Transcript International Trade and International Political Economy

International Trade and
Development
Raul Caruso
Università Cattolica del Sacro
Cuore di Milano
[email protected]
1
In the previous classes, we considered only
competitive scenarios. Ricardian and HO
worlds were purely competitive. In reality,
there is no free trade. Different trade
policies affect patterns and evolution of
trade. In particular, protectionism seems to
be the rule.
2
Protection and the Triangle
Threat, Power
Trade Protection
clealry is closer
to the Power
apex.
Exchange
Integration,
3
Measuring Protection
• The effective rate of protection can be
computed through:
PI 
V T  VW
VW
Where V is the value added in a sector. The subscripts
denote the value added in the presence of trade
policies and the value added evaluated at world prices
respectively
4
Effect of a Tariff on Prices
• If the Home country imposes a tariff the price
home at home goes up. Because of the
existence of a tariff there will be an excess
demand which leads to a higher world market
price
• On the foreign market if the country is relatively
large there will an excess of supply which should
lead to a lower price. The latter statement canno
t hold when the country is small and cannot
affect world prices.
5
Who gains from a tariff?
• 1. Domestic Producers obviously gain
from the imposition of a tariff.
• 2. The government also gains from a tariff
since it has higher revenues.
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Who loses from a tariff?
1. consumers lose because they face
higher prices.
2. Terms of trade of Small countries
worsen. When a country is price-taker it
cannot influence the world price, then the
negative impact of foreign price does not
occur.
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Net gain or loss?
• The net cost of a tariff is:
• Consumer loss - producer gain –
government revenue = net cost of a tariff
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Quantitative Non-Tariff Barriers
• Quotas, VERs and other quantitative
restrictions have the same effect of a tariff
but they add also the emergence of rents
through system of licenses and
administrative tasks to manage them.
9
Export Subsidies
An export subsidy is payment to an
exporting firm. It can be either specific (a
fixed sum per unit) or ad valorem ( a
proportionof the value exported)
In general, once subsidy is applied the price
in the exporting country rises and the price
in the importing country falls.
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Export Subsidies
What happens to terms of trade?
Terms of trade of exporting country worsen.
If the exporting country is relatively large (can set prices)
the world prices decrease. Terms of trade of other
exporting countries decrease as well. This is the case of
competition over a third market.
However, terms of trade of importing country would
improve.
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Export Subsidies
The paradox of subsidies is that only producers of
the exporting country gain.
Consumer surplus falls
Government revenue falls, (government spending
rises)
Overall National Welfare Falls
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European CAP policy
It was implemented in order to guarantee
high prices for agricultural sector by
having the European Union buy
agricultural products whenever the prices
fell below specific levels.
Since the 70s the level of protection turned
to be so high that EU would have been an
importer of agricultural products in the
presence of free trade.
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US Policy , (Farm Bill)
In USA there is a very similar institutional
architecture to protect farmers in USA.
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IL MERCATO AGRICOLO
UE
USA
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Commodities and LDCs
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Prices of Commodities and LDCS
Many LDCs are dependent upon the exports
of a small number of commodities
According to FAO(2003), as many as 43
LDCs depend upon only one commodity
More than 50 LDCs depend on exports of
three or fewer agricultural commodities
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Price of Commodities and LDCs
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Price of Commodities and LDCs
Over the last twenty years commodity prices
declined continously
Cotton (-47%), Coffee (-64%), Cocoa (71%), sugar (-77%)
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20
Price of Commodities and LDCs
Why?
Oversupply of commodities which drives the
prices down. Oversupply is based upon
enhancements of productivity and
emergence of new producers (ex. Coffee
in Vietnam)
Shocks in supply determine volatility of
prices
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Price of Commodities and LDCs
• The Argument of ‘IMMISERIZING GROWTH’ is based
upon the evidence of declining terms of trade for
developing countries turned largely on differences in the
degree of competition between industries in developed
countries, or core, and those found on the periphery.
Competition among producers of raw materials and
foodstuffs drive prices down to marginal costs in the
developing economies. The result was that the prices of
primary goods produced on the periphery declined
relative to those of manufactures produced in the core.
For developing countries, free trade supposedly resulted
in “immiserization” (or “immiserizing growth”) rather than
in increasing wealth.
Hence, according to the terms-of-trade argument,
developing economies should not favor free trade but
advocate the protection of domestic industrialization
instead.
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Price of Commodities and LDCs
Increased Export volumes until now do
not appear to compensate the losses
in the value of exports.
The decline of prices for some selected
commodities has been so significant
that the increase in volume could not
compensate for the decline of prices.
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Price of Commodities and LDCs
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Price of Commodities and LDCs
Possible Solutions
1. Diversification of Production (long-term
strategy).However, in the presence of western
subisidies diversification strategy could fail
also in the long run
2. Cartel of Producers to ensure high prices (the
demand could decrease dramatically)
3. Stabilization Mechanism through international
agreements on commodities.
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Price of Commodities and LDCs
Natural evolution?
An increased demand from newly
industrialized countries (ex. China, India)
and other growing economies could stop
(or move against) a continous decline in
commodity prices.
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Future markets
However, in the latest years (before the
subprime crises) prices of commodities
have been subject to high pressure. Such
a pressure emerged in the presence of a
high liquidity in the financial markets. This
increased dramatically the volatility of
prices.
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Prices of selected commodities
(Oil, Wheat, Rice, Corn) ( 2003=100)
Volatility and pressure
on financial markets
for some commodities
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29
Trade Integration
However countries also integrate by means
of:
(1) Preferential Trade Agreement (PTA)
(2) Free Trade Areas
(3) Customs Unions
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Trade Integration
1. A PTA occurs when a country (or a group
of countries) establishes a more
favorable duty system for goods coming
from some selected countries. (ex. Tariff
are lower)
Example: EEC/Lomè convention
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Trade Integration
2. A Free Trade Area (FTA) is an agreement
between countries allowing for free
movement of goods. No restriction is
allowed. (no tariffs , no quotas)
Example. USA has a FTA with Israel. NAFTA
is also a FTA. There is FTA between EU
and non-member countries in europe.
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Trade Integration
3. A costums union (CU) is an agreement
between countries establishing a common
duty against the rest of the world. Tariffs
and quotas are chosen and implemented
collectively.
Example: EU is a customs union.
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Trade Integration
What happens?
Economists usually distinguish between:
(1) Trade creation;
(2) Trade diversion.
The ideas of Trade Creation and Trade Diversion
date back to Viner (1950).
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Trade Integration
Trade creation is supposed to be beneficial
for member countries.
a. Volume of trade increases.
b. Prices decrease.
35
Trade Integration
By contrast Trade diversion is supposed to
have a negative impact on trade with
third countries.
a. Volume of trade with third countries
decrease
b. The impact on world prices is not
precisely predictable.
36
Trade Integration
In a FTA the individual member countries
agree to free trade between themselves
but retain their individual regime of tariffs
and other restrictions on imports from third
countries. In the absence of intra-trade
restrictions goods exported by third
countries cound eneter the market of both
countries by entering the member country
with the lowes level of pretection. This is
called Trade deflection.
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Trade Integration
Finally:
Trade integration is beneficial for member
countries and have a negative impact on
third countries. However, third countries
can deflect trade. An effective system of
rules of origin must be implemented.
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Trade Integration
Given the negativ effects of trade diversions,
economists usually favoured a spread
trade integration. That is, there is a
strong debate between people favouring:
(1) Multilateralism
(2) Regionalism
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Trade Integration
Mutilateralism would predict a continous
liberalization made by all countries made
in favour of all the other coutries.
This is the principle of MFN (most favoured
nation) sorrounding GATT and then WTO
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Trade Integration
Regionalism is simply a preferentional
agreement of some countries with othre
countries of the same region.
This should create trade diversion against
the rest of the world.
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Trade Integration
Finally we can say that:
PTAs are likely to emerge between coutries
exhibiting a different level of development
FTAs and CUs emerge between similar countries
The impact of trade deflection makes preferential
agreements uneffective.
42
Trade Integration
Translate in language of network theory.
A PTA is a form of ?
A hierarchical network (ex. EU/African
countries.)
A FTA does fit better with the idea of
Random Network
43
Trade integration
What is trade deflection:
The emergence of six degrees of
separation!!
44
Regionalism in a multilateral World
Wilfred Ethier (1998) presents and proposes
a tentative explanation of some stylized
facts of regional intergration which
emerged in the last years.
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Regionalism in a multilateral World
Ethier starts considering the historical
evidence:
In 1950s and 1960s, with the exception of
EEC, regional agreements failed.
In 1990s regional agreements exhibit a
growing success.
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Ethier (1998), New Regionalism
Ethier then defined this phenomon ‘New
Regionalism’.
Examples would be: The Creation of
NAFTA, The Mercosur, the further
enlargement of European Union.
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Ethier (1998), New Regionalism
Ethier highlights some characteristics:
1. New regionalism tipically features one or
more small countries linking up with a big
country
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Ethier (1998), New Regionalism
2. Very often the small countris have made
significant unilateral reforms (signalling
behaviour)
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Ethier (1998), New Regionalism
3. New Regional agreements seldom
address only trade barriers. They usually
involve what is known as deep integration
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Ethier (1998), New Regionalism
4. Integration is due primarily to concessions
made by small countries.
Why?
Because they have a higher evaluation of
the stake.
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Strategic Trade Policy
Now it is time to consider how the countries
behave.
Hereafter we will assume that countries
behave strategically.
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Strategic Trade Policy
The idea of Strategic trade Policy has been
explained first by James Brander and
Barbara Spencer.
It is an application of non-cooperative Game
Theory to International Trade Theory
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Strategic Trade Policy
In a strategic relationship agents (firms,
countries) have a mutually recognized
strategic interdependence.
More formally, agents’ payoffs of one agent
must be directly affected by the individual
strategy choices of other agents and this
must understood by all agents involved.
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Strategic Trade Policy
Being an application of the concept of Nash
equilibrium (NE) as the central equilibrium
concept.
Nash equilibrium is a rational concept since
all agents choose strategies such that
each player’s strategy maximizes that
player’s payoff given the strategy chosen
by other players.
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Strategic Trade Policy
A famous model proposed by Brander and Spencer (1985)
incorporated a Cournot Model of Duopoly into a Third
Market to provide an example of strategic trade policy.
In general , models of strategic trade policy show that
imposing export subsidy can raise profits of a home firm
at the expense of foreign firms.
These policies where commonly defined ‘beggar-thyneighbor policies’. They were quite common at the
beginning of XX century. Remember the period in which
Irwin divided the evolution of trade.
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Adapting the Brander Spencer
Model to include different distances
Caruso (2006) present two countries
competing as in Cournot Duopoly over a
third market.
The two countries face a simple linear world
demand represented by the inverse form
by
p  a Y
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A model of STP to explain subsidy
Countries choose quantities:
Country 1
Country 2
Max level of
production
x  0 , a 
y  0 , a 
Y  x y
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A model of STP to explain subsidy
Payoff Functions:
Country 1
Country 2
c
 1  x , y , c ,  , a   xa  ( x  y ) x  


 x

 2  y , x , c , a   ya  ( x  y ) y  cy
Note they are heterogenous in costs. Country 1 faces higher costs
(Iceberg Cost)
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A model of STP to explain subsidy
In the presence of Free Trade Country 1
would produce less than country 2
(because of higher costs) and would get
lower payoffs. Formally we have:
x*  y *
 0  1

1*   2 *  
c   2 a  c 

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A model of STP to explain subsidy
On the world market the world price will
depend also on costs of country 1.
p* 
 a  c   c
3
p * /   0
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A model of STP to explain subsidy
In country 1 interest group lobby in order to
have an export subsidy. The process of
Lobby (Rent-Seeking)is costly for national
welfare. The Larger the number of firms
the higher the loss for national welfare.
Lobbying is a competition between
different interest groups. This cost will be
indicated by L and a proportional subsidy
by sx
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A model of STP to explain subsidy
The Payoff functions become:
Country 1
Country 2
c
 1 x , y , c ,  , a , s , L   xa  ( x  y ) x  


 x  L  sx

 2  y , x , c , a ,   ya  ( x  y ) y  cy
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A model of STP to explain subsidy
In the presence of subsidy the optimal
quantities chosen will be:
s
x* s y *  s 
c 1   

s  kc , k   0 ,  
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A model of STP to explain subsidy
In the presence of subsidy the world price
will be:
p* 
s
s
 a  c  s   c
3
p*  p *
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A model of STP to explain subsidy
Does country 1 get a higher welfare with
subsidy? If and only if:
L 
4 s   a  c  s   2 c 
9
The result depend upon a combination of (1) size of demand; (2) costs; (3)
level of subsidy; (4) cost of rent-seeking
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Interest Groups and Trade Policies
Then, governments choose trade policies in
order to favour some interest group
We have historical evidence about this. It is
not a novelty.
In general an overweight posed on benefits
of some interest group can lead nations to
clash
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When countries clash
Then, Countries take into account the tradeoff (1) The potential benefit of imposing
some Trade policies (2) and the loss due
to a clash with other trading countries
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When countries clash
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When countries clash
Then, consider that countries enter
negotiations under the umbrella of an
institution as WTO, They could have a
payoff function like this:
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When countries clash
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When countries clash
The results of Caruso (2006) show that
countries joining trade institutions and
negotiations can
(1) Decrease hostility;
(2) Get a higher payoff even in the presence
of asymmetry
This holds if and only if the cost of joining is
relatively low.
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When countries clash
There are also:
(1) Reputation effect (es. US/UE steel,
Banana War)
(2) Signalling effect
(3) Insurance effect
(4) Moral Hazard (hope for unilateral
concessions and transfers from your
rival)
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When countries clash
The moral of the story is that:
International negotiations on trade, albeit
unsatisfactory, are better than harsh competition
policies that lead the prices down affecting terms
of trade and then welfare
The Wto dispute resolution mechanism is a very
good opportunity for all countries.
Creating costituencies between LDCs could be a
reasonable path
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The WTO Dispute Resolution
System
A dispute arises when a member government
believes another member government is
violating an agreement or a commitment that it
has made in the WTO. The authors of these
agreements are the member governments
themselves — the agreements are the outcome
of negotiations among members. Ultimate
responsibility for settling disputes also lies with
member governments, through the Dispute
Settlement Body.
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Main Point
The main point we have to remember is that
the WTO lacks the direct enforcement
capacity. Countries must cooperate.
Why?
1) Information mechanism leading to a
reputation building;
2) Higher payoffs which emerge in the long
run.
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Number of disputes since 1995
Number of disputes 1995-2007
60
50
40
Numero
dispute
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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Number of disputes as
complainant
USA
EU
Canada
Brazil
Mexico
Argentina
India
South Korea
Japan
Chile
Australia
91
76
29
22
16
15
15
13
12
10
7
78
N u m b e r o f d is p u te s a s
d e fe n d a n t
USA
96
EC
69
In d ia
21
Canada
15
B ra zil
15
Arg e n tin a
Japan
15
M e x ic o
14
K o re a
13
C h ile
12
Au s tra lia
10
15
C h in a
8
T u rk e y
8
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When countries invoke the dispute
resolution system?
Which countries rely on DSS?
Which variables can be considered to
interpret the ‘success’ of DSS?
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Variable
Expected Correlation
Complainant’s GDP
+
Defendant’s GDP
+
Relative military power
of complainant
+
Threat of retaliation
?
Trade competitiveness
+
Degree of Openness
?
Trade dependence
between countries
involved
?
Share of contested
sector in total export of
complainant
+
Share of contested
sector in total export of
respondant
?
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Few reasonable Facts
The countries that trade more with one
another tend to have more trade disputes
Larger economies seem to be more likely to
take on a trade dispute due to greater
ability to withstand the effects of
(retaliatory) trade restrictions
Differences in ‘power’ matter
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LDCs do not invoke the Dispute Settlement
Body very often. Why?
(1) Simply, the process is costly;
(2) Reputation (inverse signalling)
(3) Insurance effect for its exports (threat of
retaliatory measures adopted by
respondant)
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Consider also….
Consider also that actors ealuate differently
the stake of a contest. A contest which is
vital for one country can be negligible for
the other country.
In such a case:
(1) the higher-evaluation actor is willing
to concede more than the opponent.
(2) When the evalutions converge both
actors have to concede.
84
An asymmetry in the evaluation of the stake
can depend upon:
(1) Asymmetric Information;
(2) Different productive systems;
(3) Internal competition between groups
85
Summary of the course
•
Summary of the whole story about trade and
development:
(1) Trade can foster growth (we have empirical evidence
about this);
(2) Some economic policies are desirable for growth and
then for trade (resolution of conflicts through
redistribution of rents, investment in education to
enhance productivity)
(3) Joining international trade negotiations is also a
desirable policy. In particular, cooperation among
LDCs should be enhanced.
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