TRADE, FINANCIAL FLOWS, AND FOREIGN INVESTMENT

ROLE OF INTERNATIONAL ORGANIZATIONS - WTO, IMF, WORLD BANK, UN, OECD

World Trade Organisation

Role The role of the WTO is to implement and advance global trade agreements and to resolve trade
disputes between economies. Negotiating agreements aimed at reducing obstacles to
international trade (thereby contributing to eco growth + development), settling disputes arising
from their interpretation and application
● Prior, responsibility was on the General Agreement on Tariffs and Trade (GATT) process
that began in 1947 in which individual member countries had to put agreements in place
(no effective enforcement mechanism)
● WTO extended to services (insurance + banking) and intellectual property (patents,
copyright)
● 164 members countries, 25 “observer” countries negotiating to join the WTO

Effectiveness ● Effective for dispute resolution between smaller countries, but less for the two largest
forces in global economy - USA + EU → although they have not formally refused to
comply with WTO determinations, they have delayed and continues to lodge appeals
rather than accept these decisions
● Since 1995, halved tariff rates among members
● Since 1995, 617 disputes have been brought to WTO and > 350 rulings
● Unwinding trade restrictions from pandemic - 54% of trade restrictive measures removed
● Aim: reduce trade costs by 10-15% by improving customs efficiency
● Efforts to conclude a comprehensive global trade agreement since 2001 have been
unsuccessful
○ Doha Round of liberalisation failed to meet its ambitions for a new global trade
agreement → claimed that trade liberalisation could create annual welfare gains
of US$90-US$200 bil per year and life over 140 mil out of poverty in the
developing world
○ Failed due to disputes between developed and developing nations
○ Did however produce the Nairobi Package, a voluntary agreement in 2015 to
reduce subsidies for farm exports, thus increasing the international
competitiveness of developing economies

Relevance ● Past 2 decades have seen declining support for free trade in many countries whose
economies are struggling to compete in the post-globalised world → shift to bilateral and
multilateral trade agreements
● Accused by Trump Administration of favouring China → US refused to appoint officials to
WTO disputes panel → can’t conduct formal appeals and nations can only resolve their
dispute through informal arbitration

International Monetary Fund

Role Stability of international financial system, particularly in relation to foreign exchange - monitoring
of economic + financial developments, providing policy advice aimed at crisis prevention
● 190 members covering almost all nations
● When the system of fixed exchange rates collapsed in the 1970s, its role widened to
ensuring global financial stability, especially when financial crises occur
● Encourages countries to adopt economic reforms and liberalised trade + investment
policies through structural adjustment
 ● Supports reducing size of gov, privatising gov business, deregulating markets and
balancing gov budgets
● Lends to countries with balance of payments difficulties
● Published Global Financial Stability Report (May 2020) - estimated climate disaster cost
$1.3T annually, highlighting climate change as rising policy focus

Effectiveness ● After criticism about negative impact of reforms demanded by IMF after Asian financial
crises in late 1990s, IMF adopted a different approach during GFC in late 2000s,
supporting expansionary macro policies and giving borrowing countries more freedom to
increase their spending to avoid recession
● Structural adjustment policies = terms countries must accept before receiving aid
○ Reducing govt size, privatising GBEs, deregulating markets + balancing govt
budgets
● Handling of early 2020s EU sovereign debt crises reignited criticism as IMF demanded
loan recipients implement policies that harmed vulnerable groups while protecting banks
● COVID 2020: established Short-term Liquidity Line aimed at providing one-off
interest-free loans to developing countries
● July 2021: largest-ever relief package - $650B emergency aid fund to assist developing
countries in buying + rolling out vaccines and covering debt
● Russia/Ukraine 2022: US$115B total support package to help Ukraine manage
● 133 lending programs between 2011-2017
● 75% of IMF programs were partially/successful in achieving their objectives

Relevance ● IMF’s programs now protect social spending as a share of GDP in order to minimise
negative impacts on lowest income groups in countries where it is providing financial
support packages

World Bank

Role Source of funding and knowledge for developing countries with a commitment to reducing
poverty, increasing shared prosperity, promoting sustainable development and addressing
climate change
● Funded by contributions from member countries and from borrowings in global financial
markets
● Makes loans to developing nations at rates below standard commercial rates
Has many organisations that provide specific assistance to lower-income countries:
● International Development Association provides “soft loans” (little/no interest)
● International Finance Corporations attracts private sector investments
● Multilateral Insurance Guarantee Agency provides risk insurance to priv investors
● International Centre for Settlement of Investment Disputes provides conciliation and
arbitration of investment disputes between states and corporations
Two major goals:
● Reducing the rate of extreme poverty to <3% of the world’s population by 2030 (current
forecast is 6-9%) and to ensure the majority of these people are experiencing “frictional
poverty” (ie. related to short-term disasters rather than long-term poverty) → this goal
supports the UN Global Goals
● Reducing inequality by fostering income growth for the world’s bottom 40%

Effectiveness ● COVID: committed $157B for over 100 lower-income countries that accounted for 70% of
global pop → helped countries obtain vaccines, strengthen health system, reduce eco
damage
● Value of WB’s active portfolio of investments exceeds US$300B, with record lending
commitments of US$105B in 2022
● Partnered with International Finance Corporation to provide US$47B for credit support
 after COVID when private credit markets seized up
● WB’s importance has declined as private lending markets have expanded in recent
decades

Relevance ● Last 2 decades, supported Heavily Indebted Poor Countries Initiative → aims to reduce
debt by 2.3% in the world’s poorest countries whose debt is considered unsuitable
○ By 2023, 37 countries had received debt relief estimates to save them over
US$100B

United Nations
● The UN is a global organisation whose membership includes more nations than any other political
or economic organisation.
● The UN was established in 1945 and has grown to cover 193 member states.
● Its agenda is broader than any other organisation, covering:
○ The global economy
○ International security
○ The environment
○ Poverty and development
○ International law
○ Global health issues
● The UN's decision-making powers are limited because it relies on the support of its member
states.
● The budgets for the different arms of the UN are small compared to national govs in many
advanced economies.
● The UN has historically played an important role in supporting greater linkages between
economies and promoting globalisation.
● A range of different UN agencies have developed international standards that make it easier for
trade and investment flows to occur between nations, such as:
○ Standards for food safety
○ Rules on copyright and intellectual property
● Key UN agencies include:
○ WHO (World Health Organization)
○ UNICEF (United Nations International Children's Emergency Fund)
○ UNHCR (United Nations High Commissioner for Refugees)
○ UNEP (United Nations Environment Programme)
● The UN has overseen the development of a large number of international agreements to enforce
human rights and political freedoms.
● Research by the World Bank has consistently shown that individual freedoms strengthen a
country’s prospects for economic growth and development.

Organisation for Economic Cooperation and Development

● The OECD is an international economic organisation consisting of 38 mostly advanced
economies committed to democracy and open markets.
● The primary goal of the OECD is to promote policies that achieve:
○ The highest sustainable economic growth and employment
○ A rising standard of living in member countries
○ Fiscal stability
○ Contribution to the development of the world economy
● In practice, the OECD’s main roles include:
○ Conducting and publishing research on a wide range of economic policy issues
○ Coordinating economic cooperation among member nations
○ Developing common policy agendas
 ● The OECD provides a forum for member countries to:
○ Share research
○ Coordinate policy responses, such as during the COVID-19 pandemic
● The OECD has had a significant influence on the global economic policy agenda in recent years.
● Its advocacy for “inclusive growth” strategies in the past decade has challenged traditional
assumptions that policymakers must always trade off equity and efficiency (inequality versus
economic growth).
● The OECD’s position reflects concerns that rising inequality in many economies has become a
constraint on economic growth.

INFLUENCE OF GOV ECONOMIC FORUMS - G20, G7/8

Organisations that exist as forums for world leaders play an important role in coordinating policies
between major economies especially during times of economic or financial crisis. The aim of these forums
is to enable heads of state along with their treasurers and central bank governors to discuss global
economic issues with particular attention to economic stability and growth.
● Although these institutions may have been effective when globalisation was prevalent in
1980s-2000, since late 2000s, GFC + COVID have highlighted issues with such interdependence
and brought on the emergence of deglobalisation; geopolitical tensions (Trump administration,
Brexit, war in Ukraine) fuelled nationalism + decoupling → reduced the effectiveness of these
organisations
Group of Seven Nations (G7) - 1976
● Seven of the largest industrialised nations - US, UK, FRA, GER, CAN, JAP, ITA
○ RUS included from 1997-2014 (quit after seizure of Crimea)
● Status as the forum for the world’s wealthiest + most powerful economies → agenda includes
general political issues, climate change, global poverty + security
● Unofficially coordinates global macroeco policy due to influence over FP + MP of world’s powerful
ecos
● CRITIQUE: membership is no longer representative of the most important forces in global
economy (CHI + IND more important than CAN + ITA)
● Share of global GDP: 68% (1992) → 43% (2023), only covers 10% of pop
● Did not provide major leadership during COVID’s dislocation of trade, travel + eco activity
● 2023 G7 summit in Japan secured fresh diplomatic aid for Ukraine through military assistance
packages
● Recent proposals address possible expansion to include observer nations → in 2023, leaders
joined by invitation from AUS, BRAZIL, COMOROS, COOK ISLANDS, IND, INDO, SK, VIET,
UKR

Group of Twenty Nations (G20) - 1999

● 19 of world’s largest national economies + EU (AUS included) → 85% of world GDP + 65% of
pop
● Includes several emerging economies that have driven global growth since 2008
● GFC: coordinated fiscal stimulus and improved supervision of global financial system +
institutions
● COVID: cooperation weakened with countries independently determining responses
(DEGLOBALISATION)
● 2021: agreed on global tax reform in partnership with OECD → minimum global corporate tax
rate and measures to reduce tax avoidance
● Measures to coordinate large-scale debt relief for developing countries w/ WB + IMF
● Annual summit does not advance specific economic goals, so relies on individual heads of state
to provide momentum and leadership
TRADING BLOCS, MONETARY UNIONS AND FREE TRADE AGREEMENTS
Free trade agreements (or trade agreements) are formal agreements between countries designed to
break down barriers to trade between those nations. When the agreement is between two countries it is
said to be bilateral, and when the agreement is between three or more economies, it is said to be
multilateral or regional. While these agreements are generally described as “free” trade agreements, it is
often more accurate to call them preferential trade agreements because, in effect, they give more
favourable access to goods and services from one nation or a group of nations compared to another.

Sometimes they can even make it harder for nations outside the preferential trade agreement, especially
developing economies, to trade. In this respect they may not create better conditions for free trade at all,
particularly for developing economies that struggle to access global markets. Global free trade
agreements conducted through the WTO are designed to remove barriers to trade uniformly across all
economies.

A trade bloc occurs when a number of countries join together in a formal preferential trading arrangement,
to the exclusion of other countries, such as the EU and the United States-Mexico-Canada Agreement
(USMCA).

Regional trade agreements have multiplied in recent decades, with the number of agreements registered
with the WTO jumping from 27 in 1990 to 369 in force in 2024. More than half of international trade is now
covered by regional trade agreements. The proliferation of these agreements has led to some economists
arguing that regionalisation is as important as globalisation in understanding current developments in
global trade relations. While trade usually increases faster between countries that have trade agreements,
there are concerns that this can result in trade diversion, where a country’s imports of a G&S switch from
the most efficient producer to a less efficient producer with whom a regional trade agreement exists.

Trans-Pacific Partnership (CP-TPP OR TPP-11) → The Comprehensive and Progressive Agreement for
Trans-PAcific Partnership (commonly known as both the CP-TPP and the TPP-11) is a multilateral trade
agreement among 11 Pacific Rim countries that was formally signed and ratified in March 2018. Its 11
members (AUS, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and
Vietnam) represent 12% of global economic output and around 14% of global trade, with a market of over
500 million people. Even though the 11 TPP-11 economies make up just under 7% of the global
population, their contribution to global trade is significant, especially for AUS’s economy, representing
22% of all AUSn trade.

Regional Comprehensive Economic Partnership → The RCEP is the world’s largest multilateral trade
agreement, with its economies representing a larger share of the global economy than the TPP-11, the
EU or USMCA. The RCEP commenced in 2022, and was in effect for all of its 15 members by June 2023,
after almost a decade of negotiations. Estimates by the World Economic Forum suggest that the RCEP
will remove 91% of tariffs on goods traded in the region, while UNCTAD has estimated that it will boost
intraregional trade by 2% as a result of both creating new trade worth US$17 billion, and diverting existing
trade worth US$25 billion.

The membership of the RCEP comprises 15 economies, including China (which led its formation), all
ASEAN nations, Japan, South Korea, AUS, and New Zealand. India was also engaged in many of the
negotiations but withdrew in 2019. RCEP economies account for one-quarter of global trade and just
under 30% of both the world’s population and GWP.

Asia-Pacific Economic Cooperation (APEC) forum → In the early 1990s countries in AUS’s region
established the APEC forum in response to the formation of trading blocs in other areas of the world such
as the Eu and NAFTA. The 21 member economies of the forum are: AUS, Brunei, Canada, Chile, China,
Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the
Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, the United States, and Vietnam. The
APEC forum accounts for over 35% of the world’s population, over 60% of world GDP and makes up
around three-quarters of AUS’s total trade in G&S.
The APEC forum’s original vision of establishing free trade among member countries by 2020 was not
achieved. Nevertheless, APEC has contributed to progress on trade liberalisation. UNCTAD has
estimated that average tariff rates of APEC member states had been reduced from 10.2% in 1999 to
5.3% in 2021. Total merchandise trade for APEC nations increased ninefold during this period, with
two-thirds taking place between member countries.

Association of South-East Asian Nations (ASEAN) → Established in 1967, the ASEAN group covers
emerging and developing economies in South-East Asia. ASEAN has acted as a counterweight to the
APEC forum, which tends to be dominated by the large economies such as the United States, China,
Japan, and South Korea. ASEAN has become the most effective force for trade negotiations within the
Asia Pacific region.

The ASEAN Free Trade Area (AFTA) comprises Indonesia, Thailand, Malaysia, Singapore, Philippines,
Vietnam, Brunei, Burma, Cambodia, and Laos. The ASEAN-AUS-New Zealand Free Trade Area
(AANZFTA) agreement came into effect in 2010 with ASEAN nations committing to lowering and
eliminating tariffs on 96% of AUSn exports to the region (compared to 67% prior to the agreement). Until
the signing of the RCEP in 2020, this group of nations was collectively AUS’s second-largest trading
partner. Collectively the ASEAN region has a population of 717 million across 12 countries and a
combined GDP of over $5.7 trillion, equivalent to almost 9% of the global economy.

Pacific Agreement on Closer Economic Relations Plus (PACER Plus) → The PACER Plus is a
multilateral trade agreement comprised of 11 Pacific Island Forum members: AUS, Cook Islands, Kiribati,
Nauru, New Zealand, Niue, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Unlike most other
trade agreements, PACER Plus places a specific emphasis on economic development, integrating foreign
aid programs from AUS and New Zealand to assist with agricultural development, financial stability, trade
infrastructure and implementation of the agreement itself. Although the member economies only account
for 33 million people, it has combined $1.9 trillion in GDP and $36 billion of AUS's two-way trade.

The European Union →

● Most important trade bloc in world economy, formed in late 1950s to dismantle EU trade barriers
○ 27 member countries
○ 450 million pop
○ 15% of world trade
○ 17% of global GDP
● Weakened by recent departure of UK
● Single market for European g/s established in 1992 drove strong trade growth within EU which
was boosted by 38% by membership of the Union
● Voluntary monetary union (‘Eurozone’): 19 member countries w/ common interest rates
● While successful in promoting trade and economic integration, slower EU growth rates (1.1%
average 2012-2022) have meant that the share in world output halved since 1980
● World's largest exporter of manufactured goods and services, with the total value of 2020 exports
amounting to over €2.3 trillion

BILATERAL TRADE AGREEMENTS

In addition to global and regional agreements, economies enter into bilateral agreements. AUS's most
significant bilateral agreement is the Closer Economic Relations Trade Agreement (CERTA) with New
Zealand, established in 1983. CERTA, one of the most comprehensive free trade agreements globally,
eliminates tariffs and export restrictions, while also harmonizing business regulations and tax laws. Since
its inception, it has contributed to an average 8% annual increase in trade between the two countries and
is considered highly successful.
Bilateral trade agreements have gained popularity recently, partly due to a slowdown in multilateral
agreements and the US's focus on negotiating individual trade deals. These agreements often aim to
protect open trade amidst rising protectionism, while also creating new trade opportunities.

Economists remain divided on whether bilateral agreements advance or hinder global free trade. Though
govs claim these deals boost trade, their actual impact is often smaller than anticipated, with benefits
often exaggerated and costs underestimated. Bilateral agreements can lead to "trade diversion," shifting
trade between countries within the agreement, rather than expanding global trade.

Despite these challenges, pursuing bilateral agreements remains central to AUS’s trade policy. In recent
years, AUS has prioritized bilateral deals, such as the AUS-UK Free Trade Agreement (2020), which
eliminated 99% of tariffs on AUSn exports to the UK. However, the economic impact of the UK agreement
is modest, with an estimated 0.08% annual GDP growth by 2035. A key advantage of bilateral
agreements is their faster negotiation process, though AUS’s experience with China shows they do not
guarantee smooth relations.