 131 CU IDOL SELF LEARNING MATERIAL (SLM)
Channelling of payments through the system is voluntary, although if convenient or necessary, member Central Banks may make them compulsory, such as recently the case of Venezuela. During 1997, the volume of payments handled through this clearing mechanism reached US$7,864 million and in 1998, it fell to US$5,570 million. Since 1966, the settlement of payments channelled through the Agreement amount to a total of US$203,488 millions, which represent a 55.8% of importations registered among member countries. After May 1, 1991 a transitory financing mechanism of the credits due to the multilateral compensation balances (Automatic Payment Program^ was incorporated in the Agreement. This mechanism attempts to foresee occasional liquidity difficulties that the Central Banks of member countries might face at the closing of the multilateral compensation periods. This mechanism is multilateral and automatic and consists in postponing the payment of obligations derived from the situations described above for a period of four months. The Santo Domingo Agreement, another credit mechanism designed to help finance intra- regional trade, was signed by the Central Banks of the member countries of ALALC and the Dominican Republic in 1969. The Agreement, which was modified and broadened in scope on September 22, 1981, consists of credit lines provided by the member Central Banks up to a joint total close to US$700 million. These resources are allocated into three mechanisms aimed at relieving temporary illiquidity experienced by members resulting from- Deficits in the payments clearance of intra-regional trade. Deficits in the overall balance of payments of the respective country. Deficits caused by natural disasters. The support mechanisms of this Agreement were last used in 1984. Role of LAFTA LAFTA brought many new positive changes to Latin America. With LAFTA in place existing productive capacity could be used more fully to supply regional needs, industries could reduce costs as a result of potential economies through expanded output and regional specialization, and attraction to new investment occurred as a result of the regional market area. Although LAFTA has brought many constructive results, it has also brought problems to individual nations as well as to Latin America as a whole. Some of the problems which the individual countries face are the way they are grouped together by their economic strengths according to LAFTA. The grouping was originally Brazil and Argentina in one group, Colombia, Chile, Peru, Uruguay, and Venezuela in the second group, and the last group which included Bolivia, Ecuador, and Paraguay. 132 CU IDOL SELF LEARNING MATERIAL (SLM)
There is a problem in these classifications because these countries are very different economically as well as in other aspects which the classification does not take into account. Problems which Latin America faced as a whole had to deal with many of the nations in the continent being underdeveloped. The Free Trade Agreement was seen as a way of the countries having greater economic interactions amongst each other and thus improving the economic state of the poorer nations. ALADI is now the largest Latin-American group of integration. It covers more than 20 million sqkilometres and more than 493 million people. It is responsible for regulations on foreign trade which includes regulations on technical measures, sanitary regulations, environment protection measures, quality control measures, automatic licensing measures, price control measures, monopolistic measures, as well as other measures. These regulations are put into place in order for trade to be even handed amongst members of ALADI. 7.3 SAFTA The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC). The agreement came into force in 2006, succeeding the 1993 SAARC Preferential Trading Arrangement. SAFTA signatory countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. SAFTA recognizes the need for special and differential treatment for LDCs in its preamble. This has been translated in the following measures- Market access LDCs benefit from smaller sensitive lists in some of the SAFTA members (meaning that they have DFQF access in a larger number of products) and less stringent rules of origin (requirement of change of tariff heading and value addition of 10% less than the general requirement for non-LDCs), the general rule is 60% and there are some product-specific rules. i. LDCs were allowed smaller initial tariff reduction and longer implementation periods under. trade liberalization programmes; ii. LDCs can have a longer list of sensitive products exempted from liberalization commitments than non-LDC signatories; iii. LDCs were granted greater flexibility in the continuation of quantitative or other restrictions; iv. There is a commitment of contracting states to give, until the trade liberalization programme has been completed by all Contracting States, special regard to the situation of LDCs when considering the application of anti-dumping and/or 133 CU IDOL SELF LEARNING MATERIAL (SLM)
countervailing measures, providing an opportunity for consultations and favourably considering accepting price undertakings offered by exporters from LDCs; v. The agreement contains a rule whereby safeguard measures are not to be applied against products originating in LDC contracting states, “as long as its share of imports of the product concerned in the importing Contracting State does not exceed 5 per cent, provided Least Developed Contracting States with less than 5 per cent import share collectively account for not more than 15 per cent of total imports of the product concerned”; vi. There is also a commitment to consider taking direct trade measures with a view to enhancing sustainable exports from LDC contracting states, such as long and medium-term contracts containing import and supply commitments in respect of specific products, buy-back arrangements, state trading operations, and government and public procurement; vii. LDCs were to be given special consideration in requests for technical assistance and cooperation arrangements designed to assist them in expanding their trade with other Contracting States and in taking advantage of the potential benefits of SAFTA; viii. A mechanism to compensate LDCs for their loss of tariff revenue upon liberalization is contained in Article 11 of the Agreement but was not implemented. Smooth Transition provisions SAFTA contains a special provision for Maldives (Article 12), which graduated from the LDC list in 2011. The Maldives was thus accorded LDC treatment in the Agreement and in any subsequent contractual undertakings. 7.4 NAFTA AND EU NAFTA The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United States, Canada, and Mexico. It went into effect on January 1, 1994. On that day, the three countries became the largest free market in the world-; the combined economies of the three nations at that time measured $6 trillion and directly affected more than 365 million people. NAFTA was created to eliminate tariff barriers to agricultural, manufacturing, and services; to remove investment restrictions; and to protect intellectual property rights. This was to be done while also addressing environmental and labour concerns (although many observers charge that the three governments have been lax in ensuring environmental and labour safeguards since the agreement went into effect). Small businesses were among those that 134 CU IDOL SELF LEARNING MATERIAL (SLM)
were expected to benefit the most from the lowering of trade barriers since it would make doing business in Mexico and Canada less expensive and would reduce the red tape needed to import or export goods. Highlights of NAFTA Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on export goods to Mexico were common, as were long delays caused by paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately when the agreement took effect, and the remaining tariffs were targeted for gradual elimination. Among the areas specifically covered by NAFTA are construction, engineering, accounting, advertising, consulting/management, architecture, health-care management, commercial education, and tourism. Elimination of nontariff barriers by 2008. This includes opening the border and interior of Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff barriers were the biggest obstacle to conducting business in Mexico that small exporters faced. Establishment of standards. The three NAFTA countries agreed to toughen health, safety, and industrial standards to the highest existing standards among the three countries (which were always U.S. or Canadian). Also, national standards could no longer be used as a barrier to free trade. The speed of export-product inspections and certifications was also improved. Supplemental agreements. To ease concerns that Mexico's low wage scale would cause U.S. companies to shift production to that country, and to ensure that Mexico's increasing industrialization would not lead to rampant pollution, special side agreements were included in NAFTA. Under those agreements, the three countries agreed to establish commissions to handle labour and environmental issues. The commissions have the power to impose steep fines against any of the three governments that failed to impose its laws consistently. Environmental and labour groups from both the United States and Canada, however, have repeatedly charged that the regulations and guidelines detailed in these supplemental agreements have not been enforced. Tariff reduction for motor vehicles and auto parts and automobile rules of origin. Expanded telecommunications trade. Reduced textile and apparel barriers. More free trade in agriculture. Mexican import licenses were immediately abolished, with most additional tariffs phased out over a 10-year period. 135 CU IDOL SELF LEARNING MATERIAL (SLM)
Expanded trade in financial services. Opening of insurance markets. Increased investment opportunities. Liberalized regulation of land transportation. Increased protection of intellectual property rights. NAFTA stipulated that, for the first time, Mexico had to provide a very high level of protection for intellectual property rights. This is especially helpful in fields such as computer software and chemical production. Mexican firms will no longer be able to steal intellectual property from companies and create a \"Mexican\" version of a product. Expanded the rights of American firms to make bids on Mexican and Canadian government procurement contracts. One of the key provisions of NAFTA provided \"national goods\" status to products imported from other NAFTA countries. No state, provincial, or local governments could impose taxes or tariffs on those goods. In addition, customs duties were either eliminated at the time of the agreement or scheduled to be phased out in 5 or 10 equal stages. The one exception to the phase out was specified sensitive items, for which the phase-out period would be 15 years. Supporters championed NAFTA because it opened up Mexican markets to U.S. companies like never before. The Mexican market is growing rapidly, which promises more export opportunities, which in turn means more jobs. Supporters, though, had a difficult time convincing the American public that NAFTA would do better than harm. Their main effort cantered on convincing people that all consumers benefit from the widest possible choice of products at the lowest possible price-; which means that consumers would be the biggest beneficiaries of lowered trade barriers. The U.S. Chamber of Commerce, which represents the interests of small businesses, was one of the most active supporters of NAFTA, organizing the owners and employees of small and mid-size businesses to support the agreement. This support was a key in countering the efforts of organized labour to stop the agreement. History of NAFTA About one-fourth of all U.S. imports, such as crude oil, machinery, gold, vehicles, fresh produce, livestock, and processed foods, originate from Mexico and Canada, which are, respectively, the United States' second- and third-largest suppliers of imported goods, as of 2019. In addition, approximately one-third of U.S. exports, particularly machinery, vehicle parts, mineral fuel/oil, and plastics are destined for Canada and Mexico. NAFTA legislation was developed during George H. W. Bush's presidency as the first phase of his Enterprise for the Americas Initiative. The Clinton administration, which signed NAFTA into law in 1993, believed it would create 200,000 U.S. jobs within two years and 1 136 CU IDOL SELF LEARNING MATERIAL (SLM)
million within five years because exports play a major role in U.S. economic growth. The administration anticipated a dramatic increase in U.S. imports from Mexico as a result of the lower tariffs. Additions to NAFTA NAFTA's provisions were supplemented by two other regulations: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC). These tangential agreements were intended to prevent businesses from relocating to other countries to exploit lower wages, more lenient worker health and safety regulations, and looser environmental regulations. NAFTA did not eliminate regulatory requirements on companies wishing to trade internationally, such as rule-of-origin regulations and documentation requirements that determine whether certain goods can be traded under NAFTA. The free-trade agreement also contained administrative, civil, and criminal penalties for businesses that violate any of the three countries’ laws or customs procedures. European Union (EU) The European Union (EU) is a unique economic and political union between 27 European countries. History The predecessor of the EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict. The result was the European Economic Community, created in 1958 with the initial aim of increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands.Since then, 22 more countries joined (and the United Kingdom left the EU in 2020) and a huge single market (also known as the ‘internal’ market) has been created and continues to develop towards its full potential. What began as a purely economic union has evolved into an organisation spanning many different policy areas, from climate, environment and health to external relations and security, justice and migration. A name change from the European Economic Community to the European Union in 1993 reflected this. Role of EU The EU has delivered more than half a century of peace, stability and prosperity, helped raise living standards and launched a single European currency: the euro. More than 340 million EU citizens in 19 countries now use it as their currency and enjoy its benefits. Thanks to the abolition of border controls between EU countries, people can travel freely throughout most of the continent. And it has become much easier to live and work in another 137 CU IDOL SELF LEARNING MATERIAL (SLM)
country in Europe. All EU citizens have the right and freedom to choose in which EU country they want to study, work or retire. Every EU country must treat EU citizens in exactly the same way as its own citizens when it comes to matters of employment, social security and tax. The EU’s main economic engine is the single market. It enables most goods, services, money and people to move freely. The EU aims to develop this huge resource to other areas like energy, knowledge and capital markets to ensure that Europeans can draw the maximum benefit from it. The EU remains focused on making its governing institutions more transparent and democratic. Decisions are taken as openly as possible and as closely as possible to the citizen. More powers have been given to the directly elected European Parliament, while national parliaments play a greater role, working alongside the European institutions. The EU is governed by the principle of representative democracy, with citizens directly represented at EU level in the European Parliament and Member States represented in the European Council and the Council of the EU. European citizens are encouraged to contribute to the democratic life of the EU by giving their views on EU policies during their development or by suggesting improvements to existing laws and policies. The European Citizens’ Initiative empowers citizens to have a greater say on EU policies that affect their lives. Citizens can also submit complaints and enquiries concerning the application of EU law. Treaty of European Union As enshrined in the Treaty on European Union, ‘the Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevails. These values are an integral part of the European way of life. Human dignity must be respected, protected and constitutes the real basis of fundamental rights. Being a European citizen also means enjoying political rights. Every adult EU citizen has the right to stand as a candidate and to vote in elections to the European Parliament, whether in their country of residence or country of origin. Equality is about equal rights for all citizens before the law. The principle of equality between women and men underpins all European policies and is the basis for European integration. It applies in all areas. The EU is based on the rule of law. Everything the EU does is founded on treaties, which are voluntarily and democratically agreed by its member countries. Law and justice are upheld by 138 CU IDOL SELF LEARNING MATERIAL (SLM)
an independent judiciary. The EU countries have given final jurisdiction in matters of EU law to the European Court of Justice, whose judgments have to be respected by all. Human rights are protected by the EU Charter of Fundamental Rights. These cover the right to be free from discrimination on the basis of sex, racial or ethnic origin, religion or belief, disability, age or sexual orientation, the right to the protection of your personal data, and the right to get access to justice. In 2012, the EU was awarded the Nobel Peace Prize for advancing the causes of peace, reconciliation, democracy and human rights in Europe. EU Member States and institutions At the core of the EU are the 27 Member States that belong to the EU, and their citizens. The unique feature of the EU is that, although the Member States all remain sovereign and independent states, they have decided to pool some of their ‘sovereignty’ in areas where it make sense to work together. In practice, this means that the Member States delegate some of their decision-making powers to the shared institutions they have created, so that decisions on specific matters of common interest can be made democratically at EU level. Several institutions are involved in making decisions at EU level, in particular- The European Parliament, which represents the EU’s citizens and is directly elected by them. The European Council, which consists of the Heads of State or Government of the EU Member States. The Council, (also called the Council of the European Union) which represents the governments of the EU Member States. The European Commission, which represents the interests of the EU as a whole. Difference between NAFTA and EU The key difference between the North America Free Trade Agreement and the European Union is their scope. NAFTA remains a purely economic agreement among three countries, while the EU has developed into a political, social and territorial union between 28 countries. Other key differences between NAFTA and EU include- Freedom of movement- While both treaties aim at eliminating trade barriers among member states, the EU evolved into a political, territorial and social union, meaning that EU citizens are free to move from country to country with no (or very little) restrictions. Border controls have been eliminated among many EU countries, and people can move freely within the European Union. Conversely, while NAFTA facilitates the movement of goods among the US, Canada and Mexico, there are many restrictions related to the free 139 CU IDOL SELF LEARNING MATERIAL (SLM)
movement of people, in particular between Mexico and the United States. US and Canada immigration policies are rather strict, and the creation of a territorial and political union in North America is unrealistic. Currency- the EU resulted in the creation of a single currency, which has been adopted by most member countries, while each member of NAFTA maintained its own currency. 7.5 SUMMARY Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on export goods to Mexico were common, as were long delays caused by paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately when the agreement took effect, and the remaining tariffs were targeted for gradual elimination. Among the areas specifically covered by NAFTA are construction, engineering, accounting, advertising, consulting/management, architecture, health-care management, commercial education, and tourism. Elimination of nontariff barriers by 2008. This includes opening the border and interior of Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff barriers were the biggest obstacle to conducting business in Mexico that small exporters faced. The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC). The agreement came into force in 2006, succeeding the 1993 SAARC Preferential Trading Arrangement. SAFTA signatory countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Bilateral and multilateral trade agreement has the ability to facilitate and promote trade among a group of countries while reducing the likelihood of conflict and war. NAFTA is a bilateral agreement between the United States, Canada and Mexico, which came into effect in 1994. Even though it has been recently re-negotiated and altered, it aims at reducing trade barriers among member countries in order to promote the emergence of an economic bloc. Conversely, the EU is a more complex and unique economic and political union among 28 European countries. It was originally created to facilitate trade among a limited number of states, but later evolved in a political union. All member states adopted the same currency, the Euro and goods, capital and people can move freely within the EU borders. 140 CU IDOL SELF LEARNING MATERIAL (SLM)
The World Bank is an international organization that provides financing, advice, and research to developing nations to help advance their economies. The World Bank and International Monetary Fund (IMF) founded simultaneously under the Bretton Woods Agreement both seek to serve international governments. The World Bank has expanded to become known as the World Bank Group with five cooperative organizations, sometimes known as the World Banks. The World Bank Group offers a multitude of proprietary financial assistance, products, and solutions for international governments, as well as a range of research- based thought leadership for the global economy at large. The World Bank's Human Capital Project seeks to help nations invest in and develop their human capital to produce a better society and economy. The World Bank supplies qualifying governments with low-interest loans, zero- interest credits, and grants, all to support the development of individual economies. Debt borrowings and cash infusions help with global education, healthcare, public administration, infrastructure, and private-sector development. The North American Free Trade Agreement (NAFTA) was implemented in 1994 to encourage trade between the U.S., Mexico, and Canada. NAFTA reduced or eliminated tariffs on imports and exports between the three participating countries, creating a huge free-trade zone. Two side agreements to NAFTA aimed to establish high common standards in workplace safety, labour rights, and environmental protection, to prevent businesses from relocating to other countries to exploit lower wages or looser regulations. The United States-Mexico-Canada Agreement (USMCA), which was signed on Nov. 30, 2018, and went into full force on July 1, 2020, replaced NAFTA. NAFTA was a controversial agreement: By some measures (trade growth and investment), it improved the U.S. economy; by others (employment, balance of trade), it hurt the economy. 7.6 KEYWORDS Generally Accepted Accounting Principles- Generally Accepted Accounting Principles means the recognized consensus or substantial authoritative support in the territory of a party with respect to the recording of revenues, expenses, costs, assets and liabilities, disclosure of information and preparation of financial statements. These standards may be broad guidelines of general application as well as detailed standards, practices and procedures. 141 CU IDOL SELF LEARNING MATERIAL (SLM)
Goods of a party - Goods of a party means domestic products as these are understood in the General Agreement on Tariffs and Trade or such goods as the Parties may agree, and includes originating goods of that Party; Harmonized System - Harmonized System (HS) means the Harmonized Commodity Description and Coding System and its legal notes, and rules as adopted and implemented by the parties in their respective tariff laws. Enterprise - Enterprise means any entity constituted or organized under applicable law, whether or not for profit, and whether privately-owned or governmentally- owned, including any corporation, trust, partnership, sole proprietorship, and joint venture or other association. Customs Valuation Code - Customs Valuation Code means the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade including its interpretative notes. Enterprise – Enterprise means any entity constituted or organized under applicable law, whether or not for profit, and whether privately-owned or governmentally- owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association; Generally Accepted Accounting Principles - means the recognized consensus or substantial authoritative support in the territory of a Party with respect to the recording of revenues, expenses, costs, assets and liabilities, disclosure of information and preparation of financial statements. These standards may be broad guidelines of general application as well as detailed standards, practices and procedures; Goods of a Party - means domestic products as these are understood in the General Agreement on Tariffs and Trade or such goods as the Parties may agree, and includes originating goods of that Party. Sovereign immunity-The World Bank requires sovereign immunity from countries it deals with.Sovereign immunity waives a holder from all legal liability for their actions. It is proposed that this immunity from responsibility is a \"shield which The World Bank wants to resort to, for escaping accountability and security by the people\". As the United States has veto power, it can prevent the World Bank from taking action against its interests. 7.7 LEARNING ACTIVITY 1. What will happen if we raise exchange rate of Iraq? 142 CU IDOL SELF LEARNING MATERIAL (SLM)
___________________________________________________________________________ ___________________________________________________________________________ 2. Will Turkey be able to reverse the fall of the Turkish lira against the dollar by reinforcing its economy? ___________________________________________________________________________ ___________________________________________________________________________ 7.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Describe LAFTA? 2. Explain SAFTA. 3. How many countries are parts of European Union? 4. What is NAFTA? 5. Define harmonized system. Long Questions 1. Enumerate the difference between LAFTA and SAFTA. 2. Discuss the difference between NAFTA and EU. 3. Summarize the role of EU. 4. Describe the role of NAFTA. 5. What are the main features of LAFTA agreement? B. Multiple Choice Questions 1. What is the term for purchase of goods from foreign country? a. Foreign Trade b. Export Trade c. Import Trade d. Exim Trade 2. What is the term for fixed percentage on the value of the traded commodity? 143 a. Anti dumping duty b. Specific tariff c. Ad Valorem tariff d. A compound tariff CU IDOL SELF LEARNING MATERIAL (SLM)
3. What does foreign trade represent? a. GDP b. EXIM c. FDI d. Income per capita 4. Which is the category to which Cash grants, loans at low rate and tax holidays belong? a. Quota b. Tariff c. Subsidies d. Discounts 5. Which commodity import tariff is levied? a. Imported b. Exported c. Transported d. Both A & B Answers 1-b, 2-c, 3-a, 4- c, 5-a 7.9 REFERENCES References Bairoch, P. (1989). The industrial economies: the development of economic and social policies, Cambridge: Cambridge University Press. Balassa, B. (1980) ‘The Tokyo Round and the Developing Countries’, World Bank Staff Working Paper 370, Washington, DC: World Bank. Balassa, B. and associates (1971). The structure of protection in developing countries. Baltimore: Johns Hopkins University Press. Textbooks Baldwin, R. E. and Baldwin, R. E. (1996). Alternative approaches to the political economy of endogenous trade liberalization. European Economic Review 40. 144 CU IDOL SELF LEARNING MATERIAL (SLM)
Baldwin, R. E. and Murray, T. (1977). MFN Tariff Reductions and Developing Country Trade Benefits under the GSP. Economic Journal 87. Barfield, C. E. (2001). Free Trade, Sovereignty, Democracy: The Future of the World Trade Organization. Washington, D.C.: AEI Press. Websites https://www.cmcmarkets.com/en/trading-guides/how-to-trade- commodities#:~:text=Commodity%20trading%E2%80%8B%20covers%20the,perhap s%20even%20older%20than%20that. https://www.thebalance.com/myths-of-investing-in-commodities-809160 https://www.investopedia.com/financial-edge/0412/the-3-best-commodities-to-invest- in.aspx 145 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 8 – TRADE COMMODITIES II STRUCTURE 8.0 Learning Objectives 8.1 Introduction 8.2 ASEAN 8.2.1 Comparison 8.2.2 Statistics 8.3 SAARC 8.4 Summary 8.5 Keywords 8.6 Learning Activity 8.7 Unit End Questions 8.8 References 8.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the role of ASEAN Discuss the role of SAARC Discuss the statistics of ASEAN with respect to import and export. 8.1 INTRODUCTION Countries occupying a common regional space often feud with one another rather than cooperate. This is clear from the presence of regional conflicts in several parts of the world. Such conflicts not only sap the energy of the conflicting states, they also affect the fortunes of other states in the region and make the entire region unstable and unattractive. This realization, at least in some cases, has spurred the formation of regional organizations which are based on the principle of cooperation. Paradoxically, while states jealously guard their sovereignty they are also enthusiastic about forming regional groupings that have the potential to diminish their sovereignty. This essentially means two things: that there is some kind of trade-off between sovereignty and cooperation, and more importantly, that the viability of a regional organization depends on the member states’ ability to manage the trade-off. The triggers for the creation of regional 146 CU IDOL SELF LEARNING MATERIAL (SLM)
organizations are varied. They include a strong desire for reconciliation and rebuilding after a destructive war, keenness to dampen ongoing intraregional conflicts and a need to avoid the embarrassment of being a region devoid of a regional entity. Building a regional organization under such fraught circumstances may be difficult but not infeasible, as demonstrated by the European states after World War II and the non-communist states of Southeast Asia in the 1960s. The South Asian experiment in regionalism, however, falls under the third category because this was one of the few regions not to have made any attempt to build a regional organization until the 1980s. Although regional organizations have not produced uniform results across the world, they have been fairly popular as forums for engagement between proximate states. Even when regionalism accomplished little, such as during the Cold War, regional organizations continued to proliferate. Following the end of the Cold War such organizations acquired a greater profile, particularly after the UN eagerly partnered them in peace-building efforts in many of the world’s conflict zones. Their potential to promote regional order and peace was forcefully presented by UN Secretary General Boutros Ghali in 1992 when he called for complementary efforts between regional arrangements and the UN to contribute towards the resolution of conflicts and maintenance of international peace in a manner consistent with Chapter VIII of the UN Charter (UN 1992). The underlining principle was the potential of the organizations as regional order-builders and their appropriateness for handling conflicts at the formative or nascent stage. 8.2 ASEAN The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN. As set out in the ASEAN Declaration, the aims and purposes of ASEAN are - To accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations. 147 CU IDOL SELF LEARNING MATERIAL (SLM)
To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region and adherence to the principles of the United Nations Charter. To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields. To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres. To collaborate more effectively for the greater utilization of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples. To promote Southeast Asian studies. To maintain close and beneficial cooperation with existing international and regional organizations with similar aims and purposes, and explore all avenues for even closer cooperation among themselves. The ASEAN Charter On 15 December 2008, member states met in Jakarta to launch a charter, signed in November 2007, to move closer to \"an EU-style community\". The charter turned ASEAN into a legal entity and aimed to create a single free-trade area for the region encompassing 500 million people. President of Indonesia Susilo Bambang Yudhoyono stated: \"This is a momentous development when ASEAN is consolidating, integrating, and transforming itself into a community. It is achieved while ASEAN seeks a more vigorous role in Asian and global affairs at a time when the international system is experiencing a seismic shift\". Referring to climate change and economic upheaval, he concluded: \"Southeast Asia is no longer the bitterly divided, war-torn region it was in the 1960s and 1970s\". The financial crisis of 2007–2008 was seen as a threat to the charter's goals and also set forth the idea of a proposed human rights body to be discussed at a future summit in February 2009. This proposition caused controversy, as the body would not have the power to impose sanctions or punish countries which violated citizens' rights and would, therefore, be limited in effectiveness. The body was established later in 2009 as the ASEAN Intergovernmental Commission on Human Rights (AICHR). In November 2012, the commission adopted the ASEAN Human Rights Declaration. Vietnam held the chair of ASEAN in 2020. 8.2.1 Comparison India’s trade relations with ASEAN have been strengthened since 1991, as a part of her ‘Look East Policy’. Her complementary economic structure with ASEAN involves 148 CU IDOL SELF LEARNING MATERIAL (SLM)
significant mutual gains. Though ASEAN’s population is less than half of India, but their global trade is more than five time of India. The trade dependence between India and ASEAN countries has been increased over the period. But as many developed countries following protectionist trade practices, the developing world needs to find out ways to steer their exports in the world market. Therefore in order to understand the possible trade gain in Indo- ASEAN trade relations, it is very important to understand the commodities level trade possibilities, as we have seen that India and ASEAN countries shared lot of commonality in their imports. Merely studying RCA and RID in isolation may not help in developing right strategies, as RCA analysis will tell us about the comparative advantage that a country enjoys in the export of certain commodities in general, it does not necessarily tell us about the specific import requirements of the countries being focused for exports. So, although India may have a comparative advantage in the export of certain commodities, it may not necessary that ASEAN nations have a requirement for the same commodities. A comparison of the RCA of commodities in India with the RID of commodities in ASEAN countries will give a more reliable picture of the export potential of the Indian goods in ASEAN countries and vice versa. If for a certain commodity India has a RCA index greater than one, and the same commodity ASEAN countries have a RID greater than one, then such a commodity is considered to have a strong export potential in the particular country. 8.2.2 Statistics The United States has a robust trade and investment relationship with the ten countries that comprise the Association of Southeast Asian Nations (ASEAN). These countries -- Brunei Darussalam, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam collectively the United States’ fourth-largest trading partner and together represent a market with a GDP of more than $2.9 trillion and a population of 647 million people. Exports ASEAN was the United States' 10th largest goods export market in 2019. U.S. goods exports to ASEAN in 2019 were $86.1 billion, up 0.2% ($205 million) from 2018 and up 60.1% from 2009. U.S. exports to ASEAN account for 5% of overall U.S. exports in 2019. The top export categories (2-digit HS) in 2019 were: electrical machinery ($15 billion), machinery ($9.7 billion), aircraft ($9.1 billion), mineral fuels ($7.1 billion), and optical and medical instruments ($5.6 billion). U.S. total exports of agricultural products to ASEAN totalled $13 billion in 2019, our 24th largest regional agricultural export market. Leading domestic export categories include: cotton ($2.2 billion), soybeans ($2.0 billion), wheat ($1.4 billion), soybean meal ($1.2 billion), and dairy products ($932 million). 149 CU IDOL SELF LEARNING MATERIAL (SLM)
U.S. exports of services to ASEAN were an estimated $39.0 billion in 2019, 3.5% ($1.3 billion) more than 2018, and 145% greater than 2009 levels. Leading services exports from the U.S. to ASEAN were in the research and development services, professional and management services, and travel sectors. Imports ASEAN was the United States' 8th largest supplier of goods imports in 2019. U.S. goods imports from ASEAN totalled $206.3 billion in 2019, up 11.6% ($21.5 billion) from 2018, and up 124.0% from 2009. U.S. imports from ASEAN account for 8.3% of overall U.S. imports in 2019. The top import categories (2-digit HS) in 2019 were: electrical machinery ($64 billion), machinery ($24 billion), knit apparel ($14 billion), furniture and bedding ($11 billion), and woven apparel ($9.6 billion). U.S. total imports of agricultural products from ASEAN totalled $13 billion in 2019, our 25th largest regional supplier of agricultural imports. Leading categories include: tropical oils ($1.7 billion), tree nuts ($1.3 billion), rubber & allied products ($1.3 billion), processed fruit & vegetables ($755 million), and rice ($658 million). U.S. imports of services from ASEAN were an estimated $23.3 billion in 2019, 9.3% ($2.0 billion) more than 2018, and 117% greater than 2009 levels. Leading services imports from ASEAN to the U.S. were in the travel, research and development, and transportation sectors. Trade Balance The trade balance is the net sum of a country’s exports and imports of goods without taking into account all financial transfers, investments and other financial components. A country's trade balance is positive (meaning that it registers a surplus) if the value of exports exceeds the value of imports. Conversely, a country's trade balance is negative, or registers a deficit, if the value of imports exceeds that of exports. The trade balance is the official term that is used for net exports in the current account. The U.S. goods trade deficit with ASEAN was $120.2 billion in 2019, a 21.5% increase ($21.3 billion) over 2018. The United States had a services trade surplus of an estimated $15.7 billion with ASEAN in 2019, down 4% from 2018, but up 208% from 2009. Investment U.S. foreign direct investment (FDI) in ASEAN (stock) was $338.3 billion in 2019, an 11.7% increase from 2018. There is no information on the distribution of U.S. FDI in ASEAN.ASEAN's FDI in the United States (stock) was $24.9 billion in 2019, up 11.1% from 2018. There is no information on the distribution of ASEAN FDI in the U.S. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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