How developed is the Russian banking system compared to that of Western banking systems? How high is the level of competition in the Russian banking market compared to that in the West?
There is no doubt among experts that the Russian banking system is underdeveloped according to international standards. If you take any general indicator, like banking system capital to GDP, or banking assets to GDP, you will see that Russia falls well below developed and many emerging economies. That could be explained historically: in emerging economies the banking system is usually underdeveloped and grows in step with the economy. But despite the size of Russia’s economy, its banking system has not experienced a strong growth in quality. Moreover, Russia periodically faces severe banking crises, as in 1998, 2004, 2008, and 2010/11. Any of these events, of course, reduces the banking system’s potential, and creates a very unfavorable situation for the economic growth.
As for competition within the banking system, formally, Russia has slightly less than 950 banks, which seems more than enough. But most of those banks are very small, and of course they do not affect the overall situation, as the concentration of banking activity within the top 30 or top 100 banks is huge – 70% and 95%, respectively. Even more, one bank, Sberbank, accounts for approximately 50% of private savings and about 25% of the overall banking assets that makes it very difficult for a small or medium-sized regional bank to compete with Sberbank. Another cause of the weak competition is the large number of state-controlled banks, whose share of the market is increasing. State controlled banks, like Sberbank, VTB, Rosselkhozbank, Vnesheconombank, and so on are occupying a bigger and bigger share of the banking activity in the country. All of those banks enjoy considerable state support – both financial and what we call “administrative support”–like during the crisis of 2008, when all four banks – Rosselkhozbank, VEB, VTB and Sberbank – received huge capital injections from the government. And now we see as VTB performing poorly prepared and executed hostile takeover of the Bank of Moscow that creates huge losses for both banks. In order to keep those banks afloat the government provides them financial support in a form of a gift amounting 150 bln rubles ($5 bln). Of course such a policy distorts the competition, and it's not good for the economy.
What will be the effect of the introduction in 2019 of the new banking requirements developed by the Basel Committee on Banking Supervision, the so-called Basel III proposition, on the banking system in Russia?
2019 is far beyond any reasonable horizon in Russia. But it seems that Basel III will not affect significantly the Russian banking system, or the banking systems in any emerging economy. The basic idea of Basel III is to increase the capital adequacy ratio. But historically, in all emerging economies and in Russia in particular, this ratio is much higher than in developed economies. In Russia the average capital adequacy ratio is above 13%, while in Western Europe it is 2%-4%. Moreover in Russia the bulk of the banking capital is of Tier 1 according to Basel. Basel III at some point introduced a capital adequacy ratio of 6%-7%, which is well below what we see in Russia today. So I don’t think Basel III will have a significant impact on Russia.
Is the Russian banking system capable of supporting the establishment of a regional financial center? Is there a national foundation for a regional financial center?
The bulk of Russian banks, at least all big banks, are rather well developed when it comes to their relations with banks abroad. A lot of them have corresponding accounts with dozens of international banks; they operate in different currencies; they trade on international markets. So I would say that big Russian banks not only the biggest are rather active players in the international banking system, in the international financial system. Moreover, in Eastern Europe Russian banks are among the biggest; Sberbank and VTB are the biggest banks in this area, and they are ordinary, normal players in the banking system. So to answer the first part of your question, of course, Russian banks are ready to play a role, and they do play a role.
But for me, an international financial center is not only infrastructure, it's not only the banking system. I'm a little skeptical about the idea of establishing an international financial center in Moscow, not because we are Russians and we don’t speak English, and not only because of the lack of rule of law in the country. Sooner or later, I hope, we shall solve both of those problems – knowledge of English and an effective legal system and law enforcement. The problem is that an international financial center is usually a place where you have lots of investors who are ready to invest their money. An international financial center is an infrastructure that is relevant to the needs of the people who are ready to invest. In Russia in general and in Moscow, in particular, there are a lot of wealthy people, but they invest their money through their investment vehicles abroad – rich Russian individuals are not very interested in investing in Russia, because they would like to diversify their risks. But in the structure of the Russian economy, there is a lack of institutional investors – pension savings, insurance savings, of long-term savings, – and that is the biggest obstacle in the implementation of the idea to establish the regional financial center. In order for Moscow to become a top-ranked financial center, institutional investors must emerge.
How do you feel about the idea of creating an international financial center outside of Moscow?
Where is the international financial center in New York? Manhattan, yes; sooner it is downtown, but midtown as well. Where is the financial center in London? Is it the City, or is it the Docklands? Both, and some other places as well. So a financial center is not a single, concentrated place in the city. A financial center is an area where investors can do realize their ideas, meet one another, use existing infrastructure. But where any particular investor is building his own office is not very important, and definitely that should be his own decision not of the president, not of the government.
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A Brief History of U.S. Banking
Source: The Office of the Comptroller of the Currency
Banking has changed in many ways through the years. Banks today offer a wider range of products and services than ever before, and deliver them faster and more efficiently. But banking's central function remains as it has always been. Banks put a community's surplus funds (deposits and investments) to work by lending to people to buy homes and cars, to start and expand businesses, to put their children through college, and for countless other purposes. Banks are vital to the health of our nation's economy. For tens of millions of Americans, banks are the first choice for saving, borrowing, and investing.
The First Banks: 1791 to 1832
In most states of the early federal union, bank organizers needed special permission from the state government to open and operate. For a while, an additional layer of oversight was provided by the Bank of the United States, a central bank founded in 1791 at the initiative of the nation's first Secretary of the Treasury, Alexander Hamilton. Its Congressional charter expired in 1811. A second Bank of the United States was created in 1816 and operated until 1832.
In those days, city bankers tended to be extremely cautious about to whom they lent and for how long. To make sure they had enough cash available to meet unexpected demands from depositors, bankers generally made short-term loans only. Thirty to sixty days was the norm. Typically manufacturers and shopkeepers would use these funds to pay their suppliers and workers until they could sell the goods to customers. After that sale they would pay off the bank loan.
In less settled parts of the country, lending standards tended to be more liberal. There farmers could frequently obtain bank loans to buy land and equipment and finance the shipment of farm products to market. Because of the unpredictability of weather and market conditions, loan losses tended to be higher too.
Many Kinds of Money: 1832 to 1864
When the second Bank of the United States went out of business in 1832, state governments took over the job of supervising banks. This supervision often proved inadequate. In those days banks made loans by issuing their own currency. These bank notes were supposed to be convertible, on demand, to cash—hat is, to gold or silver. It was the job of the bank examiner to visit the bank and certify that it had enough cash on hand to redeem its outstanding currency. Because this was not always done, many bank note holders found themselves stuck with worthless paper. It was sometimes difficult or impossible to detect which notes were sound and which were not, because of their staggering variety.
By 1860 more than 10,000 different bank notes circulated throughout the country. Commerce suffered as a result. Counterfeiting was epidemic. Hundreds of banks failed. Throughout the country there was an insistent demand for a uniform national currency acceptable anywhere without risk.
In response, Congress passed the National Currency Act in 1863. In 1864, President Lincoln signed a revision of that law, the National Bank Act. These laws established a new system of national banks and a new government agency headed by a Comptroller of the Currency. The Comptroller's job was to organize and supervise the new banking system through regulations and periodic examinations.
Creating a National Currency: 1865 to 1914
The new system worked well. National banks bought U.S. government securities, deposited them with the Comptroller, and received national bank notes in return. By being lent to borrowers, the notes gradually entered circulation. On the rare occasion that a national bank failed, the government sold the securities held on deposit and reimbursed the note holders. No owner of a national bank note ever lost his or her money.
National bank notes were produced and distributed through an involved process. Once the basic engraving and printing were done (at first by private printers, later by the U.S. Bureau of Engraving and Printing), the notes were entered on the books of the Office of the Comptroller of the Currency, then returned to the printer where the seal of the Treasury Department was stamped on each.
Next, the notes were shipped to the bank whose name appeared on them, where they were signed by two senior bank officers. The notes were then ready for circulation. National bank notes were the mainstay of the nation's money supply until Federal Reserve notes appeared in 1914.
National bank notes featured elaborate scenes and portraits drawn from American history. The complexity of their design was intended to foil counterfeiters. Today, collectors prize national bank notes as outstanding examples of the engraver's art.
The Banking Crisis: 1929 to 1933
The onset of the worldwide depression in 1929 was a disaster for the banking system. In the last quarter of 1931 alone, more than 1,000 U.S. banks failed, as borrowers defaulted and bank assets declined in value. This led to scenes of panic throughout the country, with long lines of customers queuing up before dawn in hopes of withdrawing cash before the bank had no more to pay out.
The banking crisis was the first order of business for President Franklin D. Roosevelt. The day after taking office, on March 5, 1933, he declared a bank holiday, closing all the country's banks until they could be examined and either be allowed to reopen or be subjected to orderly liquidation. The bulk of this work fell to the Office of the Comptroller of the Currency (OCC).
In June 1933, Congress enacted federal deposit insurance. Accounts were covered up to $2,500 per depositor (now $100,000). Other laws were passed regulating bank activities and competition, with the objective of limiting risks to banks and reassuring the public that banks were, and would remain, safe and sound.
A Revolution in Banking: 1970s to Today
During the last quarter century, banking has undergone a revolution. Technology has transformed the way Americans obtain financial services. Telephone banking, debit and credit cards, and automatic teller machines are commonplace, and electronic money and banking are evolving. The techniques of bank examination have changed, too. Today OCC examiners use computers and technology to help ensure that the banks they supervise understand and control the risks of the complex new world of financial services.
The OCC supervises national banks and enforces federal banking laws. It rules on new charter and merger applications for national banks, and conducts basic research on banking and the economy. The tools have changed, but for the OCC, the basic mission remains the same as in the days of Lincoln: to ensure a safe, sound, and competitive national banking system that supports the citizens, communities, and economy of the United States.
РАЗДЕЛ 6 «МЕЖДУНАРОДНОЕ СОТРУДНИЧЕСТВО»
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How Globalization Affects Developed Countries
By Nicolas Pologeorgis
The phenomenon of globalization began in a primitive form when humans first settled into different areas of the world; however, it has shown a rather steady and rapid progress in recent times and has become an international dynamic which, due to technological advancements, has increased in speed and scale, so that countries in all five continents have been affected and engaged.
What Is Globalization?
Globalization is defined as a process that, based on international strategies, aims to expand business operations on a worldwide level, and was precipitated by the facilitation of global communications due to technological advancements, and socioeconomic, political and environmental developments.
The goal of globalization is to provide organizations a superior competitive position with lower operating costs, to gain greater numbers of products, services and consumers. This approach to competition is gained via diversification of resources, the creation and development of new investment opportunities by opening up additional markets, and accessing new raw materials and resources. Diversification of resources is a business strategy that increases the variety of business products and services within various organizations. Diversification strengthens institutions by lowering organizational risk factors, spreading interests in different areas, taking advantage of market opportunities, and acquiring companies both horizontal and vertical in nature. Industrialized or developed nations are specific countries with a high level of economic development and meet certain socioeconomic criteria based on economic theory, such as gross domestic product (GDP), industrialization and human development index (HDI) as defined by the International Monetary Fund (IMF), the United Nations (UN) and the World Trade Organization (WTO). Using these definitions, some industrialized countries in 2012 are: Austria, United Kingdom, Belgium, Denmark, Finland, France, Germany, Japan, Luxembourg, Norway, Sweden, Switzerland and the United States.
SEE: What Is The World Trade Organization?
Components of Globalization
The components of globalization include GDP, industrialization and the Human Development Index (HDI). The GDP is the market value of all finished goods and services produced within a country's borders in a year, and serves as a measure of a country's overall economic output. Industrialization is a process which, driven by technological innovation, effectuates social change and economic development by transforming a country into a modernized industrial, or developed nation. The Human Development Index comprises three components: a country's population's life expectancy, knowledge and education measured by the adult literacy, and income.
The degree to which an organization is globalized and diversified has bearing on the strategies that it uses to pursue greater development and investment opportunities.
The Economic Impact on Developed Nations
Globalization compels businesses to adapt to different strategies based on new ideological trends that try to balance rights and interests of both the individual and the community as a whole. This change enables businesses to compete worldwide and also signifies a dramatic change for business leaders, labor and management by legitimately accepting the participation of workers and government in developing and implementing company policies and strategies. Risk reduction via diversification can be accomplished through company involvement with international financial institutions and partnering with both local and multinational businesses.
SEE: Evaluating Country Risk For International Investing
Globalization brings reorganization at the international, national and sub-national levels. Specifically, it brings the reorganization of production, international trade and the integration of financial markets. This affects capitalist economic and social relations, via multilateralism and microeconomic phenomena, such as business competitiveness, at the global level. The transformation of production systems affects the class structure, the labor process, the application of technology and the structure and organization of capital. Globalization is now seen as marginalizing the less educated and low-skilled workers. Business expansion will no longer automatically imply increased employment. Additionally, it can cause high remuneration of capital, due to its higher mobility compared to labor.
The phenomenon seems to be driven by three major forces: globalization of all product and financial markets, technology and deregulation. Globalization of product and financial markets refers to an increased economic integration in specialization and economies of scale, which will result in greater trade in financial services through both capital flows and cross-border entry activity. The technology factor, specifically telecommunication and information availability, has facilitated remote delivery and provided new access and distribution channels, while revamping industrial structures for financial services by allowing entry of non-bank entities, such as telecoms and utilities.
Deregulation pertains to the liberalization of capital account and financial services in products, markets and geographic locations. It integrates banks by offering a broad array of services, allows entry of new providers, and increases multinational presence in many markets and more cross-border activities.
In a global economy, power is the ability of a company to command both tangible and intangible assets that create customer loyalty, regardless of location. Independent of size or geographic location, a company can meet global standards and tap into global networks, thrive and act as a world class thinker, maker and trader, by using its greatest assets: its concepts, competence and connections.
Some economists have a positive outlook regarding the net effects of globalization on economic growth. These effects have been analyzed over the years by several studies attempting to measure the impact of globalization on various nations' economies using variables such as trade, capital flows and their openness, GDP per capita, foreign direct investment (FDI) and more. These studies examined the effects of several components of globalization on growth using time series cross sectional data on trade, FDI and portfolio investment. Although they provide an analysis of individual components of globalization on economic growth, some of the results are inconclusive or even contradictory. However, overall, the findings of those studies seem to be supportive of the economists' positive position, instead of the one held by the public and non-economist view.
Trade among nations via the use of comparative advantage promotes growth, which is attributed to a strong correlation between the openness to trade flows and the affect on economic growth and economic performance. Additionally there is a strong positive relation between capital flows and their impact on economic growth.
Foreign Direct Investment's impact on economic growth has had a positive growth effect in wealthy countries and an increase in trade and FDI, resulting in higher growth rates. Empirical research examining the effects of several components of globalization on growth, using time series and cross sectional data on trade, FDI and portfolio investment, found that a country tends to have a lower degree of globalization if it generates higher revenues from trade taxes. Further evidence indicates that there is a positive growth-effect in countries that are sufficiently rich, as are most of the developed nations.
The World Bank reports that integration with global capital markets can lead to disastrous effects, without sound domestic financial systems in place. Furthermore, globalized countries have lower increases in government outlays and taxes, and lower levels of corruption in their governments.
One of the potential benefits of globalization is to provide opportunities for reducing macroeconomic volatility on output and consumption via diversification of risk.
Non-economists and the wide public expect the costs associated with globalization to outweigh the benefits, especially in the short-run. Less wealthy countries from those among the industrialized nations may not have the same highly-accentuated beneficial effect from globalization as more wealthy countries, measured by GDP per capita etc. Although free trade increases opportunities for international trade, it also increases the risk of failure for smaller companies that cannot compete globally. Additionally, free trade may drive up production and labor costs, including higher wages for more skilled workforce.
Domestic industries in some countries may be endangered due to comparative or absolute advantage of other countries in specific industries. Another possible danger and harmful effect is the overuse and abuse of natural resources to meet new higher demands in the production of goods.
The Bottom Line
One of the major potential benefits of globalization is to provide opportunities for reducing macroeconomic volatility on output and consumption via diversification of risk. The overall evidence of the globalization effect on macroeconomic volatility of output indicates that although direct effects are ambiguous in theoretical models, financial integration helps in a nation's production base diversification, and leads to an increase in specialization of production. However, the specialization of production, based on the concept of comparative advantage, can also lead to higher volatility in specific industries within an economy and society of a nation. As time passes, successful companies, independent of size, will be the ones that are part of the global economy.
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Pros And Cons Of Globalization
World is not a vast space anymore; everything has come together, tightly connected and interrelated that it feels like we are a part of a global village. In the new era, we all are connected to each other in a way that it never really existed before. Production of one part of the world is consumed in other part of the world. People can fly from one end to another end of the world, nothing is distant anymore. Globalization is the absence of imaginary walls and fences that countries had built up against each other, for the purpose of ambition, security and traditions.
Globalization has brought all of us together and made us understand that we are all a part of a single entity, living in different circumstances culturally. Globalization was a tidal wave that first started to enhance the economic state of the world; therefore, it was primarily a fiscal movement.
But its effect could not be restricted to finances; globalization has also affected the cultural, social, psychological and political state of the world. It has affected the mindsets of people, the way they think and react. It is globalization that has consolidated the world over communication.
This is the reason why when people increasingly migrate or travel to far away countries now; they do not have the sense of fear of the unknown anymore. They already know what to expect because the globalization has brought all of us together. Globalization is the reason how the westernization of the naïve cultures took place. Globalization has spread like a fire because of the heavy amount of information exchange all over the world and the increased amount of travel. Another reason for the wide spread of globalization is that there is a considerable amount of resource depletion all over the world and every country now depends on each other for the basic resources. To study the multi dimensional impact of globalization of every aspect of the world we need to discuss its conceivable advantages and disadvantages. In this article, we have mentioned some of the major pros and cons of globalization, to give you a better idea of the concept.
Advantages & Disadvantages Of Globalization
Positive Side Of Globalization
Globalization leads to higher employment since developed countries outsource jobs to under-developed countries. There is also increased investment in the financial projects of developing countries by established economies, which helps in accelerating their growth. Since the outset of globalization, free trade between nations has been established, this means that the countries can produce and import goods without paying heavy tariffs. This results in the availability of wide range of products at reasonable prices, everywhere in the world.
Because of globalization, a lot of information is shared across the world. Various cultures can be understood and acknowledged on global level. Countries which never had anything in common before are sharing and negotiating on a global scale now. All of this leads to the blending of cultures where people from different cultures are more interested in knowing about each other. This leads to increased tolerance among the people; ignorance is shed and social handicaps like racism is contained.
Politics is now addressed on a global platform and the power is becoming a consolidated ‘world’ concept rather than just a marginalized theory that meant that political power is separate for separate countries. Since everything is shared together economically, culturally, socially, politically also the decisions are taken keeping the benefit of the whole world in mind. Issues like global warming, depletion of natural resources, degrading ecosystems, increasing pollution in oceans and seas, etc. are addressed on the political level now since it affects the entire world together. The countries that face the tyranny of their political system are continually supported by the evolved countries, since it is not a secret anymore what happens in which country.
Negative Side Of Globalization
The major disadvantage of the globalization in the economic sector is that it has made the rich richer and left the poor poorer. The increased opportunities have benefited the managers and top investors but the hardship has fallen on workers and labour class. Since, the labour is easily available now because of the disappearance of the boundaries and people migrate from one country to another in the search of work, workers are paid horrendously low as they are available in abundance. Even if the jobs are outsourced and developing countries are benefitted because of the increase in job opportunities, the power still remains in the hands of the developed countries.
This means that the profits are not equally distributed and most of it remains with the developed economies. Since every country of the world is intertwined with each other economically, economic hardship on one country will greatly affect another country. The goods and products from one country are easily available in another country, which means that the cultural uniqueness is lost.
Since media plays a great role in globalizing all the information available, people suffer the evils of sensationalization. The media of the powerful nations has the power to circulate the information to every corner of the world, which means that they get to decide which information has to be shared and what should be the opinion of the people. It also ruins the personal identity of the cultures by westernizing everything. Third world countries are increasingly adopting the western ways as they feel inferior about their own culture. The new generation is increasingly becoming unaware of the nuances of their own culture. Globalization also leads to spreading of epidemics and communicable diseases as travelling has become accessible to all.
It can be said that the developing nations are still being colonized by the western nations but in a much sophisticated form, for example, these nations form their political decisions according to the suggestions, manipulations and pressures of the more developed nations, so that they can retain their standing in the global scenario. The developed nations take full advantage of this aspect.
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How do countries decide what to export?
Most economists argue that countries produce and export goods in which they have an absolute or comparative advantage
What is an absolute advantage? What is a comparative advantage?
A country enjoys an absolute advantage when it can produce a certain good more efficiently and/or at less cost than another country. A country enjoys a comparative advantage when it can produce a certain good with a lower opportunity cost than another country.
What does the term “opportunity cost” mean?
An opportunity cost is what you sacrifice in making an economic choice. In terms of foreign trade, it refers to the commercial profits accruing to product X that are sacrificed in deciding to produce and export product Y instead of X.
What currency is used in completing an international exchange?
Generally, buyers have to complete their purchase in the currency of the selling nation. In other words, before buying a foreign product they must secure some foreign currency.
Does that mean that people and businesses must go the bank and exchange their money before buying a foreign product through the mail or online?
No. It’s both more complicated and easier than that. When you buy something from a foreign vendor the transaction will most likely be routed through your bank and the bank of the vendor. These banks will secure the currency they need to complete the transaction from the foreign currency market. This market is not an actual place; it is a web of currency traders connected electronically.
Who or what determines the exchange rates in the foreign currency market?
Currently exchange rates are determined by laws of supply and demand. The amount you pay for foreign currency is determined by the broader demand for that currency and the amount available. If there is a great deal of interest in buying a nation’s products, investing in its industries, or buying its government’s bond then demand for the currency will be high.
What is a “strong“ or “weak” currency?
If demand for a currency is high and foreigners must pay a lot of their nation’s currency to obtain it, we say that the currency is strong. If demand for a currency is low and foreigners need to spend comparatively little of their nation’s currency to obtain it, we say that the currency is weak.
Have international exchange rates always been set by supply and demand?
No. The current system of flexible exchange rates is relatively new. For the first part of the twentieth century many nations were on the gold standard—that is, they backed their currency with gold and uniformly tied the value of their currency to a specific quantity of gold.
But during the Great Depression the United States weakened the link between their currencies and gold. After World War II, the United States and many other nations adopted a fixed rate of exchange at a conference held at Bretton Woods, New Hampshire. The value of the dollar was pegged to a certain quantity of gold ($35 per ounce) and foreign currencies were pegged to the dollar (i.e. one American dollar equaled four German marks, 360 Japanese yen, 625 Italian lira, .357 British pounds, etc).
What happened to the system of fixed exchange rates adopted at Bretton Woods?
America’s growing trade deficits and spiraling expenditures in Vietnam led many to lose confidence in the American economy and the American dollar on which the Bretton Woods agreements hinged. In 1971, President Richard Nixon announced that the United States would no longer convert its dollars to gold, essentially eliminating the dollar’s value as the basis of international finance.
Do all international currencies currently “float freely”—that is, do all nations allow the market to establish the exchange rate for their currencies?
Not exactly. Governments can influence the value of their currencies by buying and selling currencies in the foreign exchange market. For example, a country can aggressively buy foreign currency, and dump their currency into the foreign currency market in the process, thereby weakening their currency—since the supply of their currency on the foreign exchange market has been increased, the price for it will drop. Nations generally do this in order to boost their exports—if their currency is weak, foreigners can more easily acquire their currency and therefore their nation’s products. Most international trade agreements discourage this, but some nations periodically do this.
Do governments adopt any other measures in regards to international trade?
Yes. Nations often adopt measures aimed at preserving a trade surplus and a positive balance of payments. As part of these efforts, some nations provide protection for their domestic industries from foreign competition.
What is a trade surplus?
A trade surplus occurs when a country exports more than it imports. A trade deficit, on the other hand, occurs when a country imports more than it is exports.
What is a positive balance of payments?
The balance of payments measures not just the net exchange of goods between countries, but also the amount of money other countries spend on services, such as a banking and insurance, and the amount of money foreigners invest in your country’s economy. The United States could have a trade deficit, but a positive balance of payments if much of the money spent on foreign goods returned when foreigners consumed American services and invested in American industries.
What is protectionism?
Protectionism is a set of policies aimed at protecting a nation’s industries from foreign competition. Common protectionist measures include tariffs, quotas, and embargos.
What is a tariff?
A tariff is a tax on an imported good thus raising its price and diminishing its attraction.
What is a quota?
A quota is a limit placed on the quantity of a specific good allowed into the country.
What is an embargo?
An embargo is a complete prohibition of a certain good or lists of goods allowed into a country.
What is free trade?
Free trade is a trade philosophy and policy that emphasizes unrestricted commerce between nations. “Free traders” oppose the use of tariffs, quotas, and embargos.
What are the basic arguments in favor of free trade?
By insulating domestic producers from foreign competition protectionism discourages modernization and improvement. Domestic consumers are also forced to pay higher prices since the price of foreign imports that might bring down retail prices are artificially elevated by government intervention. Also, protectionism invites retaliation from other nations. A protectionist measure that benefits one domestic industry might trigger a retaliatory measure injuring a different, more vulnerable industry.
What are the basic arguments in favor of protectionism?
Protectionism protects domestic industries and therefore domestic jobs. The money spent by consumers fuels job creation and business expansion at home. In addition, foreign industries can afford to pay lower wages, are not forced to meet similar safety and environmental standards, and are often subsidized by their governments making it difficult for domestic industries to compete without some degree of protection.
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History of International Trade
by Arnold Kling
On the topic of international trade, the views of economists tend to differ from those of the general public. There are three principal differences. First, many noneconomists believe that it is more advantageous to trade with other members of one’s nation or ethnic group than with outsiders. Economists see all forms of trade as equally advantageous. Second, many noneconomists believe that exports are better than imports for the economy. Economists believe that all trade is good for the economy. Third, many noneconomists believe that a country’s balance of trade is governed by the “competitiveness” of its wage rates, tariffs, and other factors.
Economists believe that the balance of trade is governed by many factors, including the above, but also including differences in national saving and investment.
The noneconomic views of trade all seem to stem from a common root: the tendency for human beings to emphasize tribal rivalries. For most people, viewing trade as a rivalry is as instinctive as rooting for their national team in Olympic basketball.
To economists, Olympic basketball is not an appropriate analogy for international trade. Instead, we see international trade as analogous to a production technique. Opening up to trade is equivalent to adopting a more efficient technology. International trade enhances efficiency by allocating resources to increase the amount produced for a given level of effort. Classical liberals, such as Richard Cobden, believed that free trade could bring about world peace by substituting commercial relationships among individuals for competitive relationships between states.
History of Trade Theory
David Ricardo developed and published one of the first theories of international trade in 1817. “England,” he wrote,may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time.
To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England.2
If a painter takes twenty hours to paint a house, and a surgeon could do the job in fifteen hours, it still makes sense for the surgeon to hire the painter. The surgeon can earn enough money in a few hours of surgery to pay for the entire house-painting job. We say that the surgeon’s comparative advantage is in doing surgery, while the painter’s comparative advantage is in painting houses. Ricardo’s theory of comparative advantage explains why a surgeon will hire a house painter and why a lawyer will hire a secretary.
The opportunity to trade with the painter enables the surgeon to paint her house by doing a few hours of surgery. Similarly, international trade enables one country to obtain cloth more cheaply by specializing in the production of wine and trading for cloth, rather than producing both goods for itself.
What determines the pattern of specialization and trade? In the 1920s, Eli Heckscher and Bertil Ohlin offered one theory, called the factor proportions model. The idea is that a country with a high ratio of labor to capital will tend to export goods that are labor-intensive, and vice versa.
The Ricardo and Heckscher-Ohlin theories tend to predict clear patterns of specialization in trade. A country will focus on one type of industry for exports and another type of industry for imports. In fact, the types of industries in which a country exports and the types in which it imports are not dramatically different. This fact has led to the emphasis on another theory of trade, developed by Paul Krugman and others. The idea is that patterns of specialization develop almost by accident and that these patterns persist because of positive feedback. This is known as the increasing-returns model of international trade. “Increasing returns” means that the more of something you produce, the more efficient you get at producing it.
In the United States, for example, Detroit became an automobile-manufacturing center. Once the first large automaker located in Detroit, it was natural that other auto companies would be started there because it was easier to find employees with the right skills. Likewise, people with the skills to produce movies were first located in Hollywood. It became uneconomical to try to build an auto plant in Hollywood or a movie studio in Detroit. Thus, Detroit became an exporter of automobiles, and Hollywood became an exporter of movies. The same model of efficiency explains the international arena—why, for example, the Swiss specialize in watches and the Japanese in portable music players.
Gains from Trade
All of the economic theories of international trade suggest that it enhances efficiency. In this regard, international trade is like a new technology. It adds to the productive capacity of all countries that engage in trade. Some of the efficiency is due to comparative advantage, as in the Ricardo and Heckscher-Ohlin theories. In addition, some efficiency comes from taking advantage of increasing returns.
Trade based on comparative advantage should tend to benefit small countries more than large countries. That is because the benefits of comparative advantage are proportional to the difference between the relative prices in world markets and the relative prices that would prevail in home markets without trade. If that difference is large, then a country earns a large advantage from trade. If that difference is small, then there is only a small advantage from trade. Small countries are more likely than large countries to find that relative prices in the world market differ significantly from what would prevail in their home markets.
Another benefit from trade is that it promotes dynamism andinnovation within an economy. Improvements in manufacturing quality and productivity in the United States in recent decades have been credited, in part, to the pressure of competition from Japan and elsewhere.
An economy that is closed to trade is one in which inefficient industries and laggard firms are well protected. In fact, studies suggest that barriers to trade are a major cause of extreme underdevelopment. The countries that are most closed to trade tend to be the poorest in the world. Countries that have reduced trade barriers and increased the share of imports and exports in their economies tend to be among the fastest-growing nations.
According to a World Bank study, twenty-four developing countries that became more integrated into the world economy in the 1980s and 1990s had higher income growth, longer life expectancy, and better schooling. Per capita income in these countries, home to half the world’s population, grew by an average of 5 percent in the 1990s compared with only 2 percent in rich countries. China, India, Hungary, and Mexico are among the countries that adopted policies that allowed their people to take advantage of global markets. As a result, they sharply increased the amount of their GDP accounted for by trade. Real wages in these countries rose and the number of poor people fell.
The study also points out that two billion people—particularly in sub-Saharan Africa, the Middle East, and the former Soviet Union—are in countries being left behind. These countries’ integration into the world economy has not increased, and their ratio of trade to GDP has stagnated or fallen. Their economies have generally contracted, poverty has increased, and education levels have risen less rapidly than in the more globalized countries.
Another report notes that exports plus imports as a share of output among the richest countries rose from 32.3 percent to 37.9 percent between 1990 and 2001. Moreover, among developing countries, that share rose from 33.8 percent to 48.9 percent over that period. The success of India and China recently, and Japan, Taiwan, South Korea, and other countries in the 1970s and 1980s, is due in large part to trade.
The OECD countries, which together have more than $25 trillion in GDP, account for most of world trade. Poor countries account for less than $300 billion in GDP, which is less than one-tenth of world output, and thus account for only a miniscule fraction of world trade.
Purchasing Power Parity
If goods were perfectly tradable across borders, with no trade barriers or transactions costs, then there would be no reason for prices to differ. This gives rise to the idea of purchasing power parity, a theory of exchange-rate adjustment based on the law of one price.
If the same good sells for one hundred dollars in the United States and one hundred euros in Europe, then according to the law of one price the exchange rate between dollars and euros ought to be one. The theory of purchasing power parity is that this relationship holds for an overall market basket of goods and services.
Empirical tests tend to show only a weak tendency for exchange rates to move in the direction of purchasing power parity. This means that cross-border trade is not nearly friction free. The failure of purchasing power parity to hold, except perhaps in the long run, indicates that transportation costs, language-translation costs, and other factors limit the integration of global markets.
Capital Flows and the Balance of Trade
In 2000, U.S. exports were $1.1 trillion and U.S. imports were close to $1.5 trillion. The excess of imports over exports is called a current account deficit. What caused this deficit? Modern economists believe that the trade surplus and capital flows are mutually determined. When a nation’s domestic saving (personal saving plus retained earnings ofcorporations) exceeds the domestic uses of saving (financing its private investment and its government budget deficit), then that nation will run a trade surplus, and vice versa.
Imagine that all international trade took place in the form of barter of goods and services. If you wanted to buy a Japanese car, you would have to offer something of equivalent value in return. In that case, trade in goods and services would have to balance, and there would be no trade deficits.
To obtain a Japanese car without trading goods and services, the Japanese have to accept financial assets in exchange for cars. These assets could be dollars, shares of U.S. companies, corporate bonds or other private debt instruments, or U.S. government debt. A country that is accumulating foreign assets will necessarily run a trade surplus. A country that is selling assets to foreigners will necessarily run a trade deficit. A country will accumulate assets when its domestic saving is greater than its domestic uses of saving. A country will sell assets when its national saving is insufficient for its domestic uses of saving.
Typically, one would expect wealthy countries to have excess saving and to invest in capital-poor countries. From this perspective, it is an anomaly that the United States is a capital importer and China is a capital exporter. However, the United States is a relatively attractive country in which to invest, and American policies tend to encourage consumption rather than saving.
Economic theory indicates that international trade raises the standard of living. A comparison between the performance of open and closed economies confirms that the benefits of trade in practice are significant.
Интернет ресурсы по теме
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