International Monetary Fund
The International Monetary Fund is an international organization headquartered in Washington, D. C. consisting of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, reduce poverty around the world." Formed in 1944 at the Bretton Woods Conference by the ideas of Harry Dexter White and John Maynard Keynes, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. It now plays a central role in the management of balance of payments difficulties and international financial crises. Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money; as of 2016, the fund had SDR477 billion. Through the fund, other activities such as the gathering of statistics and analysis, surveillance of its members' economies and the demand for particular policies, the IMF works to improve the economies of its member countries.
The organisation's objectives stated in the Articles of Agreement are: to promote international monetary co-operation, international trade, high employment, exchange-rate stability, sustainable economic growth, making resources available to member countries in financial difficulty. IMF funds come from two major sources:quotas and loans. Quotas, which are pooled funds of member nations, generate most IMF funds; the size of a member's quota depends on its financial importance in the world. Nations with larger economic importance have larger quotas; the quotas are increased periodically as a means of boosting the IMF's resources. The current Managing Director and Chairwoman of the International Monetary Fund is French lawyer and former politician, Christine Lagarde, who has held the post since 5 July 2011. Gita Gopinath was appointed as Chief Economist of IMF from October 1, 2018, she received her Ph. D. in economics from Princeton University. According to the IMF itself, it works to foster global growth and economic stability by providing policy advice and financing the members by working with developing nations to help them achieve macroeconomic stability and reduce poverty.
The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance-of-payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse economic consequences; the IMF provides alternate sources of financing. Upon the founding of the IMF, its three primary functions were: to oversee the fixed exchange rate arrangements between countries, thus helping national governments manage their exchange rates and allowing these governments to prioritize economic growth, to provide short-term capital to aid the balance of payments; this assistance was meant to prevent the spread of international economic crises. The IMF was intended to help mend the pieces of the international economy after the Great Depression and World War II; as well, to provide capital investments for economic growth and projects such as infrastructure.
The IMF's role was fundamentally altered by the floating exchange rates post-1971. It shifted to examining the economic policies of countries with IMF loan agreements to determine if a shortage of capital was due to economic fluctuations or economic policy; the IMF researched what types of government policy would ensure economic recovery. A particular concern of the IMF was to prevent financial crisis, such as those in Mexico 1982, Brazil in 1987, East Asia in 1997–98 and Russia in 1998, from spreading and threatening the entire global financial and currency system; the challenge was to promote and implement policy that reduced the frequency of crises among the emerging market countries the middle-income countries which are vulnerable to massive capital outflows. Rather than maintaining a position of oversight of only exchange rates, their function became one of surveillance of the overall macroeconomic performance of member countries, their role became a lot more active because the IMF now manages economic policy rather than just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their policy of conditionality, established in the 1950s. Low-income countries can borrow on concessional terms, which means there is a period of time with no interest rates, through the Extended Credit Facility, the Standby Credit Facility and the Rapid Credit Facility. Nonconcessional loans, which include interest rates, are provided through Stand-By Arrangements, the Flexible Credit Line, the Precautionary and Liquidity Line, the Extended Fund Facility; the IMF provides emergency assistance via the Rapid Financing Instrument to members facing urgent balance-of-payments needs. The IMF is mandated to oversee the international monetary and financial system and monitor the economic and financial policies of its member countries; this activity facilitates international co-operation. Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, surveillance has evolved by way of changes in procedures rather than through the adoption of new obligations.
The responsibilities changed from those of guardian to those of overseer of members' policies. The Fund analyses the appropriateness of each member country's economic and financial policies for achieving orderly economic growth, assesses the consequences of these policies for other countries and for the global e
A currency union involves two or more states sharing the same currency without them having any further integration. Three types of currency unions exist: Informal – unilateral adoption of foreign currency Formal – adoption of foreign currency by virtue of bilateral or multilateral agreement with the issuing authority, sometimes supplemented by issue of local currency in currency peg regime Formal with common policy – establishment by multiple countries of a common monetary policy and issuing authority for their common currencyThe theory of the optimal currency area addresses the question of how to determine what geographical regions should share a currency in order to maximize economic efficiency. Note: Every customs and monetary union and economic and monetary union has a currency union. Zimbabwe is theoretically in a currency union with four blocs as the South African rand, Botswana pula, British pound and US dollar circulate, the US Dollar was until 2016 official tender.. Additionally the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union, common market and currency union with the mainland and in regards to third countries through the trade pacts signed by the mainland state.
Between Bahrain and Abu Dhabi using the Bahraini dinar between Bahrain, Oman and the Trucial States, using the Gulf rupee from 1959 until 1966 between Aden and South Arabia, Kenya, Oman, British Somaliland, the Trucial States, Uganda and British India using the Indian rupee between Belgium and the Grand-Duchy of Luxemburg using the Belgian/Luxembourgish franc from 1921 to the Euro between British India and the Straits Settlements using the Indian rupee between Czech Republic and Slovakia using the Czechoslovak koruna between Ethiopia and Eritrea using the Ethiopian birr between France and Andorra using the French franc between the Eastern Caribbean, Barbados and Tobago and British Guiana using the British West Indies dollar between the Eastern Caribbean, Barbados and Tobago and British Guiana using the Eastern Caribbean dollar between Italy, Vatican City, San Marino using the Italian lira between Jamaica and the Cayman Islands using the Jamaican pound and Jamaican dollar between Kenya and Zanzibar using the East African rupee between Kenya and Zanzibar using the East African florin between Kenya and Zanzibar, South Arabia, British Somaliland and Italian Somaliland using the East African shilling Latin Monetary Union between France, Belgium and Switzerland, involving Greece, Romania and other countries.
Between Liberia and the United States using the United States dollar between Mauritius and Seychelles using the Mauritian rupee between Nigeria, the Gambia, Sierra Leone, the Gold Coast and Liberia using the British West African pound between Prussia and the North German states using the North German thaler between Russia and the former Soviet republics using the Soviet ruble between Qatar and all the emirates of the UAE, except Abu Dhabi using the Qatari and Dubai riyal between Saudi Arabia and Qatar using the Saudi riyal between Samoa and New Zealand using the New Zealand pound Scandinavian Monetary Union, between Denmark and Sweden between the Solomon Islands, Papua New Guinea and Australia using the Australian dollar South German guilder between Spain and Andorra using the Spanish peseta between Trinidad and Tobago and Grenada using the Trinidad and Tobago dollar between Brunei and Singapore using the Malaya and British Borneo dollar between Cambodia and Vietnam using the French Indochinese piastre between South Africa and Botswana using the South African rand between Egypt and Sudan using the Egyptian pound – until 1956 between West Germany and East Germany between 1 July 1990 and 3 October 1990, as part of a temporary, so-called "Monetary and Social Union" prior to German reunification.
Between what became the Republic of Ireland and the United Kingdom, between 1928 and 1979. The Irish Pound was held at the same value as Sterling for this period, although it was not accepted for payments in the UK. proposed pan-American monetary union – abandoned in the form proposed by Argentina proposed monetary union between the United Kingdom and Norway using the pound sterling during the late 1940s and early 1950s proposed gold-backed, pan-African monetary union put forward by Muammar Gaddafi prior to his death List of pegged currencies North American Currency Union Acocella, N. and Di Bartolomeo, G. and Tirelli, P. ‘Monetary conservatism and fiscal coordination in a monetary union’, in: ‘Economics Letters’, 94: 56-63. Bergin, Paul. "Monetary Union". In David R. Henderson. Concise Encyclopedia of Economics. Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. CS1 maint: Extra text: editors list West Africa opts for currency union Economist- Antipodean currencies Reasons for the collapse of the Rouble Zone OECD Development Centre – the Rand Zone
Bribery is the act of giving or receiving something of value in exchange for some kind of influence or action in return, that the recipient would otherwise not offer. Bribery is defined by Black's Law Dictionary as the offering, receiving, or soliciting of any item of value to influence the actions of an official or other person in charge of a public or legal duty. Bribery is offering to do something for someone for the expressed purpose of receiving something in exchange. Gifts of money or other items of value which are otherwise available to everyone on an equivalent basis, not for dishonest purposes, is not bribery. Offering a discount or a refund to all purchasers is not bribery. For example, it is legal for an employee of a Public Utilities Commission involved in electric rate regulation to accept a rebate on electric service that reduces their cost for electricity, when the rebate is available to other residential electric customers. Giving the rebate to influence them to look favorably on the electric utility's rate increase applications, would be considered bribery.
A bribe is the gift bestowed to influence the recipient's conduct. It may be money, rights in action, preferment, emolument, objects of value, advantage, or a promise to induce or influence the action, vote, or influence of a person in an official or public capacity. Many types of payments or favors can constitute bribes: tip, sop, skim, discount, waived fee/ticket, free food, free ad, free trip, free tickets, sweetheart deal, kickback/payback, inflated sale of an object or property, lucrative contract, campaign contribution, sponsorship/backing, higher paying job, stock options, secret commission, or promotion. One must be careful of differing cultural norms when examining bribery. Expectations of when a monetary transaction is appropriate can differ from place to place. Political campaign contributions in the form of cash, for example, are considered criminal acts of bribery in some countries, while in the United States, provided they adhere to election law, are legal. Tipping, for example, is considered bribery in some societies, while in others the two concepts may not be interchangeable.
In some Spanish-speaking countries, bribes are referred to as "mordida". In Arab countries, bribes may be called baksheesh or "shay". French-speaking countries use the expressions "dessous-de-table", "pot-de-vin", or "commission occulte". While the last two expressions contain inherently a negative connotation, the expression "dessous-de-table" can be understood as a accepted business practice. In German, the common term is Schmiergeld; the offence may be divided into two great classes: the one, where a person invested with power is induced by payment to use it unjustly. The briber might hold a powerful role and control the transaction; the forms that bribery take are numerous. For example, a motorist might bribe a police officer not to issue a ticket for speeding, a citizen seeking paperwork or utility line connections might bribe a functionary for faster service. Bribery may take the form of a secret commission, a profit made by an agent, in the course of his employment, without the knowledge of his principal.
Euphemisms abound for this Bribers and recipients of bribery are numerous although bribers have one common denominator and, the financial ability to bribe. According to BBC news U. K, "bribery around the world is estimated at about $1 trillion"; as indicated on the pages devoted to political corruption, efforts have been made in recent years by the international community to encourage countries to dissociate and incriminate as separate offences and passive bribery. From a legal point of view, active bribery can be defined for instance as the promising, offering or giving by any person, directly or indirectly, of any undue advantage, for himself or herself or for anyone else, for him or her to act or refrain from acting in the exercise of his or her functions.. Passive bribery can be defined as the request or receipt, directly or indirectly, of any undue advantage, for himself or herself or for anyone else, or the acceptance of an offer or a promise of such an advantage, to act or refrain from acting in the exercise of his or her functions.
The reason for this dissociation is to make the early steps of a corrupt deal an offence and, thus, to give a clear signal that bribery is not acceptable. Besides, such a dissociation makes the prosecution of bribery offences easier since it can be difficult to prove that two parties have formally agreed upon a corrupt deal. Besides, there is no such formal deal but only a mutual understanding, for instance when it is common knowledge in a municipality that to obtain a building permit one has to pay a "fee" to the decision maker to obtain a favourable decision. A grey area may exist. United States law is strict in li
Trade justice is a campaign by non-governmental organisations, plus efforts by other actors, to change the rules and practices of world trade in order to promote fairness. These organizations include consumer groups, trade unions, faith groups, aid agencies and environmental groups; the organizations campaigning for trade justice posit this concept in opposition to free trade, the advocates of which also claim pro-poor outcomes. Trade justice advocates argue that free trade does not and will never exist, that governmental policies on trade should be in the public interest, rather than the interest of wealthy entities who try to influence trade negotiation to benefit their individual interests. Advocates of trade justice argue that growing inequity and serious gaps in social justice, the global export of terrorism, are symptoms of an economic system that permits harms to be exported to other countries, while importing their goods, they point to extinction, social unrest, as consequences of globalisation, in particular of an "unfair" globalisation.
In the past, the responses sought by critics of the international trade system included various penalties on "unfair" goods. This argument made little headway against the long-term movement towards free trade. Today, the trade justice movement concentrates more on the abolition of agricultural subsidies and dumping, to a much lesser extent on offsetting penalties on "unfair" goods. Indeed, although there are many who are still critical of free trade in general, there is a trend towards campaigning against what is seen as hypocrisy by developed countries in using protectionism against the poorest countries in agricultural products, while requiring them to leave their own producers without protection; the Trade Justice Movement in the UK was the first formal coalition of groups to use the term "trade justice". The term trade justice has been adopted internationally by campaign groups, for example by the over 100 national platforms of the Global Call to Action Against Poverty where it is one of the four main demands.
In many countries "fair trade" is used as well as or instead of "trade justice". The global institutions that are most targeted in trade justice campaigns against the alleged injustices of the current international trade system are the World Trade Organization, the International Monetary Fund and the World Bank. Campaigners lobby their own governments with the intention of creating pressure on them to prioritise poverty reduction when making international trade rules. In trading blocs such as the European Union, the campaigns seek to influence policy across a number of member state governments. "Trade Justice" and "Fair Trade" were used by those supporting social justice and the alleviation of the intense poverty found in many developing nations. They contrasted "fair trade" with'unfair' international trade practices, it is associated with labour unions and environmentalists, in their criticism of disparities between the protections for capital versus those for labour and the environment. The use of the term has expanded beyond campaigns to reform current trading practices, the major institutions such as the World Trade Organization which embody them.
Now it has become a movement to allow consumers to choose not to participate in these practices. Fairtrade labelling or "Fairtrade certification" allows consumers to identify goods commodities such as coffee, that meet certain agreed standards of fairness. Academics such as Thomas Alured Faunce argue that the insertion of a constructive ambiguity such as valuing innovation in bilateral trade agreements may undermine democratic sovereignty with regard to construction of domestic policy in areas such as the environment and public health; this view is strenuously contested by trade law officials and many domestic policy makers."The widely referred to demand of trade justice campaigners is access to the markets of developed countries or rich countries. When developing countries export to developed country markets, they face tariff barriers that can be as much as four times higher than those encountered by developed countries. Poverty claims that those barriers cost poor countries $100 billion a year – twice as much as they receive in aid."Most trade justice campaigners focus in some way on the agricultural subsidies of rich countries that make it difficult for farmers in poor countries to compete.
For example, they argue that the European Union's agricultural export subsidies encourage overproduction of goods such as tomatoes or sugar, which are sold cheaply or'dumped' in poor countries. Local farmers can not go out of business; the campaign points to the treatment of agriculture at the WTO, which has institutionalised these injustices. In the few instances where developing countries have used the complex and expensive WTO process to declare subsidies excessive, developed countries ignore these rulings, which the WTO itself does not enforce. Rich countries have begun to talk about cutting export subsidies, but they demand greater access to poor country markets in return; the term "trade justice" emphasizes that if the playing field
Emissions trading is a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants. A central authority allocates or sells a limited number of permits to discharge specific quantities of a specific pollutant per time period. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them. Financial derivatives of permits can be traded on secondary markets. Various countries and groups of companies have adopted such trading systems, notably for mitigating climate change. In contrast to command-and-control environmental regulations such as best available technology standards and government subsidies and trade programs are a type of flexible environmental regulation that allows organizations to decide how best to meet policy targets. There are active trading programs in several air pollutants. For greenhouse gases, which cause climate change, permit units are called carbon credits.
The largest greenhouse gases trading program is the European Union Emission Trading Scheme, which trades in European Union Allowances. The United States has a national market to reduce acid rain and several regional markets in nitrogen oxides. Recent reduction in California's GHG emissions are not attributed to carbon trading but to other factors such as renewable portfolio standards and energy efficiency policies. GHG emissions increased at more than half of industrial point sources regulated by California's cap and trade program from 2013 to 2015. In theory, polluters who can reduce emissions most cheaply will do so, achieving the emission reduction at the lowest cost to society. Cap and trade is meant to provide the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth. In practice the theory can fall short. Environmental hotspots arise and impact areas nearest pollution sources when credits are purchased in lieu of emission reductions.
In addition to environmental justice issues cap and trade policy is not as effective as performance standards for reducing air pollutant emissions. For example, sulfur dioxide emissions and acidic sulfate deposition decreased to a larger extent more in Europe than in the United States over similar time periods with Europe employing traditional control approaches compared to the U. S.' Subsidized market approach. Pollution is a prime example of a market externality. An externality is an effect of some activity on an entity, not party to a market transaction related to that activity. Emissions trading is a market-based approach to address pollution; the overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target. In an emissions trading system, the government sets an overall limit on emissions, defines permits, or limited authorizations to emit, up to the level of the overall limit; the government may sell the permits, but in many existing schemes, it gives permits to participants equal to each participant's baseline emissions.
The baseline is determined by reference to the participant's historical emissions. To demonstrate compliance, a participant must hold permits at least equal to the quantity of pollution it emitted during the time period. If every participant complies, the total pollution emitted will be at most equal to the sum of individual limits; because permits can be bought and sold, a participant can choose either to use its permits exactly. In effect, the buyer pays a charge for polluting, while the seller gains a reward for having reduced emissions. In many schemes, organizations which do not pollute may trade permits and financial derivatives of permits. In some schemes, participants can bank allowances to use in future periods. In some schemes, a proportion of all traded permits must be retired periodically, causing a net reduction in emissions over time. Thus, environmental groups may buy and retire permits, driving up the price of the remaining permits according to the law of demand. In most schemes, permit owners can receive a tax deduction.
The government lowers the overall limit over time, with an aim towards a national emissions reduction target. According to the Environmental Defense Fund, cap-and-trade is the most environmentally and economically sensible approach to controlling greenhouse gas emissions, the primary cause of global warming, because it sets a limit on emissions, the trading encourages companies to innovate in order to emit less."International trade can offer a range of positive and negative incentives to promote international cooperation on climate change. Three issues are key to developing constructive relationships between international trade and climate agreements: how existing trade policies and rules can be modified to be more climate friendly.
World Trade Organization
The World Trade Organization is an intergovernmental organization, concerned with the regulation of international trade between nations. The WTO commenced on 1 January 1995 under the Marrakesh Agreement, signed by 124 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade, which commenced in 1948, it is the largest international economic organization in the world. The WTO deals with regulation of trade in goods and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments; the WTO prohibits discrimination between trading partners, but provides exceptions for environmental protection, national security, other important goals. Trade-related disputes are resolved by independent judges at the WTO through a dispute resolution process; the WTO's current Director-General is Roberto Azevêdo, who leads a staff of over 600 people in Geneva, Switzerland.
A trade facilitation agreement, part of the Bali Package of decisions, was agreed by all members on 7 December 2013, the first comprehensive agreement in the organization's history. On 23 January 2017, the amendment to the WTO Trade Related Aspects of Intellectual Property Rights Agreement marks the first time since the organization opened in 1995 that WTO accords have been amended, this change should secure for developing countries a legal pathway to access affordable remedies under WTO rules. Studies show that the WTO boosted trade, that barriers to trade would be higher in the absence of the WTO; the WTO has influenced the text of trade agreements, as "nearly all recent reference the WTO explicitly dozens of times across multiple chapters... in many of these same PTAs we find that substantial portions of treaty language—sometime the majority of a chapter—is copied verbatim from a WTO agreement." The WTO's predecessor, the General Agreement on Tariffs and Trade, was established by a multilateral treaty of 23 countries in 1947 after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation—such as the World Bank and the International Monetary Fund.
A comparable international institution for trade, named the International Trade Organization never started as the U. S. and other signatories did not ratify the establishment treaty, so GATT became a de facto international organization. Seven rounds of negotiations occurred under GATT; the first real GATT trade rounds concentrated on further reducing tariffs. The Kennedy Round in the mid-sixties brought about a GATT anti-dumping Agreement and a section on development; the Tokyo Round during the seventies represented the first major attempt to tackle trade barriers that do not take the form of tariffs, to improve the system, adopting a series of agreements on non-tariff barriers, which in some cases interpreted existing GATT rules, in others broke new ground. Because not all GATT members accepted these plurilateral agreements, they were informally called "codes". Several of these codes were amended in the Uruguay Round and turned into multilateral commitments accepted by all WTO members. Only four remained plurilateral, but in 1997 WTO members agreed to terminate the bovine meat and dairy agreements, leaving only two.
Despite attempts in the mid-1950s and 1960s to establish some form of institutional mechanism for international trade, the GATT continued to operate for half a century as a semi-institutionalized multilateral treaty regime on a provisional basis. Well before GATT's 40th anniversary, its members concluded that the GATT system was straining to adapt to a new globalizing world economy. In response to the problems identified in the 1982 Ministerial Declaration, the eighth GATT round—known as the Uruguay Round—was launched in September 1986, in Punta del Este, Uruguay, it was the biggest negotiating mandate on trade agreed: the talks aimed to extend the trading system into several new areas, notably trade in services and intellectual property, to reform trade in the sensitive sectors of agriculture and textiles. The Final Act concluding the Uruguay Round and establishing the WTO regime was signed 15 April 1994, during the ministerial meeting at Marrakesh and hence is known as the Marrakesh Agreement.
The GATT still exists as the WTO's umbrella treaty for trade in goods, updated as a result of the Uruguay Round negotiations. GATT 1994 is not however the only binding agreement included via the Final Act at Marrakesh; the agreements fall into six main parts: the Agreement Establishing the WTO the Multilateral Agreements on Trade in Goods the General Agreement on Trade in Services the Agreement on Trade-Related Aspects of Intellectual Property Rights dispute settlement reviews of governments' trade policiesIn terms of the WTO's principle relating to tariff "ceiling-binding", the Uruguay Round has been successful in increasing binding commitments by both developed and developing countries, as may be seen in the percentages of tariffs bound before and after the 1986–1994
Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties support protectionism, the opposite of free trade. Most nations are today members of the World Trade Organization multilateral trade agreements. Free trade is additionally exemplified by the European Economic Area and the Mercosur which have established open markets. However, most governments still impose some protectionist policies that are intended to support local employment, such as applying tariffs to imports or subsidies to exports. Governments may restrict free trade to limit exports of natural resources. Other barriers that may hinder trade include import quotas and non-tariff barriers, such as regulatory legislation. There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare while free trade and the reduction of trade barriers has a positive effect on economic growth.
However, liberalization of trade can cause significant and unequally distributed losses, the economic dislocation of workers in import-competing sectors. Free trade policies may promote the following features: Trade of goods without taxes or other trade barriers. Trade in services without taxes or other trade barriers; the absence of "trade-distorting" policies that give some firms, households, or factors of production an advantage over others. Unregulated access to markets. Unregulated access to market information. Inability of firms to distort markets through government-imposed monopoly or oligopoly power. Trade agreements which encourage free trade. Two simple ways to understand the proposed benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade.
Most economists would recommend that developing nations should set their tariff rates quite low, but the economist Ha-Joon Chang, a proponent of industrial policy, believes higher levels may be justified in developing nations because the productivity gap between them and developed nations today is much higher than what developed nations faced when they were at a similar level of technological development. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system. Counterarguments to Chang's point of view are that the developing countries are able to adopt technologies from abroad whereas developed nations had to create new technologies themselves and that developing countries can sell to export markets far richer than any that existed in the 19th century. If the chief justification for a tariff is to stimulate infant industries, it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful; this theory, known as import substitution industrialization, is considered ineffective for developing nations.
The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market is Pworld; the tariff increases the domestic price to Ptariff. The higher price causes domestic production to increase from QS1 to QS2 and causes domestic consumption to decline from QC1 to QC2; this has three main effects on societal welfare. Consumers are made worse off. Producers are better off; the government has additional tax revenue. However, the loss to consumers is greater than the gains by the government; the magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society. An identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers. Under similar analysis, export tariffs, import quotas and export quotas all yield nearly identical results.
Sometimes consumers are better off and producers worse off and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses. According to mainstream economics theory, the selective application of free trade agreements to some countries and tariffs on others can lead to economic inefficiency through the process of trade diversion, it is economically efficient for a good to be produced by the country, the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer and not the low cost producer as well can lead to trade diversion and a net economic loss.
This is why many economists place such high importance on negotiations for global tar