Dubai International Academy Model United Nations 2012| III Annual Session

Forum:

World Economic Forum

Issue: Evaluating the Regulation of Trade and Foreign Investments Student Officers: Naman Jain Position: President World Economic Forum

Introduction
There is currently great debate over the role of trade barriers and regulations on foreign trade and investments in building sustainable developing economies. While the ideas of protectionism and free trade have always conflicted in the minds of policymakers in Less Economically Developed Countries (LEDCs), the western more economically developed countries (MEDCs) increasingly face the dilemma regarding the trade-off between cheaper imported goods and services versus domestic employment as they witness an unprecedented rise in power of outsourcing powerhouses like India and China. The impact of globalization on international trade has been immense in that individual nations are so much more likely to be exposed to foreign goods and services more competitive than those produced domestically, in both price and quality. Economists call this an absolute advantage that a country has over another in a certain good or service. This along with more complicated comparative and competitive advantages and the theories associated with them will be referred to in the key terms section of the report. It is natural that foreign goods and services will become more and more competitive as trade costs such as transportation are all but diminished with the advent of globalization and the subsequent facilitation in mobilizing resources as well as goods and services themselves. As technology has become a paramount part of most production processes and has led to great advancements in quality and efficiency in price, industrialized nations enjoy an advantage over most LEDCs in that respect. Yet, ageing and decline populations leave most MEDCs in a vulnerable position when it comes to labor intensive industries and this exchange between capital intensive and labor intensive goods and services represents the most basic form of international trade. Please note that this is only an example of how nations need to trade with one and other and does not portray the truth in terms of international trade today. A high amount of capital intensive industries or heavy industries are found in excesses in emerging markets and this represents the tradeoff mentioned above. China, India, South Korea, Brazil serve as examples. Trade has played the most significant role in the evolution of human civilization from tribes and cavemen to sovereign nations and industries. This is because of the simple truth that each entity has a different level of productivity for different goods and services with

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respect to the availability of resources and specialization of labor. This concept will be explained in detail within the history section as delegates need to understand the way in which specialization and exchange allowed humans to produce more and develop better goods and services. While, there is overall consensus that trade is beneficial, barriers to trade come into place as the nature of trade becomes unfair or unequally beneficial to the parties involved. In recent times, trade with multinational corporations and MEDCs involving complex contracts and systems has left locals in LEDCs worse off. This has been seen in the agricultural sector especially where the value chain of a crop is such that farmers are left with a very small margin of the profit. The world economic forum, this year, needs to ensure that regulations are placed so that they ensure trade is always mutually beneficial without hindering it in order to promote global competitiveness, come to a consensus regarding the extent and role of increased capital inflows into LEDCs and ensure sustainable and inclusive economic growth worldwide as much as possible.

Definition of Key Terms

Absolute and Comparative Advantage: The theories of absolute, comparative and competitive advantage are central to the debate over our indulgence in international trade. The most basic theoretical justification for trade is the fact that different entities can produce the same good, with same amount of resources with different productivities and thus varying results due to varying levels of training, quality, management and efficiency of resources. Thus, it is likely that one nation (A) has the ability to produce 10 units of cotton with 10 units of labor while another nation (B) can produce maybe 20 units of cotton with those same 10 units of labor. Here, the nation B that can produce more i.e. 20 units with the same amount of labor resource has an absolute advantage in the market. Continuing with this train of thought, it would not be economical for nation A to produce any cotton as the nation would much rather importing the demanded cotton from nation B who would be able to produce it a lower cost. Nation A would also thus benefit from being able to use its 10 units of labor to produce a good or service in which it has an absolute advantage and can thus use to exchange with in trade. The theory of comparative advantage applies the same logic which asks nations to produce only those goods and services in which they have a greater efficiency yet; instead of a simple cost analysis of production, the opportunity cost, i.e. the value of the next best alternative foregone is analyzed to determine which nation has an advantage. It is more efficient for nations to produce only those goods and services in which they have a

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comparative advantage (i.e. lower opportunity cost in production) because the practice of this theory means that all nations will have an advantage in some good or service and thus works towards global competiveness.
Comment [A1]: Please provide an example like the above as it will make it clearer for the delegates. (Maybe as a diagram)

Balance of Trade The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive balance is known as a trade surplus and constitutes a nation exporting more than it imports; a negative balance is referred to as a trade deficit or, informally, a trade gap and would thus constitute in a nation not being able to pay for its imports with the revenue from its exports. In financial terms, a balance of trade is a current account balance and may also be known as the balance of payments. Maintaining a positive and stable balance of trade is generally seen as one of the major macroeconomic objectives for any government yet; most nations today are comfortable with and maintain deficits up to and over 20% of their Gross Domestic Product. Few nations carry a trade surplus. As seen in the figure below only megamanufacturing or oil exporting nations enjoy this luxury.

Figure 1.1 - Cumulative Current Account Balance from 1980 till 2008.
Source - IMF World Economic Outlook Database, April 2009

Apart from maintaining a desirable overall balance of payments, it is extremely important that individual states keep track of their bilateral current accounts, i.e. trade with specifically one other state. For example, historically general consensus pointed towards the notion that if a nation falls behind and carries a great deficit with another nation, the surplus nation obtains a position of economic power.

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Barriers to Trade: Trade barriers include tariff and trade blocks with international trade. The barriers can take many forms, including the following terms that include many restrictions in international trade within multiple countries that import and export any items of trade: y Tariffs y Non-tariff barriers to trade y Import licenses y Export licenses y Import quotas y Subsidies y Voluntary Export Restraints y Local content requirements y Embargo Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.

Commercial Policy: Encompassing instruments of trade protection employed by countries to foster industrial promotion, export diversification, employment creation, and other desired developmentoriented strategies make up a countries commercial policy. They include tariffs, quotas, and subsidies. The two extreme forms of commercial or trade policy would be inward and outward policies. Inward policies are associated with those employed by economic nationalists and may also be known as import substitution whereby a nation looks to be self sufficient and thus promotes domestic production over all else. The primary reason that nations have adopted such policies and impose tariffs and non-tariff barriers on imports is to protect domestic employment and resources, while also recognizing the prospect of gaining a position of negotiating power over other nations. An outward policy on the other hand is one that recognizes the benefit of foreign more competitive goods and services entering the economy and thus is more free and open to imports. By nature such an economy would involve greater competition in markets and be bereft of tariffs and bureaucracy when it comes to imports. Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those
Comment [A2]: Please discuss Autarky and Self Sufficiency

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considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel.

GDP: The gross domestic product (GDP) is one of the primary indicators to gauge the health of a countrys economy. It represents the total dollar value of all goods and services produced over a specific time period. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Most economic statistics are compared and indexed with GDP figures as it represents the staple set of data for any economist, income. Therefore statistics illustrating a nations balance of payments, foreign investments, economic growth, and domestic budgets are all calculated as ratios or percentages to GDP figures for better perspective and to scale the results.

Inclusive Economic Growth Economic growth is a positive change in the level of production of goods and services by a country over a certain period of time. Economic growth is usually brought by technological innovation and positive external forces. For economic growth to be sustainable and inclusive it is required that this growth be for the long run broad based sectors such that it is successful in including the large part of its labor force and is able to increase the standard of living for its poor.

History
Delegates are advised to refer to the history section to gain comprehensive insight into the relevance and details of the events and treaties listed below, moreover the history of the economic theory and practices mentioned here is available in this section.

Dawn of Trade and Specialization The dawn of trade and specialization was a time period that proved to be the platform for the progression and rapid development of the human civilization. The ideals of selfsufficiency were only able to get individuals and family so far as to making ends meet. But, with specialization and the division of labor, by which individuals concentrated and focused their resources into producing a specific good in large volumes and then trading it with specialists in other fields to fulfill their own needs as well as their wants with the surplus they

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were able to make. This idea represents the basics of economics and although the discovery of trade was made a few millennia ago and trade has since become a fundamental part of our society, there is still room for expansion. History has seen trade expand, from being conducted by individuals within a family to families within a tribe to tribes within a society and societies within a city state. This same concept is being debated at the scale of countries and continents spanning the earth.

Mercantilism Mercantilism and economic nationalism was the prominent economic and political policy employed, by which empires used military power to protect local industries. Mercantilists thought that international trade could not have mutual benefits and thus tariffs were used to encourage exports and discourage imports. During an era notorious for great competition of militaristic powers with clashing spiritual and political ideologies, getting an edge ahead had great significance. Thus, trade surplus, self-sufficiency and economic independence were states that every European empire was looking to achieve. Exporting goods in exchange for money-like commodities of intrinsic value such as gold and silver was a way of establishing soft power and were entry lines into establishing colonies in Africa and Asia.

Industrialization It must be said that the industrial revolution and the subsequent rise in trading empires to compete with the British were a catalyst to the turmoil of the early 20th century up until 1945, at the end of World War II.
Comment [A3]: Maybe consider a separate addition regarding Foreign Investments

1973 Oil Crisis (This was a late addition proposed by my uncle, so I am still conducting research, should include minimum 300 words as it is the most relevant and recent section)

Key Issues
The points listed in this section are only briefly explained yet are extremely pertinent. I suggest that all delegates conduct further research on some of the sub-sections in order to thoroughly understand the key economic, social and political issues that existed with the events in the past as well as those that still exist today. Only with a high level understanding on these issues can we attempt to reach an effective consensus on the role of trade barriers and foreign investments i.e. international trade in the sustained development of economies that we desire.

Comment [A4]: The level to which nations must open up is definitely going to take up a majority chunk of the debate. Yet it is important to mention that several nations propose stringent legislation to prevent entry of foreign investment especially with concerns of inflation, as we have crossed the initial stages of post-recovery period. Thus it doesn t have to be North Korea which is highly extreme case. I think you might have to expand this section to consider more of the economic arguments nations present against a greater level of Economic Liberalization. Thus the discussion must not be a Yes/No to opening up but rather in relative manner. How much to open up? China and India maintain a large amount of regulation so thus they may not be a clear example for liberalization of the whole economy. Also liberalization requires lack of subsidizing which is something both nations are heavily involved in. Rather than focus on them as an argument for liberalization I would suggest to discuss more economic arguments for/against a relative amount of opening up.

Economic Liberalization in Developing Nations

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Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with classical liberalism. It is a movement whereby a nations looks to move from an inward commercial policy to a more outward one that is open up its economy to imports and foreign competition in the production of goods and services. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a "bigger pie" for everybody. Economic Liberalization gained acknowledgement recently following the application of the movement in both China and India and its subsequent success in accelerating the industrialization process within the two largest nations by population. Yet, there are nations completely opposed to such reforms, choosing even in todays day and age to pursue the goal of self-sufficiency. The greatest example of such a nation would be the Democratic Peoples Republic of Korea (DPRK or North Korea).
Comment [A5]: Please cite the diagram and give a small explanation.

For Success India and China

Against Investment is only an injection of cash for the rich and does not improve lives for poor

Comment [A6]: Please expand the points against

Theoretical Advantage, Comparative and competitive - efficiency

IMF and WB and US - unethical Unfair Trade policies MNCs exploitation

MEDCs, TNCs and Fair Trade Trade barriers are often criticized for the effect they have on the developing world. Because MEDCs and MNCs set trade policies and are the major consumers of goods and services, goods such as crops that developing countries are best at producing still face high barriers. Trade barriers such as taxes on food imports or subsidies for farmers in developed

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economies lead to overproduction and dumping on world markets, thus lowering prices and hurting LEDC farmers. Tariffs have also been criticized for being unfair with low rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to Development Index measures the effect that MEDC trade policies actually have on the developing world. Powerful cartels such as OPEC have been formed in the energy sector yet for most LEDCs and large producers of agricultural goods, unethical use of the value chain brings small yields to the locals from exports. This has been a major cause for concern as LEDCs in Latin America, Africa and South East Asia remain skeptical over the prospect of economic liberalization and trade.

Commodity Trade (Also a last minute addition by my uncle, so will include in the final draft)

Major Parties and their views

United States of America The United States of America has always held a position in favor of the economic theory of comparative advantage and trade. Thus, at times the largest economy in the world has engaged in both export and import of the same good, finding greater yields in engaging in such international trade. Yet, today several critics are worried and preoccupied by the mounting trade deficit, not only the largest in the world but also making up for a great percentage of the nations GDP. Over the past 20 to 30 years, the policies encompassing the USAs outlook towards trade and foreign exchange markets have led to a considerable decline in the value of the United States Dollar (USD) as demand for goods and services from the nation has declined. In fact, the nations own demand for goods and services has been outsourced to nations who have take advantage of globalization and inexpensive labor namely China. With the US needing funding to pay for the deficit and China holding most of this debt, the worlds largest economy has set about employing monetary measures such as quantitative easing yet the nation still maintains it stand when it comes to commercial policy. The United States has also been accused several times as corporations headquartered in the nation have allegedly exploited resources in the developing world. The United States has also set and endorsed economic, military and political embargoes on individual nations.
Comment [A7]: Please mention the exact %. A lot of the debt is also held by the Federal Reserve

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European Union (UK, Germany, Spain) The formation of the European Union (EU) brought about a new summit in free trade. Among the fundamental documents and principles that found the EU, the ideal of free and flowing trade within Europe ranked high and the subsequent creation of the Euro zone only further enable the movement of capital to, from and within the continent. With its comparative advantage in most quaternary sectors, most of Western and Northern Europe, in particular Germany, has a trade surplus with the United states of America and the rest of the world. The issue that has arisen following the monetary union of the euro zone and the greater encouragement for free trade has been caused by the lack of fiscal union within the nations. This leaves each nation with its own budget account and factors such as the large German trade surplus have sent several of the outer euro nations such as Portugal, Ireland, Italy Greece and Spain (informally known as PIIGS) to set into a grave deficit and debt cycle. Many argue that the allowance of such trade within the nations and the greater German efficiency in several high valued industries and subsequent debt cycles has left the Euro zone dream weaker than ever before.

BRIC The BRIC nations i.e. Brazil, Russia, India and China represent the four fastest growing major developing powerhouses. In recent years, albeit at different times, each of these countries has experienced rapid economic growth and capital influx following crucial reforms and economic liberalization. Having experienced both the pros and cons of embracing globalization, these nations have mastered the policies needed to regulate foreign intervention in their economies to maximize efficiency through competition and to protect the interests of their citizens with the goal of increasing their standards of living. While, the general characterization of the policies employed and endorsed by the BRIC nations are similar and represent near textbook liberalization, each nation has had indigenous and specific policies to aid in its movement as per special cultural and other consequential factors.
Comment [A8]: I understand what you mean but please reword this. Although the growth experienced by the BRIC nations must be commended, they have not mastered policies. They face several structural problems which showcases their incapability to deal with globalization in the adequate manner. This is giving them problems of their own. So I would suggest rather than generalize, you must mention the problems each of them face (briefly) and how that modifies their outlook in a summit such as WEF. As much as they are propped up they have huge structural economic problems.

OPEC Following the oil crisis in 1973, the OPEC has been able to sustain its position as the leading supplier and the price setter of crude oil. It is largely claimed by analysts that it was following this crisis that the US trade deficit began to expand.

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Today, the United States of America needs to borrow almost 2.5 billion $ daily to stay afloat with its deficit payments. While, some portion of this goes towards paying for consumer goods to China and luxury goods and electronics to nations like Germany and Japan, most of these payments are towards the Organization of Petroleum Exporting Countries. World Trade Organization, World Bank (Their inclusion will depend on our delegation list and will be synced with Anvitas Major Parties as well)

Timeline of Events
Year 1964 Event Formation of UNCTAD Formation of WTO 1973 1978 1991 Oil crisis China opens up India Opens Up Formation of WFTO

Comment [A9]: It can be agreed that a separate UN treaties and Events is not required so you can merge it to your timeline. Please elaborate however on events in the timeline and also incorporate into your timeline: -key financial crises (e.g. Asian Crisis 97) -key international agreements -elaborate (in two lines ) phrases such as opens up -key events in the BRIC nations histories (Soviet Union collapse, 1991 Indian balance of payments crises) Comment [A10]: Please elaborate

Evaluation of Previous Solutions

The fact that the issue of establishing fair global competiveness has not been appropriately addressed is evident in no clearer way than by highlighting the existence of resource exploitation, market disequilibrium and failures in several industries including core sectors such as agriculture and energy. Therefore, it has to be said that any previous attempt at a solution has not reached the standards that meet the gravity of the issue. For example, the formation and reconstruction and actions of several international organizations and treaties have raised hopes of a change in attitude and cooperation several times in history as explained in prior sections.
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Comment [A11]: Please maintain a reference to the Outcomes of several G20 meets and any economic agreements that have been derived out of that post-financial crisis 2008.

Dubai International Academy Model United Nations 2012| III Annual Session

The World Trade Organization and the United Nations Conference on Trade and Development both proved to be insufficient in terms of having an influence on the policies of individual nations.

Possible Solutions
Trend is towards outward commercial policies but individual nations cannot get lost in the process. Free trade maximizes efficiency but not social well being therefore dealing with demerit goods is necessary and so arises the need of some form of regulation. Also agriculture, energy are essentials therefore equity and balance needs to be found to keep prices manageable and include the vast majority of the population in the economic growth and development process. To ensure global competiveness in both balances of trade and in development, it is important that a widespread of markets is treated with special care. At the moment only energy in particular crude oil producing nations enjoy a price controlling cartel to protect their interest and this either needs to be abolished or similar organization are formed for LEDCs producing fundamental crops to encourage them to export in a fair trading market.

Comment [A12]: Excellent job on the entire first draft of the Research Report. Some points to keep in mind for the next draft. In its entirety in the next report -Expand the Possible Solutions with more indicative ideas and how they can be achieved. You can discuss as strengthening of existing mechanisms such as the World Trade Organization to solve trade issues regarding specific regulation. -The Outcome Document of WEF at DIAMUN must have a few solutions to existing problems in the World Economies so to make sure good debate and negotiation is reached, I would suggest incorporating areas of interest which delegates must focus on and the means they can achieve it. Again, great research report!

Bibliography
Bela Balassa. "Trade between Developed and Developing Countries': The Decade Ahead." OECD. 1985. Web. 20 July 2011. Jerome a Paris. European Tribune - Community, Politics & Progress. 11 Dec. 2006. Web. 20 July 2011. <http://www.eurotrib.com/story/2006/12/11/131616/13>. United Nations. "Trade Liberalization and Economic Reform in Developing Countries: Structural Change or De-Industrialization." UNCTAD. UN, 2005. Web. 20 July 2011. Smith, Adam. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations, Indianapolis: Liberty Fund, 1981, 2 vols. (1776) (reprint of the Clarendon Press edition, Oxford 1976, with Edward Cannan's original index from 1922)

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