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

Although there is no sign of sharp drop in the exchange rate of US dollar, the possibility of gradual depreciation of it cannot be removed. In the view of Bush administration, instead of bringing harm on the growth of US economy, the orderly devaluation of US dollar can boost the exportation and narrow the trade deficit, particularly when the inflation is under control.

Therefore, should the balance of international payment exist for a long time, it would definitely be the decisive factors for the depreciation of the US dollar. But a few other factors would probably counteract its function in various periods and lead the US dollar to appreciation. This tendency is believed to be likely to happen in medium or short term.

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10. A falling dollar can substantially decrease the trade deficit. A lower US trade deficit will of course mean a decline in the exports of Asian countries. Countries that lose exports need to adopt policies to stimulate domestic spending in order to prevent a decline in their GDP and employment levels.

Where this all ends will depend not only on market forces but also on the policies of the governments and central banks of Asia. It will be tempting but wrong for them to resist the decline in the US trade imbalance by using a combination of monetary policy and exchange market intervention to prevent the dollar's shift to an appropriately competitive level.

Without that competitive dollar, the higher saving rate in the US will mean slower US growth and rising unemployment. If that happens, the American political process is likely to turn to protectionist measures to shrink the trade imbalance and maintain employment.

It would be far better to allow the natural market forces to bring about the needed currency realignment. Instead of seeking to resist the dollar's shift to a more competitive level, governments in Asia should focus on developing policies to maintain aggregate demand in their individual economies as their export sales decline.

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Caselet 3

11. There is general talk of hopeful prospects for poor farmers gaining greater access to rich-world markets. But the benefits will not flow evenly from rich to poor. The package includes quota-free and duty-free" access for 50 LDCs to markets in rich nations and increase in funds for the aid for trade program that is meant for the increasing capability of the poor countries to take part in trade. The package also makes a mention about tech. assistance, helping to train the developing nations with the global regulations pertaining to trade and mechanisms. There were certain element of resistance from the US and Japan relating to the exclusion of certain products from duty-free, trade-free formula. 1 of the primary reasons for this resistance can be due to the fact that the US can take advantage of the ban and implement the identical in the case of textiles. As a consequence, textile being 1 of the crucial exports of the poorest nations from the LDCs, namely Cambodia and Bangladesh, it would compensate for all the benefits arising out of exports in these countries. In a different instance, Japan has also put up a reason for the inclusion of rice and leather products in the deal. Though a few of the LDCs expect that the benefits arising out of the package would even be felt at the poorest parts of the society, mainly the farmers as most of their exports are in the agricultural products. At the identical time, it needs to be mentioned that with the existent inequalities in the market, it is questionable as to how much effectively things would be put in place. Thus, it is important that 1 reviews the policy that seems to have an exaggerated focus towards market access as a road towards economic development.

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12. According to our commerce minister India had certain reasons to smile. It ensures that no subsidy-ridden farm products are exported to India the phase out of the export subsidies by developed countries would also provide the Indian farmers a chance to compete in the world market. The success of India in the meet resulted out of its strategy of forming a coalition of the developing nations (G-110) that was established in the summit. The agreement intends to protect the domestic farmers against increase in imports through the provisions of Special Products and Special Safeguard Mechanism that was a part of the ministerial declaration. Under the provisions of the Special Products, India and other developing countries would not have to cut the tariffs on certain products while the Special Safeguard Mechanism would take into account both the prices and quantity triggers in an effort to check the increase in cheap imports. Added to this, India will not have to undertake any cuts in the domestic support. In the non-agricultural market access, India's proposal along with that of Argentina and Brazil continues to top on agenda. On the services front, India has succeeded in confirming that there will be no compulsion on the part of developing countries to open up its service sectors. It has also been agreed that in relation to the discussions pertaining to geographical indications and the biological diversities that were of particular interest to India, it would be hastened by June 30, 2006. As per the Ministry of Commerce, India would also be able to draw up a list of 90 special products that would lie outside the purview of the tariff reduction formula and would also enable the Indian farmers to protect their crucial crops from global competition. With all this in place, the Indian industry would stand to benefit as the developed countries decided to decrease the duties on products that are of interest to the developing countries.

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