International business

1. Unit II
Introduction to Mercantilism
Mercantilism was an economic theory and practice, dominant in modernized parts of Europe
during the 16th to the 18th century that promoted governmental regulation of a nation's economy
for the purpose of augmenting state power at the expense of rival national powers. It was the
economic counterpart of the previous medieval version of political power: divine right of
kings and absolute monarchy. Mercantilism includes a national economic policy aimed at
accumulating monetary reserves through a positive balance of trade, especially of finished goods.
Historically, such policies frequently led to war and also motivated colonial expansion
The term "mercantile system" was used by its foremost critic, Adam Smith, but "mercantilism" had
been used earlier by Mirabeau. The goal of mercantilist economic policies was to build up the state,
especially in an age of incessant warfare, and the state should look for ways to strengthen the
economy and weaken foreign adversaries. Mercantilism was the dominant school of economic
thought in Europe throughout the late Renaissance and early modern period (from the 15th to the
18th century). Mercantilism encouraged the many intra-European wars of the period and arguably
fueled European expansion and imperialism—both in Europe and throughout the rest of the
world—until the 19th century or early 20th century. England began the first large-scale and
integrative approach to mercantilism during the Elizabethan Era (1558–1603).
Murray Rothbard, representing the Austrian School of economics, describes it this way:
Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was
a system of statism which employed economic fallacy to build up a structure of imperial state power,

2. as well as special subsidy and monopolistic privilege to individuals or groups favored by the state.
Thus, mercantilism held exports should be encouraged by the government and imports discouraged.
Absolute advantage Theory
In economics, the principle of absolute advantage refers to the ability of a party (an individual, or
firm, or country) to produce a greater quantity of a good, product, or service than competitors,
using the same amount of resources. Adam Smith first described the principle of absolute
advantage in the context of international trade, using labor as the only input. Since absolute
advantage is determined by a simple comparison of labor productiveness, it is possible for a party
to have no absolute advantage in anything; in that case, according to the theory of absolute
advantage, no trade will occur with the other party. It can be contrasted with the concept
of comparative advantage which refers to the ability to produce specific goods at a
lower opportunity cost.
Origin of the theory
The main concept of absolute advantage is generally attributed to Adam Smith for his 1776
publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he
countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich
simultaneously by following mercantilism because the export of one nation is another nation’s
import and instead stated that all nations would gain simultaneously if they practiced free trade
and specialized in accordance with their absolute advantage. Smith also stated that the wealth of
nations depends upon the goods and services available to their citizens, rather than their gold
reserves. While there are possible gains from trade with absolute advantage, the gains may not be
mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial
exchanges.

3. Figure 1
Hours of work necessary to produce one unit
Country Cloth Wine
England 80 100
Portugal 120 90
According to Figure 1, England commits 80 hours of labor to produce one unit of cloth, which is
fewer than Portugal's hours of work necessary to produce one unit of cloth. England is able to
produce one unit of cloth with fewer hours of labor; therefore England has an absolute advantage
in the production of cloth. On the other hand, Portugal commits 90 hours to produce one unit of
wine, which are fewer than England's hours of work necessary to produce one unit of wine.
Therefore, Portugal has an absolute advantage in the production of wine.
If the two countries specialize in producing the good for which they have the absolute advantage,
and if they exchange part of the good with each other, both of the two countries can end up with
more of each good than they would have in the absence of trade. In the absence of trade, each
country produces one unit of cloth and one unit of wine. Here, if England commits all of its labor
(80+100) for the production of cloth for which England has the absolute advantage, England
produces (80+100)÷80=2.25 units of cloth. On the other hand, if Portugal commits all of its labor
(90+120) for the production of wine, Portugal produces (90+120)÷90=2.33 Units of wine. By
exchanging the 2.25 units of cloth and the 2.33 Units of wine, both of the two countries can end up
with more of each good than they would have in the absence of trade.
Figure 2
Hours of work to commit after the specialization
Country Cloth Wine
England 80 + 100 0
Portugal 0 90 + 120

4. Theory of Comparative Advantage
The theory of comparative advantage is an economic theory about the work gains from trade for
individuals, firms, or nations that arise from differences in their factor
endowments or technological progress. In an economic model, agents have a comparative
advantage over others in producing a particular good if they can produce that good at a lower
relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. One
does not compare the monetary costs of production or even the resource costs (labor needed per
unit of output) of production. Instead, one must compare the opportunity costs of producing goods
across countries. The closely related law or principle of comparative advantage holds that
under free trade, an agent will produce more of and consume less of a good for which they have a
comparative advantage.
David Ricardo developed the classical theory of comparative advantage in 1817 to explain why
countries engage in international trade even when one country's workers are more efficient at
producing every single good than workers in other countries. He demonstrated that if two
countries capable of producing two commodities engage in the free market, then each country will
increase its overall consumption by exporting the good for which it has a comparative advantage
while importing the other good, provided that there exist differences in labor productivity between
both countries. Widely regarded as one of the most powerful yet counter-intuitive insights in
economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is
responsible for much of international trade.
In 1817, David Ricardo published what has since become known as the theory of comparative
advantage in his book On the Principles of Political Economy and Taxation.

5. Ricardo's example
In a famous example, Ricardo considers a world economy consisting of two
countries, Portugal and England, which produce two goods of identical quality. In Portugal, the a
priori more efficient country, it is possible to produce wine and cloth with less labor than it would
take to produce the same quantities in England. However, the relative costs of producing those two
goods differ between the countries.
Hours of work necessary to produce one unit
Country Cloth Wine
England 100 120
Portugal 90 80
In this illustration, England could commit 100 hours of labor to produce one unit of cloth, or
produce units of wine. Meanwhile, in comparison, Portugal could commit 90 hours of labor to
produce one unit of cloth, or produce units of wine. So, Portugal possesses an absolute
advantage in producing cloth due to fewer labor hours, and England has a comparative
advantage due to lower opportunity cost.
In the absence of trade, England requires 220 hours of work to both produce and consume one unit
each of cloth and wine while Portugal requires 170 hours of work to produce and consume the
same quantities. England is more efficient at producing cloth than wine, and Portugal is more
efficient at producing wine than cloth. So, if each country specializes in the good for which it has a

6. comparative advantage, then the global production of both goods increases, for England can spend
220 labor hours to produce 2.2 units of cloth while Portugal can spend 170 hours to produce 2.125
units of wine.
Moreover, if both countries specialize in the above manner and England trades a unit of its cloth
for to units of Portugal's wine, then both countries can consume at least a unit each of cloth and
wine, with 0 to 0.2 units of cloth and 0 to 0.125 units of wine remaining in each respective country
to be consumed or exported. Consequently, both England and Portugal can consume more wine
and cloth under free trade than in autarky.

7. Heckscher–Ohlin
The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical model
of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of
Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of
commerce and production based on the factor endowments of a trading region. The model
essentially says that countries will export products that use their abundant and cheap factor(s) of
production and import products that use the countries' scarce factor(s).
Features of the model
Relative endowments of the factors of production (land, labor, and capital) determine a country's
comparative advantage. Countries have comparative advantages in those goods for which the
required factors of production are relatively abundant locally. This is because the profitability of
goods is determined by input costs. Goods that require inputs that are locally abundant will be
cheaper to produce than those goods that require inputs that are locally scarce.
For example, a country where capital and land are abundant but labor is scarce will have
comparative advantage in goods that require lots of capital and land, but little labor—grains. If
capital and land are abundant, their prices will be low. As they are the main factors used in the
production of grain, the price of grain will also be low—and thus attractive for both local
consumption and export. Labor-intensive goods on the other hand will be very expensive to
produce since labor is scarce and its price is high. Therefore, the country is better off importing
those goods.

8. Theoretical development
The Ricardian model of comparative advantage has trade ultimately motivated by differences in
labour productivity using different "technologies". Heckscher and Ohlin did not require production
technology to vary between countries, so (in the interests of simplicity) the "H–O model has
identical production technology everywhere". Ricardo considered a single factor of
production (labour) and would not have been able to produce comparative advantage without
technological differences between countries (all nations would become autarkic at various stages
of growth, with no reason to trade with each other). The H–O model removed technology variations
but introduced variable capital endowments, recreating endogenously the inter-country variation
of labour productivity that Ricardo had imposed exogenously. With international variations in the
capital endowment like infrastructure and goods requiring different factor "proportions", Ricardo's
comparative advantage emerges as a profit-maximizing solution of capitalist's choices
from within the model's equations. The decision that capital owners are faced with is between
investments in differing production technologies; the H–O model assumes capital is privately held.
Assumptions
 Both countries have identical production technology
This assumption means that producing the same output of either commodity could be done
with the same level of capital and labour in either country. Actually, it would be inefficient
to use the same balance in either country (because of the relative availability of either input
factor) but, in principle this would be possible. Another way of saying this is that the per-
capita productivity is the same in both countries in the same technology with identical
amounts of capital.
Countries have natural advantages in the production of various commodities in relation to
one another, so this is an "unrealistic" simplification designed to highlight the effect of

9. variable factors. This meant that the original H–O model produced an alternative
explanation for free trade to Ricardo's, rather than a complementary one; in reality, both
effects may occur due to differences in technology and factor abundances.
In addition to natural advantages in the production of one sort of output over another
(wine vs. rice, say) the infrastructure, education, culture, and "know-how" of countries
differ so dramatically that the idea of identical technologies is a theoretical notion. Ohlin
said that the H–O model was a long-run model, and that the conditions of industrial
production are "everywhere the same" in the long run.
 Production output is assumed to exhibit constant returns to scale
In a simple model, both countries produce two commodities. Each commodity in turn is
made using two factors of production. The production of each commodity requires input
from both factors of production—capital (K) and labor (L). The technologies of each
commodity are assumed to exhibit constant returns to scale (CRS). CRS technologies imply
that when inputs of both capital and labor are multiplied by a factor of k, the output also
multiplies by a factor of k. For example, if both capital and labor inputs are doubled, output
of the commodities is doubled. The assumption of constant returns to scale CRS is useful
because it exhibits diminishing returns in a factor. Under constant returns to scale, doubling
both capital and labor leads to a doubling of the output. Since outputs are increasing in both
factors of production, doubling capital while holding labor constant leads to less than
doubling of an output.
 Factor mobility within countries

10. Within countries, capital and labor can be reinvested and reemployed in order to produce
different outputs. Similar to Ricardo's comparative advantage argument, this is assumed to
happen without cost. If the two production technologies are the arable industry and the
fishing industry it is assumed that farmers can shift to work as fishermen with no cost and
vice versa.
It is further assumed that capital can shift easily into either technology, so that the
industrial mix can change without adjustment costs between the two types of production.
For instance, if the two industries are farming and fishing it is assumed that farms can be
sold to pay for the construction of fishing boats with no transaction costs.
 Factor immobility between countries
The basic Heckscher–Ohlin model depends upon the relative availability of capital and labor
differing internationally, but if capital can be freely invested anywhere competition (for
investment) will make relative abundances identical throughout the world. Essentially, free
trade in capital would provide a single worldwide investment pool. Differences in labour
abundance would not produce a difference in relative factor abundance (in relation to
mobile capital) because the labour/capital ratio would be identical everywhere. (A large
country would receive twice as much investment as a small one, for instance, maximizing
capitalist's return on investment).
Like capital, labor movements are not permitted in the Heckscher–Ohlin world, since this
would drive an equalization of relative abundances of the two production factors, just as in
the case of capital immobility. This condition is more defensible as a description of the
modern world than the assumption that capital is confined to a single country.
 Perfect internal competition

11. Neither labor nor capital has the power to affect prices or factor rates by constraining
supply; a state of perfect competition exists.
Criticism
Although H-O model is normally thought to be basis for international trade theory, there are many
points of criticism against the model.
 Identical production function
The standard Heckscher–Ohlin model assumes that the production functions are
identical for all countries concerned. This means that all countries are in the same level
of production and have the same technology, yet this is highly unrealistic. Technological
gap between developed and developing countries is the main concern for the
development of poor countries. The standard Heckscher–Ohlin model ignores all these
vital factors when one wants to consider development of less developed countries in the
international context. Even between developed countries, technology differs from
industry to industry and firm to firm base. Indeed, this is the very basis of the
competition between firms, inside the country and across the country. See the New
Trade Theory in this article below.
 Capital as endowment
In the modern production system, machines and apparatuses play an important role.
What is referred to as capital is nothing other than these machines and apparatuses,
together with materials and intermediate products which will be consumed in the
production process. Capital is the most important of factors, or one should say as
important as labor. By the help of machines and apparatuses, the human being got a
tremendous production capability. These machines, apparatuses and tools are classified

12. as capital, or more precisely as durable capital, for one uses these items for many years.
Their quantity is not changed at once. But the capital is not an endowment given by the
nature. It is composed of goods manufactured in the production and often imported
from foreign countries. In this sense, capital is internationally mobile and the result of
past economic activity. The concept of capital as natural endowment distorts the real
role of capital. Capital is a production power accumulated by the past investment.
 Homogeneous capital
Capital goods take different forms. It may take the form of a machine-tool such as lathe,
the form of a transfer-machine, which you can see under the belt-conveyors. It may take
the form of oil or iron core. Despite these facts, capital in the Hechscher–Ohlin model is
assumed as homogeneous and transferable to any form if necessary. This assumption is
not only far from the reality, but also it includes logical flaw. Capital has a measure, just
like anything has weight. How can an amount of various goods be measured?
Usually by a system of prices. But prices depend on profit rate. In the Heckscher–Ohlin
model, the rate of profit is determined according to how abundant capital is. If capital is
scarce, it has a high rate of profit. If it is abundant, the profit rate is low. Here is a logical
circle. Before the profit rate is determined, the amount of capital is not measured. This
logical difficulty was the subject of academic controversy which took place many years
ago. In fact, this is sometimes named Cambridge Capital Controversies. The conclusion
of the controversies was that the concept of homogeneous capital was untenable.
Heckscher–Ohlin theorists ignore all these stories without providing any explanation
how capital is measured theoretically.
 No unemployment

13. Unemployment is the vital question in any trade conflict. Heckscher–Ohlin theory
excludes unemployment by the very formulation of the model, in which all factors
(including labour) are employed in the production.
 No room for firms
Standard Heckscher–Ohlin theory assumes the same production function for all
countries. This implies that all firms are identical. The theoretical consequence is that
there is no room for firms in the H–O model. By contrast, the New Trade
Theory emphasizes that firms are heterogeneous.
 Political background
From the middle of the 19th century to 1930s, giant flow of immigration took place
from Europe to North America. It is estimated that more than 60 million people crossed
the Atlantic Ocean. Some politicians worried if these immigrants may cause various
troubles (including cultural conflicts). For those politicians HO-theory provided a good
reason “in support of both restrictions on labor migration and free trade in goods”

14. Unit II
Instruments of Trade policy
Tariff
A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase
the price of imported goods and services, making them more expensive to consumers. A specific
tariff is levied as a fixed fee based on the type of item (e.g., $1,000 on any car). An ad-valorem
tariff is levied based on the item’s value (e.g., 10% of the car’s value). Tariffs provide additional
revenue for governments and domestic producers at the expense of consumers and foreign
producers. They are one of several tools available to shape trade policy.
Governments may impose tariffs to raise revenue or to protect domestic industries from foreign
competition, since consumers will generally purchase foreign-produced goods when they are
cheaper. While consumers are not legally prohibited from purchasing foreign-produced goods,
tariffs make those goods more expensive, which give consumers an incentive to buy domestically
produced goods that seem competitively priced or less expensive by comparison. Tariffs can make
domestic industries less efficient, since they aren’t subject to global competition. Tariffs can also
lead to trade wars as exporting countries reciprocate with their own tariffs on imported goods.
Groups such as the World Trade Organization exist to combat the use of egregious tariffs.
Governments typically use one of the following justifications for implementing tariffs:
 To protect domestic jobs. If consumers buy less-expensive foreign goods, workers who
produce that good domestically might lose their jobs.
 To protect infant industries. If a country wants to develop its own industry producing a
particular good, it will use tariffs to make it more expensive for consumers to purchase the

15. foreign version of that good. The hope is that they will buy the domestic version instead and
help that industry grow.
 To retaliate against a trading partner. If one country doesn’t play by the trade rules both
countries previously agreed on, the country that feels jilted might impose tariffs on its
partner’s goods as a punishment. The higher price caused by the tariff should cause
purchases to fall.
 To protect consumers. If a government thinks a foreign good might be harmful, it might
implement a tariff to discourage consumers from buying it.
Subsidy
A subsidy is a benefit given by the government to groups or individuals, usually in the form of a
cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and
it is often considered to be in the overall interest of the public.
Often considered a form of financial aid, a subsidy is a payment, provided directly or indirectly, that
provides a concession to the receiving individual or business entity. Subsidies are generally seen as
privileges, as they lessen an associated burden that was previously levied against the receiver or
promote a particular action by providing financial support.
Reasons for Subsidies
A subsidy is generally used as a form of support for particular portions of a nation’s economy. It can
assist struggling markets by lowering the burdens placed on them, or encourage new
developments by providing financial support for the endeavors. Often, these areas are not being
effectively supported through the actions of the general economy, or may be undercut by activities
in rival economies.

16. Examples of Subsidies - There are many forms of subsidies given out by the government,
including welfare payments, housing loans, student loans and farm subsidies. For example, if a
domestic industry such as farming is struggling to survive in a highly competitive international
industry with low prices, a government may give cash subsidies to farms so that they can sell at the
low market price but still achieve financial gain.
Subsidies in Health Care - With the enactment of the Affordable Care Act in the United States, a
number of U.S. citizens became eligible for health care subsidies based on the income and family
size of the associated household. These subsidies are designed to lower the out-of-pocket costs for
health care premiums on households that function below certain thresholds. In these instances, the
funds associated with the subsidies are sent directly to the insurance company to which premiums
are due, lowering the payment amount required from the household.
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity
of a good that can be imported into a country in a given period of time. Quotas, like other trade
restrictions, are typically used to benefit the producers of a good at the expense of consumers in
that economy. Quotas are considered to be less economically efficient than tariffs, which in turn are
less economically efficient than free trade.
Quotas are usually set by government or by an organization of producers of a particular product.
For trade quotas, governments set the quota limiting the import of a particular product, restricting
the access to the domestic market by an offshore producer, and giving the domestic producers the
opportunity to improve their position in the market. Such protectionist policies in industries
including steel, autos, and many consumer electronics products, have protected domestic industry

17. from international competition. In production quotas, a government or a group of producers, limit
the supply of a particular product in order to maintain a certain price level. For example, the
Organization of Petroleum Exporting Countries sets a production quota for crude oil in order to
"maintain" the price of crude oil in world markets.
Anti-Dumping
Dumping is a process where a company exports a product at a price lower than the price it
normally charges on its own home market. To protect local businesses and markets, many
countries impose stiff duties on products they believe are being dumped in their national market.
The World Trade Organization (WTO) operates a set of international trade rules. Part of the
organization's mandate is the international regulation of anti-dumping measures. The WTO does
not regulate the actions of companies engaged in dumping. Instead, it focuses on how governments
can or cannot react to dumping. In general, the WTO agreement allows governments to "act against
dumping where there is genuine (material) injury to the competing domestic industry." In other
cases, the WTO intervenes to prevent anti-dumping measures. This intervention is justified to
uphold the WTO's free market principles. Anti-dumping duties distort the market. Governments
cannot normally determine what constitutes a fair market price for any good or service; fair market
value is whatever price the market will bear as determined by supply and demand.
Practical Examples of Anti-Dumping Measures - In June 2015, American steel companies United
States Steel Corp., Nucor Corp., Steel Dynamics Inc., Arcelor Mittal USA, AK Steel Corp. and
California Steel Industries filed a complaint with the Department of Commerce and the ITC alleging
that China (and other countries) were dumping steel on the U.S. market and keeping prices unfairly
low.

18. A year later, the United States, after a review and much public debate, announced that it would be
imposing a 500% import duty on certain steel imported from China. China may bring the debate
before the WTO by China if it feels the tariffs are unfair.
Unit II
United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development (UNCTAD) was established in 1964
as a permanent intergovernmental body. UNCTAD is the principal organ of the United
Nations General Assembly dealing with trade, investment, and development issues. The
organization's goals are to: "maximize the trade, investment and development opportunities
of developing countries and assist them in their efforts to integrate into the world economy on an
equitable basis."
The primary objective of UNCTAD is to formulate policies relating to all aspects of development
including trade, aid, transport, finance and technology. The conference ordinarily meets once in
four years; the permanent secretariat is in Geneva.
One of the principal achievements of UNCTAD has been to conceive and implement the Generalized
System of Preferences (GSP). It was argued in UNCTAD that to promote exports of manufactured
goods from developing countries, it would be necessary to offer special tariff concessions to such
exports. Accepting this argument, the developed countries formulated the GSP scheme under which
manufacturers' exports and some agricultural goods from the developing countries enter duty-free
or at reduced rates in the developed countries. Since imports of such items from other developed
countries are subject to the normal rates of duties, imports of the same items from developing
countries would enjoy a competitive advantage.

19. The creation of UNCTAD in 1964 was based on concerns of developing countries over the
international market, multi-national corporations, and great disparity between developed nations
and developing nations. The United Nations Conference on Trade and Development was
established to provide a forum where the developing countries could discuss the problems relating
to their economic development.
Main Areas of Work and Achievements
Under the areas of its focus, the UNCTAD Insurance Programme conducts its activities at the
international, regional and national levels, as follows:
Policy Analysis and Technical Cooperation:
 The UNCTAD Insurance Programme monitors policy developments in the area of insurance
with special emphasis on their development implications for clients in developing and
transition countries. The Programme has so far produced more than 135 publications on
various insurance matters including accident, fire, motor, life, agriculture, marine insurance
and others.
It has also developed the modern Marine Insurance Contract and Policy Clauses, now used
universally by all insurers the world over.
Recently, the Programme has elaborated 10 publications targeted specifically at SMEs,
dealing with issues such as training of insurance agents and brokers, the role of insurance
for successfully managing business, and catastrophe insurance risk coverage.
 The Insurance Programme team of resident staff and consulting experts provides, in
beneficiary countries, policy advice and assistance in elaborating or updating policies and
legislation on insurance in line with international best practices tailored to national

20. conditions and taking into consideration cultural diversity and differences in the socio -
economic environment.
To date, this assistance has been extended to more than 30 countries in Africa, Asia and the
Caribbean, including in post-conflict situations such as in Afghanistan.
 The Insurance Programme team can also organize custom-made training and educational
activities for government officials in insurance supervisory or regulatory functions, private
sector insurers, as well as SMEs on various insurance topics, placing emphasis on special
issues faced by developing and transition countries.
 The Insurance Programme also carries out technical assistance projects in client countries
upon request and subject to funding.
For example, the Programme has been seeking funding to implement four technical
assistance projects for Africa, developed jointly with the African Insurance Organisation
(AIO) in the areas of capacity-building for African insurance training institutes, development
of life insurance and pensions in Africa, capacity-building for African insurance supervisory
authorities and the development of the African Centre for Catastrophe Risks.
Achievements of UNCTAD
Despite the disagreements over the years, UNCTAD has played a key role various sphere. The more
important of these are as follows:
1. Trade in Primary Commodities: - The UNCTAD has been active in the International
Commodity Agreement since its inception, LDC‘s (Last Developed Countries) wanted to expand
their market for their traditional exports of primary commodities. Developed countries placed
restrictions of the exports of the latter in such form as licensing, quotas, tariffs etc. and provided

21. subsidies to domestic producers. Such trade restrictions tend to be higher for processed
products than for unprocessed ones.
2. Trade in Manufactured Goods: LDC‘s have strongly urged the developed countries to give them
tariff preferences on their manufactured and semi-manufactured goods. At UNCTAD-I, the G-77
urged the develop countries to grant generalized system of preferences (GSP) to the exports of
such goods to the developed countries. It was at UNCTAD-II that all members unanimously agreed
for the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-
discriminatory preferences. Under GSP, most manufactured and semi-manufactured goods from
LDC‘s to developed countries enjoy tariff reduction or exemptions from custom duties. A majority
of developed countries grant duty free treatment for all or most products eligible for GSP.
3. Development Finance: UNCTAD is also endeavoring to reduce the debt burden of the
developing countries. These countries have taken large amount of loans from bilateral and
multilateral sources. As a result, the servicing of the accumulated debts, i.e. the interest payments
and repayments, now account for a very substantial proportion from exports. In fact, for some of
the developing countries the outgo of foreign exchange on account of debt servicing is more than
the current inflows of loans and credits. UNCTAD is trying to persuade the developed countries, to
write off a part of the accumulated debts. Some of the developed countries, mostly Scandinavian
group, have accepted the proposal.
4.Technology Transfer: In UNCTAD, measures were adopted to strengthen technology capability
of LDC‘s. It was pointed out that better research facilities, training programmes and establishment
of local and regional centers for technology transfer would serve the purpose. Thus, the UNCTAD VI
held at Belgrade in June 1983 emphasized the need for transfer of technology to LDC‘s in or der to

22. promote their speedy and self reliant development. UNCTAD VI passed a resolution relating to the
transfer of technology to LDC‘s on the lines of the policy paper approved at UNCTAD VI. The
UNCTAD has simply laid down the broad principles for transfer of publicity funded technologies at
the intergovernmental level. It may facilitate the process of technology transfer by freer access to
sources of information, cutting down barriers to free flow of technology etc.
5. Economic Co-operation: UNCTAD-II held at Delhi in 1968 emphasized for the first time the
need for promoting international co-operation and self-reliance among the LDCs. UNCTAD VI again
emphasized the need for co-operative efforts among the LDCs through widening the scope of
preferential trading arrangements, harmonizing industrial development programmes through
infrastructural facilities particularly in respect of shipping services and simple payment
mechanism under common clearing system. GSTP is major initiative of developing countries to
expand mutual trade through grant of tariff and non-tariff concessions and other measures such as
long term contracts under UNCTAD.
International Monetary Fund
The International Monetary Fund (IMF) is an international organization headquartered
in Washington, D.C., of "189 countries working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world." Formed in 1944 at the Bretton Woods
Conference primarily by the ideas of Harry White and John Keynes,[4] it came into formal existence
in 1945 with 29 member countries and the goal of reconstructing the international payment
system. It now plays a central role in the management of balance of payments difficulties and
international financial crises.[5] Countries contribute funds to a pool through a quota system from

23. which countries experiencing balance of payments problems can borrow money. As of 2010, the
fund had SDR476.8 billion, about US$755.7 billion at then exchange rates. Through the fund, and
other activities such as statistics-keeping and analysis, surveillance of its members' economies and
the demand for particular policies,[7] the IMF works to improve the economies of its member
countries. The organization's objectives stated in the Articles of Agreement are: to promote
international monetary cooperation, international trade, high employment, exchange-rate stability,
sustainable economic growth, and making resources available to member countries in financial
difficulty
Functions
According to the IMF itself, it works to foster global growth and economic stability by providing
policy, advice and financing to members, by working with developing nations to help them achieve
macroeconomic stability and reduce poverty. The rationale for this is that private international
capital markets function imperfectly and many countries have limited access to financial markets.
Such market imperfections, together with balance-of-payments financing, provide the justification
for official financing, without which many countries could only correct large external payment
imbalances through measures with adverse economic consequences. The IMF provides alternate
sources of financing.
Upon the founding of the IMF, its three primary functions were: to oversee the fixed exchange rate
arrangements between countries, thus helping national governments manage their exchange rates
and allowing these governments to priorities economic growth, and to provide short-term capital
to aid the balance of payments. This assistance was meant to prevent the spread of international
economic crises. The IMF was also intended to help mend the pieces of the international economy
after the Great Depression and World War II.

24. The IMF's role was fundamentally altered by the floating exchange rates post-1971. It shifted to
examining the economic policies of countries with IMF loan agreements to determine if a shortage
of capital was due to economic fluctuations or economic policy. The IMF also researched what
types of government policy would ensure economic recovery. The new challenge is to promote and
implement policy that reduces the frequency of crises among the emerging market countries,
especially the middle-income countries that are vulnerable to massive capital outflows. Rather
than maintaining a position of oversight of only exchange rates, their function became one of
surveillance of the overall macroeconomic performance of member countries. Their role became a
lot more active because the IMF now manages economic policy rather than just exchange rates.
In the October 2013 Fiscal Monitor publication, the IMF suggested that a capital levy capable of
reducing Euro-area government debt ratios to "end-2007 levels" would require a very high tax rate
of about 10%.
International Bank for Reconstruction and Development
The International Bank for Reconstruction and Development (IBRD) is an international
financial institution that offers loans to middle-income developing countries. The IBRD is the first
of five member institutions that compose the World Bank Group and is headquartered
in Washington, D.C., United States. It was established in 1944 with the mission of financing the
reconstruction of European nations devastated by World War II. The IBRD and
its concessional lending arm, the International Development Association, are collectively known as
the World Bank as they share the same leadership and staff.[1][2][3] Following the reconstruction of
Europe, the Bank's mandate expanded to advancing worldwide economic
development and eradicating poverty. The IBRD provides commercial-grade or concessional
financing to sovereign states to fund projects that seek to improve transportation

25. and infrastructure, education, domestic policy, environmental consciousness, energy investments,
healthcare, access to food and potable water, and access to improved sanitation.
The IBRD is owned and governed by its member states, but has its own executive leadership and
staff which conduct its normal business operations. The Bank's member governments
are shareholders which contribute paid-in capital and have the right to vote on its matters. In
addition to contributions from its member nations, the IBRD acquires most of its capital by
borrowing on international capital markets through bond issues. In 2011, it raised $29 billion USD
in capital from bond issues made in 26 different currencies. The Bank offers a number of financial
services and products, including flexible loans, grants, risk guarantees, financial derivatives, and
catastrophic risk financing. It reported lending commitments of $26.7 billion made to 132 projects
in 2011.
World Trade Organization
The World Trade Organization (WTO) is an intergovernmental organization which
regulates international trade. The WTO officially commenced on 1 January 1995 under
the Marrakesh Agreement, signed by 123 nations on 15 April 1994, replacing the General
Agreement on Tariffs and Trade (GATT), which commenced in 1948. The WTO deals with
regulation of trade between participating countries by providing a framework for negotiating trade
agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO
agreements, which are signed by representatives of member governments and ratified by their
parliaments.[7] Most of the issues that the WTO focuses on derive from previous trade negotiations,
especially from the Uruguay Round (1986–1994).
The WTO is attempting to complete negotiations on the Doha Development Round, which was
launched in 2001 with an explicit focus on developing countries. As of June 2012, the future of the
Doha Round remained uncertain: the work programme lists 21 subjects in which the original

26. deadline of 1 January 2005 was missed, and the round is still incomplete. The conflict between free
trade on industrial goods and services but retention of protectionism on farm subsidies to
domestic agricultural sector (requested by developed countries) and the substantiation of fair
trade on agricultural products (requested by developing countries) remain the major obstacles.
This impasse has made it impossible to launch new WTO negotiations beyond the Doha
Development Round. As a result, there have been an increasing number of bilateral free trade
agreements between governments. As of July 2012, there were various negotiation groups in the
WTO system for the current agricultural trade negotiation which is in the condition of stalemate.
The WTO's current Director-General is Roberto Azevêdo, who leads a staff of over 600 people
in Geneva, Switzerland. A trade facilitation agreement known as the Bali Package was reached by
all members on 7 December 2013, the first comprehensive agreement in the organization's history
Advantages of WTO:
-Helps promote peace within nations: Peace is partly an outcome of two of the most
fundamental principle of the trading system; helping trade flow smoothly and providing countries
with a constructive and fair outlet for dealing with disputes over trade issues. Peace creates
international confidence and cooperation that the WTO creates and reinforces.
-Disputes are handled constructively: As trade expands in volume, in the numbers of products
traded and in the number of countries and company trading, there is a greater chance that disputes
will arise. WTO helps resolve these disputes peacefully and constructively. If this could be left to
the member states, the dispute may lead to serious conflict, but lot of trade tension is reduced by
organizations such as WTO.
-Rules make life easier for all: WTO system is based on rules rather than power and this makes

27. life easier for all trading nations. WTO reduces some inequalities giving smaller countries more
voice, and at the same time freeing the major powers from the complexity of having to negotiate
trade agreements with each of the member states.
-Free trade cuts the cost of living: Protectionism is expensive, it raises prices, and WTO lowers
trade barriers through negotiation and applies the principle of non-discrimination. The result is
reduced costs of production (because imports used in production are cheaper) and reduced prices
of finished goods and services, and ultimately a lower cost of living.
-It provides more choice of products and qualities: It gives consumer more choice and a
broader range of qualities to choose from.
-Trade raises income: Through WTO trade barriers are lowered and this increases imports and
exports thus earning the country foreign exchange thus raising the country's income.
-Trade stimulates economic growth: With upward trend economic growth, jobs can be created
and this can be enhanced by WTO through careful policy making and powers of freer trade.
-Basic principles make life more efficient: The basic principles make the system economically
more efficient and they cut costs. Many benefits of the trading system are as a result of essential
principle at the heart of the WTO system and they make life simpler for the enterprises directly
involved in international trade and for the producers of goods/services. Such principles include;
non-discrimination, transparency, increased certainty about trading conditions etc. together they
make trading simpler, cutting company costs and increasing confidence in the future and this in
turn means more job opportunities and better goods and services for consumers.

28. -Governments are shielded from lobbying: WTO system shields the government from narrow
interest. Government is better placed to defend themselves against lobbying from narrow interest
groups by focusing on trade-offs that are made in the interests of everyone in the economy.
-The system encourages good governance: The WTO system encourages good government. The
WTO rules discourage a range of unwise policies and the commitment made to liberalize a sector of
trade becomes difficult to reverse. These rules reduce opportunities for corruption.
Disadvantages of WTO:
-The WTO is fundamentally undemocratic: The policies of the WTO impact all aspects of society
and the planet, but it is not a democratic, transparent institution. The WTO rules are written by and
for corporations with inside access to the negotiations. For example, the US Trade Representative
gets heavy input for negotiations from 17 "Industry Sector Advisory Committees" Citizen input by
consumer, environmental, human rights and labor organizations is consistently ignored. Even
simple requests for information are denied, and the proceedings are held in secret.
-The WTO won’t make us safer: The WTO would like you to believe that creating a world of free
trade will promote global understanding and peace. On the contrary, the domination of
international trade by rich countries for the benefit of their individual interests fuels anger and
resentment that make us less safe. To build real global security, we need international agreements
that respect people's rights to democracy and trade systems that promote global justice.
-The WTO tramples labor and human rights: WTO rules put the rights of corporations to profit
over human and labor rights. The WTO encourages a race to the bottom in wages by pitting
workers against each other rather than promoting internationally recognized labor standards. The

29. WTO has ruled that it is illegal for a government to ban a product based on the way it is produced,
such as with child labor. It has also ruled that governments cannot take into account non
commercial values such as human rights, or the behavior of companies that do business with
vicious dictatorships such as Burma when making purchasing decisions.
-The WTO Would Privatize Essential Services: The WTO is seeking to privatize essential public
services such as education, health care, energy and water. Privatization means the selling off of
public assets such as radio airwaves or schools to private corporations, to run for profit rather than
the public good. The WTO's General Agreement on Trade in Services, or GATS, includes a list of
about 160 threatened services including elder and child care, sewage, garbage, park maintenance,
telecommunications, construction, banking, insurance, transportation, shipping, postal services,
and tourism. In some countries, privatization is already occurring. Those least able to pay for vital
services working class communities and communities of color - are the ones who suffer the most.
-The WTO Is Destroying the Environment: The WTO is being used by corporations to dismantle
hard-won local and national environmental protections, which are attacked as barriers to trade.
The very first WTO panel ruled that a provision of the US Clean Air Act, requiring both domestic
and foreign producers alike to produce cleaner gasoline, was illegal. The WTO declared illegal a
provision of the Endangered Species Act that requires shrimp sold in the US to be caught with an
inexpensive device allowing endangered sea turtles to escape. The WTO is attempting to deregulate
industries including logging, fishing, water utilities, and energy distribution, which will lead to
further exploitation of these natural resources.
-The WTO is Killing People: The WTO's fierce defense of Trade Related Intellectual Property
rights (TRIPs) patents copyrights and trademarks comes at the expense of health and human lives.
The WTO has protected for pharmaceutical companies right to profit against governments seeking

30. to protect their people's health by providing lifesaving medicines in countries in areas like sub-
saharan Africa, where thousands die every day from HIV/AIDS. Developing countries won an
important victory in 2001 when they affirmed the right to produce generic drugs (or import them if
they lacked production capacity), so that they could provide essential lifesaving medicines to their
populations less expensively. Unfortunately, in September 2003, many new conditions were agreed
to that will make it more difficult for countries to produce those drugs. Once again, the WTO
demonstrates that it favors corporate profit over saving human lives.