Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade - II - Question Paper

Encouraging development and economic reform

The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. And the agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries.

Over 3 quarters of WTO members are developing countries and countries in transition to market economies. During the 7 and a half years of the Uruguay Round, over 60 of these countries implemented trade liberalization programmes autonomously. At the identical time, developing countries and transition economies were much more active and influential in the Uruguay Round negotiations than in any previous round, and they are even more so in the current Doha Development Agenda.

< TOP >

9. WTO members negotiate on several trade-related problems simultaneously in a certain period of time. The agreements, which constitute the WTO rules, are typically reached by consensus among all members. Such a period of negotiations forms a WTO trade round. A new trade round is often launched when WTO members realize limits of existing rules in protecting their rights and facilitating trades. These limits may become apparent when new issues stem from the existing trade or when international trade develops into new areas.

I. Advantages:

· The size of the package can mean more benefits because participants can seek and secure advantages across a wide range of problems.

· In a package, the ability to trade-off various problems can make agreement easier to reach because somewhere in the package there is something for everyone.

· Developing countries and other less powerful participants have a greater chance of influencing the multilateral system in a trade round than in bilateral relationships with major trading nations.

II. Disadvantages:

The simultaneous negotiation in various areas necessarily includes problems that certain negotiator countries are reluctant to address. These problems serve truly as conditions for the process of other problems beneficial to those countries. This situation can put the developing countries at a disadvantage. The developing ones are anxious to improve their economies through international trade. However, the prerequisites in human rights and environment protection often make it difficult for them to address the most urgent problems in economic growth

< TOP >

Caselet 3

10. Due to the sheer size of population China's tie-in with the global economy is bound to have enormous effects. Since the emergence from the disastrous "The Great Cultural Revolution" of Chairman Mao, China had gradually opened its market for outside capitals on 1 hand and had steadily devaluated its currency, Yuan, against US Dollar. By 1987 the exchange rate was around 3.7 Yuan per US Dollar; the rate was rigidly maintained at one Yuan = one US Dollar through Chairman Mao's era. In this early stage only a few Hong Kong capitals ventured in and moved a few light manufacturing facilities into southern China. It was after 1989's Tieanman square incidents, thanks to the lack of economic sanction from USA and the persistence of the leader Tang to open Chinese market and to devaluate Chinese Yuan further, China has been boosted rapidly by a unique force called "Taiwan Merchants" into the global market and has become an indispensable part of the global economy. Focusing towards economic evolution of China: With the help of "Taiwan Merchants" China is rapidly advancing to become the factory of the world. As the Chinese fever rises, manufacturers of USA are also joining the bandwagon of "Taiwan Merchants" to outsource their manufacturing facilities to China. As the vast underutilized Chinese labor resource is employed as the trenmendous export engine, enormous amount of goods and thus the consumption power are produced. The major fraction of this consumption power is exported to USA to support an unpreceedent "borrow and spend" consumption boom that is still continuing today. But a significant portion of the newly created consumption power, as was the case for Taiwan, is retained within China and is fueling an emerging consumption boom and prosperity in China. However, China is still a developing country and by definition is resource inefficient when it comes to the economic growth. This means that the boom in China that is based on USA trade deficit requires substantial natural resource to sustain, and this hungry for natural resource from China has fired up the global prices of commodities. The higher natural resource prices is going to intensify inflation rates of the whole world and will damp the consumption boom in USA. Without this natural damping mechanism, relying on the huge pool of underutilized labor source. If China succeeds in firing up its domestic consumption during the mean years of its export engine, then Chinese economy can continue on its strong growth, China's thirst for global natural resource will continue, the global inflation rate will be sustained at a rather high level, and USA will experience a prolonged period of stagflation.

< TOP >

11. After years of speculation and political gamesmanship, China announced the revaluation of its currency, the yuan. It will abandon its peg against the dollar and tie the currency's value to a "basket" of currencies -- a move that will immediately lift the yuan's value against the dollar. Economists think that China's move today is far from the end of the road. They interpret the news as a signal that more such moves are to come, and most expect the People's Bank of China to continue on revaluing in "baby steps." Indeed, China's managed-float scheme would allow officials to nudge the value of the yuan higher on a daily basis. Fed Chairman Alan Greenspan, in testimony to Congress Thursday, said: "I look it as the 1st step in a number of further adjustments as they invariably increase their participation in the world trading markets."

The impact also could be magnified if other Asian countries move to increase the value of their currencies. For example, Malaysia's central bank -- soon after China's announcement -- stated that it, too, would loosen its currency regime, abandoning the ringgit's peg to the dollar, in place since September 1998. Malaysia also will adopt a managed float regime. At the identical time, though, Hong Kong officials declared themselves satisfied with the functioning of their peg system and stated they had no plans for any further changes to that regime. Taiwan's central bank also stated it planned no modifications.

China is believed to be tying the value of its currency to the currencies of major trading partners. With this scheme, China gets more flexibility in managing its currency and domestic interest rates. a few Economics say that the basket is likely to include the dollar, the euro, and the yen, "and could include other Asian currencies" depending on trade flows. Singapore uses a similar model to manage its dollar, and it also doesn't disclose the contents of its currency basket, while changing the mix as needed depending on trade flows. To manage the yuan's value, China's central bank will similarly need to adjust its currency reserves by buying and selling the foreign currencies included in the basket.

< TOP >



< TOP OF THE DOCUMENT >

Earning:   Approval pending.