Transcript International Agreements: Trade, Labor, and the Environment

11
INTERNATIONAL
AGREEMENTS: TRADE,
LABOR, AND THE
ENVIRONMENT
1
International Trade
Agreements
2
International
Agreements on
Labor Issues
3
International
Agreements on the
Environment
4
Conclusions
Introduction
• 1999 WTO trade negotiations in Seattle, WA were
the first to be heavily protested, with protests
sometimes turning violent.
• Past trade negotiations had focused on lowering
tariffs in most sectors of members’ economies.
• Remaining barriers to trade, however, dealt with
regulatory barriers, such as environmental
regulations.
• The Uruguay Round (1986–1994) allowed for
countries to bring disputes if they felt they were
excluded from a market due to unreasonable
environmental standards.
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Introduction
• These new rules infuriated many groups who
thought the WTO might threaten their
environmental interests.
• Additionally, many felt it undesirable for a panel in
Geneva to make rulings affecting domestic
regulations.
• All these groups gathered in Seattle to voice their
dissatisfaction with the WTO.
• The goal of this chapter is to examine why
international agreements are needed, and how
these agreements affect labor and environmental
issues.
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Introduction
• When a country imposes a tariff, the domestic
producers receive a higher price which gives a
terms-of-trade gain for the importing country.
• We will show that when two or more countries
implement tariffs to try to achieve these terms-oftrade gains, they both end up losing.
• To avoid these losses, international agreements to
reduce tariffs and move toward more free trade
are needed.
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Introduction
• The WTO is a multilateral agreement, involving
many countries, with agreement to lower tariffs
between all members.
• Regional trade agreements involve several
countries, often located near each other, which
offer free trade among the member countries.
 The North American Free Trade Agreement (NAFTA).
• NAFTA also included “side agreements” involving
the rights of workers and the environment, as do
other international agreements.
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Introduction
• We will discuss the extent to which NAFTA and
other labor agreements protect the rights of
workers.
• We will also discuss international agreements on
the environment.
• Rulings at the WTO have a direct impact on the
environment, but other international agreements
have a more direct impact.
• International agreements are needed to ensure
that countries recognize the external
environmental costs of their economic activities.
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Learning Objectives
•
•
•
•
•
To understand why international agreements like
those negotiated under the WTO are needed.
To examine how such agreements affect labor
issues.
To examine how such agreements affect
environmental issues.
To understand why international agreements to
reduce tariffs and move toward free trade are
needed.
To understand what a regional trade agreement
is.
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Learning Objectives
•
•
•
•
To understand the role of regional trade
agreements in reaching the free trade goal.
To understand the role of labor and
environmental issues within regional trade
agreements.
To understand the extent to which NAFTA and
other labor agreements protect the rights of
workers and the environment.
To be able to explain the indirect impact of the
WTO on labor and environmental issues and the
direct impact of regional agreements.
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Learning Objectives
•
•
To understand how countries do not recognize
the true costs of their economic activity on the
environment—negative externalities.
To understand that for “global” pollutants,
international agreements are needed to
incorporate these negative externalities.
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International Trade Agreements
• Countries will often enter into a trade agreement
to reduce trade barriers between themselves.
 A pact to reduce or eliminate trade restrictions.
• The WTO is a multilateral trade agreement,
involving many countries, all with the goal of
reducing tariffs between member countries.
 WTO has negotiated many trade agreements.
 Under the most favored nation principle, the lower
tariffs agreed to in these negotiations must be extended
equally to all WTO members.
 New members get these benefits, but must also agree
to lower their own tariffs.
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International Trade Agreements
• To demonstrate a multilateral trade agreement, we will
assume there are only two countries.
• The important feature of a multilateral agreement is that
NO member country is left out of the agreement.
• We will then analyze regional trade agreements occurring
between smaller groups of countries.
 Implications from these are much different than those from
multilateral trade agreements.
• There are over 200 free trade agreements worldwide.
 Some threaten the WTO as a major forum for multilateral trade
liberalization.
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 Tariffs for a large Country
 Figure 11.1 shows the effects of a tariff on a large country
(Home).
 We found before that a tariff leads to a deadweight loss for
Home: (b+d).
 We also saw a terms-of-trade gain for Home, e, which equals
the reduction in Foreign price due to the tariff times the Home
imports with the tariff.
 If Home applied the optimal tariff, then the terms-of-trade gain
exceeds DWL, and Home gains overall.
 For Foreign, a DWL, f, exists from inefficient production levels.
 The Home gain comes at the expense of an equal terms-oftrade loss for Foreign, e, plus the DWL, f.
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International Trade Agreements
Figure 11.1
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 The Payoff Matrix
 We stated before that it is optimal for large countries to impose
small tariffs, but that did not consider strategic interactions
between multiple large countries.
 If every country imposes a small optimal tariff, is it still optimal
behavior for these countries?
 We can use the payoff matrix to determine the Nash equilibrium
outcome for each country’s tariff level.
 Figure 11.2 shows the payoff matrix between Home and
Foreign, both large countries deciding to impose a tariff.
 Assume the two countries are the same size so payoffs are
symmetrical.
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 Free Trade
 The upper left hand quadrant is when neither country imposes a
tariff.
 The payoff for the two countries is 0.
• Payoffs will be measured in any other situation as relative to free
trade.
 Tariffs




Suppose Home imposes a tariff but Foreign does not.
Home payoff is e – (b+d), and Foreign’s is –(e+f).
This is the lower-left quadrant.
If the opposite occurs, the payoffs are exactly opposite, and this
is the upper-right quadrant.
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 Tariffs
 If both countries impose the optimal tariff, they are the same
size.
 Terms-of-trade gain for each country is cancelled out by the
terms-of-trade loss it suffers because of the other country's
tariff.
 Both countries suffer DWL: -(b+d+f).
• Their own DWL, plus DWL from the other country’s tariff.
 This is the lower right quadrant of the matrix.
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International Trade Agreements
Figure 11.2
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 Prisoner’s Dilemma
 The pattern of payoffs we just saw has a special structure
called the “prisoner’s dilemma”.
 This is a game where two accomplices are caught in a crime
and each has to decide whether or not to confess, when locked
in separate rooms unable to communicate.
 The best result for both is to not confess. However, since they
cannot communicate and do not know what the other is doing,
the best option for each is to confess.
 This is similar to our situation where each country acting on its
own has an incentive to apply the tariff, but doing so makes
both worse off.
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 Nash Equilibrium
 The only Nash equilibrium in figure 11.2 is the lower right
quadrant—both countries apply a tariff.
 To move from that point would increase the countries’ loss, (e+f)
> (b+d+f), so the Nash equilibrium for both countries is to apply
the tariff.
 The Nash equilibrium leads to an undesirable outcome for both
countries, even though it is the best choice if the other country
imposes a tariff.
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International Trade Agreements
• The Logic of Multilateral Trade Agreements
 Free Trade Agreement
 The bad outcome can be avoided if the countries enter into
some type of free trade agreement.
 The WTO provides a mechanism to eliminate the prisoner’s
dilemma by giving an incentive to remove tariffs.
 Those who join the WTO must agree to remove some tariffs,
but in return they get lower tariffs from other members.
 This allows us to move closer to free trade.
 It is then more likely to end up in the upper left quadrant of the
payoff matrix instead of the lower right.
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International Trade Agreements
• Regional Trade Agreements
 In this case countries eliminate tariffs among
themselves, but keep tariffs against other countries.
 Article XIV of the GATT states regional trade
agreements are acceptable as long as the group does
not jointly increase tariffs against outside countries.
 They do, however, contradict the most favored nation
principle.
 Countries in the regional trade agreement are treated
better (no tariffs) than countries outside the agreement.
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International Trade Agreements
• Regional Trade Agreements
 Sometimes they are called preferential trade
agreements.
 This emphasizes that member countries are favored over other
countries.
 Even though they violate this principle, they are
permitted because they are a positive move toward free
trade with a larger group of countries.
 Regional trade agreements are classified into two basic
types:
 Free trade areas
 Customs unions
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International Trade Agreements
• Regional Trade Agreements
 Free trade area
 A group of countries agreeing to eliminate tariffs (and other
barriers to trade) between themselves, but keeping whatever
tariffs they formerly had with the rest of the world.
 In 1989, Canada entered into a free trade agreement with the
U.S. known as the Canada-U.S. Free Trade Agreement
(CUSFTA).
 In 1994, Mexico was included to create the North American
Free Trade Agreement (NAFTA).
 Each of these countries have their own tariffs with all other
countries of the world, but have worked to eliminate trade
barriers with each other.
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International Trade Agreements
• Regional Trade Agreements
 Customs Union
 Similar to a free trade area, except that in addition to eliminating
tariffs among countries in the union, the countries within a
customs union also agree to a common schedule of tariffs with
each country outside the union.
 Examples are the European Union (EU) and the signatory
countries of Mercosur South America.
 All countries in the EU have identical tariffs with respect to each
outside country, as does Mercosur.
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International Trade Agreements
• Regional Trade Agreements
 Rules of Origin
 If China is looking to export a good to Canada, it will want to do
so at the lowest cost.
 If Canada has high tariffs on that good, but Mexico has low
tariffs, why not export to Mexico and then trade it freely to
Canada?
 Free trade areas have complex rules of origin.
• Specifies what type of goods can be shipped duty-free within the
free trade area.
 The good from China to Mexico would not get duty-free access
to Canada in this example.
 The good would first have to be used in the production of
another good giving it enough “North American content” to
qualify for duty-free access.
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International Trade Agreements
• Regional Trade Agreements
 Rules of Origin
 Specifies, for each and every product, how much of its
production has been done in North America.
 These rules are clearly not needed in a customs union since all
the countries have common tariffs with outside countries.
 So why not just create a customs union and make it easier?
 Because tariffs with outside countries are a political issue, of
which many countries wish to maintain control.
 So what are the economic effects of regional trade
agreements, in either case?
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International Trade Agreements
•
Trade Creation and Trade Diversion
 When trade agreements are made, the increased
trade can be of two types.
1. Trade creation occurs when a member country
imports a product from another member country that it
made for itself before.




Gain in consumer surplus for importing country due to lower
prices.
Gain in producer surplus for exporting country due to
increased sales.
Same as opening trade effect in Ricardian or HO models.
No other country is affected because the good was not traded
at all before—welfare gains for both countries.
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International Trade Agreements
•
Trade Creation and Trade Diversion
2. Trade diversion occurs when one member country
imports a product from another member country that it
was previously importing from an outside country.
 Trade is taken away from one country and moved to
another country.
 This is not always the most efficient move since the
former country might have been producing at lower
costs, but due to changes in tariffs, it ends up cheaper
to import from the member country.
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A Korean-American Strand Enters
Trade’s Spaghetti Bowl
HEADLINES
• The U.S. and South Korea are forming a free
trade agreement.
• The agreement looks beneficial, especially for
these two countries.
• Significant reduction in tariffs, liberalization for
U.S. farm exports, greater protection for U.S.
investors, greater protection of intellectual
property, etc.
• So what are the problems?
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A Korean-American Strand Enters
Trade’s Spaghetti Bowl
HEADLINES
• This agreement essentially allows them to discriminate in
favor of exporters or investors based in each other’s
territory.
• This is likely to create significant trade diversion.
 Partners might shift from more competitive to less competitive
suppliers.
• More importantly, given the increase in the number of
preferential trade agreements, this being a significant one,
other countries will be desperate to avoid the
consequences for them.
 Could that mean even more agreements?
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A Korean-American Strand Enters
Trade’s Spaghetti Bowl
HEADLINES
• What are the economic consequences of that?
 A larger portion of world trade will be under the
complex rules that govern many of these agreements,
which means greater administrative complexity.
 Every new agreement changes the preferences for
suppliers, which is likely to create uncertainty for
businesses.
 Professor Jagdish Bhagwati of Columbia university has
called this the “spaghetti bowl” of preferences.
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A Korean-American Strand Enters
Trade’s Spaghetti Bowl
HEADLINES
• There are important political consequences that
go along with the economic ones.
 A company's access will depend more on the power of
its government to open markets than on the
competitiveness of the country.
 Governments with lots of power will compete to get
more favorable terms for their producers.
• Many are starting to believe these effects are all
far removed from what the founders of the GATT
system were after.
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International Trade Agreements
• Numerical Example of Trade Creation and
Diversion
 Let’s consider an example from NAFTA where an auto
part is now imported by the U.S. from Mexico instead of
from China.
 We can keep track of the gains and losses for the
countries involved.
 Asia loses export sales, loss in producer surplus.
 Mexico gains producer surplus from increased sales.
 Since Mexico is not the most efficient producer, there is
potential social loss due to the trade diversion.
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International Trade Agreements
• Numerical Example of Trade Creation and
Diversion
 We can see the potential cost amount in Table 11.1.
 The table shows the costs to import the part from
Mexico and Asia under three different tariff options: 0%,
10%, and 20%.
 In the first set, there is no trade agreement, so it is
cheaper to import from Asia under a tariff of 0% and
10%, but cheaper to make it themselves (no trade) with
a 20% tariff.
 However, in the second set, under NAFTA, there is no
tariff for Mexico at any point, so it is cheaper to import
from Mexico for tariffs of 10% and 20%.
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International Trade Agreements
Table 11.1 Cost of Importing an Automobile Part
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International Trade Agreements
• Numerical Example of Trade Creation and
Diversion
 Trade Creation
 Assume there is a 20% tariff.
 After NAFTA, the U.S. will import from Mexico for $20, since it
costs more to import from Asia ($22.80) or to make it
themselves ($22).
 The U.S. clearly gains from the lower cost of the part, Mexico
gains through exports to the U.S., and Asia is unaffected since
it was not exporting at that tariff level anyway.
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International Trade Agreements
• Numerical Example of Trade Creation and
Diversion
 Trade Diversion




Now suppose the tariff was 10% instead.
Before NAFTA, the U.S. imported the part from Asia for $20.90.
After NAFTA, it will import from Mexico at a price of $20.
Because of NAFTA, the U.S. switches the source of imports
from Asia to Mexico—trade diversion.
 Producer surplus in Asia falls and producer surplus in Mexico
increases.
 What about the U.S.? Although they gain $0.90 on each part,
they lose $1.90 in tariff revenue from each import from Asia.
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International Trade Agreements
• Trade Diversion in a Graph
 Figure 11.3 shows the free-trade price of the part from
Asia, with the free-trade export supply curve for Asia.
 We assume the U.S. is a small country relative to the potential
supply from Asia.
 Including the tariff, the cost of imported parts from Asia
is Pasia+t and the supply curve is Sasia+t.
 The free-trade supply from Mexico is upward sloping,
Smex and inclusive of the tariff is Smex+t.
 Before NAFTA, both Mexico and Asia face the same
tariff.
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International Trade Agreements
• Trade Diversion in a Graph
 Equilibrium is at A, importing a total of Q1 at a price of
Pasia+t.
 Of total imports, Q2 comes from Mexico at B, since
under perfect competition these imports have the same
tariff-inclusive price as those from Asia.
 Tariff revenue is collected on imports from both Mexico
and Asia as (a+b+c+d).
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International Trade Agreements
• Trade Diversion in a Graph
 After Mexico joins NAFTA, it can sell duty-free to the
U.S.
 The relevant supply curve is now Smex and imports from
Mexico increase to Q2 at C.
 The price charged remains Pasia+t since Mexico’s MC
has increased along its supply curve, so the price to
U.S. has not changed.
 U.S. loses tariff revenue of (a+b+c).
 Mexico gains producer surplus of (a+b).
 The combined effect of NAFTA is a loss of c.
 The combined welfare actually falls due to NAFTA.
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International Trade Agreements
Figure 11.3
The
facedthe
byrelevant
the U.S. supply
with thecurve
tariff,isbefore
is
Afterprice
NAFTA,
Smex. NAFTA,
Equilibrium
At this
price,
theand
U.S.Mexico
equilibrium
imports
Q1 +t
at A.
Of the
Pimports
Asia
curves
of
and
from
Mexico
are
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Q3 at
C. MCtotal
forSMexico
are
asia+t with
asia
total
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Mexico at B
Shigher
at Sfrom
mex+t so price stays
asia+t
Net Loss
Price
Smex+t
Smex
C
B
Pasia+t
b
a
•The U.S. loses tariff revenue of
(a+b+c)
•Mexico gains producer surplus of
(a+b)
•The
effect of NAFTA is a
The combined
US gains tariff
net
loss ofofc (a+b+c+d)
revenue
A
Sasia+t
d
c
Pasia
Sasia
MUS
Q2
Q3
Q1
Import Quantity
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International Trade Agreements
• Trade Diversion in a Graph
 Interpretation of the Loss
 This is one of the few cases where we have said that a move to
free trade makes a country worse off. Why does this happen?
 Asia is the more efficient producer of the good for units Q3-Q2
with MC=Pasia.
 When production is diverted to Mexico, the extra exports from
Mexico are produced at MC=Pasia+t.
 The combined loss c can be interpreted as the average
difference between Mexico’s MC and Asia’s MC times the extra
imports from Mexico.
 This is similar to the “production loss” or “efficiency loss” we
saw with a tariff for a small country.
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International Trade Agreements
• Trade Diversion in a Graph
 Interpretation of the Loss
 What we have to remember is that even though we moved to
free trade between Mexico and the U.S., the tariff with China
remained.
 It is really only a partial step toward free trade, which can
clearly be bad for countries involved.
 This is an example of why some economists oppose regional
trade agreements, but support multilateral trade agreements
under the WTO.
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International Trade Agreements
• Trade Diversion in a Graph
 Not all trade diversion creates a loss.
 The previous loss is only a possible outcome, depending on
Mexico’s MC’s.
 There could be a gain to the importing country.
 In figure 11.3, suppose that after joining NAFTA, Mexico has
significant investment into the auto parts industry, and its supply
curve shifts to S’mex.
 Equilibrium is then at D at a price of Pasia and Mexico will fully
replace Asia as a supplier of parts.
 In this case, the U.S. loses tariff revenue of (a+b+c+d).
 However, the import price drops to Pasia increasing U.S.
consumer surplus by (a+b+c+d+e).
 Net change in U.S. welfare is then +e: a net gain.
 Clearly Mexico’s producer surplus still gains as well.
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International Trade Agreements
Figure 11.3
If Mexico has significant investment in auto parts after
NAFTA, supply could shift to S’mex increasing equilibrium
imports to point D.
Net Gain
Price
U.S. still loses tariff revenue of (a+b+c+d).
But gains consumer surplus of
(a+b+c+d+e) for a net U.S. gain of e.
Smex+t
Smex
C
B
Pasia+t
a
b
A
d
c
S'mex
Sasia+t
e
Sasia
Pasia
D
MUS
Q2
Q3
Q1
Import Quantity
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International Trade Agreements
• Trade Diversion in a Graph
 It is very possible for any particular case to have
elements of trade diversion and trade creation.
 NAFTA and other regional trade agreements have the
potential to create net gains for members.
 However, this is only true if the amount of trade creation
exceeds the amount of trade diversion.
 Now we can use this information to see the effect on
Canada and the U.S. of opening free trade.
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Trade Creation and Diversion for Canada
APPLICATION
• In 1989 Canada formed a free trade agreement
with the U.S.
• Five years later, they entered into NAFTA with the
U.S. and Mexico.
• Professor Daniel Trefler at the University of
Toronto has analyzed the effects of these free
trade agreements on Canadian manufacturing
industries.
• As part of his research, Trefler estimates the
amount of trade creation and diversion for
Canada in its trade with the U.S.
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Trade Creation and Diversion for Canada
APPLICATION
• He finds the reduction in Canadian tariffs on U.S.
goods increased imports of those goods by 54%.
 Trade Creation
• Purchasing those goods from the U.S. decreased
their imports from other countries by 40%.
 Trade Diversion
• Note that 80% of all Canadian imports are from
the U.S. and the other 20% are from the rest of
the world, so the numbers above must be
weighted appropriately.
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Trade Creation and Diversion for Canada
APPLICATION
• 54% of the trade creation is multiplied by the 80% of
Canadian imports that come from the U.S.
• 40% of lost imports from the rest of the world is multiplied
by the 20% that typically comes from the rest of the world.
• Taking the difference between trade created and diverted,
we get:
80% x 54% - 20% x 40% = 35% > 0
Share of
US
imports
Increase
in US
imports
Share
of other
imports
Decrease
in other
imports
Since this number is
positive, trade creation is
greater than trade
diversion. Canada gained.
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International Agreements on Labor Issues
• Regional issues often involve issues other than
tariffs.
• The two big issues that are typically discussed are
effects on the environment and on labor.
• Labor standards refer to all issues that directly
affect workers, including occupational health and
safely, child labor, minimum wages, etc.
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International Agreements on Labor Issues
• Labor standards were included in NAFTA to
satisfy two different groups.
 Consumers and policy makers are often concerned with
working conditions, especially in developing countries,
and want to avoid any worker exploitation.
 Unions in the developed countries are also concerned
with these issues partly due to solidarity with foreign
workers and partly due to increased competition for
“home” workers.
 Imports are cheaper if businesses do not have to put costs
toward these issues.
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International Agreements on Labor Issues
• Economists are often skeptical about such
concerns as they can be viewed as attempts to
“protect” domestic interests in the developed
country.
 Results in less competition if the foreign country has to
increase their costs to the same level as the home
country.
• Economics teaches us that we need to be careful
that enforcing labor standards in other countries
does not create a worse condition for those
workers.
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International Agreements on Labor Issues
• Labor Side Agreement under NAFTA
 NAFTA does not change the labor laws in countries, but
is meant to improve enforcement.
 If one country believes another is not enforcing their
own laws, the country can be brought before the North
American Agreement on Labor Cooperation (NAACL).
 Many cases have dealt with the maquiladora plants in
Mexico, but charges have been brought against the
U.S. as well.
 Migrant workers picking apples in Washington state.
 1998 case with resolution in 2000.
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International Agreements on Labor Issues
• Labor Side Agreement under NAFTA
 Critics of NAALC argue that procedures for resolving
disputes are slow and include major exceptions that
render them ineffective.
 Others argue that the agreement has caused an
institutional forum where labor unions and activists from
the three countries can build solidarity.
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International Agreements on Labor Issues
• Other Labor Agreements
 There are many other examples of international
agreements that monitor the conditions of workers in
other countries.
 Unions and other organizations are concerned about
rights of workers to unionize, job safety, and work
hours.
 Consumers can also play a role as companies clearly
listen to what consumers say with their purchasing
decisions.
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International Agreements on Labor Issues
• Other Labor Agreements
 Consumer Responsibility
 How much do consumers value the idea that clothing
purchased is made under good working conditions?
 National Bureau of Economic Research (NBER) surveyed
consumers on this question (see Table 11.2).
 Sample A asked if they cared “about the condition of the
workers who make the clothing they buy.”
• 84% said “yes.”
 They were also asked “how much more they would be willing to
pay for items made under good working conditions.”
• Premium was $2.80 for a $10 item and $15 for a $100 item.
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International Agreements on Labor Issues
• Other Labor Agreements
 Consumer Responsibility
 Sample B was asked about the premium they would be willing
to pay for workers in “good” conditions, and the discount
needed to buy the T-shirt made under “bad” conditions.
• 84% would choose an identically priced alternative.
• 64% would not purchase the shirt at all.
• 35% would still consider buying the shirt (an average discount of
$4.30).
• The premium willing to pay for a shirt produced under “good”
conditions was $1.83.
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International Agreements on Labor Issues
• Other Labor Agreements
 Consumer Responsibility
 One observation is that consumers have a downward-sloping
demand curve for labor standards.
• Will pay a small amount to assume good standards.
 A second observation is that individuals need a higher discount
to buy the shirt made under “bad” conditions than the premium
they would pay for the one made under “good” conditions.
• Consumers are more worried about potential losses than potential
gains.
 Similar results have been found in other surveys.
 We can conclude a significant number of consumers are willing
to change shopping patterns in response to poor labor
conditions of foreign workers.
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International Agreements on Labor Issues
Table 11.2 Survey Responses
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International Agreements on Labor Issues
• Other Labor Agreements
 Corporate Responsibility
 Pressure from consumers and unions has forced many
corporations to report on the working conditions of their
overseas plants and those of sub-contractors.
 Nike publicized the names of their sub-contractors overseas.
 We see that other corporations are following suit.
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Nike Reveals Overseas Supply Chain
HEADLINES
• Nike chose to disclose the names and locations of
about 700 factories that produce their shoe and
apparel goods.
• This was on the tail of significant controversy over
labor practices in their foreign factories.
• As a move toward more corporate responsibility
and their corresponding report, Nike was the first
major apparel company to voluntarily disclose this
information.
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Nike Reveals Overseas Supply Chain
HEADLINES
• Companies have been reluctant to give plant
locations for independent assessments, due to
the fear of revealing trade secrets.
• Nike stated that even thought the risk still existed,
it was worth it to force facing some “endemic
issues.”
• Nike acknowledges that conditions in some of its
factories was less than desirable, such as
sweatshop conditions and overtime hours.
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Nike Reveals Overseas Supply Chain
HEADLINES
• In Nike’s report, they audited 569 factories during
2004 and 2005 with some of the following results:
 Physical or verbal abuses in about ¼ of South Asian
factories.
 25-50% of factories restrict access to water and/or
bathroom facilities during the workday.
 More than half of South Asian and 25% of other
factories have 60 or more hour workdays.
 In about 1 out of 10 factories, penalties existed for
refusing to work overtime.
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Nike Reveals Overseas Supply Chain
HEADLINES
• With all the demands from consumers and activist
groups, companies are realizing the importance of
their responsibility in their production processes.
• Many companies are hoping that revealing more
of their production conditions will results in gains.
• According to a survey by London-based
AccountAbility, 72 of the world’s 100 highest
grossing companies produced annual corporate
responsibility reports in 2004.
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International Agreements on Labor Issues
• Other Labor Agreements
 Country Responsibility
 Should national governments monitor and enforce labor
regulations in foreign countries?
 Many U.S. trade laws allow the President to withhold trading
privileges from countries that do not give basic rights to their
workers.
 In only about half the cases in which this has been done, has it
been considered effective at improving rights.
 One problem with withholding rights, is that denying
preferences to all industries in a country is a very broad action.
 A second problem is that these laws involve the comparison to
U.S. labor standards. That is not a good or fair comparison.
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• Other Labor Agreements
 Country Responsibility
 Many think countries should choose their own domestic policies
and countries should not impose their own beliefs on others.
 Another approach is to use a non-governmental organization
(NGO) to take action in limiting sweatshop activities.
 Studies show NGOs are more effective at raising wages than
U.S. policies have been, and at much lower costs to the foreign
country.
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• Other Labor Agreements
 Country Responsibility
 U.S. doubled a minimum wage in Indonesia at a cost of 10%
increase in unemployment.
 An NGO increase in minimum wage from anti-sweatshop
activism led to more closed plants, but with losses more than
offset by employment gains at remaining firms.
 Governments can force increased wages on foreign workers,
but it is a very blunt tool.
 NGOs are better at targeting particular plants, and not the
country as a whole.
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International Agreements on Labor Issues
• Other Labor Agreements
 Living Wage
 Is it fair to expect foreign firms to pay a “living wage”?
• A wage above the norm.
 It is difficult because you then have to ask, how high should
they be to be acceptable to activists?
 Economists typically do not believe that wages should be any
higher than the market will allow, as this may lead to
unemployment.
 In developing countries, workers laid off from these jobs are
likely to end up in activities far worse.
 This often leads many economists to reject calls for “living
wages.”
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International Agreements on Labor Issues
• Other Labor Agreements
 Living Wage
 Other types of labor standards are important and should
continue to be pursued.
 Workers in all countries are entitled to a safe and clean
workplace, honest pay, and the right to unionize.
 Enforcement of labor standards can make sure that workers
benefit from trade without being exploited in the workplace.
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International Agreements on the Environment
• Most of the protesters at the 1999 Seattle meeting
of the WTO were concerned about how WTO
rulings would affect the environment.
• Although the WTO does not deal directly with
environmental issues, other international
agreements called multilateral environmental
agreements deal specifically with the
environment.
• However, the WTO still indirectly affects the
environment.
• We will begin by clarifying the role of the GATT
and the WTO in environmental issues.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 GATT has Article XX known as the “green provision.”
 This allows countries to adopt their own laws in relation
to environmental issues, provided the laws are applied
uniformly to domestic and foreign producers.
 Laws cannot discriminate against imports.
 If these provisions allow countries to apply their own
environmental regulations, why were people protesting
so heavily?
 Table 11.3 details some of the specific GATT and WTO
cases.
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International Agreements on the Environment
Table 11.3 Environmental Cases at the GATT and WTO
Case
Issue
Outcome
Tuna-Dolphin
In 1991 Mexico
appealed to the
GATT against a
U.S. ban on
Mexican tuna
imports.
The United States put a
ban on imports of tuna
from Mexico that were
not with nets that were
safe for dolphins (as
required in the United
States under the Marine
Mammal Protection Act).
In 1992 the GATT ruled
in favor of Mexico that
the U.S. import ban
violated GATT rules. But
the strong consumer
response led to labeling
of imported tuna as
“dolphin friendly.”
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Tuna-Dolphin Case
 In 1991, Mexico brought a GATT case against the U.S.
 The U.S. had banned tuna imports from Mexico because
Mexican fishermen did not use dolphin-safe nets as were
required by U.S. fishermen.
 The U.S. reasoned the rule should be the same for both
Mexican and U.S. fishermen.
 GATT concluded that the U.S. could not ban tuna imports for
this reason because the U.S. had applied the import restriction
to the production process method and not the product itself.
 The idea that the production process could not be a basis for
trade restriction was a principle of the GATT that was upheld
here.
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• Environmental Issues in the GATT and WTO
 Tuna-Dolphin Case
 The GATT panel also wanted countries to know that GATT rules
were not set up so that trade could be used for one country to
impose its own rules on another country—even to protect the
environment.
 Although environmentalists were upset, the response by
consumers did lead to the dolphins being protected, as the U.S.
and Mexico worked out a system of labeling tuna as “dolphin
safe.”
 Major companies then only sold this “dolphin friendly” tuna, so
despite the initial ruling, the dolphins were protected.
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Table 11.3 Environmental Cases at the GATT and WTO
Case
Issue
Outcome
Shrimp-Turtle
In 1996 India,
Malaysia, Pakistan,
and Thailand
appealed to the
WTO against a
U.S. ban on shrimp
imports.
The United States put a ban
on imports of shrimp from
India, Malaysia, Pakistan,
and Thailand that were not
caught with nets that were
safe for sea turtles (as
required in the United
States under the
Endangered Species Act).
In 1998, the WTO ruled in
favor of India, Malaysia,
Pakistan, and Thailand that
the U.S. ban on shrimp
imports violated WTO
rules. But the United States
could still require these
countries to use turtle-safe
nets, provided that
adequate notice and
consultation were pursued.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Shrimp-Turtle Case
 In 1996, a second closely related case came up where India,
Malaysia, Pakistan, and Thailand appealed to the WTO against
a U.S. ban on shrimp imports.
 Shrimp were not being caught using nets safe for sea turtles,
required in the U.S. under the Endangered Species Act.
 The outcome was different from the dolphin case.
 The WTO still ruled against the U.S., but it did not rule against
the principle that one country could restrict imports based on
the production process of another country.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Shrimp-Turtle Case
 The problem with the U.S. ban was that it was applied without
sufficient notice to, and consultation with, the foreign producers.
 Therefore, the foreign producers did not have enough time to
employ turtle-safe devices.
 The WTO ruled on technical grounds, not on the principle of
protecting endangered species in foreign waters.
 This ruling ended up more favorable to environmentalists since
the WTO explicitly recognized the importance of “the
conservation of exhaustible natural resources.”
 Agreements were made with foreign producers and turtle-safe
nets were implemented.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Gasoline from Venezuela and Brazil
 A third GATT/WTO case was brought against the U.S. by
Venezuela and Brazil in 1994.
 The U.S. restricted imports of gasoline from these countries
since they did not meet the requirements of the U.S. Clean Air
Act.
 The WTO ruled that the U.S. violated the principle that national
and foreign producers should be treated equally.
 U.S. producers had been given a 3-year grace period to meet
the Clean Air Act standards, but that grace period was not
extended to foreign producers.
 Although often seen as a loss by environmentalists, economists
see the ban as “disguised protection” against the foreign
gasoline imports—the WTO was correct.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Asbestos from Canada
 In 1998, France blocked the imports of asbestos from Canada
based on known health hazards.
 Canada appealed to the WTO, but lost the case in a 2001
ruling.
 The WTO ruled that Article XX(b) allowed for some exceptions
to the equal treatment rule.
 Canada was prohibited from exporting products containing
asbestos even though French firms were themselves using
asbestos-based products.
 This ruling was considered a victory for environmentalists.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Biotech food in Europe
 A final ongoing case concerns whether genetically modified
food can be imported into Europe.
 In 2003, the U.S. appealed to the WTO that the EU was
keeping out genetically modified food and crops.
 The EU claimed that there was no “moratorium” on these
imports even though none had been approved since 1998.
 Europe said that it needed more time to study the effects of
genetically modified products and was keeping them out for
precautionary reasons until more information was collected.
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• Environmental Issues in the GATT and WTO
 Biotech food in Europe
 In 2006, the WTO ruled that Europe’s actions violated the
principle that restrictions must be based on “scientific risk
assessments.”
 They cannot keep out imports due to precautionary reasons
only, but had to have evidence to back up the import restriction.
 Europe decided to use consumer labeling to let buyers decide
whether to purchase genetically modified foods or not.
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International Agreements on the Environment
• Environmental Issues in the GATT and WTO
 Summary of GATT/ WTO Cases
 The outcomes of these cases have lead some observers to
conclude that although some of the cases have been “lost” at
the WTO, environmentalists have gained ground in making sure
that environmental concerns are respected.
 This does not mean we can now drop environmental issues.
 The lobbying activity of environmental groups has been
important in shifting public opinion and WTO rulings in support
of the environment.
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International Agreements on the Environment
• Does Trade Help or Harm the Environment?
 After looking at some specific cases, can we now
answer a more general question about whether trade
helps or harms the environment?
 We have clearly seen examples on both sides.
 So what are some possible outcomes?
 We can look at some other examples.
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International Agreements on the Environment
• Does Trade Help or Harm the Environment?
 U.S. Sugar Quota
 As discussed, the U.S. maintains an import quota on sugar,
leading to higher prices for U.S. buyers.
 One demand for imported sugar cane comes from firms
producing ethanol.
 The import price for sugar cane is very high so farmers
purchase American corn, which is federally subsidized.
 Therefore, more corn than sugar is used to produce ethanol
due to the corn subsidies and the sugar quota.
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International Agreements on the Environment
• Does Trade Help or Harm the Environment?
 U.S. Sugar Quota
 Why do we care if more corn than sugar is used for ethanol
production?
 Producing ethanol from corn is much less efficient than
producing it from sugar cane.
 Additionally, corn depletes the soil and requires significant
fertilizers to grow.
 If we could purchase sugar cane at the world prices, it would be
much more efficient to use it to produce ethanol than to use
corn.
 The U.S. quota, therefore, has an indirect and negative impact
on the environment.
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The Power of Big Corn
HEADLINES
• There has been a significant increase in demand
for ethanol, a gasoline substitute.
• The demand has increased the price of corn and
will likely lead to increases in prices of corn-based
food and drink products as well.
• Environmentalists warn of a corn shortage.
• This could all be alleviated if the U.S. government
removed trade restrictions and allowed more
sugar-based ethanol production, which requires
much less energy than corn.
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The Power of Big Corn
HEADLINES
• The country now relies on corn to produce its
ethanol.
• Corn is not the optimal input for ethanol.
• The ratio of energy gained versus the energy
needed to plant, fertilize, and harvest the crop of
corn is very poor.
• Corn is very hard on the soil on which it is grown.
• Although sugar cane can be used with
significantly less energy, the government price
fixing, tariffs, and import restrictions lead to a very
high domestic price for sugar cane.
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The Power of Big Corn
HEADLINES
• Since domestic producers can get a much higher
price for their sugar outside the ethanol market,
they are not likely to move to ethanol production.
• There are also significant tariffs and import limits
on foreign sugar cane, keeping the U.S. from
using that sugar for ethanol.
• Finally, Congress has placed a tariff on foreign
sugar-based ethanol to make sure little of that is
imported as well.
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The Power of Big Corn
HEADLINES
• The results of all the price controls, tariffs, import
restrictions are that U.S. ethanol:
 Costs more than it has to, and
 Uses more energy to produce than is necessary.
• Studies are showing that the increased demand
for corn is very likely to drive up food prices as
well.
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International Agreements on the Environment
• Does Trade Help or Harm the Environment?
 U.S. Automobile VER
 The sugar quota is not the only case where U.S. trade
restrictions have lead to environmental harm.
 The VER on Japanese cars in 1991 limited the number of cars
Japan could export to the U.S., but did not limit the value of the
cars exported.
 This gave Japan an incentive to export larger and/or more
luxurious models to gain greater profits.
 These luxurious models had larger engines and decreased fuel
economy.
 Figure 11.4 shows the impact of the VER on gas mileage.
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International Agreements on the Environment
Figure 11.4
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International Agreements on the Environment
• Does Trade Help or Harm the Environment?
 U.S. Automobile VER
 The data show that the luxury models with the lowest gas
mileage had the greatest increase in sales between the years of
the VER.
 Prices on these did not rise as much as they did on the
economy models, so sales went up.
 As consumers shifted toward the nicer, lower gas mileage cars,
carbon dioxide emissions increased.
 A free trade policy would have kept Japan importing the smaller
more fuel efficient cars during the 1980s.
 This would have been better for the environment.
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International Agreements on the Environment
• The Tragedy of the Commons
 Trade in fish
 Because of overharvesting, many species of fish are no longer
commercially viable.
 According to one study, 29% of fish and seafood species have
collapsed.
• The catch declined more than 90% between 1950 and 2003.
 This occurs when you have many individuals competing for the
same fish stock, but there is no real ownership and/or
enforcement of the stock.
 This is the tragedy of the commons—the fish are treated as
common property that anyone can harvest.
 International trade can make the problem worse as global
demand is directed toward resources of a particular country or
region, so even more overharvesting takes place.
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International Agreements on the Environment
• The Tragedy of the Commons
 The solution to the tragedy of the commons
 The cause of the tragedy is not the international trade, but the
fact that the resource is treated as common property.
 Assigning property rights to the resource, which allows the
owner to limit the use of the resource, is one way to alleviate
the tragedy.
 But with a truly global resource, this is not enough.
 International agreements are typically needed to prevent overharvesting of the resource.
 One country acting on its own does not have enough control of
the harvest.
 International agreements are arranged through the Convention
on International Trade in Endangered Species (CITES).
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Ban on Caspian Sea Caviar Exports
HEADLINES
• The export of caviar was halted by the Convention on
International Trade in Endangered Species.
• This caviar is one of the most coveted and lucrative
wildlife products.
• It was stated this was a temporary measure to compel
nations that exported the caviar from wild sturgeon to
prove they were not pushing the population to extinction.
• The suspension also barred nations from importing
sturgeon products.
• Western retailers could sell what they had but could not
get any additional supply.
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Ban on Caspian Sea Caviar Exports
HEADLINES
• A few months later the global suspension on
exports of caviar and sturgeon products had been
extended indefinitely from almost all of the
Caspian sea, the world’s main caviar-producing
region.
• CITES stated that Iran would be allowed to export
a limited amount of one species, but other
Caspian nations would not be granted annual
export quotas.
• Export quotas from Black Sea harvests were set
very low.
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Ban on Caspian Sea Caviar Exports
HEADLINES
• This ban occurred after years of reduced sturgeon
catches.
• There is worry that the remaining population is
under significant pressure from black market rings
and poachers, many sponsored by or protected
by governments.
• CITES officials stated the ban was necessary to
protect the fish and to ensure sustainable trade
into the future.
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International Agreements on the Environment
• The Tragedy of the Commons
 Trade in Buffalo
 There is a historic case from the U.S. with the slaughter of the
Great Plains buffalo, in a ten year period from 1870–1880, to
the point of near extinction.
 There have been many arguments put forth for why this
occurred, but new research offers another reason that seems to
dominate.
 An invention in London in 1871 allowed buffalo hides to be
tanned for industrial use.
 This created a huge demand for buffalo hides in Europe
increasing the price significantly in the U.S.
 Most of the hides from the U.S. were exported to Europe.
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International Agreements on the Environment
• The Tragedy of the Commons
 Trade in Buffalo
 Figure 11.5 shows estimates of the imports of untanned hides
to the UK and France from the U.S.
 It looks at the extra demand in the UK and France after the
invention was made.
 Imports into these countries grew rapidly after 1871, peaking in
1875.
 In that year, the UK and France combined imported more than 1
million hides, and from 1871–1878, imported about 5 million.
 This can plausibly explain the slaughter of the Great Plains
buffalo.
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International Agreements on the Environment
Figure 11.5
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International Agreements on the Environment
• International Agreements on Pollution
 Pollution is a by-product of many manufacturing
activities.
 The tragedy of the commons applies to pollution too, as
countries can consider the air or water as a common
resource when emitting pollutants.
 Pollution can be an international issue.
 Global pollutants are substances that cross boundaries
and affect many different countries.
 Examples: CFCs—chlorofluorocarbons which deplete the
ozone layer—and CO2—carbon dioxide which contributes to
global warming.
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International Agreements on the Environment
• International Agreements on Pollution
 Global Pollutants
 A prisoner’s dilemma similar to figure 11.2 for tariffs can apply
here as well.
 Since the pollution crosses countries, each country does not
face the full cost of its own pollution.
 There is little incentive for one country to limit their pollution
emissions.
 Therefore, in the absence of regulation, there will be a larger
than efficient level of pollution.
 International agreements are needed.
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International Agreements on the Environment
• International Agreements on Pollution
 Payoff Matrix
 Figure 11.6 shows the payoff matrix for two countries deciding
on whether to regulate emissions or not.
 Again, Home’s payoffs are in the lower-left corner and Foreign’s
payoffs are in the upper-right corner.
 We start at regulation and measure the change in welfare when
there are no regulations.
 When both countries regulate, consumers are better off, but
producers are worse off.
 If one country decides not to regulate, its producers gain, but
consumers in both countries will lose.
 If neither country regulates, there is a large loss for consumers
and a small gain for producers.
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International Agreements on the Environment
Figure 11.6
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International Agreements on the Environment
• International Agreements on Pollution
 Nash Equilibrium
 We start in the upper-left quadrant, with both countries
regulating.
 If either country deviates from this position, it will experience a
gain for producers and a loss for consumers.
 If pollution is local, the country might realize that the costs
outweigh the benefits.
 With global pollutants, however, the calculation changes.
 If the pollution crosses borders, then the gains from regulation
may appear less than the costs to the producers.
 Neither country will want to regulate.
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International Agreements on the Environment
• International Agreements on Pollution
 Nash Equilibrium
 Given that one country does not regulate, the other country will
have a greater incentive not to regulate.
 If Home does not regulate in figure 11.6, then Foreign’s best
decision will likely be to not regulate either.
 The payoffs in the matrix can lead us to a situation where
neither country regulates its pollution.
 This is very similar to the prisoner’s dilemma we discussed
before.
 Both countries end up with a bad outcome even though they
are making the best decision individually.
 Multilateral agreements are needed to ensure that countries
end up in the upper left quadrant with both regulating.
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International Agreements on the Environment
Figure 11.6
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International Agreements on the Environment
• International Agreements on Pollution
 Multilateral Agreements
 One example of an international agreement is the Montreal
Protocol on Substances that deplete the Ozone Layer.
 This has successfully eliminated the use of CFCs.
 The more difficult case the world has been dealing with is the
discussion of global warming regulated by the Kyoto Protocol.
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The Kyoto Protocol
APPLICATION
• In December 1997, representatives from many
nations met in Kyoto, Japan, to discuss nonbinding targets for reducing greenhouse gas
emissions.
• Carbon Dioxide (CO2) is emitted from fossil fuel
combustion and becomes trapped in the
atmosphere leading to increases in the earth’s
temperature.
• Even small increases in the earth’s temperature
can have drastic effects as weather patterns and
ocean levels change, affecting many economic
activities.
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The Kyoto Protocol
APPLICATION
• Building on the United Nation’s 1992 treaty on
climate change, the Kyoto Protocol established
specific targets for reduction in greenhouse gas
emissions:
 Industrial countries should cut emissions collectively to
5.2% less than 1990 levels.
 Targets for individual countries range from 8% for the
EU, 7% for the U.S., and to 0% for Russia. Additional
allowable increases exist for Australia and Iceland.
 Targets were also established, for example, so that
Russia could sell its credits if it ended up below its 1990
level.
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The Kyoto Protocol
APPLICATION
• Over 160 countries have ratified this agreement,
however, the U.S. has yet to and is the only
industrial country not to.
• The U.S. gives four reasons for this:
 Although evidence for global warning is strong, we do
not know the effect of policy actions.
 As the largest emitter, meeting Kyoto targets would
greatly affect the U.S. economy.
 Kyoto failed to include the developing countries, mainly
China and India.
 There are other ways to pursue reductions in
greenhouse gas emissions.
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The Kyoto Protocol
APPLICATION
• The first point made by the U.S. has become less
plausible over time.
 We have seen more evidence for global warming and
its possible consequences.
• The second point is also true. The U.S. is the
largest emitter of greenhouse gases and the
reductions proposed in Kyoto will adversely affect
the economy.
 Unlike many countries, the U.S. already had significant
restrictions on plant emissions in 1990, making their
baseline much lower to begin with.
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The Kyoto Protocol
APPLICATION
• The third point is probably the main point why the
U.S. has not joined.
 As we saw with the prisoner’s dilemma game, if one
country does not regulate, it decreases the incentives
for the other country.
 Any further discussions will have to include China and
India and other large developing countries.
• The fourth reason is also correct.There are other
ways of reducing emissions.
 Many states and companies have taken it upon
themselves to do things to reduce emissions, which can
play a positive role.
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Fixing Kyoto—A Global Superfund
HEADLINES
• This excerpt from an article by Jagdish Bhagwati
speaks of a possible extension of Kyoto that
would incorporate the developing countries of
India and China with a unique twist.
• First, why were India and China left off the list?
 They were able to argue successfully that they were not
responsible for most of the past emissions, so they
should be exempt for now from changing their
emissions.
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Fixing Kyoto—A Global Superfund
HEADLINES
• Because of their successful presentation, Kyoto
was left unsealable. The U.S., the largest
producer of greenhouse gases, would not join.
• Professor Bhagwati proposes looking to the
Superfund treatment as a solution.
 Superfund dealt with the cleanup of toxic waste when
no responsible party could be found.
 Superfund created a trust fund to provide for “cleanup”
in these cases.
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Fixing Kyoto—A Global Superfund
HEADLINES
• Rich nations who have been the main contributors
of greenhouse gases in the past, should agree to
pay damage in a trust similar to the Superfund
trust.
 Funds would be used to research alternatives to fossil
fuels and provide developing countries with pollutionreducing devices.
 Additionally, many of the pollution-reducing
technologies are produced by the rich countries, so
business support for the regulation might also be
expected.
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Fixing Kyoto—A Global Superfund
HEADLINES
• In addition to the fund, greenhouse gas emissions
should be taxed for each country.
• These taxes could partially be placed in the fund,
and part could be spent domestically for similar
purposes.
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Conclusions
• Earlier chapters of the text have referred to
international agreements on trade such as GATT,
WTO, and NAFTA.
• This chapter looked at the rationale for these
agreements in more detail, discussing other
areas, labor standards, and the environment, that
these agreements encompass.
• Initially we asked, why are international
agreements needed at all?
 There are strong temptations for countries to use tariffs
to their own benefit, or to avoid regulating the
environment.
 The outcome is typically worse for everyone—high
tariffs and/or high pollution.
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Conclusions
• Why international agreements?
 The prisoner’s dilemma type of game allowed us to
show how the Nash equilibrium leads to both parties
making decisions that seem right if taken on their own,
but have bad outcomes when both countries act the
same way.
 International agreements are needed to avoid these
bad outcomes.
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Conclusions
• The second issue addressed was the potentially
negative outcome from regional trade
agreements.
 Halfway steps toward complete free trade can end up
being bad.
 Regional agreements can cause the amount of trade
diversion to be greater than the amount of trade
creation with negative social costs.
 Additionally, it is possible that low cost producers can
be excluded from the agreement, which makes member
countries worse off as well.
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Conclusions
• Halfway steps can also lead to the overharvesting of resources.
 If there are not well defined property rights, free trade
leads to losses for the environment.
 We open one market without having a properly
functioning market for the other good.
 This is not only bad for the exporting country, but for the
world itself.
• Finally, we argued that actions by consumers,
unions, and firms to improve labor standards and
the environment are important.
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Key Points
1. There are two primary types of free trade
agreements: multilateral and regional.
2. Under perfect competition, we can analyze the
benefits of multilateral agreements by
considering the Nash equilibrium of a twocountry game in which the countries are deciding
whether to apply a tariff or not.
3. The welfare gains and losses due to regional
trade agreements are more complex than for
multilateral trade agreements.
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Key Points
4. Trade creation occurs when a country within a
regional agreement imports a product from
another member country that it formerly
produced for itself.
5. Trade diversion occurs when a member country
imports a product from another member country
that it formerly imported from a country outside
of the new trade region.
6. Labor standards refer to all issues that directly
affect workers, including occupational health and
safely, child labor, minimum wages, and the right
to unionize.
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Key Points
7. The WTO does not deal directly with the
environment, but environmental issues come up
as the WTO is asked to rule on specific cases.
8. International agreements on the environment are
needed for the same reasons that agreements
on tariffs are needed: to avoid a “prisoner’s
dilemma” type of outcome, which is bad for all
countries.
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