University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
1. Define economics and trace briefly its evolution. Discuss allocation, distribution, and movement of factors of production in the domestic and international economy.
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, “management of a household, administration”) from οἶκος (oikos, “house”) + νόμος (nomos, “custom” or “law”), hence “rules of the house(hold)”. Political economy was the earlier name for the subject, but economists in the late 19th century suggested “economics” as a shorter term for “economic science” that also avoided a narrow political-interest connotation and as similar in form to “mathematics”, “ethics”, and so forth. Economic writings date from earlier Mesopotamian, Greek, Roman, Indian subcontinent, Chinese, Persian, and Arab civilizations. Notable writers from antiquity through to the 14th century include Aristotle, Xenophon, Chanakya (also known as Kautilya), Qin Shi Huang, Thomas Aquinas, and Ibn Khaldun. The works of Aristotle had a profound influence on Aquinas, who in turn influenced the late scholastics of the 14th to 17th centuries. Joseph Schumpeter described the latter as “coming nearer than any other group to being the ‘founders’ of scientific economics” as to monetary, interest, and value theory within a natural-law perspective.
A 1638 painting of a French seaport during the heyday of mercantilism. Two groups, later called “mercantilists” and “physiocrats”, more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation’s wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.
Physiocrats, a group of 18th century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire, which called for minimal government intervention in the economy. Modern economic analysis is customarily said to have begun with Adam Smith (1723–1790). Smith was harshly critical of the mercantilists but described the physiocratic system “with all its imperfections” as “perhaps the purest approximation to the truth that has yet been published” on the subject. Classical political economy
The publication of Adam Smith’s The Wealth of Nations in 1776 is considered to be the first formalisation of economic thought. The publication of Adam Smith’s The Wealth of Nations in 1776, has been described as “the effective birth of economics as a separate discipline.” The book identified land, labor, and capital as the three factors of production and the major contributors to a nation’s wealth, as distinct from the Physiocratic idea that only agriculture was productive. Smith discusses potential benefits of specialization by division of labour, including increased labour productivity and gains from trade, whether between town and country or across countries.
His “theorem” that “the division of labor is limited by the extent of the market” has been described as the “core of a theory of the functions of firm and industry” and a “fundamental principle of economic organization.” To Smith has also been ascribed “the most important substantive proposition in all of economics” and foundation of resource-allocation theory – that, under competition, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment). In an argument that includes “one of the most famous passages in all economics,” Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society, and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce. In this: He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.
By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. Economists have linked Smith’s invisible-hand concept to his concern for the common man and woman through economic growth and development, enabling higher levels of consumption, which Smith describes as “the sole end and purpose of all production.” He embeds the “invisible hand” in a framework that includes limiting restrictions on competition and foreign trade by government and industry in the same chapter and elsewhere regulation of banking and the interest rate, provision of a “natural system of liberty” — national defence, an egalitarian justice and legal system, and certain institutions and public works with general benefits to the whole society that might otherwise be unprofitable to produce, such as education and roads, canals, and the like. An influential introductory textbook includes parallel discussion and this assessment: “Above all, it is Adam Smith’s vision of a self-regulating invisible hand that is his enduring contribution to modern economics.”
The Rev. Thomas Robert Malthus (1798) used the idea of diminishing returns to explain low living standards. Human population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level. Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy’s tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s. While Adam Smith emphasized the production of income, David Ricardo (1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other.
He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Ricardo was the first to state and prove the principle of comparative advantage, according to which each country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production. It has been termed a “fundamental analytical explanation” for gains from trade. Coming at the end of the Classical tradition, John Stuart Mill (1848) parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market’s two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene. Value theory was important in classical theory. Smith wrote that the “real price of every thing … is the toil and trouble of acquiring it” as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Other classical economists presented variations on Smith, termed the ‘labour theory of value’. Classical economics focused on the tendency of markets to move to long-run equilibrium. Marxism
The Marxist school of economic thought comes from the work of German economist Karl Marx. Marxist (later, Marxian) economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx’s major work, Das Kapital, was published in German in 1867. In it, Marx focused on the labour theory of value and the theory of surplus value which, he believed, explained the exploitation of labour by capital. The labour theory of value held that the value of an exchanged commodity was determined by the labour that went into its production and the theory of surplus value demonstrated how the workers only got paid a proportion of the value their work had created.
A body of theory later termed “neoclassical economics” or “marginalism” formed from about 1870 to 1910. The term “economics” was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for ‘economic science’ and a substitute for the earlier “political economy”. This corresponded to the influence on the subject of mathematical methods used in the natural sciences. Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value inherited from classical economics in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side. In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favor of ordinal utility, which hypothesizes merely behavior-based relations across persons.
In microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics. Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for analyzing long-run variables affecting national income. Keynesian economics
John Maynard Keynes (right), was a key theorist in economics. Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field. The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low “effective demand” and why even price flexibility and monetary policy might be unavailing.The term “revolutionary” has been applied to the book in its impact on economic analysis. Keynesian economics has two successors.
Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge and the work of Joan Robinson. New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behavior but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones. Chicago school of economics
The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract. Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman’s analysis of the causes of the Great Depression. Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized them. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business should be “to use its resources and engage in activities designed to increase its profits … (through) open and free competition without deception or fraud.” Other schools and approaches
Other well-known schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, include the Austrian School, the Freiburg School, the School of Lausanne, post-Keynesian economics and the Stockholm school. Contemporary mainstream economics is sometimes separated into the Saltwater approach of those universities along the Eastern and Western coasts of the US, and the Freshwater, or Chicago-school approach. Within macroeconomics there is, in general order of their appearance in the literature; classical economics, Keynesian economics, the neoclassical synthesis, post-Keynesian economics, monetarism, new classical economics, and supply-side economics. Alternative developments include ecological economics, constitutional economics, institutional economics, evolutionary economics, dependency theory, structuralist economics, world systems theory, econophysics, feminist economics and biophysical economics. Allocation of resources, apportionment of productive assets among different uses. Resource allocation arises as an issue because the resources of a society are in limited supply, whereas human wants are usually unlimited, and because any given resource can have many alternative uses.
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production (such as labour, land, and capital). In general theory and the national income and product accounts, each unit of output corresponds to a unit of income. One use of national accounts is for classifying factor incomes and measuring their respective shares, as in National Income. But, where focus is on income of persons or households, adjustments to the national accounts or other data sources are frequently used. Here, interest is often on the fraction of income going to the top (or bottom) x percent of households, the next y percent, and so forth (say in quintiles), and on the factors that might affect them (globalization, tax policy, technology, etc.). In essence, land, labor, capital and entrepreneurship encompass all of the inputs needed to produce a good or service. Land represents all natural resources, such as timber and gold, used in the production of a good. Labor is all of the work that laborers and workers perform at all levels of an organization, except for the entrepreneur. The entrepreneur is the individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business.
The capital is all of the tools and machinery used to produce a good or service. International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production.
Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country. International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics. For more, see The Observatory of Economic Complexity. Trading is a value added function of the economic process of a product finding its market, where specific risks are to be borne by the trader, affecting the assets being traded which will be mitigated by performing specific functions.
2. Discuss the implications of the forces that affect elasticity of demand and supply in the shipping industry a. Demand and supply elasticity
The concept of elasticity of demand for sea transport is useful for illustrating the relationships between the shipping industry’s gross revenue and output and changes in the freight rate. Demand for sea transport is a derived demand. For instance, the demand for tramp shipping depends on the demand for bulk materials. Furthermore, the demand for bulk materials depends on the level of consumptionof the final products using the materials. On the basis of these derived demand characteristics, Metaxas (1971) made the following observations: The elasticity of demand for sea transport depends on the elasticity of consumer demand for the goods shipped by sea. The lower the cost of sea transport as a proportion of the total cost of the final good, the more inelastic the demand for sea transport will be. The demand for sea transport will be more elastic if it can be easily substituted by another mode of transport. The demand for sea transport tends to be price-inelastic in the short run. The magnitude of demand for sea transport is increasing in the long run as shippers have sufficient time to adjust their shipping arrangements.
The term “supply” refers to a functional relationship between the freight rate and the quantity supplied by carriers (Truett and Truett 1998). The supply of sea transport is strongly influenced by the freight rate. The shipping supply function shows the quantity of shipping services supplied by carriers in response to freight rate changes. If the freight rate falls below operating costs, ships will be laid up and supply is consequently reduced. The slope of the shipping supply curve (as shown in Fig. 2.4) depends on three factors: Bigger ships have lower transport costs per unit of cargo; hence, bigger ships will have a lower lay-up point. This drives smaller or inefficient ships into layup during recessions. Old ships have higher operating costs so the lay-up point will occur at a higher freight rate. When all the available tonnage is in use, the supply of tonnage can only be increased with higher speeds and improvement in the operations efficiency of ships. Under such circumstances, there will be a steeper slope of the shipping supply curve.
Price elasticity of shipping supply measures its responsiveness to changes in the freight rate. During recessions, the supply of sea transport tends to be very elastic when many vessels are laid up. The elasticity of shipping supply is constant at all the levels of output from the lay-up point to a maximum operational speed. The shipping supply is almost totally elastic when vessels’ output is severely strained (Evans 1988). When all the ships are in service, the supply becomes inelastic. In Fig. 2.4, the shipping supply function is a J-shaped curve describing the amount of sea transport the carriers provide at each level of the freight rate.
b. Elasticity in relations to revenues
Revenue is equal to price times quantity and is represented by the shaded rectangles. Elasticity measures the responsiveness of the quantity demanded to a change in price. The effect of a price change on revenue depends on the elasticity of demand, as can be seen through varying the slope of the demand curve. Consider an initial price and quantity of 1 and 1 for a revenue, shaded in light blue, of 1. Now vary the price to see a new revenue shaded in yellow: mouse over the yellow to see the amount.
c. Elasticity revenues and the shipping industry
Price elasticity of demand and total revenue are closely interrelated because they deal with the same two variables, P and Q. If your product has elastic demand, you can increase your revenue by decreasing the price of that good. P will decrease, but Q will increase at a greater rate, thus increasing total revenue. If the product is inelastic, then you can actually raise prices, sell slightly less of that item but make higher revenue. As a result, it is important for management to know whether its product has inelastic or elastic demand. 3. Discuss the Ricardian theory of comparative advantage, the free trade and market protection and their implication on the shipping industry. Trade occurs because of differences in prices, but why does price differ? It could be because of differences in supply and demand.
Supply differs between countries because of technological differences and resource availabilities. The technological difference is explained by the Ricardo’s theory of comparative advantage. The resource and endowments differences are explained by Heckscher-Ohlin model. Comparative advantage exists when a country has a margin of superiority in the production of a good or service i.e. where the opportunity cost of production is lower. The basic theory of comparative advantage was developed by David Ricardo Ricardo’s theory of comparative advantage was further developed by Heckscher, Ohlin and Samuelson who argued that countries have different factor endowments of labour, land and capital inputs. Countries will specialise in and export those products which use intensively the factors of production which they are most endowed. If each country specialises in those goods and services where they have an advantage, then total output and economic welfare can be increased (under certain assumptions). This is true even if one nation has an absolute advantage over another country.
Worked example of comparative advantage
Consider the data in the following table:
To identify which country should specialise in a particular product we need to analyse the internal opportunity cost for each country. For example, were the UK to shift more resources into higher output of personal computers, the opportunity cost of each extra PC is four CD players. For Japan the same decision has an opportunity cost of two CD players. Therefore, Japan has a comparative advantage in PCs. Were Japan to reallocate resources to CD players, the opportunity cost of one extra CD player is 1/2 of a PC. For the UK the opportunity cost is 1/4 of the PC. Thus the UK has the comparative advantage in CD players. Specialisation and potential gains from trade
Output of both products has increased – representing a gain in economic welfare. Total output of CD players has increased by 2000 units and total output of personal computers has expanded by 500 units. Allocating the gains from trade
For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of exchange of one product for another. To work this out, consider the internal opportunity cost ratios for each country. Without trade, the UK has to give up four CD players for each PC produced. A terms of trade (or rate of exchange) of 3 CD players for each PC produced would be an improvement for the UK In the case of Japan (specialising in producing personal computers) for each After trade (3 CD’s for 1 PC)
compare with the original production matrix
After trade has taken place, total output of goods available to consumers in both countries has grown. UK’s consumption of CD players has increased by 200 and they have an extra 100 PCs. For Japan, they have an extra 200 CD players and 200 PCs. Assumptions underlying the concept of comparative advantage
Perfect occupational mobility of factors of production – resources used in one industry can be switched into another without any loss of efficiency Constant returns to scale (i.e. doubling the inputs in each country leads to a doubling of total output) No externalities arising from production and/or consumption Transportation costs are ignored
If businesses exploit increasing returns to scale (i.e. economies of scale) when they specialise, the potential gains from trade are much greater. The idea that specialisation should lead to increasing returns is associated with economists such as Paul Romer and Paul Ormerod What determines comparative advantage?
Comparative advantage is a dynamic concept. It can and does change over time.
Some businesses find they have enjoyed a comparative advantage in one product for several years only to face increasing competition as rival producers from other countries enter their markets. For a country, the following factors are important in determining the relative costs of production: The quantity and quality of factors of production available (e.g. the size and efficiency of the available labour force and the productivity of the existing stock of capital inputs). If an economy can improve the quality of its labour force and increase the stock of capital available it can expand the productive potential in industries in which it has an advantage. Investment in research & development (important in industries where patents give some firms significant market advantage) Movements in the exchange rate. An appreciation of the exchange rate can cause exports from a country to increase in price. This makes them less competitive in international markets. Long-term rates of inflation compared to other countries. For example if average inflation in Country X is 4% whilst in Country B it is 8% over a number of years, the goods and services produced by Country X will become relatively more expensive over time. This worsens their competitiveness and causes a switch in comparative advantage.
Import controls such as tariffs and quotas that can be used to create an artificial comparative advantage for a country’s domestic producers- although most countries agree to abide by international trade agreements. Non-price competitiveness of producers (e.g. product design, reliability, quality of after-sales support) Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. According to the law of comparative advantage, the policy permits trading partners mutual gains from trade of goods and services. Under a free trade policy, prices emerge from the equilibration of supply and demand, and are the sole determinant of resource allocation. ‘Free’ trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from those that would emerge under deregulation. These governed prices are the result of government intervention in the market through price adjustments or supply restrictions, including protectionist policies. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers. Since the mid-20th century, nations have increasingly reduced tariff barriers and currency restrictions on international trade. Other barriers, however, that may be equally effective in hindering trade include import quotas, taxes, and diverse means of subsidizing domestic industries.
Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as regulatory legislation and import quotas, and even inter-government managed trade agreements such as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary to their formal titles) and any governmental market intervention resulting in artificial prices. Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) “fair competition” between imports and goods and service produced domestically. This policy contrasts with free trade, where government barriers to trade are kept to a minimum. In recent years, it has become closely aligned with anti-globalization. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.
Most famous theory of comparative advantage arose with the hypothesis by Heckscher-Ohlin (HO), based on resource abundance – Labor-abundant countries would have comparative advantage in, and would export, labor intensive goods From the above widely accepted theorem there emerged three important corollaries – As a country shifts from protection to free trade, prices of factors (land, labor, and capital) adjust without the factors having to migrate to other countries, so that trade is a substitute for migration – Trading will move factor prices towards international convergence, on equalization – Free trade will increase the relative price (and income) of a country’s abundant factor. (increase trade normally raises product and factor prices in industries which enjoy comparative advantage and which are intensive in that abundant factor.) Some Institutional considerations
Tariff: In international trade, a tariff is a tax levied upon a commodity when it crosses a national boundary. Export vs Import Duty: The most common tariff is the import duty, although some countries, primarily exporters of agricultural commodities and raw materials, also employ export taxes. In many countries (mostly in developing nations) tariffs are imposed as a source of government revenue because they are the easiest taxes to administer because collection can be examined by officers stationed at official points of entry along the border. – In many countries, however, import duties are levied for protection of domestic industries. Revenue generated by a protective tariff is a pleasant by-product, not the major objective. – (A prohibitive tariff, one high enough to keep out all imports, yields only protection and no revenue). – Export duties or taxes may be used to produce government revenue, or they may be designed to curtail exports in order to prop up world prices of a primary commodity such as tea. – Since export taxes are relatively rare, we shall be concerned mainly with import duties.
Para-tariff: Border charges and fees, other than “tariffs”, on foreign trade transactions of a tariff-like effect which are levied solely on imports, but not those indirect taxes and charges, which are levied in the same manner on like domestic products. Import charges corresponding to specific services rendered are not considered as para- tariff measures. Non-tariff: Any measure, regulation, or practice, other than “tariffs” and “para-tariffs”, the effect of which is to restrict imports, or to significantly distort trade. Under an ad valorem tariff there are two bases for valuation: F.O.B. price -“Free on board” price which indicates the price of the commodity on board ship at the port of embarkation (if ship-loading costs are excluded, we obtain the f.a.s. or “free along side” price). C.I.F. price – “Cost, Insurance, Freight” price which includes the cost of the commodity up to the port of entry. (e.g. Sea freight, insurance, etc.) Domestic Value Addition (DVA)
Domestic Value Addition = FOB Value – Value of imported inputs DVA as a %= 100* (DVA / FOB Value)
The Total Tax on Imports
Consider the total tax that falls on imports of a typical good that costs Rs. 1,000/= CIF (e.g., delivered Colombo). This good is not unusual in that it is subject to a 28% tariff; 15% Value Added Tax (VAT). The total taxes for this good amount to: CIF Cost of the good delivered to Colombo;
Import Duty at 28% calculated on the CIF price;
VAT at 15% of Import Value (CIF + duties);
Total tax on the import is 47.2%
Total price of the import, landed
The tariff system continues to have a “cascading” rate structure:
What are cascading tariff rates? Higher rates on finished goods lower rates on manufactured inputs and the lowest rates on basic raw materials. The present structure looks like: 28%
What is the problem?
Biased against domestic production of inputs (backward linkages). Biased in favour of low value added industries and against high value adding activities, such as agriculture. Leads to highly variable, often unintended incentives for different activities, although they face the same tariffs.
Protection Taxes Exporters
Tariffs not only puts a burden on local consumers, but also hurts exporters. This works in several ways: Costs of production are increased and these cannot be passed on to foreign customers. (Schemes such as duty rebates help to offset some cost increases, but not all). Protection influences the exchange rate so that the returns to exporting are reduced in rupee terms. High protection for domestic industries producers high profits that draw resources away from investment in export activities. The present system discourages exporters from using local raw materials – making efforts to promote backward linkages difficult.
The present exchange rate is Rs. 100 per US$ with free trade it might be Rs. 110 per US$. Say a garment exporter can purchase 100 metres of fabric overseas for $10, or Rs. 1000 at the current exchange rate, duty free. In real terms, this should cost him Rs. 1100. This means that the exchange rate is effectively subsidizing him by Rs. 100 to import. (The exchange rate effect is also reducing what he earns in rupees as well).
Infant Industry Argument
According to the argument new industries may need temporary protection until they have mastered the production and marketing techniques necessary to be competitive in the world market.
Problems with the infant industry argument
The argument pre-supposes that protected firms will work to lower costs, even though they are destined to face increased foreign competition if they are successful. It would seem more likely that by protecting the infant industry, the infant has an incentive never to grow up.
Secondly, the argument seems to imply that governments are better able to pick winners than is the private market. It is not uncommon for industries to lose money when they get started. One of the functions of the financial sector of the private economy is to provide funds to firms to enable them to
produce until they become profitable.
Thirdly, what trade protection (in the face of an import tariff) can do, an equivalent production subsidy to the infant industry can do better. The reason is that a purely domestic distortion such as this should be overcome with a purely domestic policy (such as a direct production subsidy to the infant industry) rather than with a trade policy that also distorts relative prices and domestic consumption. A production subsidy is also more direct form of aid and is easier to remove than an import tariff. One practical difficulty is that a subsidy requires revenues, rather than generating them as, for example, an import tariff does. 4. Discuss how the following market structures affect the shipping industry. a. Perfect competition
Samuleson and Nordhaus (2001) defined prefect competition as:
1. Product homogeneity, meaning that the product supplied by different firms is the same;
2. Information freely available, meaning that firms and consumers alike know the prices set by all firms; 3. Equal access to the market, meaning that all firms have access to the same production technologies; 4. Price taking, meaning that firms and consumers take the price as given; and 5. Free entry and exit (i.e., no barriers to entry and exit), meaning that any firm may enter or exit the market as it wishes. 6. Huge market so that no single player or buyer can manipulate the price of product by selling or buying
In the shipping industry, tramp shipping operates under perfect competition. While liner shipping operates under the oligopoly market structure, as there are :
1. few sellers ( players) in the market
2. differentiated product
3. loyalty attached to some buyers
4. price agreed by players which is relatively stable over a long period of time
Under long term agreements between shippers and carriers in the liner industry, the formation of an oligopoly market structure is adopted by both parties and embraced by the authority to recognise the legitimacy of the activities of Liner Conferences. The abolishment of liner conferences will destroy the market structure in the liner shipping industry. The Structure Conduct Performance model
Structure-conduct-performance (SCP) model postulates the performance of an industry as determined by the conduct of suppliers and consumers which, in turn, is determined by market structure. The model discussed the relationship between market concentration and the firm’s profitability. There will be a systematic difference in average excess profit rates on sales between highly concentrated oligopolies and other industries. The average profit rate of firms in oligopolistic industries of a high concentration will tend to be higher than that of firms in less concentrated oligopolies or industries of atomistic structure. The SCP hypothesizes that:
(1) The exercise of monopoly power should increase as concentration (i.e., the degree of disproportionate allocation of market share) increases and (2) The greater the barriers to entry, the greater the exercise of market power.
In short, barriers to entry facilitate market power, which increases with concentration. Thus, when market concentration is growing some firms are perceived to be building monopoly power (i.e., the market deviates from the perfect competition structure), which results in positive profits (i.e., these firms charge above marginal cost and behave as monopolists).
The SCP model serves as a conceptual framework by many studies to describe industries. Basic conditions, market structure, conduct, and performance characterize an industry. The relationship of these elements is indicated in Figure 1:
the basic conditions are the primary determinants of the market or the industry structure the structure of the industry is the primary cause of the conduct by the participants in the industry conduct explains or accounts for market performance
Market conditions include many factors, which shape the market or the industry, such as consumer demand, market supply, political environment and policy change. In some cases, the effects of policies are direct. Like antitrust laws are intended to halt the spread of monopoly, the result is less mergers behaviors in that industry.
Market structure means a set of characteristics which give definition to the supply-side of the market, such as the nature of the firms which produce a product the production cost and entry, the relative size and number of producers. Analysis in industrial organization intends to predict and explain behaviors. The structure attributes are: economies of scale
barriers to entry
Having the different levels of the structure attributes make the industries fall somewhere in or between the market structures, perfect competition, monopolistic competition, oligopoly, and monopoly.
Market conduct is the actual behaviors of firms in a market and how the firms react to the conditions imposed by the market structure and interacts with rivals. One of the significant aspects of market conduct is pricing behavior. Market performance is the description and a judgment about the results of market behavior. The most important characteristics include profitability, efficient resource allocation, equity (generally viewed as low consumer prices), employment, technical progress, a generally higher standard of living, and some special social goals. 5. Trace the effects of prices on the market structure in the economy. How is pricing related to market structure? What is the effect of free trade in the shipping industry? In theory, in a free market the aggregates (sum of) of quantity demanded by buyers and quantity supplied by sellers will be equal and reach economic equilibrium over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not necessarily morally equitable.
For example, if the supply of healthcare services is limited by external factors, the equilibrium price may be unaffordable for many who desire it but cannot pay for it. Various market structures exist. In perfectly competitive markets, no participants are large enough to have the market power to set the price of a homogeneous product. In other words, every participant is a “price taker” as no participant influences the price of a product. In the real world, markets often experience imperfect competition. Forms include monopoly (in which there is only one seller of a good), duopoly (in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition (in which there are many sellers producing highly differentiated goods), monopsony (in which there is only one buyer of a good), and oligopsony (in which there are few buyers of a good). Unlike perfect competition, imperfect competition invariably means market power is unequally distributed. Firms under imperfect competition have the potential to be “price makers”, which means that, by holding a disproportionately high share of market power, they can influence the prices of their products. Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets.
This method of analysis is known as partial-equilibrium analysis (supply and demand). This method aggregates (the sum of all activity) in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across all markets.
This method studies both changes in markets and their interactions leading towards equilibrium. 6. Enumerate and discuss the forces that will affect the foreign exchange rates. What are the effects of fall monetary convertibility and foreign exchange control on the economy, including the shipping industry? Numerous factors determine exchange rates, and all are related to the trading relationship between two countries. Remember, exchange rates are relative, and are expressed as a comparison of the currencies of two countries. The following are some of the principal determinants of the exchange rate between two countries. Note that these factors are in no particular order; like many aspects of economics, the relative importance of these factors is subject to much debate. 1. Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies. During the last half of the twentieth century, the countries with low inflation included Japan, Germany and Switzerland, while the U.S. and Canada achieved low inflation only later. Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. This is also usually accompanied by higher interest rates. 2. Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates – that is, lower interest rates tend to decrease exchange rates. 3. Current-Account Deficits
The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country’s exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests. 4. Public Debt
Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors. The reason? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future. In the worst case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation.
Moreover, if a government is not able to service its deficit through domestic means (selling domestic bonds, increasing the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations. Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country’s debt rating (as determined by Moody’s or Standard & Poor’s, for example) is a crucial determinant of its exchange rate.
5. Terms of Trade
A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If the price of a country’s exports rises by a greater rate than that of its imports, its terms of trade have favorably improved. Increasing terms of trade shows greater demand for the country’s exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country’s currency (and an increase in the currency’s value). If the price of exports rises by a smaller rate than that of its imports, the currency’s value will decrease in relation to its trading partners. 6. Political Stability and Economic Performance
Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries. An exchange-rate system is the set of rules established by a nation to govern the value of its currency relative to other foreign currencies. The exchange-rate system evolves from the nation’s monetary order, which is the set of laws and rules that establishes the monetary framework in which transactions are conducted. When one currency is traded for another, a foreign exchange market is established. The foreign exchange market or FX market is the largest market in the world. The amount of cash traded exceeds the world’s stock markets.
Participants in the FX market include large commercial banks, central banks, governments, multinational corporations and other financial markets and institutions. Small retail traders also play a very minor part in the foreign exchange market. The characteristics of the FX market that make it so unique are: the volume of trading, liquidity of the market, geographical dispersion, the 24 hours trading day (except on the weekends), the number and variety of market traders, and the factors that affect the exchange rate. This market has a number of marketplaces where currencies are traded at different rates. To avoid exploitation by arbitragers, difference in rates are usually kept at a minimum. Banks all over the world are involved in foreign exchange trading, but the main trading centers are located in Tokyo, London and New York, allowing the market to remain open 24 hours a day; when Asian trading is ending, European trading is starting, and U.S. trading ends the daily session. Traders do not have to wait for the market to open. Monetary flows and economic changes such as GDP growth, interest rates, inflation, and budget and trade deficits or surpluses, cause fluctuations in the exchangerate. Because news affecting foreign exchange is well publicized, insider information is almost nonexistent in the FX market. The world relies on the foreign exchange market. When buying foreign goods and services or investing in other countries, individuals and companies need to purchase the currency of the country where they are transacting business.
Currencies are traded everyday in the FX market to be used for direct foreign investments, import and export needs of companies and individuals, purchases of foreign instruments, and managing existing positions. In addition, the FX market is often used as a means to obtain profits from short-term fluctuations of exchange rates. The U.S. dollar, the euro and the Japanese yen dominate the foreign exchange market. These hard currencies, representing the world’s largest industrialized economies, are always in demand and make up 80% of the FX market trades. There are three popular forms of foreign exchange transactions: 1.) spot transactions, 2.) forward transactions and 3.) options. With spot transactions, there is an agreement between two parties regarding a rate of exchange, and the currencies are traded at that rate. In a forward transaction, money does not change hands until a future date. The buyer and seller agree on an exchange rate and the future date when the transaction will occur, regardless of what the market exchange rate is on that date. The future exchange can be a matter of days, months or years. An option is more flexible than a forward transaction.
It allows the option owner the right to buy or sell a specific amount of foreign currency at a certain price before the chosen expiration date. Depending on the market, the option owner may exercise his option or allow the option to lapse and buy at the less expensive current market rate. For years, foreign exchange rates were relatively stable or fixed, and were dependent upon the gold-exchange standard. The FX market in the past was slow to respond to changing events. Under the gold standard, the currencies were valued by their exchange worth in gold. This system was established in 1944 at the Bretton Woods, New Hampshire Conference. In planning for the end of World War II, the conference sought to establish stability in the world economic structure. The U.S. dollar was chosen as the base of the system. The values of all currencies were expressed in relation to the worth of the dollar. The dollar was valued at $35.00 per ounce of gold. Problems arose in the 1960’s regarding the supply of gold owned by the U.S. government.
There were concerns about whether the United States owned enough gold to redeem the dollars accumulated in other countries. In 1971, U.S. dollars were no longer exchanged for gold; and in 1973, the floating exchange rate system that governs the FX market today was put into place. Now, all currencies are valued by the market forces of supply and demand. Since the abandonment of the gold standard, the FX market has become an important part of international economics. With the advent of floating exchange rates, the foreign exchange market has become unregulated. No institution sets rules for trading, and it is not under the supervision of any international organization. When necessary, governments and central banks often work together to restore stability to the FX market. Foreign exchange and international trade are closely connected. Together, they affect the economic situation of people throughout the world.
7. Discuss the contribution of both the domestic and international shipping lines to the economy of the country. It is generally accepted that more than 90 per cent of global trade is carried by sea. Throughout the last century the shipping industry has seen a general trend of increases in total trade volume. Increasing industrialization and the liberalization of national economies have fuelled free trade and a growing demand for consumer products. Advances in technology have also made shipping an increasingly efficient and swift method of transport.
World seaborne trade figures i.e. the amount of goods actually loaded aboard ships have increased considerably since the 70‘s and in 2008, reached 8.2 billion tons of goods loaded. As with all industrial sectors, however, shipping is not immune to economic downturns and 2009 witnessed the worst global recession in over seven decades and the sharpest decline in the volume of global merchandise trade. In tandem with the collapse in economic growth and trade, international seaborne trade volumes contracted by 4.5 per cent and total goods loaded went down to 7.8 billion tons in 2009. However seaborne trade bounced back in 2010 and grew by an estimated 7 % taking the total of goods loaded to 8.4 billion tons.
Developing countries continued to account for the largest share of global seaborne trade (60% of all goods loaded and 56 % of all goods unloaded), reflecting their growing resilience to economic setbacks and an increasingly leading role in driving global trade. Developed economies‘ shares of global goods loaded and unloaded were 34 % and 43 % respectively. Transition economies accounted for 6 % of goods loaded and 1 % of goods unloaded. ―Developing countries are expanding their participation in a range of different maritime businesses.
They already hold strong positions in ship scrapping, ship registration and the supply of seafarers, and they have growing market shares in more capital-intensive or technologically advanced maritime sectors such as ship construction and ship owning. China and the Republic of Korea between them built 72.4 per cent of world ship capacity (dwt) in 2010, and 9 of the 20 largest countries in ship owning in January 2011 are developing countries. 8. How does the following affects the operation of the shipping industry. a. Gross National product (GNP)
Gross national product (GNP) is the market value of all the products and services produced in one year by labor and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership. GNP does not distinguish between qualitative improvements in the state of the technical arts (e.g., increasing computer processing speeds), and quantitative increases in goods (e.g., number of computers produced), and considers both to be forms of “economic growth”. Basically, GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country.
GNP measures the value of goods and services that the country’s citizens produced regardless of their location. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal. Gross National Product (GNP) is often contrasted with Gross Domestic Product (GDP). While GNP measures the output generated by a country’s enterprises (whether physically located domestically or abroad) GDP measures the total output produced within a country’s borders – whether produced by that country’s own local firms or by foreign firms. When a country’s capital or labour resources are employed outside its borders, or when a foreign firm is operating in its territory, GDP and GNP can produce different measures of total output. In 2009 for instance, the United States estimated its GDP at $14.119 trillion, and its GNP at $14.265 trillion b. Gross Domestic product (GDP)
Gross Domestic Product (GDP) is one of the most important indicators of SNA which characterizes final results of production activities of economic units – residents. It represents the value of final goods and services produced by these units during the accounting period in prices of final purchasers. It can be computed as the sum of value added of all industries (or institutional sectors) plus net taxes on products (taxes on products less subsidies on products). Gross value added is defined as the difference between the value of produced goods and services (output) and value of goods and services entirely consumed in the production process (intermediate consumption). GDP can be also defined as the sum of primary incomes payable by resident producers to participants of the production process (both residents and non-residents): compensation of employees, net taxes on production and imports, gross operating surplus and gross mixed income.
GDP by final use represents the sum of final consumption of goods and services, gross fixed capital formation, change in inventories, net acquisition of valuables and net exports of goods and services. Volume indices of GDP are derived by dividing the value of GDP in the accounting period in prices of the base period by its value in the base period. Commonly the base period is changed every five years. In practice most of the CIS countries change the base period every year because of substantial changes which occur in economic structure and prices.
Volume indices of GDP in the accounting year as compared with the previous year are computed in this case by dividing the value of GDP in the accounting year in prices of the previous year by the value of GDP in the previous year. When volume indices of GDP are calculated for long periods the method of chain indices is used. GDP is closely related to other important aggregates of the SNA: gross national income and gross national disposable income. c. National Income accounts
National income is the total value a country’s final output of all new goods and services produced in one year. Understanding how national income is created is the starting point for macroeconomics. The national income identity
This relationship is expressed in the national income identity, where the amount received as national income is identical to the amount spent as national expenditure, which is also identical to what is produced as national output. Throughout macroeconomics the terms income, output and expenditure are interchangeable. National income accounts
Since the 1940s, the UK government has gathered detailed records of national income, though the collection of basic data goes back to the 17th Century. The published national income accounts for the UK, called the ‘Blue Book’, measure all the economic activities that ‘add value’ to the economy. Adding value
National output, income and expenditure, are generated when there is an exchange involving a monetary transaction. However, for an individual economic transaction to be included in aggregate national income it must involve the purchase of newly produced goods or services. In other words, it must create a genuine addition to the ‘value’ of the scarce resources. For example, a transaction that involves selling a second-hand good, and which was new two years ago does not add to national income, though the original production and purchase does. Transactions which do not add value are called transfers, and include second-hand sales, gifts and welfare transfers paid by the government, such as disability allowance and state pensions. The creation of national income
The simplest way to think about national income is to consider what happens when one product is manufactured and sold. Typically, goods are produced in a number of ‘stages’, where raw materials are converted by firms at one stage, then sold to firms at the next stage. Value is added at each, intermediate, stage, and, at the final stage, the product is given a retail selling price. The retail price reflects the value added in terms of all the resources used in all the previous stages of production. Final output
In accounting terms, only the value of final output is recorded. To avoid the problem of double counting, only the value of the final stage, the retail price, is included, and not the value added in all the intermediate stages – the costs of production, plus profits. In short, national income is the value of all the final output of goods and services produced in one year. When goods are bought second-hand, the transaction does not add new value and will not be included in national output. If second-hand goods are included, double-counting will occur, and this would falsely inflate the value of national income.
For example, if the car in question is sold in two year’s time for £15,000 it would provide the owner with money, but the sale will not add to national income. If it were included in national income, it would make the value of the car £35,000 – the initial £25,000 plus the second hand value of £15,000. This is clearly not the case, so any future second-hand sales are not included when valuing national income. Such second-hand transactions are called transfers. Calculating national income
Any transaction which adds value involves three elements – expenditure by purchasers, income received by sellers, and the value of the goods traded. For example, if a student purchases a textbook for £30, spending = £30, income to the bookseller = £30, and the value of the book = £30. All of the transactions in an economy can be looked at in this way, giving us three ways to measure national income. There are three methods of calculating national income:
1. The income method, which adds up all incomes received by the factors of production generated in the economy during a year. This includes wages from employment and self-employment, profits to firms, interest to lenders of capital and rents to owners of land. 2. The output method, which is the combined value of the new and final output produced in all sectors of the economy, including manufacturing, financial services, transport, leisure and agriculture. 3. The expenditure method, which adds up all spending in the economy by households and firms on new and final goods and services by households and firms.
Chained value measurement
The components of national output are valued according to their importance to the overall economy. The weights used were based on estimates made every 5 years, but, from 2003, an annual adjustment to the weightings was introduced to improve the reliability of the weighting – a process called annual chain linking. This allowed for a more up-to-date, and therefore a more accurate measure of changes to the level of national income. A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income (NNI* adjusted for natural resource depletion).
All are specially concerned with counting the total amount of goods and services produced within some “boundary”. The boundary is usually defined by geography or citizenship, and may also restrict the goods and services that are counted. For instance, some measures count only goods and services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.
Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation. Although some attempts were made to estimate national incomes as long ago as the 17th century, the systematic keeping of national accounts, of which these figures are a part, only began in the 1930s, in the United States and some European countries. The impetus for that major statistical effort was the Great Depression and the rise of Keynesian economics, which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information so that their interventions into the economy could proceed as well-informed as possible.
9. Discuss the role of the following in the shipping industry. a. Asia Pacific Economic Cooperation (APEC)
Asia-Pacific Economic Cooperation (APEC) is a forum for 21 Pacific Rim countries (formally Member Economies) that seeks to promote free trade and economic cooperation throughout the Asia-Pacific region. It was established in 1989 in response to the growing interdependence of Asia-Pacific economies
and the advent of regional trade blocs in other parts of the world; to fears that highly industrialized Japan (a member of G8) would come to dominate economic activity in the Asia-Pacific region; and to establish new markets for agricultural products and raw materials beyond Europe (where demand had been declining).
 APEC works to raise living standards and education levels through sustainable economic growth and to foster a sense of community and an appreciation of shared interests among Asia-Pacific countries. APEC includes newly industrialized economies, although the agenda of free trade was a sensitive issue for the developing NIEs at the time APEC founded, and aims to enable ASEAN economies to explore new export market opportunities for natural resources such as natural gas, as well as to seek regional economic integration (industrial integration) by means of foreign direct investment. Members account for approximately 40% of the world’s population, approximately 54% of the world’s gross domestic product and about 44% of world trade. b. Association of Southeast Asian Nations (ASEAN)
On 26 August 2007, ASEAN stated that it aims to complete all its free trade agreements with China, Japan, South Korea, India, Australia and New Zealand by 2013, in line with the establishment of the ASEAN Economic Community by 2015. In November 2007 the ASEAN members signed the ASEAN Charter, a constitution governing relations among the ASEAN members and establishing ASEAN itself as an international legal entity. During the same year, the Cebu Declaration on East Asian Energy Security was signed in Cebu on 15 January 2007, by ASEAN and the other members of the EAS (Australia, People’s Republic of China, India, Japan, New Zealand, South Korea), which promotes energy security by finding energy alternatives to conventional fuels.
On 27 February 2009 a Free Trade Agreement with the ASEAN regional block of 10 countries and New Zealand and its close partner Australia was signed, it is estimated that this FTA would boost aggregate GDP across the 12 countries by more than US$48 billion over the period 2000–2020. ASEAN members together with the group’s six major trading partners – Australia, China, India, Japan, New Zealand and South Korea – are slated to begin the first round of negotiations on 26-28 February 2013 in Bali, Indonesia, on establishment of the Regional Comprehensive Economic Partnership. c. European Union (EU)
The European Union (EU) is an economic and political union of 28 member states that are located primarily in Europe. The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. Institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, the European Central Bank, the Court of Auditors, and the European Parliament. The European Parliament is elected every five years by EU citizens. The EU’s de facto capital is Brussels. The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by the Inner Six countries in 1951 and 1958, respectively. In the intervening years the community and its successors have grown in size by the accession of new member states and in power by the addition of policy areas to its remit.
The Maastricht Treaty established the European Union under its current name in 1993. The latest major amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009. The EU has developed a single market through a standardised system of laws that apply in all member states. Within the Schengen Area (which includes 22 EU and 4 non-EU states) passport controls have been abolished. EU policies aim to ensure the free movement of people, goods, services, and capital, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries, and regional development. d. North America Free Trade Association (NAFTA)
On January 1, 1994, the North American Free Trade Agreement between the United States, Canada, and Mexico (NAFTA) entered into force. All remaining duties and quantitative restrictions were eliminated, as scheduled, on January 1, 2008. NAFTA created the world’s largest free trade area, which now links 450 million people producing $17 trillion worth of goods and services. Trade between the United States and its NAFTA partners has soared since the agreement entered into force. U.S. goods and services trade with NAFTA totaled $1.6 trillion in 2009 (latest data available for goods and services trade combined). Exports totaled $397 billion. Imports totaled $438 billion.
The U.S. goods and services trade deficit with NAFTA was $41 billion in 2009. The United States has $918 billion in total (two ways) goods trade with NAFTA countries (Canada and Mexico) during 2010. Goods exports totaled $412 billion; Goods imports totaled $506 billion. The U.S. goods trade deficit with NAFTA was $95 billion in 2010. Trade in services with NAFTA (exports and imports) totaled $99 billion in 2009 (latest data available for services trade). Services exports were $63.8 billion. Services imports were $35.5 billion. The U.S. services trade surplus with NAFTA was $28.3 billion in 2009. e. General Agreements on Tariffs and Trade (GATT)
The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” It was negotiated during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947 and lasted until 1994, when it was replaced by the World Trade Organization in 1995. The original GATT text (GATT 1948) is still in effect under the WTO framework, subject to the modifications of GATT 1994. The main role of GATT in the international trade was regulating the contracting parties to achieve the purpose of the agreement which were reducing tariffs and other barriers, and to achieve the liberalization in international trade.
The role was reflected in following aspects: Firstly, GATT established a set of standard to guide the contracting parties to participate in international trade practices. GATT stipulated several of basic principle to conduct the contracting parties in international business, such as General Most-Favored-Nation Treatment (Article II), Non-discriminatory Administration of Quantitative Restrictions (Article XIII), and General Elimination of Quantitative Regulations (Article XI) and so on in the “GATT 1947”. Every contracting party should obey these basic principles when they were involved in trade relations, otherwise they would be condemned, even be taken revenge by other parties. Besides this, contracting parties reached quite a little of agreements, and made some rules during pervious multilateral trade negotiations. For instance, Kennedy Round which was started from May 1964 brought about the Anti-dumping Agreement. (WTO). These rules and agreements which were made in the multilateral rounds later become the basic principles which were accepted by all the parties, and stimulated the development of international trade. Secondly, GATT reduced the tariff on the basis of mutual benefit, accelerate the trade liberalization after the World War II. GATT’s major contribution was to reduce of tariffs by sponsoring “rounds” of multilateral negotiations. (Mike.W.P, 2008) By sponsoring the multilateral negotiations, there was a significant reduce of the tariff. There were about 35% average tariff reductions in both Kennedy Round and Tokyo Round.
Future more, in the Uruguay Round which was the most productive in the history of GATT multilateral negotiation, the contracting parties practiced the rules that kept cutting the tariff rate, there was an average tariff cut of 39% in this round of negotiation. (Reck A, 2010) By cutting the tariff rate, there is less trade barriers in doing international business which will mutual benefit the parties which participated, and promote trade liberalization. Thirdly, GATT reduced the discrimination in tariff and trade which promoted to reduce other trade barriers. As stated in the Article II: schedule of concession in “GATT 1947”, “Each contracting party shall accord to the commerce of the other contracting parties’ treatment no less favorable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.” According to this statement, GATT regulate the contracting parties cannot increase the levels of tariff as their wish, but some countries used other non-tariff barriers to promote their protectionism. Therefore, GATT claimed the contracting parties should not use other barriers to protect their own industries, it requested the reduction of the non-tariff barriers and quantitative restriction to make sure the benefit from the reduction of tariff not be erased by the non-tariff barriers. After Kennedy Round, the multilateral negotiation started to cover non-tariff barriers on goods.
In 1968/1969, GATT compiled the “Inventory of Non-tariff Barriers” which listed more than 800 individual trade barriers in several volumes. (Quambusch, L) Codes was one of the six agreements passed in the Tokyo Round, it established new rules on government procurement, technical barriers to trade, customs valuation, import licensing, antidumping, and subsidies and countervailing measures.(Morrison.A.V, 1986) The codes worked towards the goal which to eliminate the non-tariff barriers. Future more, the Uruguay Round also made the progress in decreasing and eliminating non-tariff barriers, especially in agriculture products. All these are good for eliminating the trade barriers, which towards the development of the international trade. Fourthly, GATT protected the benefits of the developing countries to a certain extent to international trade. One of the basic objectives of GATT was that “raising of standards of living and the progressive development of the economies of all contracting parties, and considering that the attainment of these objectives is particularly urgent for less-developed contracting parties.”
(GATT 1947) In order to achieve this objective, GATT established some special measures for less-developed countries, such as provide tariff protect for specific industries, quotas which are with the purpose of balance of payment. With the increasing number of developing countries jointed the GATT, there were more concern in the trade position and benefit of less-developed countries, more over with the developing countries’ flight, so GATT established some measures for developing countries so that will benefit the less-developed countries in export-oriented trade. At the GATT ministerial meeting of 1963, it enabled the Contracting Parties to discharge the responsibilities towards the development objectives of the developing countries which led to add Part IV which entitled “ Trade and Development” to the General Agreement. (Yusuf.A, 1982) The new Part IV provided preferential treatment to the developing countries.
In the Uruguay Round which was “an important milestone for developing countries in their integration into the global economy” (Martin.W & Winters.L.A, 1996), the participants agreed a number of rules which would benefit the developing countries, for example, agricultural liberalization, manufacture trade liberalization. There was a significant reduction of non-tariff barriers (especially export subsidies) in agriculture, it converted virtually all agriculture nontariff barriers into tariff. In manufacture trade, the tariff levied on manufacture products which imported from developing countries was reduced by 40 percent on average. All these measurement reduced the burden on the economy of developing countries, and had positives in the development of trade for less developed countries. Finally, GATT acted as the “court of international trade”, by providing a platform for contracting parties to negotiation and talk to settle disputes in international trade.
One of the objectives of GATT was to settle the disputes between two or more parties. When two or more parties are involved in the international trade, it is inevitable that without disputes. Some of the disputes may be solved by the two parties themselves, however, some disputes could not be solved by themselves, without the help of the third party, and the disputes may be remaining unresolved for years. So it needed GATT to solve those disputes which could not solve by parties themselves. Before it was replaced by WTO, in a certain period, GATT had become a legal mechanism to settle trade disputes among contracting parties, it provided a platform for contracting parties to settle disputes so that the trade conflicts and disputes can be solved immediately which would protect the benefit of both parties, and lay the foundation to achieve the main objective of GATT. f. World Trade Organization (WTO)
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. Trade negotiations
The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. These agreements are not static; they are renegotiated from time to time and new agreements can be added to the package. Many are now being negotiated under the Doha Development Agenda, launched by WTO trade ministers in Doha, Qatar, in November 2001. Implementation and monitoring
WTO agreements require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted. Various WTO councils and committees seek to ensure that these requirements are being followed and that WTO agreements are being properly implemented. All WTO
members must undergo periodic scrutiny of their trade policies and practices, each review containing reports by the country concerned and the WTO Secretariat.
The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgements by specially appointed independent experts are based on interpretations of the agreements and individual countries’ commitments. Building trade capacity
WTO agreements contain special provision for developing countries, including longer time periods to implement agreements and commitments, measures to increase their trading opportunities, and support to help them build their trade capacity, to handle disputes and to implement technical standards. The WTO organizes hundreds of technical cooperation missions to developing countries annually. It also holds numerous courses each year in Geneva for government officials. Aid for Trade aims to help developing countries develop the skills and infrastructure needed to expand their trade. Outreach
The WTO maintains regular dialogue with non-governmental organizations, parliamentarians, other international organizations, the media and the general public on various aspects of the WTO and the ongoing Doha negotiations, with the aim of enhancing cooperation and increasing awareness of WTO activities. 10. Create a scenario of the Philippine Shipping In the year 2025. At what level of development would the Philippine shipping then be? What major determinants may then play a major role? Explain.