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what is heckscher ohlin theory
A state has a comparative advantage in producing goods that involve intensive use of its most abundant factor of production. Relative abundance and scarcity of capital and labor contribute to comparative advantage.
stolper samuelson theory
winners and losers of free trade; trade liberalization benefits abundantly endowed factors of production and hurts poorly endowed factors.
all state specialize in the goods they produce best and trade with each other. Adam Smith purported that gains from freetrade were a result of countries using absolute advantage.
trade is beneficial even in the absence of absolute advantage.Sates should focus on the product they can produce more efficiently than other states.
Strategic Trade Theory:
States can create comparative advantage, referred to as competitive advantage,through industrial targeting. Interventionist policies can assist a state’s strength in trade.
Dumping occurs when a firm sells products in an export market at a lower pricethan it charges in its home market or below the cost of production. A state can impose antidumping duties if foreign goods are dumped and it causes or threatens material injury to its domestic producers.The WTO Agreement does not regulate the actions of companies engaged in "dumping". Its focus is on how governments can or cannot react to dumping
non discrimination external
external (MFN):Most-favoured-nation (MFN): treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members
non discrimination internal
Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.
Countervailing duties are a response by foreign governments’ use of trade-distorting subsidies that produce or threaten material injury to domestic producers.
Safeguards are actions that permit GATT/WTO members to temporarily halt or reverse free trade measures. An Example is when a state temporarily raises a duty above the maximum tariff binding to limit imports that may harm domestic producers. Safeguards were important parts of post-war embedded liberalism that allow states to sign international agreements without jeopardizing domestic stability.
Nontariff barriers are a wide range of measures that restrict imports, assist domestic production, and promote exports. They include export subsidies, import licenses, and import regulations.
The Washington Consensus refers to the belief that democratic government, free markets, a dominant private sector, and free trade will bring growth and prosperity. The governments of President Ronald Reagan and Prime Minister Margaret Thatcher in the 1980s brought together the Washington Consensus.
How did each of the following factors play a role in the 1980s foreign debt crisis—the lenders, the borrowers, and the unexpected changes in global economy?
- UNEXPECTED CHANGES IN THE GLOBAL ECON: Late 1960s: surpluses of wheat and grain which lead to decline in int’l food prices à production cutback in grain-exporting countries Early 1970s: severe food shortage in USSRà grain prices increased US and market increased interest rate with LCD
- LENDERS: large amount of petrodollars were produce to compete lend funds charge extremely low interest rates + less concerned about the creditworthiness of borrowers + Northern govt. encouraged lending to the Southà overlending.
- Borrowers: •imprudent, avoid the conditionality requirements of IMF loans make poor investment, increase public expenditures, import luxury consumer goods, pay off corrupt officials Latin Am (protectionist ISI) vs. E Asia (export-led growth); overvalued exchange ratesà capital flight in Latin Am.
- South’s dependence on the North:
- the long-term structural nature of capitalism; export and import structures of many LDCs foreign aid= hard loans = mechanism for transferring surpluses from the periphery to the core & perpetuate LDC dependency.
What are the causes of Asian financial crisis? Discuss the “failure of Asian governance”
1.“lack of transparency” in company and bank accounts; agreements are made behind the scenes, unmonitored by independent parties and unenforced by courts. Wade: No! 2.“weak prudential regulation” by the monetary authorities; banks + big firms + gov. have close and long-term relations; allow banks to lend to heavily indebted companies; Wade: No! 3.“poor” exchange rate management; a fixed exchange rate; eg. Thailand: 25 baht to $1 4.“moral hazard”: the Asian gov. would bail out the banks and firms investors are lending to.
What are the causes of Asian financial crisis? Discuss the “failure of international financial markets”
Several big facts: currency/banking crises been more frequent since 1980 p. 94; crises occurred in response to “success” (not b/c flaws in the basic structures of Asian capitalism); regional crisis; unanticipated. General story of fin. fragility: Upswing (large k inflows)à a domestic credit boomà a surge in consumer goods imports (current account deficit); inflation in consumer goods prices; a surge in investment in asset markets (asset price inflation); a surge in industrial investment (an industrial capacity bubble); high corporate debt-to-equity ratiosà quite small shocks can precipitate fin crisis. Financial fragility: fragile corporate finances (high share of debt finance); fragile banks (lending against bubble-driven asset values); fragile b-o-p (excessive short-term debt >100% of foreign exchange reserves)
According to Robert Wade, what are the major causes of the 2008 financial crisis?
- Excessive debt leverage/imprudent lending The shift from net margin banking to “originate and distribute” banking A fragmented and light-touch US regulatory regime U.S. macroeconomic policy, the wave of liquidity launched by US monetary authorities.
- United States: Crash in the late 1990s and early 2000sàthe central bank kept short-term interest rates very lowàa credit-fueled boom The debt of households, companies, and gov reached record levels relative to GDP. The boom in the housing market. Inflow of capital from China and recycle of petrodollarsàkeep US interest rate low + turbo-charge the US housing market + lure the banks into excessive risk-taking.
What are the key principles of the global trade regime?
- trade liberalization: lower tariffs and regulate nontariff barriers through rounds of multilateral trade negotiations;
- Nondiscrimination: external (MFN):Most-favoured-nation (MFN): treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members internal (national treatment of foreign products): Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.
- Reciprocity: provide equal benefits (trade concession) in return;
- safeguards and contingent trade measures: safeguards agreement; anti-dumping duties; countervailing duties;
- Development: give LDCs special treatment and diverged from the nondiscrimination and reciprocity principles.
China started to seek membership in GATT in 1986, and it was not admitted to the WTO until 2001. Why did it take such a long time for China to be admitted to WTO?
China was managed by a communist government up until 1970 and was closed from other economies. In 1980 they began to open their economy. United States did not want them to join so they set restriction upon China. condition were China would engage in global competition according to rules
How do liberals, realists, and historical materialists explain the rise of regionalism?
- L: a stepping-stone to multilateral free trade; contribute to freer trade; “demonstration effect” in three new areas;
- R: emphasize NAFTA’s asymmetries in power and levels of econ development; access to US market + side payments; NAFTA has a detrimental effect on national sovereignty.
- HM: NAFTA shift power in favor of the capitalist class and against labor groups.
Why was Mercosur formed?
Regional integration would strengthen their position vis-à-vis the EU and the US. To gain greater pol and econ independence from the US.
What are the major obstacles facing Mercosur?
Mercosur members highly vulnerable to int’l development; highest debts during 1980s; A high level of asymmetry; Brazil accounts for 70% of Mercosur’s GDP; lack of a formal dispute-settlement process; Disparity in macroeconomic and monetary policies b/t Brazil and Argentina. 1991 Argentina pegged its peso to $; overvaluation of the Brazilian real until 1999; -A’s trade surplus with B; 1999 B devalued its currency -A’s trade balance with B deteriorated; 2001 A default on its loans; 2002 devalued its currency.
What is the underlying rationale of ISI (import substitution industrialization) strategy?
Rationale: a long-term decline in the prices of primary productsà growing N-S income gap; LDCs need to focus on industrialization; catch up the North through protectionism and state-promoted industrialization. Effect: LDCs benefited from initial industrial growth;
And why did ISI strategy fail to significantly improve the long-term economic performance of many LDCs (in other words, what are the problems with ISI)?
- ISI promoted industrialization at the cost of agriculture - poverty in the countryside; global food and energy crisis of the 1970s;
- ISI increased the South’s dependence on the North; MNCs;
- inability to promote industrial competitiveness; 1st stage (nondurable consumer imports, labor intensive)- 2nd stage of ISI (consumer durables) requires capital, economies of scale and higher levels of tech.
- concentrated development gains in a small segment of the population; exacerbated unemployment and income inequalities within LDCs.