Title: Cat for Assignment 3A
Course: 383-303-FD-55-01 • International Economics

Test info catégorie

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Open attachment "383-303-FD_assign3A_Article1."

To answer some of the questions in Assignment 3A, first read excerpts from the article "Freedom of trade, the rights of multinational corporations and the dilemma of the State: Reflecting upon the Summit of the Americas, once the smoke has cleared" by economist Jacques Parizeau (attachment).

Question

In the section on the Canada-US Treaty, in the first line, it states "the American Congress became very protectionist."

a) Explain, in general terms, the goal of protectionism. (2 points)

b) Describe the two main forms this trade strategy takes and the global consequences it brings about. (4 points)

Entrez votre réponse ci-dessous.
Feedback: Marks: 2 points for part a), 4 points for part b) a) The objective of protectionism Protectionism is put in place by a country whose goal is to reduce imports coming from abroad and thus protect certain sectors from foreign competition. By establishing protectionist barriers, a country is trying to make foreign products less competitive in favour of domestic products. b) The two forms of this trade strategy Various measures are taken to attain this main objective of reducing imports. There are two distinct forms of protectionist barriers: - Customs tariffs: These consist of taxing imports by directly increasing their price on a country's domestic territory. - Non-tariff barriers: These take the form of quantitative restrictions on imports, political arrangements, administrative controls or even measures to artificially improve the competitiveness of the domestic industry.

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To answer the question, consult your textbook and the article "Freedom of trade, the rights of multinational corporations and the dilemma of the State: Reflecting upon the Summit of the Americas, once the smoke has cleared" by economist Jacques Parizeau (attachment).

Question

When a country applies a protectionist policy, it may use several instruments. Describe three instruments that a country may use and how to apply each one.

Entrez votre réponse ci-dessous.
Feedback: Marks: 4 points per instrument. Here are some possible answers: Customs tariffs or customs duties are the base instrument used to slow down merchandise coming from outside the country. A tariff consists of taxing a foreign product as soon as it arrives at the border, either for a specific amount or, as is more often the case, in ad valorem form (tariff expressed as a percentage of the good's value). For example, Korean TVs entering a given country may be hit with ad valorem customs duties of 10%; that is, the moment it crosses the border, it is subject to an entrance tax of 10%. Quotas are the best-known quantitative restrictions. They are also called "quota restrictions." They consist of accepting only a certain amount of imports, by number or value. For example, at the beginning of the 1990s, France fixed the following entry quotas on foreign TVs entering its territory: Japan was authorized to export no more than 84,000 TVs to France per year, and Korea, 50,000. Production subsidies could appear to be a substitute for customs tariffs, inasmuch as they are a measure that provides protection against foreign competition. The subsidy changes the price national producers pay without changing the price consumers pay: the State grants money to the producers to help them. The producers can then lower their prices as they see fit to oust the imported products and/or pocket greater profits. On the internal market, it is easier for subsidized businesses to remain competitive in the face of goods and services from abroad; in external markets, national exports will have the same advantages. The objective is to encourage the sectors that are already exporting and therefore already have competitive advantages.

Question

Using each of the three instruments you referred to in Question 2, explain the consequences of the various protectionism instruments on:

- The consumer in the country.

- The local producer.

- The price of the protected goods.

Entrez votre réponse ci-dessous.
Feedback: Marks: 5 points per instrument Here are some possible answers: Applying a customs tariff results in: - Consumers paying more for products. - Lower equilibrium quantities and quantities sold. - Sales of domestic products increase. - Sales of foreign products decrease. - The final result is a net loss of production, as the gains made by domestic producers do not compensate for the losses suffered by foreign producers. In practice, quotas have the same effect as tariffs: they lower the quantity of imported products and cause the price of the product to go up. Quotas limit imports and cause prices to go up. On the other hand, local producers sell more. Some foreign producers are eliminated by quotas, but those who aren't get a better price. The state could recover this sum by charging for import licences when allocating quotas. The effect, then, is that quotas subsidize local producers, perhaps while adding to the state coffers, but to the detriment of the consumer. Subsidies change the price domestic producers pay: the State gives money to producers to help them out. Producers can then lower their prices to push out imported products and/or pocket higher profits. In the domestic market, it is easier for subsidized businesses to compete with goods and services from abroad; in foreign markets, domestic exports have the same edge. The objective is to encourage sectors that are already exporting by giving them a competitive advantage (in other words, an artificially created competitive advantage).

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To consult the article "Freedom of trade, the rights of multinational corporations and the dilemma of the State: Reflecting upon the Summit of the Americas, once the smoke has cleared" by economist Jacques Parizeau, open the attachment.

Question

The text states: "When the American company Ethyl sued Canada on the basis of the NAFTA provisions, the awakening was brutal." The Textbook also makes a reference to this company.

In light of the Ethyl case:

a) Give the positive and the negative aspects that come up for the host country when a multinational firm moves in. (6 points)

b) Explain how NAFTA treats a case such as the one involving the Ethyl Corporation. (4 points)

Entrez votre réponse ci-dessous.
Feedback: Marks: 6 points for part a), 4 points for part b) a) The dilemma caused when a multinational moves in (6 points) The arrival of Ethyl Corporation caused a big splash in terms of job creations and the capital it brought with it. This is why the arrival of foreign companies is usually highly valued and received with a good deal of media coverage by politicians looking to increase their political capital and show they are playing a role in their region's development. But the establishment of a new company often comes with negative outcomes, which are usually felt by the people living in the area. Infrastructures for the new company must be built, which may involve expropriating farms or homes and building new roads. Moreover, the day-to-day operations of the new firm might disrupt the lives of people living around it, through pollution, use of highly toxic products, danger to workers' safety, foul odours, and so forth. b) How NAFTA handles these relationships (4 points) Ethyl Corporation, a US company, used the provisions of the North America Free Trade Agreement (NAFTA)which were much less favourable to foreign capital than those of the Multilateral Agreement on Investment (MAI)to recover $251 million from the Canadian government. In April 1997, the Government of Canada had in effect banned the use of a gasoline additive called MMT, a neurotoxin suspected of damaging automobile emission-control devices. Ethyl, the only producer of this product in the world, which itself was also banned in several American states, filed a suit against the Canadian government by using a NAFTA clause that served as the model for the MAI: the mere fact that Parliament debated a ban on MMT amounted to an expropriation of the company's holdings. Also, and as unbelievable as it seems, in August 1998, the Government of Canada agreed to repeal its ban on the sale of MMT. Furthermore, it paid $14 million to Ethyl in damages for lost earnings, reimbursed the corporation's legal fees and had its health agency publish a communiqué declaring MMT to be safe. The example has been used by people contesting the MAI.

To answer this question, you must consult the NAFTA Secretariat website (www.nafta-sec-alena.org).

Question

NAFTA, to which Canada, the United States and Mexico belong, took effect in 1994. It is understood that this agreement adheres to the philosophy defined by the Canada-US Free Trade Agreement (CUSFTA) that involved Canada and the US.

State six important objectives of NAFTA; these could also have been defined in CUSFTA.

Entrez votre réponse ci-dessous.
Feedback: Marks: 1 point per correct answer NAFTA's objectives are to: 1. Eliminate the obstacles to trading products and services between member countries and facilitate the transborder movement of these products and services. 2. Encourage loyal competition in the free trade zone. 3. Substantially boost investment possibilities within the member countries' territory. 4. Efficiently and sufficiently protect and uphold intellectual property rights within the member countries' territories. 5. Establish effective procedures for setting up and applying this agreement, for its joint administration and for settling disputes. 6. Create the framework for more extensive trilateral regional and multilateral cooperation in order to increase and broaden the advantages stemming from this agreement.

Question

The Canada-US Free Trade Agreement and NAFTA are two examples of trade agreements that affect countries within a specific region; they entail a lowering in tariffs only for the countries involved.

Are these regional agreements permitted under the WTO?

Do these regional agreements contravene any WTO rules?

Explain in half a page.

Entrez votre réponse ci-dessous.
Feedback: Article I of the GATT charter and now of the WTO establishes the unconditional clause of the "General Most-Favoured-Nation Treatment," which ensures identical treatment to all partners. If two countries, A and B, bilaterally reduce their customs barriers, this concession must automatically extend to the other WTO member countries. But the WTO recognizes several exceptions. Article XXIV, regarding regional unions such as free-exchange zones and customs unions, undoubtedly constitutes the most important exception to the most-favoured-nation clause. In fact, regional unions reinforce the strength of trade relations between their members, even if this increased cooperation occurs to the detriment of third-country relations, which makes it a challenge to the principle of non-discrimination. But the WTO authorizes regional economic integration agreements, while at the same time setting a certain number of conditions: in particular, tariffs established vis-à-vis third countries must not be higher than their former general level. Thus, the Canada-US Free Trade Agreement and NAFTA do not contravene the WTO.

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Open attachment "383-303-FD_assign3A_Article2."

To answer Question 7, first read the article entitled "Canadians continue to invest abroad," which appeared on February 26, 2002, in La Presse (Montreal).

Question

According to the article, do Canadians invest more abroad? Or is it the opposite, that foreigners are investing more in Canada? Explain.

Entrez votre réponse ci-dessous.
Feedback: It is Canadians who are investing more abroad; the new standards changing the RRSP dollar limit on foreign currency from 20% to 30% have helped make this happen.

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Open attachment "383-303-FD-55_Assign3A_Article2".

To answer Question 8, first read the article entitled "Canadians continue to invest abroad," which appeared on February 26, 2002, in La Presse (Montréal).

Excerpt from the article:

"Over the last two years, Canadians have wagered almost $100 billion on foreign stocks and bonds. That is two times more than the $49.7 billion that foreigners have invested in this country during the same period."

Question

This excerpt deals with two transactions that are entered on the Canadian balance of payments.

a) When entering the $100 billion mentioned in the article, which sign goes in front of the figure: a plus or minus sign? Explain. (4 points)

b) When entering the $49.7 billion, which sign goes in front of the figure? Explain. (4 points)

c) Are these two transactions entered as a current account balance or a capital account balance? (3 points)

d) Which of the above diagrams best depicts the effect of these net flows on the value of the Canadian dollar? Explain. (6 points)

Entrez votre réponse ci-dessous.
Feedback: Marks: - 4 points for part a) - 4 points for part b) - 3 points for part c) - 6 points for part d) a) Plus or minus sign in front of "100 billion" "100 billion" is written with a negative sign in front, as this transaction means money leaving Canada: Canadians bought foreign shares and bonds. b) Plus or minus sign in front of "49.7 billion" "49.7 billion" has a positive sign in front (understood), as this transaction means money coming back to Canada: $49.7 billion invested in the country by foreigners. c) How the two transactions are entered Rather than being entered in the current account balance, the two transactions are entered in the capital account balance. d) The effect of these flows The curve representing the supply of Canadian dollars moves to the right, which lowers the exchange rate. In fact, the capital account balance becomes negative (or a lower positive value): money leaving is illustrated by the curve representing the supply of Canadian dollars moving to the right. On the foreign exchange market, all things being equal, this lowers the break-even point and in consequence the value of the Canadian dollar.

Question

We know that foreign exchange dealers often intervene in foreign exchange markets. Recently, it is estimated that US$1,800 billion is traded every day on the foreign exchange market. But this was not always the case; this came about as a result of changes in the international monetary system.

a) State how the International Monetary System operated as defined by Bretton Woods. (7 points)

b) Explain how the changes that occurred in the function of the monetary system and the capital markets led to the boom in the foreign exchange market. (7 points)

Your answers to questions a) and b) should total approximately 300 to 350 words.

Entrez votre réponse ci-dessous.
Feedback: Marks: 7 points for each part Even though the question has been divided into two parts, the grader should be flexible in correcting it if elements of a) appear in b), or vice versa. a) How the international monetary system operates At Bretton Woods in 1944, the countries established the basics of an organized international monetary system. They came to an agreement on the following points: - Over time, each country must ensure that its currency is convertible with the dollar and with other currencies. - Exchange rates must be fixed. Monetary authorities defined parity and abided by it up until they decided to change it. They used reserves to intervene and maintain this parity. - The US dollar was refundable in gold at a fixed rate of $35 per ounce. The central banks recognized two assets for paying off international transaction balances: the US dollar and gold. - A supranational agency was created. The IMF's main role was to help countries keep fixed exchange rates. Member countries were assigned a quota that determined the amount of their contribution and the share of voting rights assigned to them. b) Explanation of the expansion of the foreign exchange market This paragraph puts the evolution of the IMS from 1958 to 1973 into context, but during this period there was no marked expansion of the foreign exchange market. Somehow, the system worked. This period showed up the contradictions inherent in the Bretton Woods system. The dollar-and-gold standard, which was in effect in most countries in 1958, offered several advantages that stimulated growth in the world economy but that also brought major drawbacks. The parity of the dollar with respect to gold had to be maintained, even though the US posted repeated deficits in their balance of trade. For any other country, this would have led to their currency being devalued. But the US dollar, being a reserve currency, was in circulation in the rest of the world. The withholding of higher and higher amounts of dollars (eurodollars) outside of US territory aroused suspicion about the ability of the US central bank to reimburse these dollars in gold and in face of the real value of US currency. The inflation of dollar reserves held outside the US stimulated speculation against the dollar. In 1971, Richard Nixon suspended the convertibility of the dollar into gold. This unilateral act, without prior discussion, surprised the world and was highly criticized. The permanent deficits of the US balance of payments also led to a first devaluation of the dollar in 1971 and a second in 1973. But without gold-convertibility, the reference values became purely theoretical. The year 1973 also marked the beginning of floating exchange rates. In summary, 1973 brought an end to the gold-convertibility of the US dollar and the end of fixed exchange rates within the International Monetary System. During the period from 1973 to 1985, a system of floating exchange rates took hold, but the central banks exercised strict control over exchange markets. However, from 1985 to today, the effects of capital market deregulation have become apparent, and interventions by the central banks on the market have proven to be much less effective. In fact, since the deregulation of financial markets, capital has circulated freely and moved from country to country; at the same time, this influences the foreign exchange markets. Furthermore, US currency is not the only one traded: several currencies are speculated upon daily (pound sterling, euro, yen, Swiss franc, etc.). It is a multicurrency system. More stock exchanges have opened and the markets trade currencies for cash and credit.