ASSIGNMENT-2
2/20/2012
TRADE OPENNESS
Openness in trade refers to the degrees to which countries or economies permit or have trade with other countries or economies. The trading activities include import and export, foreign direct investment (FDI), borrowing and lending, and repatriation of funds abroad. Open economies generally greater market opportunities, at the same time they also face greater competition from businesses based in other countries. In terms of financial development trade openness enables a form to obtain funds from other countries, and also invest its surplus funds in other countries. Trade openness has been measured in various ways in the hundreds of studies investigating the issue, but most measures share a common feature; they express trade in terms of its share of income for a given country.
Exports jumped 34.42% in April 2011 to $ 23.8 billion continuing the fast paced growth of the previous fiscal. Imports, too, continued to rise although at a lower pace of 14/13% to $32.8 billion. The trade deficit for April 2011 was estimated at $ 8.98 billion which was lower than the deficit of $ 11.02 billion during April 2010. India's exports grew a record 37.6 percent in the 2010-11 fiscal year due to high growth in the engineering sector, gems & jewellery and petroleum products. Oil imports during April, 2011 were valued at $ 10.18 billion which was 7.7% higher than oil imports of $ 9.45 billion in the corresponding period last year. Non-oil imports during April, 2011 were estimated at $ 22.64 billion which was 17.3% higher than non-oil imports of $ 19.31 billion in the previous year.
disappointing. Clearly, adverse conditions internationally have influenced these results, but problems also abound in domestic policies relating to the exchange rate, public debt and high interest rates, and there have been difficulties in implementing all the economic reforms. Comment: Most of economic literature considers that trade liberalization leads to an increase in welfare derived from an improved allocation of domestic resources. It may be fair to say that openness, by leading to lower price, better information and newer technologies, has a useful role to play in promoting growth. Trade liberalization helps the poor in the same way it helps other consumer, by lowering prices of imported goods and keeping prices of import substitutes lower, thus increasing real incomes. Given the high incidence of poverty in both countries, it is clear that trade alone cannot address this problem; improvements in income distribution will also be necessary to achieve a faster pace of poverty reduction and for the growth of the economy. In conclusion, there are strong theoretical reasons to believe that trade is a positive tool for development, although extensive overnight liberalisation may be too disruptive and a phased and reciprocal approach is most likely to achieve a balanced outcome. Beyond theory we see that many developing countries have used trade, together with sound domestic policies, as a key motor for their development and have seen significant reductions in poverty and increases in welfare. The hope is that these emerging growth economies can bring a new wave of developing countries into the globalisation process. To achieve this, trade barriers need to be reduced both in developing and in developed markets.
Spain has slightly reduced its world market share in exports, but to a much lower extent than other European countries. In fact, in the case of services, Spain has overtaken Italy and reduced the gap with France and the UK. Coming back to goods exports, Spain s share in world manufacturing trade has been stable at slightly below 2%, compared to a share around 3% for agricultural products. The highest share in world trade is within the automotive/automobile sector, but other industrial products, such as machinery, iron products, clothing and chemical products, also have a world trade share close to 2%. Indeed, the maintenance of the export share has been preserved in most industries during the last decade. However, in spite of this lower apparent price competitiveness; Spain increased its exports at a faster pace than some other EU countries. Several explanations to this apparent puzzle have been: low price elasticity of Spanish exports, important diversification of markets and the very competitive behaviour of Spanish exporting firms. Comment: As Spain is a developed economy, we can clearly see the advantages of trade openness on the economy of Spain. Openness to import increases efficiency and reduces costs for industry, reduces costs for consumers and entails restructuring cost. It seems that trade openness is a necessary, but not a sufficient, requirement for development.
Changes over the last two decades on the Major Economies due to Trade Openness
World trade recorded its largest ever annual increases in 2010 as merchandise exports surged 14.5% buoyed by a 3.6% recovery in global output as measured by gross domestic product. Both trade and output grew faster in developing economies than in developed countries. The difference between trade of developed and developing economies was even greater on the import side, where developed economies imports rose by 11% compared with 18% in the rest of the world. Export in volume terms were upto 13% in developed economies while the increase for developing economies was nearly 17%. The factors that contributed to the unusually large 12% drop in the world trade in 2009 may have also helped boost the size of the rebound in 2010. Although the growth of world export in 2010 was the highest on record in a data series going back to 1950, it might have been even higher if trade had quickly reverted to its pre-crisis trend. This did not happen. The rebound was strong enough for world exports to recover their peak level of 2008, but it was not strong enough to bring about a return to the previous growth path. The record expansion of trade and the revival of economic activity in 2010 were certainly welcome developments, but their importance should not be overstated.
Cumulative number of PTAs in force, 1950-2010, notified and non-notified PTAs, by country group
Article XXIV of the General Agreement on Tariffs and Trade (GATT) permits member countries of the World Trade Organization (WTO) to form preferential trade agreements (PTAs) such as free trade agreements (FTAs) and customs unions (CUs) under which PTA members can grant tariff reductions to each other that they do not extend to other WTO members. Empirical evidence indicates that WTO members have made rather liberal use of Article XXIV. The sanctioning of discriminatory trade agreements by GATT Article XXIV and the complicated web of global tariffs that has resulted from their pursuit by WTO member countries raises some uncomfortable questions about the very structure of GATT. Indeed, Article XXIV appears to be in direct conflict with the first and the most fundamental Article of GATT i.e., the most favored nation (MFN) clause that forbids WTO members from pursuing discriminatory trade liberalization. MFN-based liberalisation does not require complex rules of origin. Often, rules of origin are not only difficult and cumbersome to administer, thereby imposing a burden on the business sector, but they also tend to have protectionist effects. Whether intentional or not, they direct exporters towards using inputs that have been produced inside the regional integration area, even if more competitive inputs might have been available in third countries. These rules are therefore not only another source of welfare-decreasing trade diversion, but also a source of discrimination against third countries. From a political perspective, trade liberalisation on the MFN basis provides protection for countries from the abuse of trade policy for political or non-trade purposes by more powerful countries. By contrast, preferential trade agreements may have exclusive, and therefore also exclusionary, character.
Finally, the MFN principle is of particularly high value from the perspective of a small or mediumsized country. On the one hand, small and medium-sized countries often lack the market power necessary to negotiate commitments from larger partners. On the other hand, small and mediumsized countries depend much more on free trade than their larger counterparts because their firms require international markets in order to harvest the gains from specialisation and economies of scale. By contrast, firms in large markets such as the United States may find a sufficiently large customer base already at home. The MFN principle has therefore done small and medium-sized economies a great service: It has secured a certain level of market access on a global scale and it has made sure that the concessions granted by Members in the many trade rounds since the establishment of the GATT have been applied to all trade partners, regardless of their political or economic weight. There are many more points we could mention transparency, global coherence in trade policy making, predictability, fairness considerations and so on. They have one message in common: The MFN principle has lost none of its virtues today; from both an economic and a political point of view, and under both theoretical and practical considerations, it appears to be still the first best approach to trade liberalisation. This is particularly true when we consider the increasing trend towards globalisation. Obviously, the fruits of the increasing entangling of national economies into the world economy can best be reaped by a universally applied rule the MFN principle. The second and third conditions require that duties and other restrictive commercial regulations must be eliminated within a reasonable length of time and that the regional integration area covers "substantially all the trade of member countries. These conditions serve as a litmus test, making sure that the PTA exemption from the MFN principle is only invoked where two or more economies really share a strong and sincere determination towards a quick and broad-based liberalisation of their trade. Fourth, PTAs shall be notified to the WTO and all relevant information made available to enable WTO-Members to evaluate them and make recommendations. This provision has at least two important effects. One is direct: It ensures transparency and enables Members to evaluate the possible effects that a PTA might have on their trade. The second effect, rather indirect but arguably important: In the light of the transparency provision, it is more difficult for the parties to a PTA to agree on rules or commitments that would violate WTO rules or be otherwise detrimental to the interest of third parties.