Professional Documents
Culture Documents
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The texts making-up this document review and emphasize significant issues covered
during the sessions. The questions asked at the beginning of each set of texts are
meant to help students identify the issues that they should pay attention to.
Students will work in teams on one single case study (see class outline for number of
students per team). Each team will produce a presentation slideshow of its case study
(7-10 slides per presentation, depending on the size of the case).
Slideshows will be presented orally during sessions, according to the class outline (15-
20mn per presentation). Each team member will actively participate in his/her team
presentation.
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CONTENTS
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Questions
1. Why is the US calling China a mercantilist country? (information about the issue is
also available in C.W. HILL, chapter 5, p. 164)
2. What are the justifications of the Chinese trade policy / trade surplus? What do they
mean to Chinas trade partners?
3. Would a decrease of the Chinese trade surplus necessarily benefit to its trade
partners?
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effectively steal jobs from other countries turn out to be valid. He then went on to argue that
persistently misaligned exchange rates create genuine problems for free-trade apologetics. The
best answer to these problems is getting exchange rates back to where they ought to be. But thats
exactly what China is refusing to let happen.
The bottom line is that Chinese mercantilism is a growing problem, and the victims of that
mercantilism have little to lose from a trade confrontation. So Id urge Chinas government to
reconsider its stubbornness. Otherwise, the very mild protectionism its currently complaining about
will be the start of something much bigger.
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and loosening of credit of any large economy, Chinas real domestic demand is likely to grow by at
least 10% this year. In fact, the popular perception that China has always relied on export-led growth
is rather misleading. Its current-account surplus did soar from 2005 onwards but until then was
rather modest. And over the past ten years net exports accounted, on average, for only one-tenth of
its growth.
The problem is more that the mix of domestic demand between consumption and investment is
unbalanced, and becoming even more so. In 2008 private consumption accounted for only 35% of
GDP, down from 49% in 1990 (see chart 2). By contrast, investment had risen from 35% to 44% of
GDP. This year the bulk of the governments stimulus is going into infrastructure, further swelling
investments share. Chinese capital spending could exceed that in America for the first time, while its
consumer spending will be only one-sixth as large. This is Chinas most glaring economic imbalance.
Spending lots of money on building railways, roads and power grids is the most effective way for the
government to prop up demand in the short termespecially since China, as a poor country, needs
better infrastructure. However, the pace of investment is unsustainable. Even before this years
infrastructure boom capital spending was too great, causing many economists to worry about excess
capacity and the risk that bank loans could sour. China deserves credit for the speed with which it
responded to the global downturn. Now it needs to focus on structural reforms not just to keep
domestic demand growing strongly and to reduce its trade surplus further, but also to derive more of
its growth from consumption and less from investment.
Before exploring how China can do so, it is important first to clear up a misunderstanding. It is often
argued that China runs a current-account surplus because its consumer spending has been sluggish.
On the contrary, China has the worlds fastest-growing consumer market, increasing by 8% a year in
real terms in the past decade. Retail sales have leapt by 17% in real terms in the past 12 months,
although this figure may be inflated by government purchases. Even so, Chinas consumer spending
has grown more slowly than the overall economy. As a result consumption as a share of GDP has
fallen and is extremely low by international standards: only 35%, compared with 50-60% in most
other Asian economies and 70% in America. []
The more important reason why consumption has fallen is that the share of national income going to
households (as wages and investment income) has fallen, while the share of profits has risen.
Workers share of the cake has dwindled because Chinas rapid growth has generated surprisingly
few jobs. Growth has been capital-intensive, focusing on heavy industries such as steel rather than
more labour-intensive services. Profits (the return to capital) have outpaced wage income. Capital-
intensive production has been encouraged by low interest rates and by the fact that most state-
owned firms do not pay any dividends, allowing them to reinvest all their profits. The government
has also favoured manufacturing over services by holding down the exchange rate as well as by
suppressing the prices of inputs such as land and energy.
Simply urging households to spend a bigger slice of their income will not be enough to shift Chinas
growth towards consumption. Beefing up the welfare state is important but policy also needs to
focus on how to lift household income and reduce corporate saving, says Mr Kuijs. Making growth
more labour-intensive will require lots of difficult reforms. China needs financial-sector liberalisation
to lift the cost of capital for state-owned companies and improve access to credit for private ones,
especially in services. Higher deposit rates would also boost household income. Distortions in the tax
system which favour manufacturing and barriers to private-sector participation in some service
industries should be scrapped. State-owned firms ought to be forced to pay bigger dividends. The
prices of subsidised industrial inputs should be raised. Land reform and the removal of restrictions on
migration from rural to urban areas would also help to lift incomes and thus consumption. China has
barely started on these important reforms. That may be because they involve much harder political
decisions than creating a welfare state. They require the government to loosen its control over the
economy, something which Beijing will do slowly and reluctantly.
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Last but not least, China needs to allow its exchange rate to rise. This would lift consumers real
purchasing power, discourage excessive investment in manufacturing and help to reduce the trade
deficit further. It would also alleviate the risk of a protectionist backlash abroad. From July 2005
(when China abandoned its dollar peg) to February 2009, the yuan rose by 28% in real trade-
weighted terms, according to the Bank for International Settlements. But alarmed by the collapse of
exports, China has virtually repegged the yuan to the dollar over the past 12 months. As the
greenback fell this year, it dragged the yuan down with it. Since February the yuans real trade-
weighted value has lost 8%.
Economists disagree about the extent to which the yuan is undervalued. In the IMFs Article IV
assessment of China, published on July 22nd, officials were split over whether the currency was
substantially undervalued. Morris Goldstein and Nicholas Lardy, of the Peterson Institute for
International Economics, have done some of the most extensive work on Chinas exchange rate. In a
new study, they estimate that the yuan is undervalued by 15-25%, based on the adjustment needed
to eliminate the current-account surplus.
The American government has softened its demands for revaluation, largely because it needs China
to keep buying Treasury bonds to fund its own stimulus spending. At the Strategic and Economic
Dialogue meeting between American and Chinese officials on July 27th and 28th in Washington, DC,
the yuans exchange rate was barely discussed. However, the case for appreciation remains strong.
Chinas recent efforts to boost domestic spending have helped to maintain robust growth and reduce
its trade surplus. But excessive levels of investment are not a recipe for sustained rapid growth.
Unless it is prepared to embrace difficult structural reforms and to allow the yuan to climb, Chinas
commitment to rebalancing will remain half-hearted. In the long run that will be bad news for China
itself as well as for the rest of the world.
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There are worrying signs that Beijing is going the wrong way. Earlier this month, it imposed a volley
of duties against American-made sport utility vehicles. It will have little economic importance as few
of these vehicles are sold in China. But analysts viewed the move as a warning that China will
retaliate against Washingtons efforts to combat its subsidized exports. And the pace of appreciation
of Chinas currency has slowed markedly. The Obama administration must also act with care. It is
justified in challenging illegal trade practices, including pursuing its case at the World Trade
Organization against illegal subsidies of Chinese makers of solar panels. But it should act
multilaterally, including mustering other countries to add to the pressure on Beijing to act by the
rules. Unilateral initiatives, like those in Congress to punish China for its cheap currency, are likely to
cause more harm than good.
The ball is, however, in Chinas court. Beijing must understand that it is a bad idea to double-down on
an export-led strategy. There are better alternatives, including sensible stimulus measures like
investing in low-income housing and expanding government-run health insurance. These would
boost consumer spending and growth, reducing Chinas dependence on export markets and
investment bubbles. A policy switch like this would stimulate global growth. Sticking to the old game
plan will drag the world down.
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Questions
1. What is the current global position of Bangladesh's textile and garment industry?
2. How can it be explained?
Information about the issue is also available in C.W. HILL, chapter 5, p. 158
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unionised, although big protests did force the government to announce a near doubling of the
minimum wage to Tk1662 ($25) a month last yearthe first increase since 1994.
In the short run, garment-makers of all stripes are simply trying to survive an indiscriminate anti-
corruption drive launched by Bangladesh's recently installed military regimea disadvantage for
which neither low wages nor trade preferences can compensate.
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Questions
1. What is the nature of the Brazilian-Chinese bilateral trade pattern? How can it be
explained?
2. What are the pros and cons thereof for both partners?
3. Why is Brazil applying protectionist measures, in particular on Chinese imports? What
are these measures?
4. China is also expanding its foreign direct investment in Brazil. Why? What are the
consequences thereof for Brazil?
Wrap-up question: in which sense are Brazilian-Chinese bilateral economic relations a
perfect illustration of free trade theories strong points and shortcomings?
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The growing homogeneity of Brazilian exports to China, in conjunction with the increasing share of
such exports as a percentage of Brazils total trade volume, have led some to believe that this trend
could fuel infrastructure development in China at the expense of deindustrialization in Brazil. Yet,
between 2002 and 2009, the dollar value of Brazils exported manufactured goods increased two-
fold, reaching $67.3 billion USD by the end of that year. At the same time, manufactured and semi-
manufactured goods made up 57 percent of Brazils total exports in 2009. This sustained strength by
Brazils secondary exports market helps ease concerns about the countrys growing dependence on
the export of commodities. It also shelters the Brazilian economy from a potential terms-of-trade
shock.
On the other hand, China has also been pouring liquidity into Brazils energy sector as part of its
efforts to increase control over Latin American oil and energy supplies. In May 2009, for example,
China agreed to lend $10 billion USD to Brazils oil giant Petrleo Brasileiro (Petrobras) in exchange
for a guaranteed supply of oil over the next decade. Moreover, in December of that year, state-
owned PetroChina signed a memorandum of understanding with Petrobras to invest in ethanol
production projects in Brazil, with the specific aim of exporting ethanol to China as an alternative
energy source.
More recently, the East China Mineral Exploration and Development Bureau agreed to pay $1.2
billion USD to acquire Itaminas Comercio de Minerios, a major Brazilian iron ore miner based in
Sarzedo. Chinese firms are also actively involved in bidding for a 40 percent stake in an untapped
Brazilian offshore oil field being sold by Norways Staoil. The bilateral agreements that were signed at
the BRIC summit in Braslia last April were specifically aimed at boosting trade and energy
cooperation between the two countries, and include provisions for the construction of a Chinese
steel plant in Brazil.
The long-term economic benefits of China and Brazils trade relationship are substantial, and the
nature of this important bilateral relationship will become an important part of the domestic policy
agendas of both major BRIC nations. Problems, such as Brazils growing bilateral trade deficit with
China, as well as the threat of deindustrialization from trade imbalances caused by an
overabundance of Brazilian commodities exports, pose substantial risks to the relationships long-
term growth. However, the economic climate remains promising, while the level of economic
integration is still shallow. Brazilian exports do not directly compete with Chinese exports in most
markets, and Chinas rapid growth prospects will continue to usher in new opportunities for Brazils
energy and commodities sectors.
Consequently, Brazils primary challenges remain in its ability to enhance the value of its energy
supplies and its raw materials exports to satisfy Chinese demands. The administration of Brazils new
president, Dilma Rousseff, must confront these difficult challenges this decade in order to properly
manage the risks and opportunities of her countrys growing trade integration with China.
Elenice Portz and Xingjian Zhao are attorneys at Diaz Reus & Targ.
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with less than 65% local content took effect, taking the tax on some imported models to a punitive
55%on top of import tariffs.
The tax increase is an unusually blatant act of protectionism. It almost certainly violates the rules of
the World Trade Organisation, of which Brazil is normally an enthusiastic supporter. It shows how
sensitive the government of President Dilma Rousseff is to claims that the country is suffering de-
industrialisation.
Although the latest figure shows industrial production increasing slightly, it has been broadly flat for
more than a year. Economic growth has fallen sharply.
But consumer demand remains robust, rising 4.1% last
year, says the Central Bank. A bigger share of the market
is going to importersChina in particular. Imports of
Chinese cars rose almost fivefold last year; the new year
has brought complaints of dumping of Chinese mobile
phones and shoes.
With extraordinary speed, China has become Brazils
most important economic partner: total trade between
the two countries has risen 17-fold since 2002. But
frictions are increasing almost as fast. Although Brazil
enjoys a big overall trade surplus with China, most of its
exports are of commodities (mainly iron ore, soya beans
and crude oil). It has a big deficit in manufactures (see
chart).
The reasons are not hard to spot. In recent years Brazils manufacturers have been hobbled by a
strong currency, high interest rates, high taxes, poor infrastructure and a poorly educated workforce.
Brazil faces a big competitive challenge, and the relationship with China only dramatises that, says
Srgio Amaral, a former industry minister who chairs the Brazil-China Business Council.
The governments response is a mix of short-term protectionist measures combined with modest
steps towards more constructive longer-term policy changes. The tax rise on cars was announced last
September, as part of a new industrial policy. The aim was to bully carmakers without plants in Brazil
to hurry up and build them. This seems to be working: JAC Motors, BMW, and Jaguar Land Rover, a
unit of Indias Tata Motors, have all announced plans to build factories in Brazil since the import tax
was unveiled.
The industrial policy also features an experimental cut in the payroll tax for footwear, textile,
furniture and software firms. But officials are at pains to point out that, rather than help specific
industries, the main thrust of the new policy is to try to boost competitiveness more generally by
promoting innovation, higher education and training.
Many Brazilian industrialists distinguish between Chinese and other competitors. We dont believe
in protection against efficiency, insists Roberto Giannetti of So Paulos Federation of Industries
(FIESP). But he adds that today we cant accept China as a fair trader. FIESP says it did not want the
tax increase on imported cars. But it complains that China is dumping diverted exports from
depressed Europe. Meanwhile, Brazilian manufacturers trying to export to China face steep non-tariff
barriers on manufactured goods, such as obstructive state purchasing agents. Rubens Ricpero, a
former finance minister, thinks that rather than acquiesce in the disappearance of its industries,
Brazil will move towards managed trade with China, at least in some sectors.
Two things may serve to reduce some of the trade tensions. The first is that Chinese investment in
Brazil is taking off. Until 2009 this amounted to only about $500m. But in 2010 investment of $19
billion was announced, and $12.7 billion finalised, according to calculations by the Brazil-China
Business Council, making China the largest single foreign investor in Brazil that year. Of that sum, just
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three acquisitions (two of oil stakes, and one in electricity distribution) accounted for more than $11
billion. But Chinese firms are also starting to build manufacturing plants in Brazil.
The second emollient is that the real has depreciated by 17% against the dollar since its peak in late
July. That is partly because investors fled emerging markets but also because of government
intervention, in the form of taxes on short-term capital inflows. At the same time, the Central Bank
has taken advantage of the economys soft patch to cut its benchmark interest rate, from 12.5% in
August to 11%. With inflation at 6.5%, the real interest rate is much lower than at any other time in
the past decade.
But industry also wants to see fewer taxes, cheaper energy, less bureaucracy and better transport
networks, says Paulo Skaf, FIESPs president. On these things the government is moving far more
slowly, if at all. However narrowly targeted, protectionism will not only raise prices in Brazil but risks
sending the wrong message to businesses. Across Latin America, trade with China is growing but
partly at the expense of intra-regional trade in manufactures. Brazil should lead a move to tear down
all trade barriers within Latin America, thus turning the Chinese challenge into an opportunity, says
Mr Amaral.
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restriction, and still more if the government thinks it is in the national interest. But there is no
timetable for passing a new law. The Brazilian Rural Society estimates that $15 billion of planned
foreign agriculture investments are being dropped.
The strength of the new protectionist mood can be gauged by the governments willingness to
tolerate legal uncertainty and collateral damage. It reintroduced the antique land-ownership law
despite knowing that its flawed design would almost halt much-needed foreign investment. Since it
limits the total share of each district that can be owned by foreigners, many land registries are
playing it safe and rejecting all foreign purchasers. Kory Melby, an agricultural consultant, advises
foreigners on land purchases in Brazil. He says he has heard from furious sellers whose deals are now
as good as garbage.
Car importers are mulling a challenge to the tax increase at the WTO. At issue is whether a tax that
can be avoided by producing locally is an import tariff in disguise. Their trade group is trying a
different legal tack: it says that the government was obliged to give 90 days notice (it gave only one).
Chinese carmakers building Brazilian factories are lobbying hard. They say that they will be unfairly
hit, since ramping up production in a new plant takes years. Foreigners whose plans are less
advanced may opt for a complete rethink.
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Questions:
1. Why has Russia long been reluctant to join the World Trade Organisation (WTO)?
2. Why did it eventually join the organization in December 2011?
3. Why does the US strongly support Russia's WTO membership?
Wrap-up question: in which sense is Russia an illustration of the opportunities and threats
of free trade?
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Russia sees any foreign project that touches the former Soviet Union, including the European Union's
new eastern partnership, as a direct challenge. Yet the bigger threat to its ambitions to reassert
regional influence lies in its own attitude towards the neighbours. Even as it was signing a customs
union with Belarus, Russia imposed a ban on Belarusian milk products, which it claimed did not meet
its new packaging rules (rather as it once argued that Georgian wine, fruit and mineral water were of
substandard quality). But Alyaksandr Lukashenka, the autocratic president of Belarus, interpreted
this (probably accurately) as a punishment for being rude about Russia and refusing to back its policy
of recognising the independence of the Georgian territories of Abkhazia and South Ossetia. []
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Text 10. Biden Says U.S. Will Push For Russia to Be in Trade Organization
By ELLEN BARRY, New York Times, March 9, 2011
Vice President Joseph R. Biden Jr., left, in meetings with Russias president on Wednesday, called the
countrys accession to the World Trade Organization the most important item on our agenda, and
promised that the White House would push for the repeal of cold-war-era trade restrictions. But he
warned that international investors were watching closely to see whether Russia made progress on
corruption and rule of law. Investors are looking for assurances that the legal system treats them
fairly and acts on their concerns swiftly, Mr. Biden said during a visit to the Skolkovo business
school. Mr. Biden, who two years ago originated the idea of a reset between Russia and the United
States, is tasked with maintaining the momentum in the still-jittery relationship. Russia is looking for
the United States to help promote its economic modernization, a central goal of Dmitri A.
Medvedevs presidency.
Text 11. Russia Declares It Is Close to Joining the World Trade Organization
By ELLEN BARRY, New York Times, October 4, 2011
MOSCOW After high-level meetings in Washington, Russian officials said Tuesday that they were
on the brink of a deal that would allow Russia to become a member of the World Trade Organization
after 18 years of halting negotiations, though hostility between Georgia and Russia remains a crucial
sticking point.
Russias accession to the organisation has been a key goal of the reset between Russia and the
United States, a reconciliation whose future is uncertain amid political change in both countries.
Russias first deputy Prime minister, Igor I. Shuvalov, said Tuesday that United States officials were
vigorously advocating for Russia and that they were near a breakthrough. We have Americans
working 24 hours a day on our application in order to persuade other WTO members that Russia
should get membership before the end of the year, Mr. Shuvalov said at a United States-Russia
trade event in Chicago. At the beginning of this year, very few people believed it was possible. Now
we are very close to that. United States officials offered similarly upbeat assessments. One said
American officials see every likelihood that Russia could obtain membership in December.
Russia has the largest economy of any country not in the 153-member trade group, and the World
Bank says that as a member, Russia could bolster its annual gross domestic product as much as 11
percent over the long term []. [Short-term gains would be smaller, at 3.3 percent, and non-
competitive industries stand to suffer, leading some Russian experts to oppose membership.] The
repeated delays have frustrated Prime Minister Vladimir V. Putin, who publicly chastised his officials
this spring for complying with regulations of the group, telling them, Why the hell should they admit
us if we already observe everything?. [Moreover, Mikhail Remizov, head of the Institute of National
Strategy, a research group in Russia, called membership neither a necessity, nor some sensible
benefit. In conditions of economic crisis, it would limit Russias ability to use protectionist policies to
support its industries, he said in an interview with the radio station Kommersant FM.
A top Georgian official said it was premature to celebrate Russias accession. The trade group accepts
members through a consensus system, meaning that Georgia, which joined in 2000, could block
Russia. Although the organisation could technically admit Russia through a vote of the majority, that
type of accession has never happened. Russia and Georgia have remained in an icy standoff since
they fought a war in 2008, and Russias military is deeply entrenched in the Georgian enclaves of
South Ossetia and Abkhazia. The countries began negotiating in March, with Georgia asking for
international observers to be posted on the Russian side of the enclaves borders. The countries have
found no common ground, said Giga Bokeria, the secretary of Georgias National Security Council.
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Mr. Bokeria said the matter was a central topic of his meeting last week with Secretary of State
Hillary Rodham Clinton. We know our allies are interested in having Russia in the WTO, but there is
a compromise that has to be reached first, he said. The ball is in their court.
The issue has taken on new significance with the news that Mr. Putin is poised to return to the
presidency. Mr. Putin adopted a defiant posture toward the United States in his second presidential
term and had little public role in the reset, though he clearly approved of the conciliatory tone set by
President Dmitri A. Medvedev. Mr. Shuvalov said Tuesday that he had delivered a message to
American officials from Mr. Putin. Everyone in the United States should understand that we will not
forget the reset, Mr. Shuvalov said. In recent days, negotiators appear to have removed most of the
remaining obstacles to Russias accession, including differences on meat imports, sanitary standards
and incentives to Russian automobile producers. Andrei Slepnev, a deputy minister for economic
development, said the burst of progress had surprised his team. We see today that our accession
process is at the very end of its final stage, said Mr. Slepnev, in comments carried by the Interfax
news service. Completing the process by December, he said, is quite possible if the consensus and
the mood achieved within the WTO today are maintained. []
Steven Yaccino contributed reporting from Chicago, and Helene Cooper from Washington.
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may face stiffer competition. Last month, when he was asked about the costs and benefits of
membership, Mr. Putins response was 50-50, but over all there are probably more pluses than
minuses. The announcement on Wednesday suggests that he has been convinced by the arguments
of liberal economists that membership will bring long-term benefits. It also suggests that despite his
bristling language, Mr. Putin has a lasting desire to integrate Russia into the worlds great power
alliances, a choice that could affect the countrys long-term trajectory.
Because accession to the trade group is a consensus process, Russia had to gain the consent of
Georgia, a member, overcoming the hostility that has divided the two countries since they went to
war in 2008. Russia has built military bases in Abkhazia and South Ossetia, two separatist enclaves
that make up a large portion of Georgias territory, and Moscow has recognized them as sovereign
nations. In exchange for its consent, Georgia sought transparency of trade on its border with Russia,
a delicate issue because two sections of that border abut Abkhazia and South Ossetia. Russian
leaders said Georgias demands were political, and urged Western governments in particular, the
United States to pressure Georgia into giving its consent. []
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Industrial and agricultural lobbies have opposed entry, claiming that Russian companies require more
time before facing global competition. However, little has been done to make Russian industry more
efficient in the last 18 years, even without unfettered competition.
The challenges of membership are not limited to economic policy; they also undermine the political
model that has come to define Russia since 2000. Under Putin, Russian citizens accepted reduced
political freedoms in exchange for stability and economic growth. Within the WTO, Moscow will have
fewer means to support inefficient industries against competition from abroad. This could cause
problems for the 460 monotowns, which rely on one factory or industry for jobs and public utilities.
Certainly, Russia does not stand to reap immediate rewards from membership. World Bank studies
stress that while all households will benefit in the long run, some will confront initial challenges of
retraining or relocation. The government will struggle to maintain its legitimacy if it does not provide
ample means for these costs to be met.
As a major oil exporter, over 50 percent of its foreign trade is already tariff free. However, the
metallurgy and chemicals industries stand to gain from increased market access and protection from
antidumping measures. In time, other industries will benefit from restructuring and increased
productivity stimulated by increased competition.
Russia needs foreign capital in order to affect its modernization and is aware of the need to project a
more positive investment image. World Bank analysis also stresses that the largest gains from WTO
membership will come from increased foreign investment in the Russian market for services. Clearly,
WTO membership alone will not convince cautious investors, but opening the Russian economy to
international practices can only have positive benefits for the business climate.
Still, to become a truly open economy, Russia will need to use WTO membership as a springboard for
wider economic change. It is Putin who will face the tough realities of implementing WTO
commitments, leading an elite that has long favored protectionism and subsidy over serious reform.
However, the long-term benefits of membership should outweigh the initial costs. Russia will first
have to make courageous decisions on which industries are truly sustainable and take measures to
protect the population from the upheaval of adjustment.
Dominic Fean is a junior research fellow at the Russia/New Independent States Center at the
French Institute of International Relations.
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Questions
1. What are the objectives and contents of the recent free trade agreement signed
between the European Union and South Korea?
2. What are the economic underlying principles of this agreement?
3. Why has the agreement been questioned both in the EU and South Korea?
4. Why are Japanese businessmen worried about the agreement? Why are Japanese
policy-makers trying to sign a similar deal with the EU?
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the financial crises, this trend slowed down in 2009 when the EU's exports to South Korea reached
21.5 billion. In the same year, South Korea exported 32.1 billion worth of goods to the EU. The
value of EU services exports to South Korea in 2008 was close to 8 billion, while EU absorbed 4.4
billion of Korean services.
EU-South Korea goods trade was worth around 54 billion in 2009. The EU currently runs a deficit
with South Korea in goods trade, although trends suggest that the Korean market offers significant
growth potential. For products like chemicals, pharmaceuticals, auto parts, industrial machinery,
shoes, medical equipment, non-ferrous metals, iron and steel, leather and fur, wood, ceramics, and
glass, the EU enjoys a solid trade surplus. Similarly, for agricultural products South Korea is one of the
more valuable export markets globally for EU farmers, with annual sales of over 1 billion. On
services, the EU has a surplus with South Korea of 3.4 billion, with exports of 7.8 billion in 2008
and imports of 4.4 billion.
In terms of tariffs, South Korea and the EU will eliminate 98.7% of duties in trade value for both
industrial and agricultural products within 5 years from the entry into force of the FTA. By the end of
the transitional periods, duties will be eliminated on almost all products, with a few exceptions in the
agricultural sector. This is the most ambitious trade coverage ever achieved in a FTA negotiated by
the EU.
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The FTA will provide new opportunities in many services sectors, where the EU is highly
competitive. These include telecommunications, environmental services, shipping, financial and
legal services.
The FTA will offer transparency and predictability on regulatory issues such as the protection of
intellectual property (including through strengthened enforcement); improved market access in
government procurement; as well as a new approach on trade and sustainable development
involving civil society in the monitoring of commitments.
The FTA will offer a high level of protection for EU Geographical indications such as Champagne,
Prosciutto di Parma, Feta cheese, Rioja, Tokaji wine or Scotch whisky
Efficient dispute settlement rules will be set up to ensure enforceability of commitments
(arbitration ruling within 120 days, which is faster than in the WTO).
The FTA will offer protection via a general safeguard clause. This would allow the re-
establishment of duties for up to four years in case of a sudden surge in imports. A Regulation
implementation this clause is currently being discussed by the European Parliament, the Council
and the Commission. The Commission will monitor closely the evolution of the market in
sensitive sectors.
On rules of origin, rules have been simplified and made more business friendly. At the same time,
strict rules apply in sensitive sectors. For instance, for cars, the agreement would only moderately
increase the levels of permissible foreign content from 40% to 45%. For textiles, agricultural and
fisheries, the EU standard rules of origin will be maintained with only a small number of derogations
applying. []
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carmakers' association, the agreement goes against the interest of major manufacturing industries in
Europe, including the automotive sector, and their millions of employees. "We call on EU member
states not to ratify the current text. The concerns that many of them expressed before, and that
were echoed by members of the European Parliament, a number of European commissioners - as
well as trade unions and businesses - have not been addressed," said Ivan Hodac,
ACEA's secretary-general. "The Korean negotiators have not only obtained unrestricted access to a
market of over 500 million people, the European Commission has in addition allowed South Korea to
subsidise exports from its key industries to the EU. This constitutes unfair competition and will lead
to economic distortion," Hodac added. EU car sales to Korea went up by a total of 78% in unit sales
(39% in value) between 2005 and 2008, whilst Korean car exports to the EU decreased by 37% in unit
sales over the same period.
DigitalEurope, the assocation representing the ICT industry in Europe, also raised concerns about the
FTA's impact. "Lowering or removing tariffs will put European and other non-Korean electronics
companies at a competitive disadvantage," it said in a statement.
The ratification process by national parliaments, which could take several months, might face also a
few hurdles.
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launching a joint study group on an economic partnership agreement (EPA) with the EU at a summit
held in April. But the idea hasnt gone down well with the EU which believes that Japan's efforts to
ease non-tariff barriers are not yet sufficient. "Many so-called non-tariff barriers to trade remain in
place, which hamper access to the Japanese market and cause hesitance from the EU side to go
ahead," Herman Van Rompuy, president of the European Council, said before the summit.
While a free trade agreement aims mainly to remove tariffs on goods and trade barriers for services,
an EPA goes beyond it and covers areas such as intellectual property rights and investment
protection rules. The EU has been pressuring Japan to ease safety standards for automobiles and to
hasten the screening process of medical devices while Tokyo wants the EU to halt tariffs on
automobiles and flat-panel televisions. According to the European Business Council, EU exports to
Japan could rise as much as 7 percent if current tariffs and non-tariff measures are removed. This will
help boost Japan's trade to the EU bloc by almost 60 percent, the council says.
Japan and the EU will make a decision next year on whether negotiations on the EPA should get
under way.
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Questions:
1. What are the explanations of the recent appreciation of the Swiss franc and Japanese
yen?
2. What are the consequences thereof on the Swiss and Japanese economies?
3. What can export-oriented Japanese and Swiss firms do to offset the instability of
their domestic currency?
4. What can these countries' central banks do to alleviate the issue? What are the pros
and cons of such measures?
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We judged that rises in the yen have economic costs, including the risk of damaging corporate
sentiment and encouraging companies to shift production overseas, the governor of the Bank of
Japan, Masaaki Shirakawa, said at a news conference. Japan, which had taken a laissez-faire
approach to currency policy from about the middle of the last decade, has over the last year become
more willing to intervene. Last Sept. 15, with concerns over the American economy mounting, it
spent 2.1 trillion yen in its biggest one-day intervention ever.
On March 18, a week after an earthquake, tsunami and subsequent nuclear crisis, the Group of 7
industrialized economies came to Japans aid by staging a joint intervention, coordinating efforts to
sell the Japanese yen on global currency markets. Traders had attributed the yens surge to Japanese
companies repatriating funds to finance recovery back home. But since then, the dollar has again
slumped against the yen, falling 5 percent in the last month as investors wary of the debt impasse in
the United States fled to other currencies. Even after lawmakers in Washington struck a deal on
Tuesday to avert a default or downgrade of United States debt, fresh concerns over the economy
again weighed on the dollar.
Japan did not disclose the size of its intervention on Thursday, but traders estimated that the
government had spent more than a trillion yen on the maneuver, according to Reuters. Asian central
banks, Japanese retail investors and exporters bought into the dollars rally, helping to buoy the
American currency, Reuters said. The central bank followed with its announcement that it would
seek to raise liquidity by increasing its asset purchase program, including Japanese government and
corporate bonds, to 15 trillion yen from 10 trillion yen announced previously. The bank said it would
also expand its credit facility its pool of funds available to buy up assets from banks and other
businesses to 35 trillion yen, from 30 trillion yen. The bank also kept its benchmark interest rate
near zero.
Still, the effect of moves to influence foreign exchange markets, especially by a single country, has
often been short-lived. Japan acted alone in the intervention, though Tokyo was in touch with other
countries over the maneuver, Mr. Noda said. What Japanese policy makers could aim for, Mr. Okubo
of Socit Gnrale said, was to hold the yen at the current level in the hope that the American
economy showed some kind of strength soon.
Japan has been desperate to shore up its fragile recovery. Even as companies have raced to repair
damaged factories and resume production, they have been hit by a surge in the yen that threatens
their business overseas. The March disaster struck an economy that, despite its strong currency, was
even more fragile than that of the United States. The Japanese economy has shrunk in two of the last
three years, and its debt is twice the size of its economy. Japans sovereign debt rating, AA-, is three
notches below that of the United States. On the other hand, most of Japans debt is held
domestically, and the country runs a current account surplus factors that help to make the yen a
haven currency for investors in times of turmoil on global markets.
The recent rise in the yen is, to a large extent, the continuation of a trend that began several years
ago with the global economic crisis, which caused investors to flee to the yen. Since the start of the
crisis, the yen has strengthened by 30 percent against the dollar. The muscular yen has been
squeezing profits among Japanese exporters, making their cars and electronics more expensive
overseas, and eroding the value of overseas earnings when converted into yen. Toyota, Honda and
other exporters all recently blamed the strong yen, in part, for their sharply lower earnings in the
latest quarter. And so the nations exporters welcomed Thursdays intervention. It was a really
aggressive appreciation, Kazuo Hirai, executive deputy president at Sony, said of the yens recent
moves. The fact that the government decided to intervene was a good thing for Japanese industry
as a whole.
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Questions
1. What were the nature and origins of the Argentine economic crisis in 2001?
2. What was the role of the International Monetary Fund during the crisis? (you can find
information about the crisis in C.W. HILL, Chapter 11, p. 399)
3. How can Argentinas recent impressive economic record be explained?
4. What are the objectives and means of Argentinas trade policy? What key role does it
play in the countrys global economic strategy?
5. What are the limitations thereof?
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investment. Were trying to make it profitable, says Eduardo Pulenta, the companys export
manager. Well keep working to import cars. Thats what we know how to do.
Copying from Brazil, the next target of Argentinas new protectionism will probably be land. In April
the government put forward a bill to cap total foreign landholdings at 20% of the countrys territory,
and to stop any individual from acquiring over 1,000 hectares (2,471 acres). It makes no exemption
for technology transfers. And it counts any firm with over 25% foreign ownership as an outside
buyer, forcing the government to track every trade in the shares of public companies near the limit.
Investors in mining, which many Argentines tout as the new soyabeans, are nervous. The bill has
not been approved. But in next months election Ms Fernndez is expected both to win again and to
increase her partys share of seats in Congress.
The net effect of these policies is hard to measure. Since 2005 imports have grown faster than
exports. But that gap might have been bigger without the trade limits. The industry ministry says
Argentina has substituted $5 billion of imports a year since 2009 (1.4% of GDP). Local consumers
bear most of the cost, although some will fall on taxpayers now that the government is offering loans
to exporters at negative real interest rates. Marcelo Elizondo, head of the UCES business school in
Buenos Aires, says the interventions have affected the trade balance only slightly. But its a
deterrent, he says. Its a general message for everyone who wants to import that it will be
expensive and complicated, and youre better off producing here.
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Earlier in 2011, Argentina extended the list of products subject to non-automatic import licences
from 412 to 600 products, including such key imports as autoparts, cars, textiles, glass, chemicals,
paper and cardboard, electronics and household appliances. The new rules, among other things,
required individual approval for each licence to import a product that is also made in Argentina. The
government claimed the move was an anti-dumping measure intended to protect its producers from
artificially low-cost Asian imports; such a defensive measure is permissible under World Trade
Organisation (WTO) rules. However, the import barriers contravened the rules of the Southern
Common Market (MERCOSUR), a [customs] union between Brazil, Argentina, Uruguay and Paraguay.
It therefore created fresh tensions with Brazil and particularly Uruguay, which was badly affected by
the new measures. Brazil is Argentinas main trading partner, and about one-third of Argentinas
total trade is with its Mercosur partners.
In May, Brazil responded to Argentinas actions by imposing its own non-automatic licensing system
on a number of imported goods from Argentina, including vehicles and their components. In part this
was because of complaints by Brazilian exporters that Argentinian authorisation for non-automatic
licences frequently took much longer than the officially stipulated 60 days. Brazils action led to the
blockage of some 40,000 Argentina-made vehicles at the border with Brazil. Argentinian carmakers
send about 80% of their exports to Brazil, and the auto industry has been central to Argentinas
economic growth in recent years.
Emergency discussions took place in late May and early June between the industry ministers of both
countries, leading to a good will commitment to ease some of the trade measures (and promise to
allow entry of stalled goods within 60 days). However, the barriers in the automotive sector that are
at the core of the dispute remain in place. As a result, reports suggest that many thousands of cars
remain stuck in customs. Likewise, Brazilian manufacturers claim that their textile and footwear
exports are being obstructed at Argentinas border.
Besides the tensions that Argentinas protectionist measures have stoked within the MERCOSUR
trading bloc, they could complicate ongoing discussions with the EU over a trade agreement between
the two regions. There is also a risk that the measures might prompt retaliatory measures from
China, a growing trading partner. Argentina and China have only just resolved an existing dispute
over entry of Argentinian beef and agricultural products to the Asian market. The spat between
Argentina and Brazil in particular has also alarmed international investors who worry about the
potential for greater protectionism among emerging markets in general, especially those affected by
their own appreciating currencies and uneven global growth rates.
At the same time, Argentinas government might find that its policies designed to protect its trade
balance and it domestic productive sectors might have mixed results. With demand remaining
relatively firm and capacity constraints becoming increasingly problematic for several industries,
government pressure of this sort will help stoke some fixed investment growth. However, in the
short term local industries will find it difficult to replace products affected by the new imports
controls. Moreover, given an uncertain policy environment and national elections approaching in
October, major investments to increase domestic capacity are likely to be limited. This will
perpetuate the constraints that have contributed to domestic supply shortages and contributed to
inflationary pressures.
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Source: Global Trade Alert, based on own data base and government data (www.Infoleg.gov.ar)
* Measures implemented between November 2008 and May 2010.
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