Académique Documents
Professionnel Documents
Culture Documents
Faculty of Business
Department of International Business
Prepared By:
Nerin Abu-Keer
Mera Al-Horani
Aroob Tamimi
International Finance
Instructor: Dr. Mohammad Al-Abadi
January - 2009
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Table of contents
Abstract
Introduction
• Problem studied
• Background Information
• Research objectives
WTO: an overview
Jordan accession to the WTO
Actions toward trade liberalization
The effect of free trade on Jordan's Balance of payment
•Current account
•Capital and financial account
Is the fixed exchange rate the best regime?
Conclusions
Recommendations
References
2
Abstract
Countries are not all the same in their production capabilities, which increases the
need for the international trade, without trade, each country must make everything
it needs, including things it is not very efficient at producing. However, free trade
has its impacts on the economy whether it is positive or negative.
Consequently we aim in this paper at studying the effect of free trade on Jordan's
balance of payment; observing the major effects among Jordan accession to the
WTO on the BOP main anchors: current account, capital account, and financial
account.
In sum, our study finds that Jordan has made great strides following its accession
to the WTO, in reforming its economy and liberalizing its trade regime, and yet has
many challenges to face to lead stabilization and economic reform in order to
direct FDI inflows to invest in export sectors given the new access to global
markets. And to support the development of high-value added industries to reduce
the effect of high import content of exports
Introduction
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The Jordanian economy has undergone a remarkably positive transformation since the
exchange rate and banking crisis prior to 1993, which nearly halved the average
Jordanian’s living standard. Since then, export-led growth is higher, foreign direct
investment is increasing, and poverty and unemployment have been reduced. By all
accounts, a substantial portion of this transformation owes to the economic reforms
implemented by the Government of Jordan (GOJ) in the last decade, including
macroeconomic stabilization, liberalized foreign trade and domestic prices, reduced
public debt, and privatization of state owned enterprises (IMF, 2005).
The economy continued to expand at a healthy, though slower pace, At the same time,
the external current account deficit widened significantly, mainly reflecting a growing
trade deficit and a decline in external grants. International trade and integration with
the world economy has become one of Jordan’s primary strategies for continued
domestic economic growth.
The trade liberalization facilitated by the General Agreement on Tariffs and Trade
(GATT) and World Trade Organization (WTO) commitments and obligations, and
bilateral and multilateral agreements, brought about not only considerable growth in
exports and imports, but also a diversification of trade.
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The business environment remains somewhat inhibited by, inter alia, administrative
hurdles, limitations on foreign participation in certain activities, such as road
transport, and costly transport infrastructure and utilities. State ownership remains
substantial. Moreover, the surge in world prices of fuel and food is exerting pressure
on inflation (6.3% in 2006 and 5.4% in 2007). To meet these challenges, Jordan is
improving education and health services, modernizing its infrastructure, and
addressing some structural problems, notably through the privatization of state-owned
enterprises. In addition, steps are being taken to improve the business environment
through, inter alia, the launching of the one-stop shop facility.
WTO, overview
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An international organization designed to supervise and liberalize international trade.
It came into being in 1995, and is the successor to the General Agreement on Tariffs
and Trade (GATT).WTO deals with the rules of trade between nations at a global
level, and it is responsible for negotiating and implementing new trade agreements,
The WTO has 153 members and it is governed by a Ministerial Conference, which
meets every two years; and is responsible for implementing the conference's policy
decisions. The WTO's headquarters is in Geneva, Switzerland.
The WTO's goal is to improve the welfare of the people of its member countries,
specifically by lowering trade barriers .Its main mission is "to ensure that trade flows
as smoothly, predictably and freely as possible".
1. Reviewing the national trade policies, and to ensure the coherence and
transparency of trade policies through surveillance in global economic policy-
making.
2. Assisting the developing, least-developed and low-income countries in
transition to adjust to WTO rules and disciplines through technical cooperation
and training.
3. Assessing the global trade annually through the economic research and
analysis; and producing scientific annual reports.
4. Cooperating closely with the IMF (International Monetary Fund) and the
World Bank.
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About two thirds of the WTO’s 150 members are developing countries. They play an
increasingly important and active role in the WTO because of their important role in the
global economy, and because they increasingly look to trade as a vital tool in their
development efforts. The WTO deals with the special needs of developing countries in
three ways:
which gives them special rights allowing them to be treated more favorably than
other WTO members; Like "extra time" to fulfill their commitments (in many of
the WTO agreements), providing them with techniques to safeguard their
interests when adopting some domestic or international measures (e.g. in anti-
dumping.
2. WTO has created a special entity "The committee on trade and
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Developing Countries members
1. The accession to the WTO
The developing countries are facing the problem of being accepted in the WTO as a
member; moreover, a least developed country can hardly afford to remain outside the
global trading regime.
WTO rules put the “rights” of corporations to profit over human and labor rights. The
WTO has ruled that it is illegal for a government to ban a product based on the way it is
produced, such as goods produced with child labor.
The WTO is seeking to force national governments to privatize essential public services
such as education, health care, energy and water so that these sectors are open to
multinational corporations; which damages the developing countries the most.
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The WTO has protected pharmaceutical companies’ ‘right to profit’ against
governments seeking to protect their people’s health by providing lifesaving medicines
in countries like Africa, where thousands die every day from HIV/AIDS.
To date, developing countries have played a minor role in setting the agenda for
multilateral trade negotiations. This has allowed developed countries to extract
considerable concessions from weaker trade partners.
Therefore, we recommend:
1. Developing and least developed countries need to draw up their own positive
agenda.
2. Developing countries need to mobilize scarce resources for technical preparation,
identifying areas of interest, rather than reacting to pre-set agendas presented by
others, and mounting a joint effort towards capturing the initiative from the very
beginning in the negotiation process.
3. The WTO should consider its top priority to be the development needs of its
members.
4. Sections of agreements that work to the disadvantage of developing countries must
be changed, including agriculture, TRIPS, textiles, and the dispute settlement
system.
5. U.S. domination should end, decision-making should be democratic, and each
government should consult regularly with its broader society on trade deliberations.
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Jordan became a member of the World Trade Organization in April 2000 as to be the
136th member of the WTO. Jordan has agreed to assume all its WTO obligations upon
accession, and undertook several reforms to bring its economic policies into
compliance with the WTO agreements, such as amending to existing laws and drafting
several new laws especially in the field of intellectual property rights.
The government enacted national economic reform procedures and new legislations in
preparation to Join WTO. It also liberalized a number of important services sectors
providing market access to foreign investors and service providers of WTO Members in
accordance with Jordanian laws and regulations. Whereas in goods' trade, Jordan
committed to reduce customs tariffs to reach 30% as a maximum in 2000, to be reduced
to 25% in 2005, and to reach 20% in 2010 with the exclusion of a limited number of
goods.
On the other hand, government improved the business environment resulting in high
rates of growth in gross domestic product as a result of steady growth in the volume of
Jordanian exports as well as attract a lot of Arab and foreign investments, also
commended the leading role of H.M. King Abdullah II in promoting trade and
economic relations through several royal visits to various countries and regions of the
world and his persistent effort in promoting and enhancing Jordan's trade and economic
relations with countries worldwide.
Accession to WTO provides Jordan's goods and services with market access to more
than 150 countries within clear and transparent trade procedures and laws and
regulations in accordance with WTO rules and agreements. It also helps reduce the cost
of production requirements i.e. customs on inputs will be diminished. Furthermore, the
WTO membership will open the way to more export opportunities for competitive
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products.
On October 24, 2000, the United States and Jordan signed the US-Jordan Free Trade
Agreement (FTA). By wining US congressional and Jordanian parliamentary approval
for the FTA, Jordan became only the fourth country in the world to have a bilateral free
trade agreement with the US, and the first in the Arab state.
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achieving significant and extensive liberalization across a wide spectrum of trade
issues. It will eliminate all tariff and other commercial barriers to bilateral trade in
goods and services between the United Stated and Jordan in virtually all industrial
goods and agricultural products within ten years.
The FTA also includes substantive provisions addressing trade and environment, trade
and labor, and electronic commerce, a step that should help advance a global free trade
agenda in a sector critical to American high technology and multimedia companies.
Intellectual property provisions occupy a large part of the US-Jordan FTA. The
agreement’s provisions incorporate the most up-to-date international standards for
intellectual property right, including prospects for technology-based industries,
copyright-based industries and pharmaceutical companies.
The EU Association Agreement with Jordan was signed in November 1997, was
ratified by the Government of Jordan in September 1999, and has come into force in
May 2002. The agreement was signed with the aim of creating a free trade area by
2010. The objectives of the Association Agreement are:
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1- Provide an appropriate framework for the political dialogue, allowing for the
development of close political relations between the Parties.
2- Establish the conditions for the progressive liberalization of trade in goods,
services and capital.
3- Foster the development of balanced economic and social relations between the
parties through dialogue and cooperation.
4- Improve living and employment conditions and hence productivity and financial
stability.
5- Encourage regional cooperation with a view to the consolidation of peaceful co-
existence and economic and political stability.
6- Promote cooperation in other areas which are of reciprocal interest.
Therefore, and in light of the objectives of the Barcelona Process, the agreement
revolves around three major themes: political, economic and financial, and social and
cultural.
1. Trade in Industrial Products. The agreement entails that exports into Jordan are
exempted from duties, over a transitional period of twelve years upon entry into
force of the agreement, in accordance with a specific arrangement.
2. Removing Non-tariff Restrictions. The agreement sets out the provisions that
relate to requirements regarding non-tariff restrictions between Jordan and the
EU.
3. Rules of Origin. In terms of the rules of origin requirements, the third protocol
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processing that has to be carried out on non-originating materials to confer
originating status in Jordan.
4. Trade in Services. In terms of trade in services, the EU Member States and
Jordan commit to use their best endeavors to allow the progressive liberalization
of the trade in services.
5. Competition. Jordan’s commitment regarding competition entails the prevention
The Agreement allows entry of Jordanian industrial exports into EU-member countries
free of customs duties and other charges having equivalent effect from date of entry
into force of the Agreement. Also, EU industrial exports are allowed entry into Jordan
free of customs duties and charges having equivalent effect over a transitional period of
12 years starting from date of entry into force of the Agreement, except for a list of
specific products.
Moreover, within the context of the Agreement, the EU has pledged to set up a Special
Fund to assist in improving the export capacity and competitiveness of Jordanian
industries.
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Greater Arab Free Trade Area
Jordan, along with sixteen other Arab countries, signed the Greater Arab Free Trade
Agreement and its implementation commenced on March 9, 1998. According to the
agreement, all Arab products moving among member states have been awarded the
status of national goods in accordance with the principle of gradual liberalization,
leading to duty-free movement of goods and the establishment of the Arab Free Trade
Zone since January, 2005. It is expected that the other Arabian countries will join this
agreement in the near future.
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1- Jordan
7- Morocco
13- Kuwait
2- United Arab
Emirates
8- Syria
14- Tunis
3- Bahrain
9- Lebanon
15- Libya
4- Saudi Arabia
10- Iraq
16- Sudan
5- Oman
11- Egypt
17- Yemen
6- Qatar
12- Palestine
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GAFTA is
1. The effect of free trade on Jordan's Balance of payment
Current account
Trade in goods and services
17
years, the current account deficit has been financed by FDI and other long-term
capital inflows, with gross official international reserves increasing from US$4,745
million (4.8 months of imports) in 2005 to US$6,870 million (5.5 months of imports)
in 2007. An external current account deficit of 15.6% of GDP is expected for 2008.
The external current account deficit widened significantly, mainly reflecting: a
growing trade deficit and a decline in external grants.
7000.0
increased industrial
6000.0
Exports, f.o.b.
5000.0
Imports, c.i.f.
2000.0
pickup in domestic
1000.0
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In commercial services trade, Jordan ranked 49th among exporters and 51st among
importers.
Jordan has a relatively diversified export base, with manufactures accounting for
about 70% of total merchandise exports, on average, during 2000-07. Chemicals are
the main exports (26.3% of manufactured exports in 2007, up from 22.2% in 2000),
followed by textiles and clothing products, and machinery and transport equipment.
The contribution of food products (led by tomatoes and other vegetables) to total
merchandise exports remained stable at around 14% on average over 2000-07, while
the share of mining products declined from 11.1% in 2000 to 6.5%.
Jordan's imports have increased in line with its significant economic growth over the
last few years. Total merchandise imports more than tripled from US$4,013 million in
2000 to US$13,531 million in 2007. Almost 60% of total merchandise imports are
manufactures, led by machinery and transport equipment; chemicals, office machines
and telecoms equipment, automotive products, and textiles also represent a sizeable
share. Fuels represented 21.7% of total merchandise imports in 2007 (up from 4.8%
in 2000), whereas the share of food imports decreased from 21.2% to 15% during the
same period.
Balance of payments data indicate that Jordan is a net importer of services, with a
deficit averaging JD 89.4 million per year during 2001-07. The deficit of
transportation services went from JD 339.5 million in 2001 to JD 823 million in 2007,
partly offsetting an increasing surplus of travel services, which went from JD 228.4
million to JD 1,013.1 million during the same period.
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The deficit in the portfolio investment current
account is offset by the
800.0
JD/millions
200.0 portfolio investment
-200.0
FDI. 1000.0
th
Jordan ranked 8 out of
current account VS capital and financial account
500.0
141 economies in 2006 1500.0
-500.0
current account
-1500.0
-2000.0
20
-2500.0
years
for attracting foreign investors and fostering domestic investment remains somewhat
untapped. Its position in UNCTAD's Inward FDI Potential Index was 59th in 2005
(61st in 2004). This is mainly because, in general, FDI in Jordan has been inhibited by,
inter alia, administrative hurdles for starting a business. As a result, Jordan ranks 80 th
(out of 178 economies) in the World Bank's Ease of Doing Business 2008 Index (79 th
in 2007). In addition, limitations are maintained on foreign participation in certain
activities
In general, the pegged exchange rate arrangement has served the Jordanian economy
well; it has lent stability and credibility to the investment environment, and provided a
credible anchor for price stability. Nonetheless, the depreciation of the U.S. dollar
against other major currencies since 2006 has contributed to the rise in Jordan's
inflation rate. To manage liquidity in the financial system, the CBJ basically relies on
indirect instruments of monetary control, notably the purchase and sale of certificates
of deposit. Core inflation has remained below 3% over the last few years. To contain
inflationary pressures, the Government recently eliminated import duties and sales
taxes on certain products considered essential, while the CBJ has tightened its
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monetary policy. The annual average inflation rate in Jordan, as measured by the
consumer price index (CPI), was 3.1% during 2000-07 (5% during 1990-99).
However, it reached 6.3% in 2006,5.4% in 2007, and 15.6% in 2008.
Conclusion
The growth in trade that results from lowered trade barriers is generally beneficial
regardless of its effects on the balance of trade for the following reasons; for example
it brings capital, modern technology, and improved skills for domestically hired labor,
it reduces poverty and unemployment rate, it modernizes the infrastructure, and
attracts larger foreign direct investment (FDI) inflows, in addition to reducing public
debt, and increasing the role of the private sector in the economy
However, it is the growth in both exports and imports of each country that allows
production to shift to the most efficient producers and thereby expands output. No
country would export if it could not import.
For a trade agreement to have much effect on the trade balance, it would have to
significantly alter either aggregate saving or gross domestic investment. Only
substantial changes to barriers that affect large amounts of trade and investment
(relative to the size of the economy) might do that.
Even if an agreement were to significantly worsen the balance of trade with the world;
that would not undermine the benefits of the agreement. Trade deficits with the world
are not generally harmful, and trade surpluses are not generally beneficial.
reports concluded that such deficits normally have a small positive effect on gross
domestic product (GDP) and little if any effect on aggregate employment (although
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some redistribution of employment among industries may occur, and some individual
workers may be made better or worse off).
Recommendations
23
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