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Thursday, May 6, 2010

WTO and Foreign Exchange Market

Seminar report on

WTO and Foreign Exchange Market

Submitted to : MS. LORRAINE JOAN ROSARIO

LECTURER

DEPT. OF BUSINESS ADMINISTATION

ST. JOSEPH ENGINEERING COLLEGE

MANGALORE

Submitted by : VENIL VAZ

VINITA FRANK

VARSHA P.S.

SHRUTHI H.V.

SHRUTHI M.G.

SWATHI

SUBJECT : INTERNATIONAL BUSINESS MANAGEMENT

Subject code : 09MBA28

Submitted on : 1st April 2010

Group number : 10

TABLE OF CONTENTS

Ø WTO- Genesis

Ø Difference between WTO & GATT

Ø Functions of WTO

Ø Future of WTO

Ø Advantages & disadvantages of WTO

Ø Foreign Exchange Markets

INDIA AND THE WTO

WTO- GENESIS

In order to implement the final act of Uruguay Round agreement of GATT the World Trade Organization was established on January 1, 1995 .On May 31, 1995, WTO General Council approved the Head Quarters Agreement with the Swiss Confederation, including the decision to locate the WTO in Geneva. First WTO Ministerial Conference held in Singapore, 9-13 December 1996.India is one of the (out of 104) founder members of the WTO.

Differences between GATT and WTO

GATT

WTO

· It is a set of rules and multilateral agreement.

· It was designed with an attempt to establish International Trade Organization.

· It was applied on a provisional basis. applicable

· Its rules are to trade in merchandise goods.

· Its dispute settlement system was not faster and automatic.

· It is a permanent institution.

· It is established to serve its own purpose.

· Its activities are full and permanent.

· Its rules are applicable to trade in merchandise and trade in related aspects of intellectual property.

· Its dispute settlement system was fast and automatic.

(1)

Functions of WTO

The World Trade Organization is expected to play its role in the following areas:

· WTO administers the 28 agreements contained in the final Act and a number of plurilateral agreements and government procurement through various councils and committees.

· WTO oversees the implementation of the significant tariff cut(averaging 40%) and also reduction of non –tariff measures agreed to in the trade negotiation.

· WTO examines regularly the trade regimes of individual member countries. Thus, it acts as a watchdog of international trade.

· WTO provides for Disputes Settlement Court in order to adjudicate the trade disputes which could not be solved through bilateral talks between member countries. The disputes are examined by the panel of independent experts in view of WTO rules and provide rulings. This procedure is laid down in order to provide equal treatment for all trading partners and to encourage member countries to live up to their obligation.

· WTO acts as a agreement consultant for world trade. The economists of the WTO observe the pulse of the global economy and provide studies on the main trade issues.

· Technical Co-Operation and training division is established in the WTO’s secretariat in order to help the developing countries in the implementation of Uruguay Round results.

· Member countries can use the WTO as a forum for continuous negotiation of exchange of trade barriers in the entire world.

· WTO co-operates with other international institutions like IMF, IBRD(world bank)and ILO involved in global economic policy making.

· WTO oversees the national trade policies of member governments. (2)

There was much discussion and arguments for and against regarding India becoming a member of the WTO.

India was one of the 76 Governments that became members of the WTO on the first day of the formation of the WTO. Thus, India was one of the founder members of the WTO.

THE FUTURE OF THE WTO

Much remain to be done on the international trade front. Four issues at the forefront of the current agenda of the WTO are the increase in antidumping policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual property rights in many nations, and high continued tariff rates on nonagricultural goods and services in many nations. we shall look at each in turn before discussing the latest round of talks between WTO members aimed at reducing the trade barriers, the Doha Round, which began in 2001.

1. Antidumping Actions

Antidumping actions proliferated during the 1990s. WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers show that they are being harmed. Unfortunately, the rather vague definition of what constitutes “dumping” has proved to be a loophole that many countries are exploiting to pursue protectionism.

Between January 1995 and June 2004, WTO members had reported implementation of some 2,537antidumping actions, some 383; the EU initiated 287 over the same period, and the united states 356. Antidumping actions seem to be concentrated on certain sectors of the economy. Basic metal industries (e.g. aluminum and steel)accounted for 770 of the 2,537 antidumping cases between 1995 and 2004, followed by chemicals (495), plastic(315), and machinery & electrical equipment (210). In sum four sectors account for some 70% of all antidumping sections reported to the WTO. These four sectors since 1995 have been characterized by periods of intense competition and excess productive capacity, which have led to low prices and profits( or losses)for firms in those industries. (3)

Figure (a) shows the rise (and fall) of antidumping actions (number of actions per year by reporting country)

(2)Protectionism in Agriculture

Another recent focus of the WTO has been the high level of tariffs and subsidies in the agricultural sector of many economies. Tariff rates on agricultural products are generally much higher than tariff rates on manufactured products or services. In 2003, for example, the average tariff rates on non agricultural products were 4.2% for Canada, 3.8% for European union,3.9% for Japan and 4.4% for united states. On agriculture products, however the average tariff rate was 21.2% for Canada, 15.9% for European Union, 18.6% for Japan, and 10.3% for the united states. The implication is that consumers in these countries are paying significantly higher prices than necessary for agricultural products imported from abroad, which leaves them with money to spend on other goods and services.

The biggest defenders of existing system have been the advanced nations of the world, which want to protect their agricultural sectors from competition by low cost producers in developing nations. In contrast developing nations have been pushing hard for reforms that would allow (4)

their producers greater access to the protected market of the developed nations. Estimates suggest that removing all subsidies on agricultural production alone in OECD countries could return to the developing countries of the world three times more than all the foreign aid they currently receive from the OECD nations. In other words free trade in agriculture could help to jump start economic growth among the world’s poorer nations and alleviate global poverty.

(3) Protecting Intellectual Property:

Another issue that has become increasingly important to the WTO has been protecting. As noted earlier, the1995 Uruguay agreement that established the WTO also contained an agreement to protect intellectual property. The TRIPS regulations of WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50years. Rich countries had to comply with the rules within a year. Poor countries, in which such protection generally was much weaker, had 5years grace and the very poorest had 10 years. Inadequate protection for intellectual property reduced to incentive for innovation. Because innovation is central engine of economic growth and rising living standards, the argument has been that a multilateral agreement is needed to protect intellectual property.

Without such an agreement it is feared that producers in a country. Lets say India, might market imitations of patented innovations pioneered in a different county let say United States. This can affect International trade in two ways. First it reduces the export opportunities in India for the original innovator in the United States. Second, to the extent that the Indian producers is able to export its for pirated imitation to the countries, it also reduces the export opportunities in those countries for the U.S inventor. Also, one can argue that because the size of the total world market for the innovator is reduced, its incentives to pursue risky and expensive innovations are also reduced. The net effect would be less innovation in the world economy and less economic growth.

Intellectual property rights violation is also an endemic problem in several other industries, most notably computer software and music. A world without piracy would have more new drugs, computer software and music recordings produced every year. In turn, this would boost economic and social welfare, and global economic growth rates. While the 1995 Uruguay (5)

agreement that created the WTO did make head way with the TRIPS agreements, some believe these requirements do not go far enough and further commitments are necessary.

(4) Market access for Nonagricultural goods and services:

Although the WTO and the GATT have made huge strides in reducing the tariff rates on nonagricultural products, much work remains. In particular, while average tariffs are low, high tariff rate persist on certain goods in developed nations, which limit access and economic growth. For eg, Australia and South Korea, both countries, still have bound tariff rates of 15.1% and 24.6% respectively on imports of transportation and equipment. The bound tariff rates on imports of transportation equipment into the United States, E.U and Japan 2.7%, 4.8% and 0% respectively. The tariff on service remains higher than on industrial goods. The average tariff on business and financial services imported into United States for example is 8.2% into the E.U it is 8.5% and into Japan it is 19.7%.

The WTO would like to bring down tariffs rates still further, and reduced the scope for the selective use of high tariff rates. The ultimate aim is to reduce tariff rates to zero. While this might sound ambitious, 40 nations have already moved to zero tariffs on information technology goods, so a precedent exists. The WTO would like to bring down tariff rates on imports of Nonagricultural goods into developing nations. While many of the nations use the infant industry argument to justify the continued imposition of high tariffs rates, ultimately these rates need to come down for these nations to reap the full benefits of international trade. For eg, the bound tariff rates of 53.9% on imports of transportation equipment into India and 33.6% on imports into Brazil, by reducing the real income of consumers who must pay more for transportation equipment and related services.

BENEFITS TO INDIA

· The GATT secretariat estimated that the largest increase in the level of merchandise trade in goods (in general, it would be US $ 745 billion by the end of 2005) will be in the areas of clothing (60 per cent), agriculture, forestry and Fishery products (20 per cent) and processed food and beverages (19 per cent). India’s competitive advantage lies in these fields. Hence, it is logical to believe that India will obtain large in these sectors. (6)

· The reduction in agricultural subsidies and barriers to export of agricultural exports from India will increase.

· The multilateral rules and disciplines relating to anti-dumping, subsidies and countervailing measures, safeguards and disputes settlement machinery will ensure greater security and predictability of international trade. This would be favorable environment for India’s international business.

· India along with other developing countries as the market access to a number of advanced countries due to the imposition of the clauses concerning to trade without discrimination.

· Impact of Abolition of Textile Quota System: The dawn of 2005 brings in host of opportunities for the Indian textile sector as quota system in the world textile sector as quota system in the world textile trade ended. According the Apparel Export Promotion Organization the industry is hopeful of achieving 15-18 per cent growth in exports following the dismantling of Multi-Fibre Agreement. These projections are based on India’s presence in all stages of textile chain and cheap and abundant labor. However, OECD study indicates that low cost would not be the sole factor to win the competition in the world textile trade during the post MFA and the countries that aspire to maintain export-led strategy must also develop their expertise in value added services.

· According to the OECD report, technical textiles (non clothing application of textiles) are growing at fast rate and account for half of the textile production. While developing countries like India and Pakistan will scramble for the low-value textiles and apparel market, advanced countries and China are building expertise in technical textiles. The textile industry in India, therefore, will need greater supply-chain affiances and flexible labour laws to improve its position in technical textiles market.

· Adoption of product patent: In line with its World Trade Organization obligations, India has adopted the product patent regime for food, drugs and chemicals from the 1st January, 2005 and embedded software with adequate safeguards to protect the interests of common man.

(7)

DISADVANTAGES TO INDIA

Despite the benefits of the WTO to India, many economists and sociologists argue that, India would be in a disadvantageous position by becoming a member of the WTO. This argument includes:

· Trade Related Intellectual Property Rights (TRIPs): Protection of intellectual property rights (patents, copyrights, trademarks etc.) has been made stringent. Under TRIPs patents can be granted to methods of agriculture and horticulture, bio-technological process including living organism like plants and animals. The duration of patents under TRIPs is 20 years.

· Introduction of product patents in India will lead to hike in drug prices by the MNCs who have the product patent. This will hit the poor people who will not have the generic option open.

· The extension of intellectual property right to agriculture has negative effects on India. Presently, plant breeding and seed production are largely, in the public domain. Indian scientists have undertaken plant breeding and multiplication which is in the hands of National and state Seed Corporations. Government, through this machinery seed to Indian formers at very low prices. Indian Scientists, in future will find it extremely difficult to breed new varieties and Indian research institutions will be unable to compete financially with MNCs and will be denied access to patented genetic material. MNCs will get the control over our genetic resources and as such the control over food production would be jeopardized.

· Patenting has also been extended to a large area of micro-organism.

· Application of TRIMs agreement undermines any plan or strategy of self-reliant growth based on local technology and resources.

· Services: Services sector like insurance, banking, telecommunications, transportation is backward in India compared to that of developed countries. Therefore, inclusion of trade in services is detrimental to the interest of India. Liberalization of service sector would be under tremendous pressure.

(8)


BIBLIOGRAPHY

International Business - By P. Subba Rao

THE FOREIGN EXCHANGE MARKET

Meaning

Foreign exchange is the money of the foreign country in the form of notes and coins, foreign currency bank balances, bank notes, cheques , drafts, electronic money and any other forms foreign. Foreign exchange market is physical, on-line and institutional structure through which money of one country is exchanged for any other country, at the rate determined either mutually or by market forces.

Functions of Foreign Exchange Market

Functions of foreign exchange market includes transfer of purchasing power between countries , credit for international business , and minimize exchange rate risks.

Transfer of purchasing power:

International business transactions between two countries or individual or institutional are dealt in one currency. The individuals or institution or country should have the currency in which the transaction takes places in order to make purchase. The foreign exchange market transfers the purchasing power.

Credit for international business:

The importer cant pay for the goods until they are received. But the exporter can’t export until he receives payment or guarantee for payment. Therefore, providing credit when the goods are in transmit is necessary. Foreign exchange market provides a sources of credit in the form of instruments like bankers acceptance, letters of credit and letter of guarantee.

Minimize exchange rate risks:

There are a numbers of risks in dealing with foreign exchange due to fluctuations in foreign exchange rate in addition to political risks. Foreign exchange market transfers foreign exchange risk to others, who are willing to carry them through ‘hedging’. (9)

NATURE OF FOREIGN EXCHANGE MARKET

Foreign exchange market is widespread throughout the globe, market participants are specialists, transactions involve immense volume and involvement of variety of transactions.

Widespread geographically:

Foreign exchange market is widespread geographically. Foreign exchange transactions take place in the countries in the world and in all geographical areas in each country.

All time operations:

Foreign exchange market carries the transactions 24 hours a day and 365 days a year. In fact, foreign exchange transactions take place every minute in one or the other part of the world. All the trading centers work 24 hours a day in view of varying time zones in various countries

Market Participants:

Foreign exchange market consists of two levels viz., interbank or wholesale market and retail market. The participants in the foreign exchange market include bank and non bank foreign exchange dealers, individuals and firms conducting commercial and instruments transactions , speculators and arbitragers, central banks and treasuries & foreign exchange brokers.

Banks & non-bank foreign exchange dealers operate in interbank & client markets. Individuals & firms conducting commercial & investment transactions include importers, exporters, international portfolio investors & others. This category of parties uses the foreign exchange market to facilitate the commercial transactions.

Spectaculars and arbitragers participate in foreign exchange market to earn profit by trading in foreign exchange rate changes. Central banks & treasuries participate in the market to acquire and spend foreign exchange reserves and to influence the price in the market.

Size of the market:

The volume of foreign exchange market is very large. The volume of foreign exchange traded is estimated at US $1.5 trillion a day. (10)


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