political economy of trade ch. 6

8/3/2019 Political Economy of Trade Ch. 6

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The Political Economy of International Trade


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Governments and Trade

More often governments manage trade

( level the playing-field)

Restriction of imports: protectionist

intervention

Promotion of exports

Trade promotion and FDI incentives

Free-trade Good or Bad?

Social issues related to free-trade

Implications for business and individual groups


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Instruments of Trade Policy

Tariffs

Subsidies

Import quotasVoluntary export

restraints

Local contentrequirements

Administrative policies

Anti-dumping policies


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Taxes levied on imports (also sometimes on exports)Specific tariff: fixed charge for each good imported

Ad valorem tariff: a % of imported goods value

Who gains:

Government

Domestic producers (at least in the short run)

Employees of protected industries keep their jobs

Who loses:Consumers who pay higher prices

The economy which remains inefficient

Employees of protected industries who dont

develop new skills

Tariffs


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Subsidies

Government support to domestic producers Cash grants, low-interest loans, tax breaks, equity

participation, government purchases

Aim to achieve lower costs to

Compete against cheaper imports Gain export markets

Increase domestic employment

Help local producers achieve first-mover advantage in

emerging industries Governments

Tax individuals to pay for subsidies

Consumers buy more expensive goods with lower

disposable incomes


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Import quota: government specifies how much ofwhat product can be imported from which countries

Voluntary export restraint: how much of what product canbe exported to which countries imposed officially orunofficially

Local Content RequirementsA products certain % has to be produced domestically withlocal raw materials

Used by LDCs toAchieve technology transfer, skills transferShift manufacturing to a higher technological level

Similar effects to those of import quotas

Quotas and Voluntary Restraints


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Administrative policies Bureaucratic rules that make it difficult

for imports to enter a country

Dumping: selling goods in an overseas marketAt below their production costs orBelow fair market value

Anti-dumping policies punish

producers who dump and protectdomestic producers

Anti-dumping Policies


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Political Arguments for Intervention

National security Individual industries and jobs

protected

Retaliation

Consumer protection (health, safety)

Furthering foreign policy objectives

Economic Arguments for InterventionInfant industry protection

Strategic trade policy


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Revised Case for Free Trade

Retaliation and Trade War Krugman

Strategic trade policy is tantamount to beggar

thy neighbor policy How to respond if ones competitive nation is

subsidizing specific industries?

Domestic politics

Governments often do not act in the nationalinterest when they intervene

Politically important groups influence them


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International Trade Cooperation (!)

U.S.A. and:

foreign companies trading with Cuba

any company dealing with Iran - N. Korea

W.T.O. in place but... US prefers to resolvedisputes bilaterally with

China--new WTO member

Japan--old WTO member

Trade blocks proliferating

Anti- free trade movement


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The Global Trading System

Adam Smith to Great Depression

Britain adopts free trade in 1846

Smoot-Hawley act (US) 1930 aimed atemployment protection one cause of the Great

Depression1947-1979: GATT, Trade Liberalization,

Economic Growth

1980-1993: GATT needs fixing

Uruguay round of GATT negotiations (1986-1993)

Creation of WTO with powers to implement

trade agreements


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GATT

Pre-WWII protectionism Smoot-Hawley +57% import tariffs (1930)

UK, France, Italy followed suit

world depression in 30sHavana Conference (1947) -> GATT

125 countries by 1994

small staff in Geneva

tariffs fm 40% in 47 to 3% in 95

trade 15x to $6.75 trillion in 92

WTO superceded GATT in 1995


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GATT/WTO

MFNany preferential treatment offered to one member

country must be extended to all other members

members can extend MFN to non-members (e.g.,China)

Exceptions

GSP (Generalized System of Preferences) for

LDCsregional arrangements such as NAFTA

countries still use NTBs, other loopholes (peanutwaiver, 1955)


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Uruguay Round of GATT negotiations

Tariffs cut further

Agricultural Policy Modified:

cut price supports 20%, export subsidies 36%

For this policy: USA, Argentina, Australia, Canada

Anti: Japan, Korea, India, EU

Services given prominence: developed set of

principles Intellectual Property Rights protected further:

patents, copyrights, trademarks, brand names

WTO created: to implement Uruguay round,

controversial


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WTO: Experience WTO as a global policeman -- 146 members by 04

1995-2004: >304 trade cases brought to WTO for decision

Three quarters had been resolved by late 2003 throughbilateral consultations

WTO recommendations have been adopted

GATT dealt with 196 cases from 1947-1995! WTO telecommunications agreement 1998 (effect)

WTO Financial Services agreement 1999 (effect)

The WTO in Seattle

Aim: reduce barriers to agricultural trade, trade &investment services

Protests

Disagreements

Environmental issues

Doha round and unresolved issues


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So what for Business

Trade barriers affect firm

strategy

Government policy has direct

impact on a firms business

political economy of trade ch. 6

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