2A Challenges in the Global Economy Flashcards
(25 cards)
Nixon Shocks
15 Aug 1971
Impacts of Nixon Shocks
- Devaluation of USD, causing rapid increase in exchange rate of currencies, endangering exports
- National reserves in USD decreased in value
- Increased interest rates -> less consumption, imports and trade
- 20% decrease in trade between Oct 1974 - Mar 1975
Management of Nixon Shocks
- London Gold Pool (1961-71)
- Simithsonian Agreement (Dec 1971)
- Plaza Accord (1985)
London Gold Pool
1961-71
US and 7 countries maintained the BWS by pooling their gold to keep gold at USD35/ounce
Smithsonian Agreement
Dec 1971
Currencies revalued to continue adjustable peg instead of floating currencies
Failed as devaluation of USD remained uncontrollable
Reasons for the decline in the ability of the US to lead
- Overextension of aid to Western Europe and Japan, and globally in the Cold War
- US Budget Deficit due to defence spending etc
- Recovery of Europe and Japan, reducing dependence on US goods
- Increased competition from NICs
- Protectionism from Europe and Japan
Reasons for increased protectionism
- Fall in GDP growth in the 1970s-80s, and increasing unemployment
- Competition amongst MNCs in foreign markets when domestic markets stagnate
Protectionism in textile industries
- 1957 VERs on Japan by the USA
- 1974 Multifibre Arrangement (MFA), which slowed growth of trade and discriminated against exporting countries
Protectionism in steel industries
- 1968 VERs on Europe and Japan by the USA on basic carbon steel
- 1970s US limiting imports of steel by placing a floor on the price of imported steel
- 1983 US import quotas on steel products
Protectionism in automobile industries
- 1981-85 US import-reducing agreement with Japan
Dumping
- US antidumping actions increased from 18 in 1980 to 97 in 1986
- Prohibition against dumping by GATT
Subsidies
- Low interest rates on export credits
- Preferential tax treatment on profits from export
Challenges faced by GATT
- Non-tariff barriers unaddressed in Kennedy Round (1967)
- Rise of trade blocs in the 80s-90s (NAFTA and EU)
- Tokyo Round (1973-79) unable to address agricultural issues
- Failure of industrialised countries to honour the Uruguay Round Agreement on Agriculture (1995)
World Trade Organisation (WTO)
Jan 1995
1st Oil Shock
Oct 1973
Impact of 1st Oil Shock
- Reduced economic activity in oil-importing countries
- 1973-74, industrial countries went from $20 billion current-account surpluses to $11 billion current-account deficits
Managing 1st Oil Shock
- Borrowing from IMF
- Petrodollar recycling -> OPEC deposits in commercial banks which then lent to countries
- 1973-76, debts of developing countries rose from $130 billion to $228 billion, and $30 billion to $74 billion to foreign banks
2nd Oil Shock
1979
Managing 2nd Oil Shock
- Growing trend towards energy conservation
- Additional production by countries outside OPEC
Latin American Debt Crisis
1980s
Started in Aug 1982
Triggers for the Debt Crisis
- 1979 Oil Crisis
- 1980s Volcker Shocks, high interest rates by the US Federal Reserve
- 1979-1982, Latin American Debt doubled from $159 billion to $327 billion
Long term causes for the Debt Crisis
- Import Substitution Industrialisation
- Loans to cover accured interest on existing debt and maintain consumption levels rather than productive investments
- Debt-service ratios of Latin America averaged >30% of export earnings
Medium term causes for the Debt Crisis
- 1973 Oil Shock
- Breakdown of US regulatory system
- US banks not permitted to make loans to a single borrower in excess of 10% of bank’s capital
Managing Debt Crisis
- Restructuring existing loans
- US regulatory forbearance -> prevented possible failure of US banks
- Brady Plan (1989)
