Module Code & Module Title

EC5002NI INTERNATIONAL BUSINESS AND WORLD MARKETS

Assessment Weightage & Type

50% Part Seen/ Part Unseen Examination

Year and Semester

2021 Spring 4th Semester

Student Name: Yogesh Sharma

London Met ID: 19033644
College ID: NP01CP4S200006

Assessment Submission Date: 14th May 2020

I confirm that I understand my coursework needs to be submitted online via Google

Classroom under the relevant module page before the deadline in order for my
assignment to be accepted and marked. I am fully aware that late submission will be
treated as non-submission and marks of zero will be awarded.
 Part 1: Case Study
DISCUSSION QUESTION
What is Dutch Disease? Why do many real-world examples of Dutch disease originate
from developments in energy products?

Answer:

The Dutch Disease refers to the issues that arise when raw materials such as oil and
gas increase rapidly, causing other sectors of the economy to suffer. When raw
materials become scarce, the economy can find itself in a worse position than before.
Suppose a nation extracts large quantities of oil, gas, or another natural resource. In
that case, it will begin to export these products, resulting in a significant rise in GDP,
which will boost tax revenues, strengthen the current account, and create jobs. It was
first noticed in Holland after that country discovered much natural gas in the 1970s,
which is why it is called Dutch disease. When the gas was discovered in Holland,
people thought it would make the country's economy much more prosperous and
healthier. In foreign trade, though, something else happened. The Dutch disease begins
because of the continuous flow of money into the country from petroleum products, gas,
and minerals. As a result, the currency strengthens as people invest in oil, gas, and
other commodities. When the stuff comes out of the ground, people in more affluent
countries buy it and pay for it on the foreign market.

At worldwide, primarily Dutch disease is related to the energy sector. When a country
invests its capital in the energy sector in a considerable amount, then the Dutch disease
arises. Whenever a nation is dependent on the energy sector, they need to invest a
considerable amount of its capital in technology and to produce skilled labor. When a
nation is extracting and investing in the energy sector, they need to extract natural
resources or improve technology. A considerable amount of the country’s capital is
required for improving technical resources through conducting research, experiments,
and developmental activities.

Other skilled laborers are also required to improve technology. In a country that is
overdependent on the energy sector, significant capital was invested in a single industry.
Because of this, they will have to face a shortage of capital to invest in other different
sectors and which will decline production of goods in another industrial sector. For
instance, different countries in the Middle East like Saudi Arabia, Iraq, United Arab
Emirates, Iran are exporting petroleum products worldwide. The primary source of revenue
of these countries is petroleum products. Moreover, these countries are investing their
capital in oil extraction again and again. As a result, this situation has given rise to a
circumstance where the other factors of the development will be overlooked, eventually
constituting a sluggish acceleration in the overall growth of the nation. So, it is of utmost
importance to take all growth factors in alignment with each other to reap maximum
outcome by syncing every aspect together without undermining the potential of other
prominent aspects of the economy.

Part 2: Long Answer Question

QN. 1
In the book, “The general theory of employment, interest, and money”, John Maynard
Keynes referred many trade theories arguing for trade liberalization as the slaves of
economic theory. What are the flaws of the trade liberalization theories? Are the trade
wars outcomes of those flaws of trade liberalization theories?

Answer:
The General Theory of Employment, Interest, and Money, was published by John
Maynard Keynes in 1936, laid the groundwork for the Keynesian Theory of Economics.
Trade liberalization refers to the abolition of all or any limits on the exchange of goods
between countries. Tariffs, such as duties and surcharges, and nontariff obstacles, such
as licensing laws and quotas, are examples of these restrictions. Trade liberalization
encourages free trade by allowing countries to exchange products without facing
regulatory barriers or incurring additional costs. Since imports are a problem to lower
prices, and competition is likely to increase, this reduced legislation lowers costs for
countries that trade with other countries and can potentially reduce consumer expenses.
Trade liberalization also causes a shift in a country's balance of payments. Some
industries are growing, while others are contracting. As a consequence, some factories
could close, resulting in long-term joblessness. Trade liberalization can be expensive for
specific firms and workers in the short term as uncompetitive industries slowly
disappear. Even if net economic welfare improves, compensating workers who are
disadvantaged by international competition can be difficult. Increased raw material
production and the export of nuclear waste to countries with weak environmental
regulations could result from trade liberalization. Trade liberalization could impact
emerging economies that were unable to compete in a free market. According to the
infant industry statement, trade security is justified to aid emerging economies in
diversifying and developing new industries. Almost every economy has seen trade
protectionism at some stage. It is a stretch to assume that developing countries cannot
use tariff protectionism in certain situations. Some claim that trade liberalization benefits
developed countries rather than developing economies because of this point.

Trade liberalization can trigger a dispute. Since different countries compete for new
markets and raw materials for their factories, foreign trade can lead to war. In January
2018, former President Donald Trump began enforcing tariffs and other trade barriers
on China to push it to reform "unfair trade practices" and intellectual property theft, as
he calls them. These practices, according to Trump, could result in a trade deficit
between the US and China, and the Chinese government requires the transfer of
American technology to China. In response to US trade policies, the Chinese
government has accused the Trump administration of engaging in nationalist
protectionism.  Several trade disputes have arisen around the world due to the flaws of
trade liberalization theories.

In the same way, trade liberalization may have a detrimental impact on some domestic
firms due to increased competition from overseas producers, which may result in less
local assistance for those industries. If goods or raw materials are imported from
countries with lower environmental standards, there would be an economic and social
risk. Since they are forced to compete in the same markets as stronger economies or
countries, trade liberalization may be a risk for developing countries or economies. This
challenge can trap existing local industries or cause newly developed industries to fail.

QN. 2
On August 11, 2015, the people’s bank of China devaluated its Yuan Renminbi by
knocking over 3% of its value. What are the implications of such devaluation?

Answer:

The People's Bank of China (PBOC) shocked markets by devaluing the Chinese yuan
renminbi (CNY) three times in a row on August 11, 2015, knocking over 3% off its value.
China's currency has strengthened by 33% against the US dollar since 2005. The step
came as a surprise, and many believed that China's futile attempt to raise exports to
sustain an economy expanding at its slowest pace in the past decades. It was one of
several distortive economic and trade policies that gave Chinese producers and
exporters an unfair competitive advantage. The People's Bank of China, on the other
hand, said that the devaluation was part of its reforms aimed at making the economy
more market-oriented. The decision has far-reaching consequences for the rest of the
world.The step was sudden, and many assumed that it was a desperate effort by China
to raise exports to sustain an economy that was expanding at its slowest pace in
decades. The PBOC, on the other hand, argued that the devaluation was part of its
reforms to make the economy more market oriented. The decision has far-reaching
consequences around the world.

Investors became familiar with the yuan's stability and increasing strength after a
decade of steady growth against the US dollar.  In March 2013, Chinese President Xi
Jinping pledged the government's commitment to reforming China's economy to make it
more market oriented. The POBC argues that the devaluation enables the market to
play a more significant role in deciding the yuan's value became more credible. The
PBOC announced the devaluation with official statements that the "yuan's central
exchange rate would correspond more closely with the previous day's closing spot
prices" due to this "one-off depreciation."  It also aimed to "give markets a bigger say in
deciding the renminbi exchange rate, to allow for more currency reform." Currency
depreciation is not a recent phenomenon.

From the European Union to many developing nation have devalued their currencies
regularly to boost their economies. China's devaluations, on the other hand, could pose
a threat to the global economy. China is the most significant worldwide exporter and the
second-largest economy. Any adjustment to the macroeconomic environment by such a
large entity has far-reaching consequences. For reference, footwear and textile exports
are significant to Vietnam, Bangladesh, and Indonesia. These countries will suffer if
China's currency depreciation lowers the cost of its products on the global market.

A weaker Chinese currency had many consequences for the Indian economy. Demand
for dollars increased worldwide due to China's decision to allow the yuan to depreciate
against the dollar. Investors in India, for example, bought into the dollar's protection at
the cost of the rupee. The Indian currency instantly fell to a two-year low against the US
dollar and stayed there for the rest of the year. The threat of increased emerging market
risk due to the yuan depreciation increased uncertainty in Indian financial markets,
causing the rupee to weaken further. In addition, textiles, garments, chemicals, and
metals are among the industries where China and India compete. For Indian exporters,
a weaker yuan meant more competition and lower margins. It also said that Chinese
manufacturers could sell products into the Indian market, undercutting domestic
manufacturers. China, as the world's largest energy user, has a significant influence on
crude oil pricing. The PBOC's decision to depreciate the yuan sent a threat to investors
that Chinese demand for the commodity, which had already slowed, would start falling.

To sum up, the growth of the US dollar is China's fundamental reason for devaluing the
yuan in 2015. The country's willingness to move toward domestic consumption and a
service-based economy. Fears of more devaluations persisted on the international
investment platform for another year, but they dissipated in 2017 as China's economy
and foreign exchange reserves improved. China was briefly branded a currency
manipulator in 2019 and early 2020 due to the negative impact of currency devaluations
on relations with the United States.

QN. 3
Although Nepal face massive trade deficit, the massive deficit is not evident beyond the
current account. Why?

Answer:

A trade deficit can be defined as the export of the country is less than the exports.
Current account deficit is a broader term than the trade deficit. A trade deficit is the
subset of the current account deficit. The current account deficit includes other factors
like FDIs and further foreign outflow of money that necessarily don't have to be
encompassed in trade. A country faces a trade deficit when the cost of imports exceeds
the cost of its exports. Exports provide raw materials for manufacturing that are
exported overseas for factory production. When finished manufactured products are
imported back into the country, they are considered imports.

As an emerging nation, Nepal is experiencing a rapidly growing trade deficit due to low
export of goods and relatively substantial import goods. In terms of countries and
commodities, Nepal is also unable to diversify its trade. Low export and high import are
the leading causes of Nepal's growing trade deficit: low-quality products, inappropriate
trade policy, higher production costs, lack of publicity and marketing, low production,
slow industrial growth, and lack of trade diversification.

Likewise, the current account deficit is greater than the trade deficit in Nepal. The
reason behind Nepal having a much higher current account deficit than the trade deficit
is the fact that Nepal is an emerging economy. Out of the various traits of the emerging
economy, the most common trait is that the market is quite volatile, and the country is
accelerating towards a relatively higher pace of industrialization. So, to keep up with
that case, a country must import machinery and other required raw materials for the
growth of industries in the country. With the import of those resources for future
anticipation of exports, the country's current account deficit comes up to be a hike.
Another reason why the country's current account deficit is more than the humungous
trade deficit of the country is that the current account deficit also encompasses all sorts
of foreign outflow of money. So, as an emerging market and a developing nation, the
per capita income of Nepal is getting enhanced day by day, which constitutes in
providing quality foreign education to the youths of the country by their parents, health
checkups, and operations in the foreign land and the use of luxurious items imported
from the developed countries. This significantly hikes the current account deficit of the
country.

Nepal is a developing nation and is also facing a trade deficit as most of the imported
goods are utilized in developmental activities. Nepal is progressing in various fields like
engineering, architecture, metallurgy, paper manufacturing, dyeing, and food
technology. In the same way, Nepal enjoys a strategic advantage in terms of the labor
force. With the enhancement of the quality of living of the population of the country, the
citizens have started investing in foreign companies, giving a significant ignition to the
outward FDIs from the country. What can be inferred from all the understanding about
the high current account deficit than the trade deficit in the country is the elevation of the
standard of living of the population of the country, significant growth in the
Industrialization sector of the country, and overall, the transition phase of a nation from
being a developing nation to a developed nation.