lecture 4 ib 404 institutional framework for international business

LECTURE 4Institutions and Regulatory Framework

Institutional Framework Lecture 4 2

Role of World Trade Organization

Trade allows a division of labour between countries. It allows resources to be used more efficiently and effectively for production. But the WTO’s trading system offers more than that. It helps to increase productivity and to cut costs even more because of important principles enshrined in the system, designed to make life simpler and clearer.

Non-discrimination is one of the key principles of the WTO’s trading system.

Transparency (clear information about policies, rules and regulations) Increased certainty about trading conditions (commitments to lower

trade barriers and to increase other countries’ access to one’s markets are legally binding)

Simplification and standardization of customs procedure, removal of red tape, centralized databases of information, and other measures to simplify trade, known as “trade facilitation”.

Together, they make trading simpler, cutting companies’ costs. That, in turn, means more jobs and better goods and services for consumers.

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Trade Facilitation

Trade facilitation has become an important subject in the Doha Round negotiations. Red tape and other obstacles are like a tax on trade.

The saving from streamlining procedures could be 2% –15% of the value of the goods traded, according to estimates by the Organization for Economic Cooperation and Development (OECD).

The Peterson Institute for International Economics estimates that it could add $117.8 billion to the world economy (global GDP).

The World Bank says that for every dollar of assistance provided to support trade facilitation reform in developing countries, there is a return of up to $70 in economic benefits.

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Trade Facilitation

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Essentials for International Trade

International trade is defined as a contract where two parties (These parties may operate their business in different countries trading in goods and services) enters into the transaction of buying and selling of goods and services irrespective of national boundaries. This involves the import and export trade where one country either sells goods or service to other country or buys goods and service from other country. Followings are the five essentials for such international trades – The contract of sale of goods. The contract of carriage of goods. The contract of insurance for the goods. The compliance with exports and imports authorities in terms of

formalities and documentation required. The mechanism for payment set up by the buyer.

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Responsibilities of WTO

The World Trade Organization is the organization which was set up out of the Uruguay Round of General Agreement on Tariffs and Trade negotiations in 1995 and which became the successor to and replacement of the General Agreement on Tariffs and Trade [GATT] and it inter alia regulates trade and tariffs worldwide and settles trade disputes amongst members.

The role of WTO in international trade is as stipulated in the Agreement establishing it and includes: Facilitating the implementation, administration and operation and

furthering the objectives of the agreement establishing it and other Multilateral Trade Agreements and providing the framework for the implementation, administration and operation of the Plurality Trade Agreements. (Article III of the Agreement establishing WTO)

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Providing the forum for negotiations among its Members concerning their multilateral trade relations in matters dealt with under the agreements in the Annexes to the Agreement setting it up and for the results of such negotiations as may be decided by the Ministerial Conference. (Article III of the Agreement establishing WTO)

Administering the Understanding on Rules and Procedures Governing the Settlement of Disputes or the Dispute Settlement Understanding which is Annex 2 to the agreement setting it up. (Article III of the Agreement establishing WTO)

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Administering the Trade Policy Review Mechanism in Annex 3 of the agreement setting it up. (Article III of the Agreement establishing WTO)

Cooperating as appropriate with the International Monetary Fund and the International Bank for Reconstruction and Development [a.k.a. the World Bank] with a view to achieving greater coherence in global economic policy making. (Article III of the Agreement establishing WTO)

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WTO Charter

The WTO has a charter for a Multilateral Trade Organization [MTO] aimed at providing an institutional framework within which the results of the Uruguay Round could operate.

Within the MTO was established a new dispute settlement mechanism and a Trade Policy Review Mechanism [TPRM].

There was a framework which, provided annexes of the more important areas such as the General Agreement on Trade in Services [GATS] and The Agreement on Trade Related Intellectual Property [TRIPS] which were a part of the Text.

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Ultimate Goal of WTO

The ultimate goal of the multilateral institution of GATT and WTO is the provision of free global trade and economic relationship among members and that GATT is designed to achieve free trade and to improve market access by-1. Having all protection take the form of tariffs;2. Holding multilateral negotiation at which those tariffs

are lowered and bound;3. Ensuring that these agreements are implemented by

requiring that any increase in a bound tariff must be compensated by the reduction of another;

4. Providing a mechanism by which signatories can settle disputes.

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IMF

The International Monetary Fund (IMF) is an intergovernmental organization that oversees the global financial system by monitoring the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments.

Its objectives are to stabilize international exchange rates and facilitate development through the encouragement of liberalizing economic policies in other countries as a condition of loans, debt relief, and aid.

It also offers loans with varying levels of conditionality, mainly to poorer countries. Its headquarters is in Washington, D.C.

IMF

The International Monetary Fund was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement, with a goal to stabilize exchange rates and assist the reconstruction of the world’s international payment system.

Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances.

The IMF was important when it was first created because it helped the world stabilize the economic system. The IMF works to improve the economies of its member countries.

The IMF describes itself as “an organization of 187 countries (as of July 2010), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.”

The IMF’s responsibilities The IMF's primary purpose is to ensure the

stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with one other.

This system is essential for promoting sustainable economic growth, increasing living standards, and reducing poverty.

Following the recent global crisis, the Fund has been clarifying and updating its mandate to cover the full range of macroeconomic and financial sector issues that bear on global stability.

Surveillance

To maintain stability and prevent crises in the international monetary system, the IMF reviews country policies, as well as national, regional, and global economic and financial developments through a formal system known as surveillance.

Under the surveillance framework, the IMF provides advice to its 187 member countries, encouraging policies that foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards.

It provides regular assessment of global prospects in its World Economic Outlook, financial markets in its Global Financial Stability Report, and public finance developments in its Fiscal Monitor, and publishes a series of regional economic outlooks. The Fund’s Executive Board has been considering a range of options to enhance multilateral, financial, and bilateral surveillance, and better integrate the three.

Financial assistance

IMF financing provides member countries the breathing room they need to correct balance of payments problems.

A policy program supported by IMF financing is designed by the national authorities in close cooperation with the IMF, and continued financial support is conditioned on effective implementation of this program.

In an early response to the recent global economic crisis, the IMF strengthened its lending capacity and approved a major overhaul of the mechanisms for providing financial support in April 2009, with further reforms adopted in August 2010.

SDRs

The IMF issues an international reserve asset known as Special Drawing Rights (SDRs) that can supplement the official reserves of member countries. Two allocations in August and September 2009 increased the outstanding stock of SDRs almost ten-fold to total about SDR 204 billion (US$308 billion). Members can also voluntarily exchange SDRs for currencies among themselves. In a recent paper, IMF staff explore options to enhance the role of the SDR to promote international monetary stability.

Special Drawing Rights (SDRs) The SDR is an international reserve asset,

created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204 billion (equivalent to about $324.1 billion, converted using the rate of March 31, 2011).

Technical assistance

The IMF offers technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and statistics.

Members' quotas and voting power, and board of governors (Note: Voting shares before the changes made on October, 2010)

IMF member countryQuota: millions

of SDRsQuota:

percentage of Governor Alternative Governor

Votes: number

Votes: percentage of total

United States 37,149.30 17.09Timothy Geithner Ben Bernanke 371,743 16.74

Japan 13,312.80 6.12 Yoshihiko Noda Masaaki Shirakawa 133,378 6.01 Germany 13,008.20 5.98 Jens Weidmann Wolfgang Schäuble 130,332 5.87

France 10,738.50 4.94 Christine Lagarde Christian Noyer 107,635 4.85 United Kingdom 10,738.50 4.94 George Osborne Sir Mervyn King 107,635 4.85 China 8,090.10 4.42 Zhou Xiaochuan Yi Gang 81,151 3.65 Italy 7,055.50 3.24 Giulio Tremonti Mario Draghi 70,805 3.19

Saudi Arabia 6,985.50 3.21Ibrahim A. Al-Assaf Hamad Al-Sayari 70,105 3.16

Canada 6,369.20 2.93 Jim Flaherty Mark Carney 63,942 2.88 Russia 5,945.40 2.73 Aleksei Kudrin Sergey Ignatyev 59,704 2.69

India 5,898.20 2.44Pranab Mukherjee Duvvuri Subbarao 58,832 2.34

Netherlands 5,162.40 2.37 Nout Wellink L.B.J. van Geest 51,874 2.34 Belgium 4,605.20 2.12 Guy Quaden Jean-Pierre Arnoldi 46,302 2.08

Switzerland 3,458.50 1.59 Jean-Pierre RothEveline Widmer-Schlumpf 34,835 1.57

Australia 3,236.40 1.49 Wayne Swan Martin Parkinson 32,614 1.47 Mexico 3,152.80 1.45 Agustín Carstens Guillermo Ortiz 31,778 1.43

Spain 3,048.90 1.4 Elena SalgadoMiguel Fernández Ordóñez 30,739 1.38

Brazil 3,036.10 1.4 Guido Mantega Alexandre Tombini 30,611 1.38 South Korea 2,927.30 1.35 Okyu Kwon Seong Tae Lee 29,523 1.33

Venezuela 2,659.10 1.22Gastón Parra Luzardo

Rodrigo Cabeza Morales 26,841 1.21

remaining 166 countries 62,593.80 28.79 respective respective 667,438 30.05

Resources The IMF’s resources are provided by its member

countries, primarily through payment of quotas, which broadly reflect each country’s economic size. At the April 2009 G-20 Summit, world leaders pledged to support a tripling of the IMF's lending resources from about US$250 billion to US$750 billion. To deliver on this pledge, the current and new participants in the New Arrangements to Borrow (NAB) agreed to expand the NAB to about US$550 billion, which was approved by the Executive Board of the IMF on April 12, 2010. When concluding the 14th General Review of Quotas in December 2010, Governors agreed to double the IMF’s quota resources to approximately US$745 billion and a major realignment of quota shares among members. When the quota increase becomes effective, there will be a corresponding rollback in NAB resources.


Resources

Historically, the annual expenses of running the Fund have been met mainly by interest receipts on outstanding loans, but the membership recently agreed to adopt a new income model based on a range of revenue sources better suited to the diverse activities of the Fund.

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Governance and organization The IMF is accountable to the governments

of its member countries. At the top of its organizational structure is the Board of Governors, which consists of one Governor and one Alternate Governor from each member country. The Board of Governors meets once each year at the IMF-World Bank Annual Meetings. Twenty-four of the Governors sit on the International Monetary and Finance Committee (IMFC) and meet at least twice each year.

Governance and organization The day-to-day work of the IMF is conducted by its

24-member Executive Board, which represents the entire membership; this work is guided by the IMFC and supported by the IMF’s professional staff. In reforms approved by the Governors in December 2010, the Articles of Agreement will be amended so that the Executive Board will consist solely of elected Directors, doing away with the practice of some member countries appointing their representatives. The Managing Director is Head of IMF staff and Chairman of the Executive Board, and is assisted by three Deputy Managing Directors.

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The Role of the World Bank The official name for the World Bank is the

International Bank for Reconstruction and Development (IBRD).

The bank's initial mission was to help finance the building of Europe's economy by providing low-interest loans.

As it turned out, the World Bank was overshadowed in this role by the Marshall Plan, under which the United States lent money directly to European nations to help them rebuild. So the bank turned its attention to "development" and began lending money to the nations of the Third World. In the 1950s, the bank concentrated on public-sector projects.

lecture 4 ib 404 institutional framework for international business

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