The Global Economy - Essay Example

The Global Economy Table of Contents Question 3 Reference 7 APPENDIX 8 Figure Differential Measures to Support Trade 8 Figure 2: Trade Restriction Measures 8 Figure 4: Growth of Anti-Dumping Cases 9 Figure 5: Growth of Employment and Imports [1987–2007] 10 Question: 2 11 References 15 8.APPENDIX 17 Figure 6: FDI Inflows during 1980-2005 ($ billion) 17 Figure 7: Flow of Net Resource to Developing Nations by the Types of Flow during 1990-2005 ($ billion) 17 Figure 8: FDI Flows by Region during 2004-2005 ($ billion) 18 Figure 9: FDI in Africa from Selected Developing Economies from Asia during 1990-2004 ($ million) 19 Question: 1 Evaluation of the Relative Merits of Trade Protection and the Range of Import Protection Mechanisms Available to Implement a Trade Protection Policy A trade protection policy typically ensues from the global politico-economical dynamics and aims at protecting economies around the globe from the detrimental influences of monopolistic as well as oligopolistic trading mechanisms. However, owing to the fact that “global trade has expanded significantly since World War II for a number of reasons, including lower transportation and information costs, higher per capita income, and changes in government policies” (Krol, 2008, P.3), the significance of such a policy has been enhanced manifold. It may be observed that cutting edge improvements in the area of information technology (IT) have made most of the business processes easier as well as economical, apart from pushing geographical boundaries into near obsolescence. These improvements “have made it less costly for consumers to determine the characteristics of products produced abroad” (Krol, 2008, P.3), and have also provided the producers/manufacturers with the ease to gauge consumer preferences. As a result the manufacturers are in a better position to customize their products and/or services with an aim to tap the foreign markets. Hence it can easily be comprehended that the modern business scenario that prevails in the global arena is highly competitive and the players are keen on utilizing every possible avenue to maximize their gains. It may be observed that “income growth in developed countries and even in some less-developed countries has increased the demand for goods and services produced domestically as well as from abroad” (Krol, 2008, P.4), which implies that the volumes of international trade – and hence its inherent perils – have been rising incrementally, thereby calling for efficient trade protection policies. Another important reason for the implementation of such policies is that “trade restrictions have decreased significantly since World War II” (Krol, 2008, P.4). In the context of global economies it has been observed that the developed nations can afford to subsidise, the developing nations prefer barriers to protect their trading activities. Data from the World Bank reveal that a large number of trade restrictions have been brought into effect as “several countries, including 17 of the G-20, have implemented 47 measures whose effect is to restrict trade at the expense of other countries” (Gamberoni & Newfarmer, 2009, P.1). Within the eventful cauldron of international trade one of the phenomena that raise concern is that of dumping which, according to the World Trade Organisation (WTO), takes place “if a company exports a product at a price lower than the price it normally charges on its own home market” (World Trade Organization, n.d.). However, it has been observed that there is an increase in the number of anti-dumping cases. Attempts to undertake a comparative analysis of the advantages and disadvantages of trade protection have revealed that most of the free traders are against the concept of protection. This has been observed in the case of Ken Iverson (1984), CEO – Nucor Steel who had opined “we believe that tariff or nontariff trade barriers will delay modernisation of our steel industry, [and] will cost the consumer billions of dollars” (Krueger, 1996, P.30). With reference to the American steel industry, it has been observed that “the spotty protection (final high duties placed on some countries’ products and all provisional duties removed on others) meant that the integrated industry could count on very little significant comprehensive protection” (Krueger, 1996, P.29), which also means that the enduring effects of the said duties will largely depend on “whether countries not covered by final duties will step in to replace the displaced imports” (Krueger, 1996, P.29). However, it is worth mentioning that such an occurrence will minimise the effects of these duties on domestic pricing strategies and thus, it is clearly evident that trade protection plays a vital role in defining international relations as well. The recent recession has added to the intricacies underlying this area of global economics. During the process of outlining the post-crisis protectionist trends Supachai Panitchpakdi – Secretary General, UNCTAD had said “the instinct to protect one´s own economy -- the jobs and welfare of citizens -- appears logical, but we have learnt that it is not: we know that retaliatory protectionism leads to an aggregate loss of trade, investment and wealth” (United Nations Conference on Trade and Development-website-a, 2010). This should further bolster the anti-dumping initiatives and motivate economies – especially those of the developed nations – around the world to foster fair trade so that the developing countries that are characteristically poor to a great extent do not suffer. Trade protection policies should be formulated in such a way that on being implemented they allow developing nations to strengthen their foreign reserve through the export of indigenous products, instead of turning them into hapless dump yards of foreign merchandise. The speed at which anti-dumping initiatives are growing, it may be safely inferred that most of the world economies have realised the importance of fair trade practices and their role in building a sustainable global economy. Despite oppositions from certain quarters, research data has revealed that “trade integration and stronger rules have thus far muted protectionism” (Gamberoni & Newfarmer, 2009, P.4), thereby augmenting the preceding inference. Another significant effect that trade protection policy might have on national economies is the protection of the labour forces. It has been observed that enhanced imports reduce the employability of the indigenous population as the domestic production of most of the necessary commodities gets stalled. This interrelationship may be observed in the following diagram. Quite obviously, while formulating their trade protection policies countries should keep in mind the fact that they should not affect the base industries, especially the likes of steel, coal, textiles, etc. of importing nations in a way that devastates the local labour pools. It can be seen in the figure that in the year 2007 equilibrium had been struck between these two variables; however in the period prior to that there had been large differences between these economic factors. The global economy is subject to a myriad of changes on a regular basis. There are numerous factors that shape the course of actions taken by nations in harnessing sustainable economies, albeit the dynamics of these factors are far too wide and intricate, and hence beyond the scope of this essay. However, it has been observed that “successive GATT/WTO agreements have provided much greater legal stability of trading relations” (Gamberoni & Newfarmer, 2009, P.4-5), and these in turn have given rise to a different type of political economy wherein certain protectionist restrictions that were proposed have been rejected. This piece of information heralds a phase wherein the world economy will create a common platform on which nations – both developed as well as developing – will work together towards the development of sustainable trade policies that will foster fair trade practices. Reference 1. Krol, R. September 16, 2008. TRADE, PROTECTIONISM, AND THE U.S. ECONOMY: EXAMINING THE EVIDENCE. No. 28. Cato Institute. [Pdf]. Available at: http://www.cato.org/pubs/tbp/tbp-028.pdf [Accessed on May 7, 2010]. 2. Gamberoni, E. & Newfarmer, R. March 2, 2009. TRADE PROTECTION: INCIPIENT BUT WORRISOME TRENDS. Trade Notes. No. 37. International Trade Department. The World Bank. [Pdf]. Available at: http://siteresources.worldbank.org/NEWS/Resources/Trade_Note_37.pdf [Accessed on May 7, 2010]. 3. World Trade Organization. No Date. ANTI-DUMPING. [Online]. Available at: http://www.wto.org/english/tratop_e/adp_e/adp_e.htm [Accessed on May 7, 2010]. 4. Krueger, O. A. 1996. THE POLITICAL ECONOMY OF TRADE PROTECTION. University of Chicago Press. 5. United Nations Conference on Trade and Development-website-a. February 18, 2010. 18 FEB 10 – UNCTAD SECRETARY-GENERAL SPEAKS ON PROTECTIONISM. News. [Online]. Available at: http://www.unctad.org/Templates/Page.asp?intItemID=5316&lang=1 [Accessed on May 7, 2010]. APPENDIX Figure 1: Differential Measures to Support Trade (Source: Gamberoni & Newfarmer, 2009, P.2) Figure 2: Trade Restriction Measures (Source: Gamberoni & Newfarmer, 2009, P.1) Figure 3: Recent Trend of Anti-Dumping Cases (Source: Gamberoni & Newfarmer, 2009, P.4) Figure 4: Growth of Anti-Dumping Cases (Source: Gamberoni & Newfarmer, 2009, P.4) Figure 5: Growth of Employment and Imports [1987–2007] (Source: Krol, 2008, P.7) Question: 2 Analysis of the Changing Trends in Foreign Direct Investment (FDI) and their Economic Implications for both Host Countries and Countries of Origin According to an UNCTAD report the inflows of global FDI has increased substantially in the year 2005, largely due to transnational mergers and acquisitions (M&As). In response to this economic phenomenon, Supachai Panitchpakdi – Secretary General, UNCTAD had observed that the rise in inflows experienced by 126 economies out of a sample size of approximately 200 had made the growth broad-based and stated that “this reflects high economic growth and strong economic performance in many parts of the world” (United Nations Conference on Trade and Development-website-b, n.d.). It has been found that the current rise in FDI inflow have been focussed in particular sectors as well as countries/regions. Simultaneously, research data has shown that the global levels of FDI concentration have also gone up. Although “investments by collective investment funds (e.g. private equity and hedge funds) – a relatively new source of FDI – have been growing” (United Nations Conference on Trade and Development-website-c, 2006, P.3), the investments that are made by these firms generally have shorter time horizons as compared to those made by the usual transnational corporations. Owing to this fact the sustainability of the current growth in FDI remains suspect. The figure appended above shows the trends of FDI inflows in terms of the cumulative global economy as well as groups of economies during the period of 1980-2005. The changing nature of the curve represents the gradual transformation that the scope of FDI has undergone in 25 years. It may be noted that FDI inflows in the developing economies have been steadily bolstered since 1992. In this context, it is worth mentioning that a lot of foreign investments in the BRIC (Brazil, Russia, India and China) nations in the post-1990 period have actually helped in augmenting their economies and step-up their infrastructure and growth. UNCTAD data reveal that “inward FDI in developed countries had already started to increase in 2004, after three years of significant decline between 2000 and 2003” (United Nations Conference on Trade and Development-website-c, 2006, P.4), and this decline had been attributed to slow growth in the European Union (EU) and Japan. It’s not surprising that these characteristically strong and stable economies find it much easier to attract foreign investors and the argument is supported by the observation that “while developed countries other than those of the European Union (EU) contributed to the growth of inflows in 2004, the increase in 2005 was particularly marked in the EU (97%), most notably in Germany, the Netherlands and the United Kingdom, each of which experienced an increase of more than $40 billion (more than $100 billion in the case of the United Kingdom)” (United Nations Conference on Trade and Development-website-c, 2006, P.4). In the year 2005, the five leading host economies had been the United Kingdom (UK), the United States of America (USA), the Netherlands, France and Canada. Together these nations had contributed a staggering 75 per cent of the total FDI that was received by the developing nations. Without going into further details about the developed nations it will be worthwhile to analyse the developing nations in this context in order to find out how the changing patterns of FDI inflow in these countries have helped them over the years to elevate their economic status. It has been observed that the FDI inflow to these countries had increased by 57 per cent in 2004. In the following year there was an additional growth of 22 per cent that brought the net FDI to $ 334 billion. As is evident from Figure 7 above, FDI inflows stood out as the biggest constituent in the flow of net resource to developing nations. Another significant observation in this context is that “While all developing regions experienced an increase in FDI flows, South, East and South-East Asia they increased by 20%” (United Nations Conference on Trade and Development-website-c, 2006, P.4-5), thereby surpassing those in the Caribbean and Latin America, where FDI inflows had increased by a mere 3 per cent during 2005. UNCTAD has reported that “Brazil, China, Hong Kong (China), Mexico and Singapore – that have been the five largest host developing economies almost every year since 1996 – accounted for some 48% of total flows to developing countries” (United Nations Conference on Trade and Development-website-c, 2006, P.5). The above figure shows the distribution of FDI inflows to the developing nations that are generally clustered as ‘Africa’, ‘Asia and Oceania’ and ‘The Caribbean and Latin America’. It may be observed as well as appreciated that the FDI inflows over the years have actually helped the host economies to such an extent that they have gradually turned into potential investors, i.e. they have started boosting other developing economies through FDI outflows. This phenomenon is testified by the figure appended below. Especially during 2001 and 2002 the FDI outflows to Africa from India and China had shown an increase of 378 per cent and 23 per cent respectively. These figures clearly suggest that the rate of economic development in these two nations being significantly robust put them in a position to invest comfortably. Hence it may be inferred that FDIs are important components of the global economy that help developing nations build up their sustainability. Fortanier (2007) has propounded that “investment of a TNC in the host economy can stimulate competition and improve the allocation of resources, especially in those industries where high entry barriers are limiting the degree of domestic competition (e.g. utilities)” (Fortanier, 2007, P.44). However, the characteristics of a host country that determine whether or not a TNC will invest in it are its internal trade dynamics, its openness to foreign trade, human capital and technological sophistication. However, in the context of FDIs in the GCC nations, Faras and Ghali (2009) have argued that FDI inflows have no contribution towards the economic development of host nations; however “FDI is being attracted by economic growth and the favourable economic conditions in the host countries” (Faras & Ghali, 2009, P.135). It has been observed that the stupendous increase in FDI inflows in the context of developing nations during the 1990s took place mainly due to unilateral liberalisations in terms of their regulatory regimes as well as FDI policies. Bora (2001) have argued that “theoretical and empirical evidence provide strong support for the proposition that neutral policies designed to enhance the efficiency of investment are better suited to attracting foreign investment and enhancing its contribution to development than conventional methods” (Brooks, Fan & Sumulong, 2003, P.29), and hence upcoming WTO negotiations pertaining to these areas of economic concern should “identify the best ways to foster economic development while taking into account the specific conditions and policies prevailing in a developing country” (Brooks, Fan & Sumulong, 2003, P.29), in order to ensure optimal utilisation of FDIs for the manifestation of all round development in these nations. On a closing note it may be said that FDIs “may promote economic development by contributing to productivity growth and exports in their host countries” (Blomström & Kokko, 1997, P.32). References 1. Blomström, M. & Kokko, A. March 1997. THE IMPACT OF FOREIGN INVESTMENT ON HOST COUNTRIES: A REVIEW OF THE EMPIRICAL EVIDENCE. [Pdf]. Available at: http://www.fetp.edu.vn/shortcourse/0203/Trade03/Readings/The%20impact%20of%20foreign%20investment%20on%20host%20countries.pdf [Accessed on May 7, 2010]. 2. Brooks, H. D., Fan, X. E. & Sumulong, R. L. April 2003. FOREIGN DIRECT INVESTMENT IN DEVELOPING ASIA: TRENDS, EFFECTS, AND LIKELY ISSUES FOR THE FORTHCOMING WTO NEGOTIATIONS. ERD Working Paper Series No. 38. Economics and Research Department. Asian Development Bank. [Pdf]. Available at: http://www.adb.org/Documents/ERD/Working_Papers/wp038.pdf [Accessed on May 7, 2010]. 3. Faras, Y. R. & Ghali, H. K. 2009. FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: THE CASE OF THE GCC COUNTRIES. International Research Journal of Finance and Economics. Issue 29. EuroJournals Publishing, Inc. [Pdf]. Available at: http://www.eurojournals.com/irjfe_29_09.pdf [Accessed on May 7, 2010]. 4. Fortanier, F. August 2007. FOREIGN DIRECT INVESTMENT AND HOST COUNTRY ECONOMIC GROWTH: DOES THE INVESTOR’S COUNTRY OF ORIGIN PLAY A ROLE? Transnational Corporations. Vol. 16. No. 2. [Pdf]. Available at: http://www.unctad.org/en/docs/iteiit20072a2_en.pdf [Accessed on May 7, 2010]. 5. United Nations Conference on Trade and Development-website-b. No Date. TRENDS IN FOREIGN DIRECT INVESTMENT. PROGRAMMES. [Online]. Available at: http://www.unctad.org/templates/Page.asp?intItemID=3971&lang=1 [Accessed on May 7, 2010]. 6. United Nations Conference on Trade and Development-website-c. 2006. GLOBAL TRENDS: RISING FDI INFLOWS. FDI from Developing and Transition Economies: Implications for Development. Chapter I. World Investment Report 2006. [Pdf]. Available at: http://www.unctad.org/en/docs/wir2006ch1_en.pdf [Accessed on May 7, 2010]. 7. United Nations Conference on Trade and Development-website-d. 2006. REGIONAL TRENDS: FDI GROWS IN MOST REGIONS. FDI from Developing and Transition Economies: Implications for Development. Chapter II. World Investment Report 2006. [Pdf]. Available at: http://www.unctad.org/en/docs/wir2006ch2_en.pdf [Accessed on May 7, 2010]. 8. APPENDIX Figure 6: FDI Inflows during 1980-2005 ($ billion) (Source: United Nations Conference on Trade and Development-website-c, 2006, P.4) Figure 7: Flow of Net Resource to Developing Nations by the Types of Flow during 1990-2005 ($ billion) (Source: United Nations Conference on Trade and Development-website-c, 2006, P.5) Figure 8: FDI Flows by Region during 2004-2005 ($ billion) (Source: United Nations Conference on Trade and Development-website-d, 2006, P.39) Figure 9: FDI in Africa from Selected Developing Economies from Asia during 1990-2004 ($ million) (Source: United Nations Conference on Trade and Development-website-d, 2006, P.43) Read More