Transcript The Political Economy of International Trade Chapter 5

The Political Economy of International
Trade
Chapter 5
© McGraw Hill Companies, Inc., 2000
EU-US and Beef
1989 - EU bars growth hormone treated beef.
US exports decline form $231mm in ‘88 to
$98mm in ‘94.
With other countries, US files complaint to WTO.
US wins (1998) - WTO Panel
declares ban to be illegal.
EU reluctant to comply and
appeals, but loses the appeal.
1999 - US threatens to raise
tariffs on hundreds of EU products.
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US Targets EU
Beef
Pork
Sausages
Corned Beef
Roquefort Cheese
Chocolate Products
Mustards
Chewing Gum
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Soups and Broths
Truffles
Mineral Water
Cut Flowers
Yarn
Electric Hair Clippers
Motorcycles and
Mopeds
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Trade Policy and Politics
Protecting jobs and industries:
emerging industries.
Increasing exports.
National security.
Retaliation.
International product domination:
New trade theory and subsidies.
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Instruments of Trade Policy
Tariffs
Tariffs - oldest form of trade policy
Specific
ad valorem
Good for government
Good for producers
But reduces efficiency
Bad for consumers
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Instruments of Trade Policy
Subsidies
A payment to a domestic producer.
Cash grants
low-interest loans
tax breaks
government equity participation in the
company
• Airbus
Subsidy revenues generated from taxes.
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Subsidies
(Cash Value)
7
6
5
4
3
Percent
2
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Ireland
Sweden
W. Ger.
UK
Japan
US
0
IDC
1
5-6
Subsidies to EC Manufacturers
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Greece
Italy
Portugal
Ireland
Belgium
Spain
France
Holland
Luxembourg
16
14
12
10
8
6
4
2
0
Germany
%
GB
(Percent of Value Added)
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Instruments of Trade Policy
Import Quotas and
Voluntary Export Restraints
Import Quota:
Restriction on the quantity of some good
imported into a country.
Voluntary Export Restraint (VER):
Quota on trade imposed by exporting country,
typically at the request of the importing
country.
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Results of Japanese VERs
Benefits producers by limiting import
competition
Japan - limited to 1.85 mm vehicles/year
Cost to consumers - $1B/year between ‘81 - 85.
Money went to Japanese producers
in the form of higher prices.
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Instruments of Trade Policy
Local Content Requirements
Requires some specific fraction of a good to be
produced domestically.
Percent of component parts.
Percent of the value of the good.
Initially used by developing countries to help shift
from assembly to production of goods.
Developed countries (US) beginning to implement.
For component part manufacturer, LCR acts the
same as an import quota.
Benefits producers, not consumers.
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Instruments of Trade Policy
Antidumping Policies
Defined variously as:
Selling goods in a foreign market below
production costs.
Selling goods in a foreign market below fair
market value.
Result of:
Unloading excess production.
Predatory behavior.
Remedy: seek imposition of tariffs.
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Instruments of Trade Policy
Administrative Policies
Bureaucratic rules designed to make it
difficult for imports to enter a country.
Japanese ‘masters’ in imposing rules.
Tulip bulbs.
Federal Express.
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Annual Cost to American
Consumers for Import Protection
$ Millions
30
Textiles
25
20
Consumer Losses
Producer Gains
15
10
Automobiles Dairy
5
Meat
Sugar
0
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Political Arguments for Intervention
Protecting jobs and industries.
VERs.
National security.
Defense industries - semiconductors.
Retaliation.
Protecting consumers.
Furthering foreign policy objectives.
Helms-Burton Act.
Protecting human rights.
MFN.
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National Security
World Semiconductor Production
60
50
40
Japan
USA
30
20
10
0
1974
76
78
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80
82
84
86
88
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Retaliation
US Trade Sanctions
Partial List
25
20
15
New
Sanctions
10
98
97
95
0
1993
5
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Afghanistan Italy
Burma
Libya
Canada
Nigeria
China
N. Korea
Cuba
Pakistan
India
Saudi Arabia
Iran
Sudan
Iraq
Syria

Yugoslavia
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Retaliation
Helms-Burton Act
1996.
Allows American to sue foreign firms that
use property in Cuba confiscated from them
after the 1959 revolution.
Backlash
Violates a state’s sovereignty.
Also passed the D’Amato Act - Libya and
Iran.
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Economic Arguments for Intervention
Infant industry.
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
• Brazil auto-makers - 10th largest - wilted when protection eliminated.
Requires government financial assistance.
• If a good investment, global capital markets would invest.
Strategic trade policy.
Government helps raise national income if first-mover
advantage successful.
Government intervention may help domestic firms overcome
first-mover advantage of foreign firms.
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The Impact of Subsidies
(Airbus versus Boeing)
Airplane Orders
800
700
600
500
Boeing
Airbus
400
300
200
100
0
85 86 87 88 89 90 91 92 93 94 95 96 97
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Development of the World
Trading System
Intellectual arguments for free trade:
Adam Smith and David Ricardo.
Free trade as government policy:
Britain’s (1846) repeal of the Corn Laws.
Britain continued free trade policy.
Fear of trade war.
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World War I to World War II
1918 - 1939
Great Depression
US stock market collapse
Smoot-Hawley (1930)
• US had positive trade balance with world
• Foreign response was to impose own barriers
• US exports tumbled
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General Agreement on Tariffs
and Trade
WWII allies want international organization in trade
arena similar to UN in political arena.
GATT proposed by US in 1947 as step toward ITO.
1948: Havana Conference.
Failed charter for the International Trade
Organization.
GATT
19 original members
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GATT
Multilateral agreement: objective is to
liberalize trade by eliminating tariffs, subsidies,
import quotas, etc.
Used ‘rounds’ to gradually reduce trade
barriers.
Generalized System of Preferences
MFN status
Products of LDCs are given duty free
access to IDCs.
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GATT Negotiating Rounds
Geneva 947
Annecy 1949
Torquay 1950-51
Geneva 1956
Dillon 1960-62
Kennedy 1964-67
Tokyo 1973-79
Uruguay 1986-94
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23
13
38
26
45
62
99
117
Growth Under GATT
9.0
%
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
1953-63
1963-73
World Trade
World Income
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Average Reduction in US Tariff
Rates 1947 - 85
120
Index
Pre-Geneva
Tariff = 100
100
80
60
40
20
To
ky
o
K
en
ne
dy
illo
n
D
G
en
ev
a
ay
To
rq
u
An
n
ec
ev
a
G
en
ev
a
en
G
Pr
e-
Figure 5.1
y
0
GATT Negotiating Rounds
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GATT- Disturbing Trends
1980 - 1990s
Increase power of Japan’s economic
machine.
US trade deficit.
GATT circumvented by many countries.
VERs
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Uruguay Round
Most comprehensive trade agreement in
history.
Created the World Trade Organization.
Impacted:
Agriculture subsidies (stumbling block: US/EU).
Applied GATT rules to services and intellectual
property.
Strengthened GATT monitoring and
enforcement.
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USA
France
GB
Germany
Italy
Japan
Spain
Holland
Belgium
90
80
70
$Billions 60
50
40
30
20
10
0
Austria
Leading Exporters of Services
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GATT Criticisms
Economic theories don’t fit the ‘real world’
model.
US global preeminence has declined.
Shift from cutting tariffs to eliminating
non-tariff barriers angered countries.
‘National Treatment’ or ‘Most Favored
Nation’ status results in inequalities.
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Impact of GATT
Currently, >120 members.
Represents 90% of world trade.
9 of 10 disputes satisfactorily settled.
Tariff reduction from 40% to 5%.
Trade volume of manufactured goods has
increased 20 times.
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World Trade Organization
Umbrella organization for:
GATT
Services
Intellectual property
154 Rue de Lausanne, Geneva
Responsibility for trade arbitration:
Reports adopted unless specifically rejected.
After appeal, fail to comply can result in
compensation to injured country or trade
sanctions.
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WTO -World Policeman?
104 disputes brought to WTO in first three
years.
196 handled by GATT during its 50 year
history.
US is biggest WTO user - 34 disputes.
Big wins - beef - bananas
Big loss - Kodak
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WTO - Leading Victories
Telecommunications
68 countries (90%) of world
telecommunications revenues
Pledged to open their markets
to fair competition
Financial Services
95% of financial services market
102 countries will open,
to varying degrees, their markets.
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Sovereignty an Issue?
Still protected
No change to rights or obligations w/o US
consent
No US laws changed by WTO
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