The Political Economy of International Trade

Governments and Trade

More

often governments manage trade ( level the playing-field)

Restriction of imports: protectionist

intervention Promotion of exports Trade promotion and FDI incentives

Free-trade Good or

Bad?

Social issues related to free-trade Implications for business and individual groups

Instruments of Trade Policy

Tariffs Subsidies Import

quotas Voluntary export restraints Local content requirements Administrative policies Anti-dumping policies

Tariffs
Taxes

levied on imports (also sometimes on exports)

Specific tariff: fixed charge for each good imported Ad valorem tariff: a % of imported goods value
Who

gains:

Government Domestic producers (at least in the short run) Employees of protected industries keep their jobs
Who

loses:

Consumers who pay higher prices The economy which remains inefficient Employees of protected industries who dont

develop new skills

Subsidies

Government support to domestic producers

Cash grants, low-interest loans, tax breaks, equity

participation, government purchases Aim to achieve lower costs to

Compete against cheaper imports Gain export markets Increase domestic employment Help local producers achieve first-mover advantage in emerging industries

Governments
Tax individuals to pay for subsidies Consumers buy more expensive goods with lower

disposable incomes

Quotas and Voluntary Restraints

Import quota: government specifies how much of what product can be imported from which countries
Voluntary export restraint: how much of what product can

be exported to which countries imposed officially or unofficially Local Content Requirements A products certain % has to be produced domestically with local raw materials Used by LDCs to
Achieve technology transfer, skills transfer Shift manufacturing to a higher technological level

Similar effects to those of import quotas

Anti-dumping Policies
Dumping: selling goods in an overseas market At below their production costs or Below fair market value

Anti-dumping policies punish producers who dump and protect domestic producers
Administrative policies Bureaucratic rules that make it difficult for imports to enter a country

Political Arguments for Intervention

National security Individual industries and jobs protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives

Economic Arguments for Intervention

Infant industry protection Strategic trade policy

Revised Case for Free Trade

Retaliation and Trade War Krugman Strategic trade policy is tantamount to beggar

thy neighbor policy How to respond if ones competitive nation is subsidizing specific industries?

Domestic politics Governments often do not act in the national

interest when they intervene Politically important groups influence them

International Trade Cooperation (!)

U.S.A.

and:

foreign companies trading with Cuba any company dealing with Iran - N. Korea
W.T.O.

in place but... US prefers to resolve disputes bilaterally with

China--new WTO member Japan--old WTO member

Trade

blocks proliferating Anti- free trade movement

The Global Trading System

Adam Smith to Great Depression Britain adopts free trade in 1846 Smoot-Hawley act (US) 1930 aimed at

employment protection one cause of the Great Depression

1947-1979: GATT,

Trade Liberalization,

Economic Growth 1980-1993: GATT needs fixing

Uruguay round of GATT negotiations (1986-

1993) Creation of WTO with powers to implement trade agreements

GATT
Pre-WWII protectionism Smoot-Hawley +57% import tariffs (1930) UK, France, Italy followed suit world depression in 30s Havana Conference (1947) -> GATT 125 countries by 1994 small staff in Geneva tariffs fm 40% in 47 to 3% in 95 trade 15x to $6.75 trillion in 92 WTO

superceded GATT in 1995

GATT/WTO
MFN any preferential treatment offered to one member

country must be extended to all other members members can extend MFN to non-members (e.g., China)
Exceptions GSP (Generalized System of Preferences) for

LDCs regional arrangements such as NAFTA countries still use NTBs, other loopholes (peanut waiver, 1955)

Uruguay Round of GATT negotiations

Tariffs cut further Agricultural Policy Modified:

cut price supports 20%, export subsidies 36% For this policy: USA, Argentina, Australia, Canada Anti: Japan, Korea, India, EU

Services given prominence: developed set of principles Intellectual Property Rights protected further: patents, copyrights, trademarks, brand names WTO created: to implement Uruguay round, controversial

WTO: Experience

WTO as a global policeman -- 146 members by 04

1995-2004: >304 trade cases brought to WTO for decision Three quarters had been resolved by late 2003 through

bilateral consultations WTO recommendations have been adopted

GATT dealt with 196 cases from 1947-1995! WTO telecommunications agreement 1998 (effect) WTO Financial Services agreement 1999 (effect) The WTO in Seattle
Aim: reduce barriers to agricultural trade, trade &

investment services Protests Disagreements Environmental issues

Doha round and unresolved issues

So what for Business

Trade

barriers affect firm strategy policy has direct impact on a firms business

Government