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LABUAN SCHOOL OF INTERNATIONAL BUSSINES AND FINANCE

UNIVERSITI MALAYSIA SABAH

LABUAN INTERNATIONAL CAMPUS

SEMESTER 2 (SESSION 2011/2012)

LECTURER : MISS YANTI AHMAD SHAFIEE

PROGRAMME : HE22 INTERNATIONAL FINANCIAL ECONOMICS

COURSE : BUSINESS LAW

COURSE CODE : GT01103

TITLE : What are the sources of international economic law?

Discuss the part which international economic law plays

in international trade.

SUBMISSION DATE : MAY 22, 2012

NAME MATRIX NUMBER

RICHIE GRAY MOLITIS BG 1011 0434

ARCHER VINIS BG 1011 0022

KEVIN LEE CHEE KIANG BG 1011 0169

MUHAMMAD ABDULLAH BIN AZZHAR BG 1011 0271

MUHAMMAD AKMAL BIN JOHARI BG 1011 0272

RAZMAN BIN NORMAN BG 1016 0593

RIDHWAN BIN HASSAN BG 1011 0435


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Contents

1.0 INTRODUCTION ................................................................................................................................. 3

1.0.1 WHAT IS INTERNATIONAL ECONOMIC LAW .............................................................................. 4

1.0.2 WHAT IS INTERNATIONAL TRADE .............................................................................................. 6

2.0 SOURCES OF INTERNATIONAL ECONOMIC LAW ............................................................................... 7

2.0.1 CUSTOMARY INTERNATIONAL LAW ........................................................................................... 7

2.0.2 LAW MERCHANTS ...................................................................................................................... 8

2.0.3 CONVENTIONAL INTERNATIONAL ECONOMIC LAW .................................................................. 8

2.0.3INTERNATIONAL INVESTMENT LAW .......................................................................................... 9

2.0.5 WORLD TRADE ORGANIZATION (WTO) ..................................................................................... 9

2.0.5.1 ORIGINS ............................................................................................................................. 10

2.0.5.2 OBJECTIVES AND OPERATION ........................................................................................... 11

2.0.5.3 RESOLUTION OF TRADE DISPUTES .................................................................................... 12

2.0.5.4 TRADE-POLICY REVIEWS ................................................................................................... 12

2.0.5.5 ASSESSMENT ..................................................................................................................... 13

2.0.6 INTERNATIONAL MONETARY FUND (IMF) ............................................................................... 14

2.0.6.1 ORIGINS ............................................................................................................................. 14

2.0.6.2 OPERATIONS ..................................................................................................................... 15

2.0.6.3 STABILIZING CURRENCY EXCHANGE RATES ...................................................................... 15

2.0.6.4 FINANCING BALANCE-OF-PAYMENTS DEFICITS ................................................................ 15

2.0.6.5 CRITICISM AND DEBATE .................................................................................................... 17

2.0.6.6 ORGANIZATION ................................................................................................................. 17

3.0 GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) ................................................................ 19

3.0.1 AGREEMENT ON SERVICES....................................................................................................... 19

3.0.2 AGREEMENT ON INTELECTUAL PROPERTY .............................................................................. 20

3.0.3 AGREEMENT ON AGRICULTURAL SUBSIDIES ........................................................................... 20

4.0 WHY NATIONS TRADE ..................................................................................................................... 21

4.0.1 COMPARATIVE ADVANTAGE .................................................................................................... 22

4.0.2 COMPARATIVE OPPORTUNITY COST ....................................................................................... 24

4.0.3 ABSOLUTE ADVANTAGE AND WAGE RATES ............................................................................ 26

4.0.4 DYNAMIC GAINS FROM INTERNATIONAL TRADE (BENEFITS) .................................................. 28


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5.0 INTERNATIONAL AND REGIONAL TRADE ORGANIZATIONS ............................................................ 30

5.0.1 EUROPEAN UNION (EU) ........................................................................................................... 30

5.0.1.1 FUNCTIONS OF EU ............................................................................................................. 30

5.0.2 EUROPEAN FREE TRADE ASSOCIATION (EFTA) ........................................................................ 30

5.0.2.1 OBJECTIVES OF EFTA ......................................................................................................... 31

5.0.3 ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN)......................................................... 31

5.0.4 NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) .......................................................... 32

5.1 THE ROLE OF INTERNATIONAL ECONOMIC LAW IN INTERNATIONAL TRADE ................................ 32

6.0 THE ROLE OF GOVERNMENT IN INTERNATIONAL ECONOMICS LAW TOWARDS INTERNATIONAL

TRADE .................................................................................................................................................... 34

6.0.1 INTERVENTION OF GOVERNMENT IN INTERNATIONAL TRADE ............................................... 34

POLITICAL MOTIVES ...................................................................................................................... 34

ECONOMIC MOTIVES .................................................................................................................... 34

CULTURAL MOTIVES...................................................................................................................... 35

6.0.2 INTERVENTION OF GOVERNMENT IN FOREIGN DIRECT INVESTMENT .................................... 35

BALANCE OF PAYMENTS ............................................................................................................... 35

OBTAINS RESOURCES AND BENEFITS............................................................................................ 36

6.0.3 INTERVENTION OF GOVERNMENT IN PROMOTING INTERNATIONAL TRADE ......................... 36

6.0.4 INTERVENTION OF GOVERNMENT IN RESTRICTION OF TRADE ............................................... 37

7.0 SUMMARY ....................................................................................................................................... 39

8.0 REFFERENCES .................................................................................................................................. 40


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1.0 INTRODUCTION

International economic law had a strong influence on the shape and evolution of the

international law of international trade, investment and financial transactions. Indeed, the

General Agreement on Tariffs and Trade (GATT), which forms much of the foundation for

the following organizations, is clearly based on the perception that international trade is

beneficial, that the gains to society from trade outweigh the losses to those who are hurt by

competition from abroad, and that value is created through specialization and exchange in

open markets. It is this perception that leads to the overriding principle of the GATT/WTO

system that barriers to trade imposed by government should be subjected to international

discipline, and that regular procedures should be established looking to reduction or

elimination of such barriers.

In short, the doctrine of comparative advantage has informed, if not quite dominated,

the GATT since its creation in the early post-war years, and has sustained that fragile

enterprise for half a century, climaxed by establishment of the World Trade Organization in

1994. But the doctrine of comparative advantage is not self-evident, and doubts about its

validity, as well as about its political sustainability, have also informed the GATT, as well as

the behavior of its member states. The theory of comparative advantage is therefore seems

useful as background to the detailed exploration of tariffs and quotas, subsidies and

dumping, non-discrimination and preferences that make up the public law of international

trade.

This paper examines the sources of international economic law. Hence, we explain

the definition of international economic law and international trade in the following section.

Afterward we will discuss the organizations involved in international economic law and the

role of international economic law in international trade.


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1.0.1 OVERVIEW OF INTERNATIONAL ECONOMIC LAW

Before going further to know the definition of international economics law, we must first

know the definition of international economics. International economics concerns the

flow of commodities, services and productive factors (capital and labor) across national

boundaries. Trade in commodities refers to imports and exports of merchandise. Service

transactions involve such activities as shipping, travel, insurance or tourist services

performed by companies of one country for the residents of another. Capital flows represent

the establishment of manufacturing plants in foreign countries, or the acquisition of foreign

bonds, stocks and bank accounts. Labor flows describe the international migration of

workers.

From the text above, we can simply undertake international economics as any

activities of exchange goods or services between parties in the global perspective. These

activities must have rules in order to avoid any problem or prohibited act in the trade.

International economic lawregulates the international economic order or economic

relations among nations. However, the term international economic law encompasses a

large number of areas. It is often defined broadly to include a vast array of topics ranging

from public international law of trade to private international law of trade to certain aspects

of international commercial law and the law of international finance and investment. The

International Economic Law Interests Group of the American Society of International Law

includes the following non-exhaustive list of topics within the term international economic

law:

1) International Trade Law, including both the international law of the World TradeOrganization and GATT and domestic trade laws

2) International Economic Integration Law, including the law of the European Union,NAFTA and Mercosur

3) Private International Law, including international choice of law, choice of forum,enforcement of judgments and the law of international commerce

4) International Business Regulation, including antitrust or competition law,environmental regulation and product safety regulation

5) International Financial Law, including private transactional law, regulatory law, thelaw of foreign direct investment and international monetary law, including the law of

the International Monetary Fund and World Bank6) The role of law in development


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7) International tax law8) International intellectual property law.

THE BASIS OF INTERNATIONAL ECONOMICS LAW

International economic law is based on the traditional principles of international law such as

pacta sunt servanda, freedom, sovereign equality, reciprocity and economic sovereignty. It

is also based on modern and evolving principles such as the duty to co-operate, permanent

sovereignty over natural resources, preferential treatment for developing countries in

general and the least-developed countries in particular.

The sources of international economic law are the same as those sources of

international law generally outlined in Article 38 of the Statute of the International Court of

Justice: The Court, whose function is to decide in accordance with international law such

disputes as are submitted to it, shall apply: (a) international conventions, whether general

or particular, establishing rules expressly recognized by the contesting states; (b)

international custom, as evidence of a general practice accepted as law; (c) the general

principles of law recognized by civilized nations; (d) subject to the provisions of Article 59,

judicial decisions and the teachings of the most highly qualified publicists of the various

nations, as subsidiary means for the determination of rules of law.


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1.0.2 OVERVIEW OF INTERNATIONAL TRADE

The theory of international trade had raised questions such as why do nations trade? what

do they do? or is trade a good thing? To answer these questions we have to understand the

theory of international trade. International trade refers to the exchange of merchandise and

services among the countries of the world. It is important to acknowledge that a significant

portion of world trade is also composed of trade in services.

This type of trade gives rise to a world economy, in which prices, or supply and

demand, affect and are affected by global events. Political change in Asia, for example,

could result in an increase in the cost of labor, thereby increasing the manufacturing costs

for an American sneaker company based in Malaysia, which would then result in an increase

in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in

the cost of labor, on the other hand, would result in you having to pay less for your new

shoes.

Trading globally gives consumers and countries the opportunity to be exposed to

goods and services not available in their own countries. Almost every kind of product can be

found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks,

currencies and water. Services are also traded: tourism, banking, consulting and

transportation. A product that is sold to the global market is an export, and a product that is

bought from the global market is an import.

Global trade allows wealthy countries to use their resources - whether labor,

technology or capital - more efficiently. Because countries are endowed with different assets

and natural resources (land, labor, capital and technology), some countries may produce the

same good more efficiently and therefore sell it more cheaply than other countries. If a

country cannot efficiently produce an item, it can obtain the item by trading with another

country that can. This is known as specialization in international trade.

International trade not only results in increased efficiency but also allows countries to

participate in a global economy, encouraging the opportunity of foreign direct investment

(FDI), which is the amount of money that individuals invest into foreign companies and

other assets. In theory, economies can therefore grow more efficiently and can more easily

become competitive economic participants.


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2.0 SOURCES OF INTERNATIONAL ECONOMIC LAW

The main sources of International Economic Law are Customary International Law, the Lex

Mercatoria or Law Merchant and the common traditions of national legal systems. Both

characteristics of international economic law have undergone radical changes, especially

since the Second World War. Other than that, other sources of international economic law

are Conventional International Economic Law, World Trade Organization (WTO),

International Monetary Fund (IMF) and International Investment Law.

2.0.1 CUSTOMARY INTERNATIONAL LAW

Customary international law is those aspects of international law that derive from custom.

Along with general principles of law and treaties, custom is considered by the International

Court of Justice, jurists, the United Nations, and its member states to be among the primary

sources of international law. For example, laws of war were long a matter of customary law

before they were codified in the Hague Conventions of 1899 and 1907, Geneva Conventions,

and other treaties. The vast majority of the world's governments accept in principle the

existence of customary international law, although there are many differing opinions as to

what rules are contained in it.

The Statute of the International Court of Justice acknowledges the existence of

customary international law in Article 38(1)(b), incorporated into the United Nations Charter

by Article 92: "The Court, whose function is to decide in accordance with international law

such disputes as are submitted to it, shall apply...international custom, as evidence of a

general practice accepted as law." Customary international law consists of rules of law

derived from the consistent conduct of States acting out of the belief that the law required

them to act that way." It follows that customary international law can be discerned by a

"widespread repetition by States of similar international acts over time (State practice); Actsmust occur out of sense of obligation (opinio juris); Acts must be taken by a significant

number of States and not be rejected by a significant number of States." A marker of

customary international law is consensus among states exhibited both by widespread

conduct and a discernible sense of obligation.

The International Court of Justice (case of USA vs Nicaragua in 1989) held that the

elements of an international customary law would be Opinio Juris (Past Judge Decisions or

works of the most highly qualified publicists) which is then proven by existing state practices.A peremptory norm (also called jus cogens, Latin for "compelling law") is a fundamental


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principle of international law which is accepted by the international community of states as a

norm from which no derogation is ever permitted. These norms rooted from Natural Law

principles, and any laws conflicting with it should be considered null and void. Examples

include variousinternational crimes; a state which carries out or permits slavery, torture,

genocide, war of aggression, or crimes against humanity is always violating customary

international law. Other examples accepted or claimed as customary international law

include the principle of non-refoulement and immunity of visiting foreign heads of state.

2.0.2 LAW MERCHANTS

Law merchant, during the Middle Ages, the body of customary rules and principles relating

to merchants and mercantile transactions and adopted by traders themselves for the

purpose of regulating their dealings. Initially, it was administered for the most part in special

quasi-judicial courts, such as those of the guilds in Italy and, later, regularly constituted

piepoudre courts in England.

The law merchant was developed in the early 11th century in order to protect foreign

merchants not under the jurisdiction and protection of the local law. Foreign traders often

were subject to confiscations and other types of harassment if one of their countrymen had

defaulted in a business transaction. A kind of law was also needed by which the traders

themselves could negotiate contracts, partnerships, trademarks, and various aspects of

buying and selling. The law merchant gradually spread as the traders went from place to

place. Their courts, set up by the merchants themselves at trade fairs or in cities,

administered a law that was uniform throughout Europe, regardless of differences in

national laws and languages. It was based primarily on Roman law, although there were

some Germanic influences; it formed the basis for modern commercial law.

2.0.3 CONVENTIONAL INTERNATIONAL ECONOMIC LAW

International conventions are treaties or agreements between states (the primary actors in

international law). See Malcolm N. Shaw, International Law 88 (5th ed., Cambridge, 2003).

International convention is used interchangeably with terms like international treaty,

international agreement, compact, or contract between states. Conventions may be of a

general or specific nature and between two or multiple states. Conventions between two

states are called bilateral treaties; conventions between a small number of states (but more

than two) are called plurilateral treaties; conventions between a large number of states are

called multilateral_treaties.


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2.0.3INTERNATIONAL INVESTMENT LAW

Bilateral investment treaties (or, BITs) areinternational agreements establishing the terms

and conditions for privateinvestment by nationals and companies of one state in another

state.

The first generation of these treaties were Friendship, Commerce and Navigation Treaties

(FCNs), which required the host state to treat foreign investments on the same level as

investments from any other state, including in some instances treatment that was as

favorable as the host nation treated its own investments. FCNs also established the terms of

trade and shipping between the parties, and the rights of foreigners to conduct business and

own property in the host state.

The second generation of these treaties are Bilateral Investment Treaties (BITs), which set

forth actionable standards of conduct that applied to governments in their treatment of

investors from other states, including:

fair and equitable treatment (often meaningnational treatment ormost favorednation treatment);

protection from expropriation; free transfer of means and full protection and security.

The distinctive feature of many BITs is that they allow for an alternative dispute resolution

mechanism, whereby an investor whose rights under the BIT have been violated could have

recourse toInternational arbitration, often under the auspices of theICSID (International

Center for the Settlement of Investment Disputes), rather than suing the host State in its

own courts.

2.0.5 WORLD TRADE ORGANIZATION (WTO)

World Trade Organization (WTO),international organization established to supervise and

liberalize world trade. The WTO is the successor to theGeneral Agreement on Tariffs and

Trade(GATT), which was created in 1947 in the expectation that it would soon be replaced

by a specialized agency of theUnited Nations (UN) to be called the International Trade

Organization (ITO). Although the ITO never materialized, the GATT proved remarkably

successful in liberalizing world trade over the next five decades. By the late 1980s there

were calls for a stronger multilateral organization to monitor trade and resolve trade
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disputes. Following the completion of theUruguay Round (198694) of multilateral trade

negotiations, the WTO began operations on January 1, 1995.

2.0.5.1 ORIGINS

The ITO was initially envisaged, along with theInternational Monetary Fund (IMF) and

theWorld Bank,as one of the key pillars of post-World War II reconstruction and economic

development. In Havana in 1948, the UN Conference on Trade and Employment concluded a

draft charter for the ITO, known as the Havana Charter, which would have created

extensive rules governing trade, investment, services, and business and employment

practices. However, theUnited States failed to ratify the agreement. Meanwhile, an

agreement to phase out the use of importquotas and to reducetariffs on merchandise trade,

negotiated by 23 countries inGeneva in 1947, came into force as the GATT on January 1,

1948.

Although the GATT was expected to be provisional, it was the only major agreement

governinginternational trade until the creation of the WTO. The GATT system evolved over

47 years to become a de facto globaltrade organization that eventually involved

approximately 130 countries. Through various negotiating rounds, the GATT was extended

or modified by numerous supplementary codes and arrangements, interpretations, waivers,

reports by dispute-settlement panels, and decisions of its council.

During negotiations ending in 1994, the original GATT and all changes to it

introduced prior to the Uruguay Round were renamed GATT 1947. This set of agreements

was distinguished from GATT 1994, which comprises the modifications and clarifications

negotiated during theUruguay Round (referred to as Understandings) plus a dozen other

multilateral agreements on merchandise trade. GATT 1994 became an integral part of the

agreement that established the WTO. Other core components include the General

Agreement on Trade in Services (GATS), which attempted to supervise and liberalize trade;

the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which

sought to improve protection of intellectual property across borders; the Understanding on

Rules and Procedures Governing the Settlement of Disputes, which established rules for

resolving conflicts between members; the Trade Policy Review Mechanism, which

documented national trade policies and assessed their conformity with WTO rules; and four

plurilateral agreements, signed by only a subset of the WTO membership, oncivil aircraft,

government procurement,dairy products, and bovine meat (though the latter two were

terminated at the end of 1997 with the creation of related WTO committees). These
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agreements were signed in Marrakech,Morocco, in April 1994, and, following their

ratification, the contracting parties to the GATTtreaty became charter members of the WTO.

By the early 21st century the WTO had more than 140 members.

2.0.5.2 OBJECTIVES AND OPERATION

The WTO has six key objectives: (1) to set and enforce rules for international trade, (2) to

provide a forum for negotiating and monitoring further trade liberalization, (3) to resolve

trade disputes, (4) to increase the transparency of decision-making processes, (5) to

cooperate with other major international economic institutions involved in global economic

management, and (6) to helpdeveloping countries benefit fully from the global trading

system. Although shared by the GATT, in practice these goals have been pursued more

comprehensively by the WTO. For example, whereas the GATT focused almost exclusively

on goodsthough much of agriculture and textiles were excludedthe WTO encompasses

all goods, services, and intellectual property, as well as some investment policies. In

addition, the permanent WTO Secretariat, which replaced the interim GATT Secretariat, has

strengthened and formalized mechanisms for reviewing trade policies and settling disputes.

Because many more products are covered under the WTO than under the GATT and

because the number of member countries and the extent of their participation has grown

steadilythe combined share of international trade of WTO members now exceeds 90percent of the global totalopen access to markets has increased substantially.

The rules embodied in both the GATT and the WTO serves at least three purposes.

First, they attempt to protect the interests of small and weak countries against

discriminatory trade practices of large and powerful countries. The WTOsmost-favoured-

nation and national-treatment articles stipulate that each WTO member must grant equal

market access to all other members and that both domestic and foreign suppliers must be

treated equally. Second, the rules require members to limit trade only through tariffs and toprovide market access not less favourable than that specified in their schedules (i.e., the

commitments that they agreed to when they were granted WTO membership or

subsequently). Third, the rules are designed to help governments resist lobbying efforts by

domestic interest groups seeking special favours. Although some exceptions to the rules

have been made, their presence and replication in the core WTO agreements were intended

to ensure that the worst excesses would be avoided. By thus bringing greater certainty and

predictability to international markets, it was thought, the WTO would enhance economic

welfare and reduce political tensions.
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2.0.5.3 RESOLUTION OF TRADE DISPUTES

The GATT provided an avenue for resolving trade disputes, a role that was strengthened

substantially under the WTO. Members are committed not to take unilateral action against

other members. Instead, they are expected to seek recourse through the WTOs dispute-

settlement system and to abide by its rules and findings. The procedures for dispute

resolution under the GATT have been automated and greatly streamlined, and the timetable

has been tightened.

Dispute resolution begins with bilateral consultations through the mediation, or

good offices, of the director-general. If this fails, an independent panel is created to hear

the dispute. The panel submits a private draft report to the parties for comment, after which

it may revise the report before releasing it to the full WTO membership. Unlike the IMF and

theWorld Bank,both of which use weighted voting, each WTO member has only one vote.

As in the earlier GATT system, however, most decisions are made by consensus. Unless one

or both of the parties files a notice of appeal or the WTO members reject the report, it is

automatically adopted and legally binding after 60 days. The process is supposed to be

completed within nine months, and, if an appeal is lodged, the WTO Appellate Body hears

and rules on any claim of legal error within 60 days. Appellate rulings are automatically

adopted unless a consensus exists among members against doing so.

2.0.5.4 TRADE-POLICY REVIEWS

The WTO also seeks to increase awareness of the extent and effects of trade-distorting

policies, a goal that it accomplishes through annual notification requirements and through a

policy-review mechanism. Notices of all changes in members trade and trade-related

policies must be published and made accessible to their trading partners. For many

developing countries and countries whose economies were formerly centrally planned, this

requirement was a major step toward more transparent governance. The WTO reviews the

trade policies of the worlds four largest traders (the European, the United States, Japan,

and Canada) once every two years, the policies of the 16 next largest traders once every

four years, and the policies of all other traders once every six or more years. After extensive

consultations with the member country under review, the WTO Secretariat publishes its

review together with a companion report by the countrys government. The process thus

monitors the extent to which members are meeting their commitments and provides

information on newly opened markets. It also provides a firmer basis for subsequent trade

negotiations and the resolution of trade disputes.
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2.0.5.5 ASSESSMENT

The pace of internationaleconomic integration through the GATT and WTO rounds of

multilateral trade negotiations has been slower and less comprehensive than some members

would prefer. Some have suggested that there should be additional integration among

subgroups of (often neighbouring) member economiese.g., those party to theEuropean

Union, theNorth American Free Trade Agreement, and theAsia-Pacific Economic

Cooperationfor political, military, or other reasons. Notwithstanding the most-favoured-

nation clauses in the agreements establishing the WTO, the organization does allow such

preferential integration under certain conditions. Even though many such integration

agreements arguably do not involve substantially all tradethe WTOs main condition

there has been little conflict over the formation of free-trade areas andcustoms unions.The

most common omissions from such agreements are politically sensitive sectors such as

agriculture.

Beginning in the late 1990s, the WTO was the target of fierce criticism. Opponents

ofglobalization, and in particular those opposed to the growing power ofmultinational

corporations, argued that the WTO infringes upon nationalsovereignty and promotes the

interests of large corporations at the expense of smaller local firms struggling to cope with

import competition. Environmental and labour groups (especially those from wealthiercountries) have claimed that trade liberalization leads to environmental damage and harms

the interests of low-skilled unionized workers. Protests by these and other groups at WTO

ministerial meetingssuch as the 1999 demonstrations in Seattle, Washington, U.S., which

involved approximately 50,000 peoplebecame larger and more frequent, in part because

the development of the Internet and e-mail made large-scale organizing and collective

action easier. In response to such criticism, supporters of the WTO claimed that regulating

trade is not an efficient way to protect the environment and labour rights. Meanwhile, some

WTO members, especially developing countries, resisted attempts to adopt rules that would

allow for sanctions against countries that failed to meet strict environmental and labour

standards, arguing that they would amount to veiledprotectionism.Despite these criticisms,

however, WTO admission remained attractive for non-members, as evidenced by the

increase in the number of members after 1995. Most significantly,China entered the WTO in

2001 after years of accession negotiations. The conditions for Chinese membership were in

some ways more restrictive than those for developing countries, reflecting the concerns of

some WTO members that the admission of such a large and still somewhatplannedeconomy might have an overall negative effect onfree trade.
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2.0.6 INTERNATIONAL MONETARY FUND (IMF)

International Monetary Fund (IMF), United Nations (UN) specialized agency, founded at the

Bretton Woods Conference in 1944 to secure international monetary cooperation, to stabilize

currency exchange rates, and to expand international liquidity (access to hard currencies).

2.0.6.1 ORIGINS

The first half of the 20th century was marked by two world wars that caused enormous

physical and economic destruction in Europe and a Great Depression that wrought economic

devastation in both Europe and the United States. These events kindled a desire to create a

new international monetary system that would stabilize currency exchange rates without

backing currencies entirely with gold; to reduce the frequency and severity of balance-of-payments deficits (which occur when more foreign currency leaves a country than enters it);

and to eliminate destructive mercantilist trade policies, such as competitive devaluations and

foreign exchange restrictionsall while substantially preserving each countrys ability to

pursue independent economic policies. Multilateral discussions led to the UN Monetary and

Financial Conference in Bretton Woods, New Hampshire, U.S., in July 1944. Delegates

representing 44 countries drafted the Articles of Agreement for a proposed International

Monetary Fund that would supervise the new international monetary system. The framers of

the new Bretton Woods monetary regime hoped to promote world trade, investment, and

economic growth by maintaining convertible currencies at stable exchange rates. Countries

with temporary, moderate balance-of-payments deficits were expected to finance their

deficits by borrowing foreign currencies from the IMF rather than by imposing exchange

controls, devaluations, or deflationary economic policies that could spread their economic

problems to other countries.

After ratification by 29 countries, the Articles of Agreement entered into force on

December 27, 1945. The funds board of governors convened the following year in

Savannah, Georgia, U.S., to adopt bylaws and to elect the IMFs first executive directors.

The governors decided to locate the organizations permanent headquarters in Washington,

D.C., where its 12 original executive directors first met in May 1946. The IMFs financial

operations began the following year.


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2.0.6.2 OPERATIONS

Since its creation, the IMFs principal activities have included stabilizing currency exchange

rates, financing the short-term balance-of-payments deficits of member countries, and

providing advice and technical to borrowing countries.

2.0.6.3 STABILIZING CURRENCY EXCHANGE RATES

Under the original Articles of Agreement, the IMF supervised a modified gold standard

system of pegged, or stable, currency exchange rates. Each member declared a value for its

currency relative to the U.S. dollar, and in turn the U.S. Treasury tied the dollar to gold by

agreeing to buy and sell gold to other governments at $35 per ounce. A countrys exchange

rate could vary only 1 percent above or below its declared value. Seeking to eliminatecompetitive devaluations, the IMF permitted exchange rate movements greater than 1

percent only for countries in fundamental balance-of-payments disequilibrium and only

after consultation with, and approval by, the fund. In August 1971 U.S. President Richard

Nixon ended this system of pegged exchange rates by refusing to sell gold to other

governments at the stipulated price. Since then each member has been permitted to choose

the method it uses to determine its exchange rate: a free float, in which the exchange rate

for a countrys currency is determined by the supply and demand of that currency on the

international currency markets; a managed float, in which a countrys monetary officials will

occasionally intervene in international currency markets to buy or sell its currency to

influence short-term exchange rates; a pegged exchange arrangement, in which a countrys

monetary officials pledge to tie their currencys exchange rate to another currency or group

of currencies; or a fixed exchange arrangement, in which a countrys currency exchange

rate is tied to another currency and is unchanging. After losing its authority to regulate

currency exchange rates, the IMF shifted its focus to loaning money to developing countries.

2.0.6.4 FINANCING BALANCE-OF-PAYMENTS DEFICITS

Members with balance-of-payments deficits may borrow money in foreign currencies, which

they must repay with interest, by purchasing with their own currencies the foreign

currencies held by the IMF. Each member may immediately borrow up to 25 percent of its

quota in this way. The amounts available for purchase are denominated in Special Drawing

Rights (SDRs), whose value is calculated daily as a weighted average of four currencies: the

U.S. dollar, the euro, the Japanese yen, and the British pound sterling. SDRs are an

international reserve asset created by the IMF in 1969 to supplement members existing


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reserve assets of foreign currencies and gold. Countries use the SDRs that have been

allocated to them by the IMF to settle international debts. More than 20 billion SDRs were

allocated to members in successive allocations from 1969 through 1981. SDRs are not part

of the quota subscriptions supplied by members, and thus they are not part of the general

asset pool available for loans to members. The IMF uses the SDR as its unit of account for

all transactions. Drawing on the IMF by a country raises the funds holdings of that countrys

currency but lowers its holdings of another countrys currency by an equal amount. Thus the

composition of the funds resources changes, but the total resources as measured in SDRs

remains the same. The country repays the loan over a specified period (usually three to five

years) by using member currencies acceptable to the IMF to repurchase its own national

currency. Only about 20 currencies are borrowed during a typical year, with most borrowers

exchanging their currency for the major convertible currencies: the U.S. dollar, the Japanese

yen, the euro, and the British pound sterling. Countries whose currencies are borrowed by

other member governments receive remunerationabout 4 percent of the amount borrowed.

Additional loans are available for members with financial difficulties that require them

to borrow more than 25 percent of their quotas. The IMF uses an analytic framework known

as financial programming, which was first fully formulated by IMF staff economist Jacques

Polak in 1957, to determine the amount of the loan and the macroeconomic adjustments

and structural reforms needed to re-establish the countrys balance-of-payments equilibrium.

The IMF has several financing programs, or facilities, for providing these loans, including a

standby arrangement, which makes short-term assistance available to countries

experiencing temporary or cyclical balance-of-payments deficits; an extended-fund facility,

which supports medium-term relief; a supplemental-reserve facility, which provides loans in

cases of extraordinary short-term deficits; and, since 1987, a poverty-reduction and growth

facility. Each facility has its own access limit, disbursement plan, maturity structure, and

repayment schedule. The typical IMF loan, known as an upper-credit tranche arrangement,

features an annual access limit of 100 percent of a members quota, quarterly

disbursements, a one- to three-year maturity structure, and a three- to five-year repayment

schedule. The IMF charges the same interest rate to every country that borrows from a

particular financing facility. Loans typically carry annual interest charges of approximately

4.5 percent.

Each of these loans is accompanied by a letter of intent that specifies the

macroeconomic adjustments and structural reforms required by the IMF as conditions for

assistance. Loan conditions, or conditionality, have been explicitly authorized by the


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Articles of Agreement since 1968. Typical conditionality require borrowing governments to

reduce budget deficits and rates of money growth; to eliminate monopolies, price controls,

interest rate ceilings, and subsidies; to deregulate selected industries, particularly the

banking sector; to lower tariffs and eliminate quotas; to remove export barriers; to maintain

adequate international currency reserves; and to devalue their currencies if faced with

fundamental balance-of-payments deficits. These adjustments are intended to reduce

imports and increase exports to enable the country to earn sufficient foreign exchange in

the future to pay its foreign debts, including the newly incurred IMF debt. Most lending

programs specify quarterly targets for key economic variables that, in theory, must be met

to receive the next loan instalment.

2.0.6.5 CRITICISM AND DEBATE

The impact of IMF loans has been widely debated. Opponents of the IMF argue that the

loans enable member countries to pursue reckless domestic economic policies knowing that,

if needed, the IMF will bail them out. This safety net, critics charge, delays needed reforms

and creates long-term dependency. Opponents also argue that the IMF rescues international

bankers who have made bad loans, thereby encouraging them to approve ever riskier

international investments.

IMF conditionality have also been widely debated. Critics contend that IMF policy

prescriptions provide uniform remedies that are not adequately tailored to each countrys

unique circumstances. These standard, austere loan conditions reduce economic growth and

deepen and prolong financial crises, creating severe hardships for the poorest people in

borrowing countries and strengthening local opposition to the IMF.

2.0.6.6 ORGANIZATION

The IMF is headed by a board of governors, each of whom represents one of theorganizations approximately 180 member states. The governors, who are usually their

countries finance ministers or central directors, attend annual meetings on IMF issues. The

funds day-to-day operations are administered by an executive board, which consists of 24

executive directors who meet at least three times a week. Eight directors represent

individual countries (China, France, Germany, Japan, Russia, Saudi Arabia, the United

Kingdom, and the United States), and the other 16 represent the funds remaining members,

grouped by world regions. Because it makes most decisions by consensus, the executive

board rarely conducts formal voting. The board is chaired by a managing director, who is


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appointed by the board for a renewable five-year term and supervises the funds staff of

nearly 3,000 employees from more than 120 countries. The managing director is usually a

European andby traditionnot an American. The first female managing director, Christine

Lagarde of France, was appointed in June 2011.

Each member contributes a sum of money called a quota subscription. Quotas are

reviewed every five years and are based on each countrys wealth and economic

performancethe richer the country, the larger its quota. The quotas form a pool of

loanable funds and determine how much money each member can borrow and how much

voting power it will have. For example, the United States approximately $50 billion

contribution to date is the most of any IMF member, accounting for approximately 18

percent of total quotas. Accordingly, the United States receives about 18 percent of the total

votes on both the board of governors and the executive board. The Group of Seven

industrialized nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the

United States) controls nearly 50 percent of the funds total votes.


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3.0 GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The General Agreement on Tariffs and Trade (GATT), which was signed in 1947, is a

multilateral agreement regulating trade among 153 countries. According to its preamble, the

purpose of the GATT is the "substantial reduction of tariffs and other trade barriers and the

elimination of preferences, on a reciprocal and mutually advantageous basis."

The GATT functioned de facto as an organization, conducting eight rounds of talks

addressing various trade issues and resolving international trade disputes. The Uruguay

Round, which was completed on December 15, 1993 after seven years of negotiations,

resulted in an agreement among 117 countries (including the U.S.) to reduce trade barriers

and to create more comprehensive and enforceable world trade rules. The agreement

coming out of this round, the Final Act Embodying the Results of the Uruguay Round of

Multilateral Trade Negotiations, was signed in April 1994. The Uruguay Round agreement

was approved and implemented by the U.S. Congress in December 1994, and went into

effect on January 1, 1995.

3.0.1 AGREEMENT ON SERVICES

Because of the ever-increasing importance of services to the total volume of world trade,

nations wanted to include GATT provisions for trade in services. The General Agreement on

Trade in Services (GATS) extended the principle of nondiscrimination to cover international

trade in all services, although talks regarding some sectors were more successful than were

others. The problem is that, although trade in goods is a straightforward concept goods

are exported from one country and imported to anotherit can be difficult to define exactly

what a service is. Nevertheless, the GATS created during the Uruguay Round identifies four

different forms that international trade in services can take:

1. Cross-border supply. Services supplied from one country to another (for example,international telephone calls).

2. Consumption abroad. Consumers or companies using a service while in anothercountry (for example, tourism).

3. Commercial presence. A company establishing a subsidiary in another country toprovide a service (for example, banking operations).

4. Presence of natural persons. Individuals traveling to another country to supply aservice (for example, business consultants).


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3.0.2 AGREEMENT ON INTELECTUAL PROPERTY

Although international piracy continues, the Uruguay Round took an important step toward

getting it under control. It created the Agreement on Trade-Related Aspects of Intellectual

Property (TRIPS) to help standardize intellectual property rules around the world. The TRIPS

Agreements agrees that protection of intellectual property rights benefits society because it

encourages the development of new technologies and other creations. It supports the

articles of both the Paris Convention and the Berne Convention and in certain instances

takes a stronger stand on intellectual property protection.

3.0.3 AGREEMENT ON AGRICULTURAL SUBSIDIES

Trade in agricultural products has long been a bone of contention for most of the worlds

trading partners at one time or another. Some of the more popular barriers that countries

use to protect their agricultural sectors include imports quotas and subsidies paid directly to

farmers. The Uruguay round addressed the main issues of agricultural tariffs and nontariff

barriers in its Agreement on Agriculture. The result is increased exposure of national

agricultural sectors to market forces and increased predictability in international agricultural

trade. The agreement forces countries to convert all nontariff barriers to tariffs a process

called tariffication. It then calls on developed and developing nations to cut agricultural

tariffs significantly, but it places no requirements on the least-developed economies.


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4.0 OVERVIEW OF NATIONS TRADE

Nations trade with each other for the same reasons that individuals engage in exchange of

goods and services or simply say to obtain the benefits of specialization. Since nations, like

individuals, are not equally suited to produce all goods, hence, all would benefit if each

specialized in what it could be do best and obtained its other needs through exchange

(Kreinin, 1998). The point is self-evident, for in a free society communities would not

engage in trade if it did not benefit them. In this section, we will discuss what is

comparative advantage, opportunity cost from comparative advantage, absolute advantage

and wage rates and lastly what is dynamic gain(benefits) from International trade practices.

In November 1945, the United States government issued a document entitled

Proposal for Expansion of World Trade and Employment for consideration by an

International Conference on Trade and Employment, purporting to represent a consensus

resulting from the United States-United Kingdom discussions over the presiding two years.

The proposals called for a detailed charter or code of conduct relating to governmental

restraints on international trade, and for creation of an International Trade Organization

(ITO)(Lowenfeld, 2008).

A few days after issuing the proposals looking to long-term arrangement, the United

States issued an invitation to fifteen countries to enter into negotiation looking to early

conclusion of a multilateral trade agreement, almost all courtiers except Soviet Union invited

accepted. This proposal for an International Conference on Trade and Employment was

taken up by the United Nations Economic and Social Council(Ecosoc) at it first meeting in

Paris in February 1946, at this meeting Ecosoc appointed a Preparatory Committee of

nineteen countries to drafts the document to be considered at such a conference. The

Preparatory Committee met at London in OctoberNovember 1946.

The Geneva negotiations 1947 set the precedent for subsequent Rounds eight in all

through the life of the GATT as an organization that played a major sources and part in the

development of international trade law in the second half of the 20th century (Lowenfeld,

2008). GATT contained a code of conduct designed to safeguard, at least provisionally, the

undertakings given and to commit the participants to a common (if incomplete) standard of

behavior with respect to international law trade. In the same city, in the preparation of the

propose character for the International Trade Organization (ITO), the code of conduct

largely paralleled the commercial policy sections of the draft of the ITO Charter as it then


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stood. The General Agreement was opened for signature on 30 October 1947, and entered

into effect provisionally on 1 January 1948.

4.0.1 COMPARATIVE ADVANTAGE

One of the reasons that most of the countries practice international trade is based on the

purpose of comparative advantage. International trade is the windows of world economy

refer to exchange of merchandise and services among the countries in the world. Trading in

merchandise can be in term of steel, automobiles, wine, bananas, and others, while service

including financial services, architectural services, engineering services and many more.

Besides that, international production which production of a goods or services with

processes located in more than on country also become a major international trading occurs.

The General Agreement On Tariffs and Trade (GATT) is an agreement originally to

reduce the trade barriers, quantitative restrictions and subsidies on trade through a series of

different agreements. According to Preamble of GATT, the objective of GATT is to raising

the standard living, ensuring full employment, steadily grow the real income and effective

demand, develop full use of resources in that particular country, and expanding the

production and exchange of goods. Comparative advantage that have in some countries

may be better as this will enhance many international trade occurs, thus satisfy demands for

each country.

Comparative advantage is a situation where a countrys relative autarkic price ratio of

one good in term of another is lower than that of other countries around the world economy.

As an example, Vietnam have an absolute advantage in producing rice than Japan even

though Japan also producing rice. Vietnam can produce rice using superior technology to

Japan, and also the price for inputs used in rice production are lower in Vietnam compare to

Japan which consequently the labour productivity in rice production of Vietnam is higher.

Besides that Vietnam also have an advantage in land and agricultural labor which in turn

supporting Vietnam being more productive in rice production. Japan consequently can

import rice from Vietnam since that they can get rice more cheaply in term of price.

Another example is that, suppose in England a gallon of wine cost 120 and a yard of

cloth 100 units of work, while in Portugal a gallon of wine costs 80 units and a yard of cloth

costs 90 units. Portugal has an absolute cost advantage in both wine and cloth, but England

has a comparative advantage in cloth, since the production of a yard of cloth in England

involves giving up production of 5/6 (100/120) gallon of wine, whereas production of a yard


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of cloth in Portugal involves giving up 9/8 (90/80) of a gallon of wine. Assuming constant

costs, price accurately reflecting costs, and ignoring transport and handling, a price of cloth

anywhere between 5/6 and 9/8 of the price of wine would make it profitable for Portugal to

import cloth and export wine, and for England to export cloth and import wine. If the same

amount of resources as before trade are committed, the output for the two countries will be

both more wine and more cloth.

However, as income increase in Vietnam they also need to think about buy the other

products and one of the product is motorcycles. Japan is a country that have a great

production towards this product. Generally, Honda Dream motorcycles from home economy

of Japan is in particularly are in range of Vietnam and international trading occurs which

hundreds of new motorcycles in city of Hanoi, Vietnam are registered daily. Most of the

tourist that visiting this city report that the city is being overwhelmed by the chaos of

motorcycles traffic which this consequently shows that these two countries are involved in

comparative advantage of international trade when there is an increase of consumption of

goods.

Under the World Trade Organization (WTO), all peoples are treated equally which

normally no discrimination between their partner. As an example, the Canadian products

had to be treated as favourably as the like as United States products as interpreted by the

panel that interpret the like product as stated in GATT Article 3 paragraph 1. Most-

favoured-nation (MFN) all other WTO members granted a special favour among all WTO

members such as lower customs duty rate of a product. Lowering the trade barriers is one

of the most obvious means of encouraging trade. The barriers concerned include customs

duties or tariffs and measures such as import bans or quotas that restrict quantities

selectively. A country such as United States, Japan, United Kingdom, and so on that with a

better technology and larger endowment of the factors necessary to produce an item is

more likely have an advantage to produce that item and this more likely increase export

towards another country.

Since the international trading is encourage and brings a lot of advantage, more

develop country involved in globalization era which these county also have their own

speciality in producing specific product. For example, Malaysia that is a member of GATT

that is rich in supply of natural resources and without no doubt will continually develop

through international trading besides maintaining international environmental standard (ISO

14000).


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4.0.2 COMPARATIVE OPPORTUNITY COST

Opportunities cost is the amount of good or service that is sacrificed or given up in order to

produce another goods or services. A country is said to have a comparative advantage

whenever if they have the lowest cost to produce a good or service. Besides that, countries

have different natural, human, and capital resources and different ways of combining these

resources and mostly they are not equally efficient to producing the goods and services that

their residents demand. The decision to produce any good or service has an opportunity

cost which is the amount of another good or service that might otherwise have been

produced. Given a choice of producing one good or another, it is more efficient to produce

the good with the lower opportunity cost, using the increased production of that good to

trade for the good with the higher opportunity cost.

Countries have different opportunity cost because of differentiation in endowments

of productive resources -warmer climates and longer growing seasons, natural resources

such as oil, iron ore, and water, educated and skilled workers, and larger quantities of more

sophisticated machinery. Because of these differentiation, countries can make international

trade and the trade made usually beneficial to both countries even if one has an absolute

advantage in the production of both goods that are to be traded. However, the terms of

trade must be such that both countries are lower in opportunity costs of the goods they aregetting from the trade.

An example of on how the opportunity cost working is that, suppose that United

States can produce 500 apples or 100 oranges in a month whereas Canada can produce 150

apples and 75 oranges in a month. The opportunity cost of U.S to produce an apple in a

month is 0.2 orange while its opportunity cost to produce orange is 5 apples per month.

Meanwhile, Canadas opportunity cost when producing an apple is 0.5 orange while in

producing one orange, the opportunity cost is 2 apples. Based on this comparison ofopportunities cost, we can see that one apple is much more cheaper to be produce in US

which its opportunity cost is 0.2 orange while in Canada, it is better to produce an orange

since it have lower cost in producing that particular product which is 2 apples. Therefore,

U.S has a comparative advantage in apples while Canda is advantageous in producing

orange. When the trade is occurs between U.S and Canada, it should be worth that U.S

produce more apples rather that oranges, while Canda produce more oranges than apples,

then U.S change some apples with Canada for oranges. The outcome must be higher than

the normal production of these country.


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Based on this point, more nations is entering themselves towards globalisation to

enhancing export and import activities. Countries involved in exporting because individuals

and firms can produce more goods and services that can be consumed at home, and also

they can sell the products in other countries in higher price rather than they can get when

sell domestically. In example, U.S have a comparative advantage in an array of high

technology industry such as chemicals, computers, aircraft, medical instruments, and certain

specialized machine. This advantage has increase since 1990s which U.S. software industry

holds 75 percent of the world market, and its employment grew at 9.6 percent per year

between 1987 and 1994 since the globalization increase among other countries including

developing countries.

INTERNATIONAL SALES CONTRACT (LAW OF INTERNATIONAL TRADE)

When the firms making an international transaction involving buying and selling process,

they are tied under international sales contract. International sale is defined as a contract

involving the sale of goods to be carried from one states to another, or where offer and

acceptance has taken place in different states: the Uniform Sales Law 1964, art 1. Trading

that occurs among between these two part from different countries are going through

international sales transactions which the parties that are deemed to have fixed their

respective right and duty in law and cannot evade these responsibilities in the absence of an

express exclusion.

Typically, there are separated charge that is involved when the process of

international trade or sales occurs which is payment of the price of the goods, the cost of

transportation of the goods from seller to buyer between different countries whether by sea,

land, air or combination of these way, charge made for insurance of goods during

transportation, and charge imposed by national authorities for the importation and

exportation of goods including customs duties, taxes, and the cost of obtaining import and

export licences. The liabilities of these charge are respectively under the buyer and seller

which depends on the sales contract.

The International Chamber of Commerce has introduced a standard contract of

uniform system which allows the buyers and sellers to establish their right and duties by

referring to the standard contract known as INCOTERMS which entered into force on

January 1, 2000. INCOTERMS provided a useful and practical body of rules which allows

buyer and sellers to fix their respective rights and duties in international sales transaction.

An example is that, by referring to the INCOTERMS, German company can make trading


27/41


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price must be $1.50 per yard or less, implying that a British laborer who produces 10 yards

a day must earn less than $15 a day. At any higher wage rate the U.K. would not remain

competitive in textiles. Thus if the established pattern of trade is to prevail, the British wage

rate must be somewhere between $10 and $15 a day, or between one half and one third of

the American wage rate. These limits are equal to, and are determine by the productivity

ratios in the industries, (Kreinin, 1998).

National Minimum Wage Act 1998creates a minimum wage across the United

Kingdom, currently 6.08per hour for workers aged 21 years and older, 4.98per hour

for workers aged 18 to 20. It was a flagship policy of the Labor Party in the U.K. during its

1997 election campaign and is still pronounce today in Labor Party circulars as an

outstanding gain for at least 1.5 million people. The national minimum wage (NMW) took

effect on 1 April 1999.

No national minimum wage existed prior to 1998, although there were a variety of

systems of wage controls focused on specific industries under the Trade Boards Act 1909.

Part of the reason for labors minimum wage policy was the decline of trade union

membership over recent decade (weakening employees bargaining power), as well as a

recognition that the employees most vulnerable to low pay (especially in service industries)

were rarely unionized in the first place.

Labor had returned to government in 1997 after 18 years in opposition, and a

minimum wage had been a party policy as long as 1986 under the leadership of Neil

Kinnock. The implementation of a wage was opposed by the opposition Conservative Party

and Liberal Democrats.

However that wage ratio cannot depart from these limits is illustrated by the events

following the reunification of Germany in 1990. For political reasons, the Germen

government established a wage level in East Germany of 80% of West German wage rates.

But East Germany productivity measured only 30%-50% depending on the industry of West

German productivity. Since the wage ratio between the two countries did not lie within the

productivity ratios, most East German firms could not compete, resulting inmass

unemployment. The German government has been pouring $100 billion of investments per

year into East Germany in effort to rise their productivity levels to 70%-80% of those of

West Germany. That way East Germany will able to compete globally in the industrys in

which it has a comparative advantage but the process takes years to complete.


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It is also possible to evaluate the frequent complains of protectionist forces in the

United States that they cannot withstand foreign competition because foreign wages are

lower than American wages. Time and again, in hearings before congressional committees,

representatives of import competing industries demand the imposition of a Scientific

Tariff. This particular tariff would equalize wage rates here and abroad.

4.0.4 DYNAMIC GAINS FROM INTERNATIONAL TRADE (BENEFITS)

The foregoing analysis of the benefits from international trade followed the traditional line of

emphasizing specialization and reallocation of existing resources. In fact, these gains can be

outweighed by the impact of trade on the countrys grow rate and therefore on the volume

of additional resources made available to, or employed by, the trading country. These are

termed dynamic benefits, in contrast to the static effects of reallocating an unchanged

quantity of resources. The reasons for disproportionality little space devote to these factors

is that they are difficult to measure as well as to theorize upon. But their important should

not be underestimated. The short discourse that follows is intended to be indicative rather

than exhaustive.

Consider first a fully employed economy. Its income and output are equal and may

be considered two sides. For what does it imply to state that the price of a desk is $100?

First, this is its value as a unit of output. Next, the price reflects the fact that a total of $100

in income was generated and paid to productive factors used in the production of the desk

in the following forms, wages and salaries for labor, rental income for the use of natural

resources, interest paid in capital and profit return for entrepreneurial ability.

For, if in a fully employed economy all income is spent on consumer goods, meaning

that the saving rate is nil. Then all resources must be occupied in the production of these

goods and no investment is possible, On the other hand, should consumer abstain from

consuming part of their income, save, or invest that making possible economic growth. It is

an integral part of economy theory, demonstrated time and again in empirical study. The

higher the income, the higher the savings too. Because it is easier to save out of higher

levels of earnings. Therefore, any positives increment to the communitys income necessarily

resulting in additional savings, when income is rise, the grow rate also will growth higher.

But this is precisely what international trade was shown to do. Income rises because

of more efficient utilization of fully employed resources. This raises savings and makes

additional resources available for investment purposes. Furthermore, since the opening up


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of the economy to foreign trade changes relative prices, the tendency toward higher

investment is accentuated if investment goods are imported or are made out of imported

materials, for the prices of imports goes down relative to that of export and other goods as

a results of trade. A country that is integrated into the global economy is likely to enjoy the

benefits of technological spillover from inventions develop in other countries. Trade and

investment is an important channel through which knowledge is conveyed throughout the

world.

This is not all. There are important benefits to developed and developing countries

alike that arise from the fact that foreign trade increases the size of the national market.

Export enable small and moderately sized countries to established and operate many plants

of efficient size, which would be impossible if production were confined to the domestic

markets. Not only can firms enjoy economics of scale, but the economy as a whole benefits

from the competitive pressure on prices, product improvement and technological

advancement. Innovation is often held back when competition is lacking. Furthermore,

expansion of an industry ensures the availability of such things as a pool of skilled labor on

which individual firm can draw ( these benefits are known as economist external to the firm

but internal to the industries).

Overall industrial expansion usually brings with it the creation and development of

the necessary infrastructure, such as transportation and power facilities, on which whole

industries can draw (economies external to the industries). In turn, imports assure the

existence of competitive pressure on domestic imports-competing industries, even those

that are internally monopolized. They also damped inflation in the importing country. It is

cleared that the immense potential of potential of dynamic benefits that can flow from

international trade. This effect of benefits is not same in all countries due to many causes.


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5.0 INTERNATIONAL AND REGIONAL TRADE ORGANIZATIONS

5.0.1 EUROPEAN UNION (EU)

According to Article 37 of the Treaty, the Council of the European Union (Council) acting on

proposals from the European Commission and in consultation with the European Parliament

sets up market organizations which are then implemented by the Commission. Market

organizations exist for most agricultural products produced within the EU. Their primary

function is to set common prices, grant aid to producers, control production and regulate

trade.Market organizations may require importers to obtain import licenses or pay import

levies and may take measures to safeguard the community market. Organizations also pay

subsidies to EU exporters to bring their prices in line with the world markets.

5.0.1.1 FUNCTIONS OF EU

EUs components, the three European communities of EEC, ECSC, and EURATOM, have

functioned well in their individually focused aspects.

i. Upon its establishment, the EEC was aimed to integrate the memberseconomic resources other than coal and steel, into an economic union within

which goods, labor, services, and capital will move freely. Common policiesfor foreign trade, agriculture, and transport will also be implemented. In the

past, customs duties within EU have been abolished.

ii. The purpose of ECSC was to set up a common market for the membercountries' resources of coal, steel, iron ore, and scrap.

iii. The role of EURATOM is to create the conditions necessary for the speedyestablishment and growth of nuclear industries in the Community.

iv. In order to create a closer monetary cooperation leading to a zone ofmonetary stability in Europe, the European Council established the European

Monetary System (EMS) in 1979. Later, the single market has opened new

prospects for Economic and Monetary Union (EMU).

5.0.2 EUROPEAN FREE TRADE ASSOCIATION (EFTA)

The European Free Trade Association (EFTA) is an international organization comprising four

states: Iceland, Liechtenstein, Norway and Switzerland. Its headquarter is located in Geneva

and offices are located in Brussels and Luxembourg.


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5.0.2.1 OBJECTIVES OF EFTA

a) to promote sustained economic growth, full employment, increased productivity andthe rational use of resources within the member states, financial stability and

continuous improvement in living standards,

b) to promote free trade among members states,c) to avoid significant disparity between Member States in the conditions of supply of

raw materials produced within the Area of the Association, and

d) to seek a broader economic union with the Western European countries andtherefore contribute to the expansion of trade to the world.

The activities of EFTA can be divided into three main areas. Firstly, the monitoring and

management of relationships between the EFTA States on the basis of the EFTA Convention ,

which is the legal basis of the Association. Secondly, in line with the broad objectives of the

Convention, EFTA has developed relations with a large number of non-EU countries (usually

referred to as third country relations), managed from the Geneva headquarters.

Thirdly, three of the four member states (Iceland, Liechtenstein and Norway) have

structured their relations with the European Union (EU) in the form of the Agreement on the

European Economic Area (EEA), through which they participate in the EU Single Market. The

servicing of the EFTA pillar of this extensive Agreement is undertaken by the office in

Brussels. The Office of the Statistical Adviser in Luxembourg handles statistical co-operation

on the basis of the EEA Agreement. A Secretary-General, who is assisted by a Deputy in

Geneva and in Brussels, heads the Secretariat.

5.0.3 ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN)

Malaysia, the Philippines, Singapore and Thailand formed the Association of Southeast Asian

Nation in (ASEAN) in 1967. Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in

1997 and Cambodia in 1998. Together, the 10 ASEAN countries comprise a market of about

560 million consumers and a GDP of nearly $1.1 trillion. The three main objectives of the

alliance are to (1) promote economic, cultural and social development in the region; (2)

safeguard the regions economic and political stability; and (3) serve as a forum in which

differences can be resolved fairly and peacefully.


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5.0.4 NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

The North American Free Trade Agreement (NAFTA) is an agreement signed by the

governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in

North America. The agreement came into force on January 1, 1994. It superseded the

CanadaUnited States Free Trade Agreement between the U.S. and Canada. In terms of

combined GDP of its members, as of 2010 the trade bloc is the largest in the world.

NAFTA has two supplements that are the North American Agreement on

Environmental Cooperation (NAAEC) and the North American Agreement on Labour

Cooperation (NAALC).

5.1 THE ROLE OF INTERNATIONAL ECONOMIC LAW IN

INTERNATIONAL TRADE

International economic law is a field of international law that regulates the behaviour of

states, international organizations and firms operating in the international arena.

International economic law, as a sub-discipline of international law, subsumes the following

fields:

Regional economic integration agreements, such as the European Union, ASEAN andother regional trade organizations;

International law and development and international development; International commercial arbitration; International intellectual property law; International business regulation; International trade law; Aspects of international environmental law;

International economic law regulates the international economic order or economic

relations among nations. However, the term international economic law encompasses a

large number of areas. It is often defined broadly to include a vast array of topics ranging

from public international law of trade to private international law of trade to certain aspects

of international commercial law and the law of international finance and investment. The

International Economic Law Interests Group of the American Society of International Law


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includes the following non-exhaustive list of topics within the term international economic

law:

1. International Trade Law, including both the international law of the World TradeOrganization and GATT and domestic trade laws;

2. International Economic Integration Law, including the law of the European Union,NAFTA and Mercosur;

3. Private International Law, including international choice of law, choice of forum,enforcement of judgments and the law of international commerce;

4. International Business Regulation, including antitrust or competition law,environmental regulation and product

business law group full

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