CONTEMPORARY WORLD PRELIMS

"For I, the LORD your God, hold your right hand; it is I who say to you, 'Fear not, I am the one who helps you.'" Isaiah 41:13

1. Preferential trading area (PTA)

2. Free trade area

3. Customs union

4. Common market

5. Economic union

6. Eonomic and monetary union

7. Complete economic integration

I. SEVEN STAGES OF ECONOMIC INTEGRATION

Preferential Trade Areas (PTAs)

- happens when there’s an agreement on reducing or eliminating tariff (tax or duty to be paid on a particular class of imports or exports) barriers on selected goods imported from other members of countries within the geographical region or areas. 

1. bilateral (between two countries)

2. multi-lateral (several countries)

In Preferential Trade Areas (PTAs), agreement can either be:

bilateral

between two countries

multi-lateral

several countries

 Free Trade Areas (FTAs)

- are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. 

North Atlantic Free Trade Agreement (NAFTA)

is an example of such a free trade area, and includes the USA, Canada, and Mexico.

 Free Trade Agreements (FTAs)

• Preferential Trade Agreements (PTAs)

• eliminate import tariffs as well as import quotas between signatory countries

Customs Union

Removal of tariff barriers between members, together with the acceptance of a common or unified external tariff against non-members is involved in the __________.

Customs Union

Single payment or duty is made by countries exporting to ______________.

Common Market (CM)

One major step towards economic integration is ____________. All barriers to the mobility of people, capital and other resources within the area in question, as well as eliminating non- tariff barriers to trade, such as the regulatory treatment of product standards are removed by ____________ aside from containing the provisions of a customs union.

Economic Union

The trading bloc that has both a common market between members, and a common trade policy towards non-members, although members are free to pursue independent macro-economic policies is termed _______________.

Economic Union

It requires coordinated monetary and fiscal policies as well as labor market, regional development, transportation and industrial policies.

European Union (EU)

The best example of Economic union is the _____________.

Economic and Monetary Union (EMU)

As a key stage towards complete integration, the _________________ involves a single economic market, a common trade policy, a single currency and a common monetary policy. - It represents a major step in the integration of EU economies. 

Complete Economic Integration

• is the final stage of economic integration in which member states completely forego independence of both monetary and fiscal policies. States that participate in complete economic integration have no control of economic policy including economic trade rules. 

Neoliberalism

is the intensification of the influence and dominance of capital. It is the elevation of capitalism as a mode of production into an ethic, a set of political imperatives, and a cultural logic. 

Economic sovereignty

on the other hand is the power or national governments to make decisions independently of those made by other governments.

1. International Legal Sovereignty

2. Westphalian Sovereignty

3. Interdependence Sovereignty

4. Domestic Sovereignty

Four different concepts of sovereignty

International Legal Sovereignty

It refers to the acceptance of a given state as a member of the international community.

Westphalian Sovereignty

It is based on the principle that one sovereign state should not interfere in the domestic arrangements of another.

Interdependence Sovereignty

It is the capacity and willingness to control flows of people, goods and capital into and out of the country.

Domestic Sovereignty

It is the capacity of a state to choose and implement policies within the territory

The Prehistoric Period (10000 BCE-3500 BCE)

• In this earliest phase of globalization, contacts among hunters and gatherers – who were spread around the world – were geographically limited. In this period due to absence of advanced forms of technology, globalization was severely limited.

The Pre-modern Period (3500 BCE- 1500 CE)

In this period the invention of writing and the wheel were great social and technological boosts that moved globalization to a new level. The invention of wheel in addition to roads made the transportation of people and goods more efficient. On the other hand writing facilitated the spread of ideas and inventions.

The Early Modern Period (1500-1750)

It is the period between the Enlightenment and the Renaissance. In this period, European Enlightenment project tried to achieve a universal form of morality and law. This with the emergence of European metropolitan centers and unlimited material accumulation which led to the capitalist world system helped to strengthen globalization.

The Modern Period (1750-1970)

• Innovations in transportation and communication technology, population explosion, and increase in migration led to more cultural exchanges and transformation in traditional social patterns. Process of industrialization also accelerated.

The Contemporary Period (from 1970 to present)

• The creation, expansion, and acceleration of worldwide interdependencies occurred in a dramatic way and it was a kind of leap in the history of globalization.

1. Tariffs

2. Trade barriers

3. Safety

Focuses of Trade Policy in International Trade

Tariffs

- These are taxes or duties paid for a particular class of imports or exports. Imposing taxes on imported and exported goods is a right of every country. Heavy tariffs on imported goods are levied by some nations for the protection of their local industries. The prices of imported goods in local markets are inflated due to high imported taxes to ensure demand of local products.

Trade barriers

- These are measures that governments or public authorities introduce to make imported goods or services less competitive than locally produced goods and services

Safety

- This ensures that imported products in the country are of high quality. Inspection regulations laid down by public officials ensure the safety and quality standards of imported products.

historical globalization

An approach to the study of globalization that locates the phenomenon itself in early patterns of trade and exchange is known as ______________.

multinational corporations (MNCs)

Combination of invention and social organization resulting to increase in worldwide capital and wealth of nation is allowed by modern nation state system that emerged in the period prior to the end of World War II. American Corporations led the economic recovery and expansion after the World War II destruction. This period up to the reentry of Japanese and European corporation to the global scene is viewed as ____________________.

Market integration

- refers to how easily two or more markets can trade with each other 

Market integration

- It occurs when prices among different locations or related goods follow similar patterns over a long period of time.

Market integration

- exists when there are exerted effects that prompt similar changes or shifts in other markets that focus on related goods on events occurring within two or more markets.

1. Stock Market Integration
2. Financial Market Integration

Types of Related Markets where Market Integration Occurs

Stock Market Integration

- This is a condition in which stock markets in different countries trend together and depict same expected risk adjusted returns.

- Two markets are perfectly integrated if investors can pass from one market to another without paying any extra costs and if there are possibilities of arbitration which ensures the equivalence of stock prices on both markets.

Financial Market Integration

- It is an open market economy between countries facilitated by a common currency and the elimination of technical, regulatory and tax differences to encourage free flow of capital and investment across borders 

Financial Market Integration

- It occurs when lending rates in several different markets begin to move in tandem with one another.

Global Corporation

A business that operates in two or more countries.

Global Corporation

• Also goes by the name “multinational company”

• Expanding revenue opportunities and diversifying business risk are the purposes of becoming this.

Historical Periods of Global Corporation

An approach to the study of globalization that locates the phenomenon itself in early patterns of trade and exchange

World War II

Combination of invention and social organization resulting to increase in worldwide capital and wealth of nation is allowed by modern nation state system that emerged in the period prior to the end of ___________________.

American Corporations

led the economic recovery and expansion after the World War II destruction

end of World War II to the present

From the _____________is considered the period of transformation of global corporations.

The Finance Function in a Global Corporation

As corporations go global, capital markets open up within them, giving companies a powerful mechanism for arbitrage across national financial markets

1. Financing

2. Risk Management

3. Capital Budgeting

3 Functions can be created by CFOs through exploiting their internal capital markets

Financing

A group’s tax bill can be reduced by the CFO like borrowing in countries with high tax rates and lending to operations in countries with lower rates.

Risk Management

Global firms can offset natural currency exposures through worldwide operations instead of managing currency exposures through financial markets.

Capital Budgeting

Getting smarter on valuing investment opportunities CFOs can add value.

Foreign Direct Investment (FDI)

• Corporate origin

• major driver of extended global corporate development

• an investment made by a company or individual in one country in business interests in another country

BRICS Economies

• Brazil, Russia, India, China, and South Africa

• BRIC, without South Africa, was originally coined in 2003 by Goldman Sachs, which speculates that by 2050 these four economies will be the most dominant.

Goldman Sachs

• BRIC, without South Africa, was originally coined in 2003 by _____________, which speculates that by 2050 these four economies will be the most dominant.

General Agreement on Trade in Services (GATS)

• the first multilateral agreement covering trade in services which was negotiated during the last round of multilateral trade negotiations, called the Uruguay Round, and came into force in 1995.

Uruguay Round

the last round of multilateral trade negotiations

General Agreement on Trade in Services (GATS)

• provides a framework of rules governing services trade, establishes a mechanism for countries to make commitments to liberalize trade in services and provides a mechanism for resolving disputes between countries 

General Agreement on Tariffs and Trade (GATT)

• Deals with trade in goods

• Similar principle with the GATS

two primary objectives of GATTS

• ensure that all signatories are treated equitably when accessing foreign markets; 

• to promote progressive liberalization of trade and services

Trade Policies

• refer to the regulations and agreement of foreign countries

• defines standards, goals, rules, and regulations that pertain to trade relation between countries

1. Tariffs

2. Duties

3. Subsidies

4. Embargoes

5. Quotas

Most Common Trade Barriers

1. National Trade Policy

2. Bilateral Trade Policy

3. International Trade Policy

Types of Trade Policies

National Trade Policy

safeguards the best interest of its trade and citizen

Bilateral Trade Policy

• To regulate the trade and business relations between two nations, this policy is formed 

• Under the trade agreement the national trade policies of both the nations and their negotiations are considered while bilateral trade policy is being formulated

International Trade Policy

This defines the international trade policy under their charter like the International economic organizations, such as Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO) and International Monetary Fund (IMF).The best interests of both developed and developing nations are upheld by the policies

Trade Policy and International Economy

• most developed countries where open market economy prevails, the international economic organizations support free trade policies 

• In the case of developing nations, partially-shielded trade practices are preferred to protect their local trade industries.

• sound trade policies for market changes 

• establishment of free and fair trade practices 

• expansion of possibilities for booming international trade 

The following are dependent on globalization:

World Trade Organization (WTO)

• deals with the global rules of trade between nations with the main function of ensuring that trade flows smoothly, predictably and freely

World Trade Organization (WTO)

• It is the only global international organization dealing with the rules of trade between nations with WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments at its heart

World Trade Organization (WTO)

is viewed as the means by which industrialized countries can gain access to the markets of developing countries

ECONOMIC DIMENSIONS

One of the six dimensions of globalization. (Economic, Political, Technological, Cultural, Religious, and Ecological)

ECONOMIC DIMENSIONS

refers to the extensive development of economic relations across the globe as a result of technology and the enormous flow of capital that has stimulated trade in both sources and goods

1. Property rights

2. Regulatory institutions

3. Institutions for macro-economics

4. Stabilization

5. Institutions for social influence

6. Institutions for conflict management

Major Sources of Economic Growth across Countries

International monetary system (IMS)

refers to a system that forms rules and standards for facilitating international trade among the nations. It helps in reallocating the capital and investment from one nation to another.

International monetary system (IMS)

It is the global network of the government and financial institutions that determine the exchange rate of different currencies for international trade.

International monetary system (IMS)

It is a governing body that sets rules and regulations by which different nations exchange currencies with each other.

a. 1870 to 1914

b. After World War I

c. 1931

d. 1944

e. 1971

f. 1973

Evolution of the International Monetary System

1870 to 1914

• with the help of gold and silver, trade was carried without any institutional support. The monetary system during that time was decentralized while market based and money played a minor role in international trade in contrast to gold. 

• Gold was believed to guarantee a non-inflationary, stable economic environment, a means for accelerating international trade and the gold standard functioned as a fixed exchange rate regime, with gold as the only international reserve. 

Gold Standard

•  is a system of backing a country’s currency with its gold reserves. Such currencies are freely convertible into gold at a fixed price, and the country settles all its international trade transactions in gold

After World War I

use of gold declined due to increased expenditure and inflation which were caused by war.

1931

major economic powers were on gold standards but could not maintain it and failed because of the Great Depression.

1944

• 730 representatives of 44 nations met at Bretton Woods, New Hampshire, United States to create a new international monetary system called the Bretton Woods system, the aim of which is to create a stabilized international currency system and ensure monetary stability for all the nations.

• Since the United States held most of the world’s gold, all the nations would determine the values of their currencies in terms of dollar. The central banks of nations were given the task of maintaining fixed exchange rates with respect to dollar for each currency.

Bretton Woods system

• 730 representatives of 44 nations met at Bretton Woods, New Hampshire, United States to create a new international monetary system called the ___________, the aim of which is to create a stabilized international currency system and ensure monetary stability for all the nations.

1971

The Bretton Woods system ended as the trade deficit and growing inflation undermined the value of dollar in the whole world.

1973

the floating exchange rate system, also known as flexible exchange rate system was developed that was market based

 Economic Interdependence

• The rising momentum of global free-market capitalism in the final decades of the 20th century, the accompanying rise in transnational enterprises, and the resulting disparities between easy flows of money and commodities across international borders and the legal barriers and logistical hurdles that keep most workers tied to their home communities are associated with globalization

Golden Straitjacket

• Thomas Friedman 

• The belief that globalization imposes a forced choice upon states either to conform to free market principles or run the risk of being left behind is termed into a phrase

Thomas Friedman

a neoliberalism journalist and advocate, to illustrate the forcing of states into policies that suit the preferences of investment houses and corporate executives (Electronic Herd) who swiftly move money and resources into countries favored as adaptable to the demands of international business and withdraw even more rapidly from countries deemed uncompetitive

• the economy grows; and

• politics shrinks

Two things that will happen if a country is in Golden Straitjacket:

Westphalian Sovereignty

It is based on the principle that one sovereign state should not interfere in the domestic arrangements of another.

Global economic trade

is the cross-border exchange of goods, services, and capital. It allows nations to specialize based on comparative advantage, lower consumer costs, and access wider markets

Global economic trends

• are influenced by economic sovereignty of an individual member.

• The increase of the number of international organizations and the expansion of their functions have undeniably restricted an individual country's sovereignty to certain extent.

• The 60,000-plus transnational corporations, which developed rapidly in the latter half of the last century, are now sharing or "encroaching upon" individual country's "sovereignty" in the economic domain.

• Many underdeveloped nations that resorted to foreign assistance and interventions resulted to the deprivation of government as regard control of their economy due to the disorderly domestic economic establishments. Due to this, some scholars predicted the loss of their economic sovereignty under this form of neo- colonialism. 

• More importantly, some of the world's leading economic entities, such as the United States, the European Union and Japan, by taking advantage of their predominant economic status, are affecting or infringing upon other countries' economic sovereignty. 

• Under these circumstances, an increasing number of scholars have concluded that the economic dominion of individual nations has come to an end. While countries inevitably cede some control over their economic sovereignty to external actors, it is the “structural power” of sovereign states which still dictates the terms and tenets of globalization.

1. the World Bank (WB)

2. the International Momentary Fund (IMF) 

3. the World Trade Organization (WTO)

world's three leading financial institutions