Case #1 Binding Policy Maker’s Hand
Topic: Problem with the imposed plan of WTO.
Summary
Since the advent of WTO, the economic scenario of the world has changed drastically. WTO has imposed certain restrictions on tariffs and trade. The core purpose of WTO is to manage trade effectively and efficiently and to guarantee the free flow of trade. Countries are experiencing two types of tariffs these are bound tariffs and applied tariffs. Applied tariffs are the tariff rates on imports that are applied by the country. Similarly, bound tariffs are the rates that are applied by the policymakers of the WTO. WTO sets a limit that the tariffs can’t go beyond that limit. When two or more countries decide to set tariffs then the tariff rates are bound rates rather than applied rates. This issue is not present to that extent in industrial countries and both the tariff rates usually correspond closely especially in manufactured goods. However, in certain developing countries the bound rates are well above the applied rates. Similarly, in certain countries the tariff rates remain unbound. Statistics show that the United States and Uruguay have bound 100 % of their tariffs. The same is the case with Sri Lanka as its bound tariffs on 9.2 percent of its import and 1.4 percent are bounded above-applied rates. There are two reasons why bound rates exceed applied rates. Policymakers due to political pressures can’t manage the tariffs and that’s why bound rates exceed applied rates. Similarly, the negotiations of the policymakers of WTO take usually take more time and in the meanwhile applied rates go above the bounded rates.
Statement of the problem
The main problem in this scenario is that when countries are bounded by the law of WTO then the main issue was of tariffs. All the members of the WTO are agreed on the point that they would reduce the tariffs but the rates under and after the negotiation were the bound tariff rates of the country rather than applied tariff rates.
Solution
The members of the WTO should abide by and must confirm the fact that they should reduce tariffs on all the imports. Policymakers should strictly deal with members of countries that didn’t follow the rules. The applied tariff rates must be lower than the bound rates. Countries must not enjoy the negotiating time and they must ensure that applied rates must not exceed the desired limit of the WTO (Narlikar, 2005). All the member countries must ensure that as they are the members of WTO therefore they have to abide by the rules and for that reason they must follow the bounded rates of the WTO. Training and development must be provided by the individuals of the WTO to the policymakers of those countries that aren’t following the regulations of the WTO.
Learning Objectives
This case study gives us a glimpse of the issues that are related to WTO and the implications of the WTO. The WTO tariffs are an issue every country is dealing with. Therefore, every country should understand the implications of the WTO and they must abide by the rules of the WTO. Tariffs on imports must be similar or lower than the bounded rates and they must never exceed the bounded rates.
Case #2 Does Policy Matter? The Two Koreas
Topic: Comparison between an open and closed economy.
Summary
In today’s dynamic economic environment, no country exists on its own. Some countries stay together while some stay apart. Since the Korea split in 1950’s North Korea took the route towards the autarky approach while South Korea pursued more open economic and trade policies. These two countries highlight an apparent example of open versus closed development strategies. The economic indicators shows a notable difference with North Korea suffering from slow or no economic growth while south’s economic growth reaching new heights despite the Asian economic crisis. Hefty military expenditures and an army of about 1.2 million can be treated as one of the major reasons of the slow growth of North Korea. The countries also face difficulties in buying oil at the world prices and because of that the factories are working below its capacities. As a result of which the exports of North Korea become non competitive because of its low prices. The situation gets so distorted that people of this country were suffering from starvation. The country was living on food aid because of floods and failed crop. Numerous talks have been going on regarding the issue of North Korea and that South should help the North in order to regain its place. The project of Tumen river was developed to help the trade related issues of North Korea. After the Korean War a company of South Korea Hyundai won the approval of the government to collaborate with South Korea. Experts believe that North Korea is running on a stable path and their GDP are expected to grow by 25 to 35 percent. The experts are claiming that a huge amount of trade is engaged in the sale of heroin, illegal drugs and weapons. Moreover, after the September 11 attacks the United States suspended the trade between these two countries.
Statement of Problem
The problem in this case is the closeness of the North Korean economy due to which the country is suffering from serious economic drawbacks with its economy’s growth shrinking year by year. This case clearly highlights the importance of the policies in determining the economic pathways for the nations. The nation attempts to being self sufficient doesn’t helps the economic progress as it is obvious in the case of north Korea but this is not the only problem, the improper distribution of the country’s productivity also leads to serious problems with north Korea’s ample share of output going for military expenditure. Another problem is the focus on limited trade partners which in turns lead to low foreign currency reserves it happened with fall of Soviet Union because that was the only partner of the North Korea and till now its factories are running below capacity.
Solution
The policy is the deciding factor behind the success or a failure of any economy. As this is obvious in this case highlighted by the example of two Korean nations, South Korea being prosperous by following an outward open policy while North Korea suffering badly because of the command economy regime. So the solution seems to be apparent that North Korea has to open its door to other economies of the world, appropriately using its resources for the development. Moreover, international organizations should favor North Korea and on all international forums North Korea must be supported. This would help the people of North Korea to attain self sufficiency in all walks of life.
Learning objective
The apparent lesson from this case that in today’s international business environment it’s inevitable for the countries to adopt an open and outward policies for its growth (Krugman & Obstfeld, 2008). With international trade growing, countries need to gear up their resources and to make them in line with the international standards. The resource needs to be efficiently used in the areas of development rather than focusing on the military and defense. Countries should think in the forward looking manner and they must think positively and they must target the bigger picture in order to achieve efficiency and affectivity in their operations.
Case #3 A Special Case: The Reserve-Currency Country
Topic: Issues related to currency pegging.
Summary
Today’s economic environment with all its dynamism constitutes of many economies trading with each other, thus exchange rates hold real importance in the policies of any country. Countries either explicitly or implicitly choose a single currency as their reserve currency and then the central banks fix the rates between its domestic currency and the reserve currency which it holds as its foreign reserves. This system indirectly produces fixed exchange rate between each pair of no reserve currencies. The Breton Woods system in effect from the end of World War II till 1973, the US dollar served as the reserve currency in most of the countries. Private arbitrage kept cross exchange rates between no dollar currencies fixed, because of the profitable arbitrage opportunity as the inconsistency of the exchange rates created this situation. This system creates a unique situation for the policy makers in the reserve currency country because the reserve currency country never has to intervene in the foreign exchange market as each central bank intervenes to keep its exchange rate fixed relative to the reserve currency. This situation entails that the reserve currency country can use its monetary policy to create internal balance while on the other hand no reserve countries face the failure of monetary policy as they must intervene to cover any balance of payments surpluses or deficits, which will offset the effects of the changes in the monetary policy. While on the other hand reserve currency country can use its monetary policy not for itself but also for the entire set of countries. An expansionary monetary policy in the reserve country shifts the LM curve to the right. This would result in the falling of domestic interest rates and balance of payments moves into deficit. The occurrence of this shift is because the lower interest rates generates outflow of capital from the reserve country to the non reserve country. Thus changes occur in the balance of payment line and when its shifts down then the economy of that would experience a surplus of balance of payments from the capital inflow. This situation goes on and experts suggest that if reserve and non reserve countries experience economic ups and downs like recession and booms then the reserve-country policy across the borders will be embraced.
Problem
The exchange rate regimes all around the world are one of the most important constituent of the economic policies and their importance is increasing day by day with rising trade between countries (Mankiw, 2006). Countries pegging their currencies against a single currency always suffer from the failures of monetary policy because of this system while on the other hand the reserve currency country can even influence the economies of non reserve currency country with their monetary policy. The reserve currency country never has to intervene in foreign exchange market as the other central banks keeps intervening to control their fixed exchange rates. The effects of the monetary policy for the non reserve currency country are short lived as they have to intervene in the foreign exchange market to cover any balance of payments surpluses or deficits. Policy makers in the reserve currency country enjoys a clear advantage from their ability to conduct monetary policy under the fixed exchange rate regime, other countries feel the spillover effects of the monetary policy by the reserve currency country, this situation creates real problem when the economies differ in both the countries.
Solution
The countries need to mutually construct their policies as to come to common grounds with each other while taking on their course of actions otherwise it might create real problems for the non reserve currency countries, as the expansionary policy adopted by the reserve currency country harms the non reserve currency country badly if the economy is in recession as the expansionary policy will result in more money stock in the market creating more problems for the non reserve countries. The non reserve countries should try to peg their currencies with multiple sources so as to overcome the dependency of one single country.
Learning objective
This case very clearly explains the mechanism of the fixed exchange rate regime, the pegging of the currencies and thus educates us about the phenomenon that runs behind the international economy. The effects of the monetary policy also clearly identified and also highlight the dependency of the non reserve currency country over the reserve currency country.
Case #4 Non-Traded Goods and the Real Exchange Rate
Topic: Implications of the Balassa-Samuelson effect on Non-Traded goods and real exchange rates.
Summary
International trade is an essential element in the progress of all the major countries. Workers and the labor force in the country are mobile in nature and they usually switch between the domestic arena rather than international borders. Workers mobility is an important factor in determining the rates of productive and the real wage rates. However, the change in the rates of productivity can result in the change in exchange rate or purchasing power parity. The difference of productive growth and real exchange rates is termed by the economist as Balassa-Samuelson effect. Since the wages are rising and the combination of wages with the no productivity growth in sectors which are treated as non-traded results in the rising of prices in the non- traded goods. This effect is usually referred to situations like when yen was dramatically appreciated in relation to the US dollar in the period of 1960 and this goes on till late 1990s. Japan experienced productivity in the traded goods sectors which results to increased Japanese wages, and labor mobility. The Balassa-Samuelsson affect can be explained by evaluating the patters of traded goods and non-traded goods of United States and Japan. History shows that Japan is moving rapidly in nontrade items as compared to United States. The generalized theory of Balassa-Samuelson affect revolves round the scenario that the price level of the richer countries should be higher than the poor countries because countries that have high GDP have higher price levels. Similarly, another important implication of Balassa-Samuelson effect is why non-traded goods usually are cheaper in poor countries as compared to the richer ones. This implication can be explained like when there is low productivity in traded goods it results in low wages in poor countries. India is the most apt example of this scenario.
Statement of Problem
Immobility of workers across the international borders is one of the most important determinants of the international trade theory, and the differences in the countries’ productivity growth cause changes in the real exchange rates. The case highlights this characteristic of world market using the Balassa-Samuelson effect, the phenomena given states that rapid growth in the trade-goods sector leads to a wage rise and with workers being mobile between the sectors this also leads to a wage rise in the non traded goods sector. A wage increase accompanied with no productivity growth in the non trade goods sector results in higher prices for non traded goods as compared to the trade goods in the local economy and with no productivity growth in the foreign non traded sectors, the relative price of the local non traded goods also raise.
Solution
The Balassa-Samuelson effect clearly shows the role of labor mobility, productivity growth and real exchange rate in the determination of economic indicators. The implications of this effect states that countries with higher per capita GDP have higher price levels than the countries with low per capita GDP, but income itself is not a good enough indicator. The non traded goods are found to be more cheaper in the poor countries than in the rich ones because the low labor productivity results in lower wages which in turns leads to lower prices, this implication is common in the third world countries of the world. These implications of the Balassa-Samuelson model help to understand the differences in the real exchange rates between different countries.
Learning objectives
This case analysis provides a detailed overview of the Balassa-Samuelson effect, with it showing the relationship between the productivity growth, labor mobility, and wages, prices in the trade and non trade goods sector and the real exchange rates between countries. It clearly helps to understand the details at the backdrop of many factors of the international economy (Soleman, 2006). The implications of the international economic theories and the difficult nature of international trade can easily be evaluated in this case.
References
- Krugman, P., & Obstfeld, M. (2008). International Economics: Theory and Policy. Pearson Education.
- Mankiw, G. (2006). Principles of Economics. South-Western College.
- Narlikar, A. (2005). The World Trade Organization: A Very Short Introduction. Oxford University Press.
- Soleman, J. (2006). Economics. Financial Times/ Prentice Hall.