BUSI 605 Week 3 Group DB Forum 3 Example

Group Discussion Board Forum 3: International Organizations and Business

BUSI 605 Environment of International Business, Group Discussion Board Forum 3 (thread and 2 replies)

Thread by [Student Name]

The forum question and the two classmates' threads are composites standing in for the course's own; the research cited is real, and the requirements follow Liberty's public course guide for BUSI 605.

Thread

Most of us assume that joining the World Trade Organization raises a country's trade, since that is its purpose. The evidence is more interesting than the assumption. Rose (2004) compared the trade of members of the WTO and its predecessor, the General Agreement on Tariffs and Trade, with that of nonmembers over five decades and found little evidence that membership increased trade once other factors were accounted for. The finding was surprising enough to prompt a wave of responses.

Subramanian and Wei (2007) offered the most persuasive one. They argued that membership affected countries very differently, because the rules required much more liberalization from some members than others. Industrial countries that negotiated real tariff cuts saw large increases in trade, while many developing countries, which were allowed to keep high tariffs under special provisions, saw little change. Trade also rose most among members that both liberalized. An institution's effect depends less on membership than on what members actually commit to do.

For a business, the debate has a practical lesson. The value of a trade agreement lies in the specific tariff cuts and rules it contains, not in the name of the institution. An exporter evaluating a new market should read the actual tariff schedules and commitments that apply to its products. The WTO's role in enforcing those commitments has also weakened: its Appellate Body, which hears appeals in trade disputes, has been unable to function since late 2019 because the United States blocked the appointment of new members. Firms that once relied on WTO dispute settlement to protect market access now depend more on regional agreements and bilateral negotiation.

Reply to Olivia

Olivia, your thread gave a clear account of how the International Monetary Fund lends to countries in balance-of-payments crises and attaches conditions, such as budget cuts or currency reforms, to its loans. You concluded that IMF programs help countries recover. The research suggests a more complicated picture. Dreher (2006) studied IMF programs across many developing countries over three decades and found that participation in IMF programs was associated with lower economic growth on average, though better compliance with the conditions attached to loans was associated with a less negative effect.

The finding does not necessarily mean that the IMF causes harm. Countries turn to the Fund when they are already in crisis, so slow growth after a program may reflect the crisis rather than the program, and researchers struggle to know what would have happened without IMF help. But it does suggest caution about assuming that programs deliver growth. The compliance finding is especially relevant to business. Investors watching a country under an IMF program should pay attention to whether the government is actually implementing the agreed reforms, since programs that stall tend to deliver less.

For a company with operations in a country entering an IMF program, the practical implications include possible currency devaluation, tighter government budgets that affect public contracts and, if reforms succeed, improved stability that supports investment. In your view, how should a company adjust its plans when a country where it operates signs an IMF agreement, especially if the government's commitment to the conditions is uncertain? Hedging currency exposure and delaying large new investments until reforms take hold might be reasonable first steps.

Reply to Nathan

Nathan, your thread argued that regional trade agreements, such as the United States-Mexico-Canada Agreement, have become more important to business than the WTO. The research supports you. Baier and Bergstrand (2007) addressed a problem that had made earlier estimates unreliable: the partners that choose to sign an agreement tend to be ones that already exchange a lot of goods, so higher trade after an agreement might simply reflect who chooses to sign. Using methods that accounted for that selection, they found that a free trade agreement approximately doubled bilateral trade between members after about ten years.

That finding fits the changes you described in North American supply chains. The North American pact, with its rules requiring a share of a vehicle's content to come from the region, has encouraged firms to source more within North America, and Mexico's role as a manufacturing location has grown as firms diversify away from distant suppliers. For a business, this means that rules of origin, which are often detailed and differ by product, the requirements a product must meet to qualify for an agreement's lower tariffs, can matter as much as the tariff rates themselves.

One caution is that regional agreements can divert trade from more efficient suppliers outside the region, which raises costs for buyers even as members' trade grows. Do you think the advantages of regional agreements for supply chain resilience outweigh the costs of buying from suppliers that may not be the cheapest in the world? Your answer probably depends on the industry, since a delay costs far more for some products than others.

References

Baier, S. L., & Bergstrand, J. H. (2007). Do free trade agreements actually increase members' international trade? Journal of International Economics, 71(1), 72-95. https://doi.org/10.1016/j.jinteco.2006.02.005

Dreher, A. (2006). IMF and economic growth: The effects of programs, loans, and compliance with conditionality. World Development, 34(5), 769-788. https://doi.org/10.1016/j.worlddev.2005.11.002

Rose, A. K. (2004). Do we really know that the WTO increases trade? American Economic Review, 94(1), 98-114. https://doi.org/10.1257/000282804322970724

Subramanian, A., & Wei, S.-J. (2007). The WTO promotes trade, strongly but unevenly. Journal of International Economics, 72(1), 151-175. https://doi.org/10.1016/j.jinteco.2006.07.007