Trade, Financial flows and foreign investment

The basis of free trade – its Comparative advantage is the economics principle that nations should
advantages and disadvantages specialise in the areas of production in which they have the lowest opportunity
cost, and trade with other nations so as to maximise both nations’ standards of
living.
Free Trade is a situation where governments impose no artificial barriers to
trade that restrict the free exchange of goods and services between countries.
Advantages of free trade
● Trade allows countries to obtain goods and services that they cannot
produce themselves or in sufficient quantities to satisfy domestic
demand and generally occurs due to a lack of resources.
● Free trade allows countries to specialise in the production of goods and
services in which they are most efficient leading to better resource
allocation and increased production.
● Encourages the efficient allocation of resources because the countries
are producing the goods in which they have a comparative advantage.
● Greater specialisation leads to economies of scale moving production to
the technical optimum.
● International competitiveness will improve as domestic businesses will
face greater pressures and govt will encourage industrial efficiency
● Encourages innovation and the spread of new technology and
production processes throughout the world.
● Leads to higher living standards as a result of lower prices, increased
production and consumer choice. Leads to higher rates of economic
growth and increased real incomes.
Disadvantages of free trade
● An increase in unemployment may occur since domestic businesses may
not be able to compete with international businesses.
● It may be more difficult for lesser advanced economies to establish new
industries if they are not protected from larger foreign competitors
● Production surpluses may be sold at unreasonably low prices affecting
efficient domestic industries.
● It may encourage environmentally irresponsible production methods.

Role of international World Trade Organisation (WTO)

organisations – WTO, IMF, World Role: To implement and advance global trade agreements and to resolve
Bank, United Nations, OECD trade disputes between economies.
The formation of the WTO in 1995 was significant since it not only had powers
to resolve trade disputes unlike its predecessor GATT (General agreement on
Tariffs and trade, est 1947) but its reach included trade in services (eg -
insurance and banking) and intellectual property (eg- patents, copyright etc)
A failure to comply with WTO obligations can lead to a complaint being lodged
against the country leading to the process of dispute resolution. If no
agreement can be reached, a WTO panel will hear the complain and then issue
a decision, failure to comply with this decision can lead to the imposition of
 trade sanctions.
Traditionally, the WTO has been successful in negotiating differences between
developing nations, however it is harder to negotiate with the 2 major powers
of the world - US v/s EU

International Monetary Fund (IMF)

Role: Maintain international financial stability, particularly in relation to
Forex markets
The IMF plays a critical role in minimising the crisis. As a longer term goal, the
IMF aims to support the free trade of goods & services and the free movement
of finance and capital. Typically, before giving financial assistance, the IMF
requires countries to change economic policies and open up markets. The
policies that the IMF requires countries to adopt are generally known as
structural adjustment policies and tailor these to wider economic priorities.
Many international banks and private lenders require countries to adopt these
policies before they are willing to lend money.
IMF’s demands harm the most vulnerable groups in society while protecting
financial institutions and has also been criticised for moving too slowly and
cautiously.

World Bank
Role: primarily concerned with helping poorer countries with their economic
development.
It has 3 main objectives: fund investment in infrastructure, reduce poverty and
help countries adjust their economies to the demand of globalisation.
The 2 main major goals are:
- Reducing the rate of extreme poverty to less than 3% of world’s
population by 2030
- Reducing inequality by fostering income growth for the world’s bottom
40%

United Nations (UN)

THe UN was established in 1945 and its agenda is broad covering the global
economy, international security, the environment, poverty and development
etc.
Its decision making powers are limited since it relies on the support of its
member states and the budgets are small compared to the budgets of many
advanced economies.
Historically, it played a great role in supporting greater linkages between
economies and promoting globalisation through a range of its agencies.

Organisation for Economic cooperation and Development (OECD)

Role: To conduct and publish research on a wide range of economic policy
issues and to coordinate economic cooperation among member nations.
OECD economic research is regarded as the most reliable and highest quality
economic research in the world and has influenced the global economics policy
agenda.

Influence of government The aim of these forums is to enable heads of state along with their treasurers
economic forums – G20, G7/8 and central bank governors to discuss global economic issues with particular
 attention to economic stability and growth.

Group of Seven Nations (G7)

Includes : UK, US, France, japan, Germany, Canada and Italy
The G7is the unofficial forum coordinating global macroeconomic policy due to
its influence over the fiscal and monetary policies of the world’s largest and
most powerful economies.

Gorup of Twenty Nations (G20)

The G20 includes 19 of the world’s largest national economies plus the EU,
covering 80% of the world’s GDp and ⅔ of the world’s population.
It does not have any permanent leadership or headquarters and the annual
summit generally deals with a wide range of current issues without advancing
any specified economic goals.

Trading blocs, monetary unions Free trade agreements are formal agreements between countries designed to
and free trade agreements break down barriers to trade between those nations.
● Advantages and Trade blocs occur when a number of countries join together in a formal
disadvantages of preferential trading agreement, to the exclusion of other countries.
Trade diversion is where a country’s imports of a good or service switch from
multilateral (EU, APEC,
coming from the most efficient producer to another country because of the
NAFTA, ASEAN) and impacts of a trade agreement’s provision.
bilateral agreements
When an agreement is between 2 countries the agreement is said to be
bilateral, when it is between more than 2 countries it is said to be
multilateral.

Asia Pacific Economic Cooperation (APEC) forum

The APEC consists of 21 countries in the Asia-pacific region. APEC’s original
vision was to establish free trade among member countries and has not been
met by 2020. However, it has contributed to progress on trade liberalisation.
The APEC adopts the principle of non-discriminatory arrangements, meaning
countries outside the agreement will trade on the same basis as the members
within this agreement.

Trans-Pacific partnership (Cp-TPP or TPP-11)

It is a multilateral trade agreement among 11 Pacific Rim countries that was
formally signed and ratified in March 2018.
The TPP-11 lacks a clear implementation timeline and some members have
upto 10 years to implement their commitments. It also includes controversial
provisions that give corporations the right to sue governments for policy
decisions that might harm their investments.

Regional comprehensive Economci partnership

The world's largest multilateral trade agreement with its economies
representing ¼ of global trade. After almost a decade of negotiations it was
ratified in 2021. It comprises 15 economies.

Association of South-East Asian Nations (ASEAN)

Established in 1967, ASEAn has become the most effective force for trade
negotiations within the Asia Pacific region.

Pacific Agreement on Closer Economic relations Plus (PACER Plus)

It is a multilateral trade agreement comprised of 11 Pacific Island Forum
members and places a specific emphasis on economic development, integrating
foreign aid programs from Australia and New Zealand to assist with
agricultural development, financial stability, trade infrastructure and
implementation of the agreement itself.

The European Union (EU)

The world’s most important trade bloc. The formation of the EU in late 1950’s
helped to dismantle the trade barriers within Europe, however has frequently
used tariff barriers against non-member countries, resulting in accusations that
the EU is a closed trading bloc. Within the EU, 19 member countries also
participate in the voluntary monetary union which involves the adoption of a
common currency and common interest rates, playing a major role in economic
integration among the eurozone economies.
US-Mexico-Canada Agreement (USMCA)
The US-Mexico-Canada agreement is a three country trade deal that
contributed to the value of trade more than tripling between the three
economies in the 25 years after its introduction.

Bilateral trade agreements

Closer Economic Relations Trade Agreement (CERTA) is a bilateral agreement
between Australia and New Zealand and is considered to be one of the most
comprehensive free trade agreements in the world. CERTA prohibits all tariffs
and export restrictions and has been gradually extended to cover other areas of
trade. It has resulted in an annual increase in trade of 7% and is widely
regarded to be successful in both countries.

In the past decade, Australia has concluded 7 more bilateral agreements