Lecture IV: Political Economy of International Trade

Introduction

• Free trade: refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country.

Instruments of Trade Policy: Tariffs and Subsidies

Instrument of trade policy:1. Tariffs• Subsidies• Import quotas• Voluntary export restraints• Local content requirements• Administrative policies• Anti-dumping policies

Case for Government Intervention: Political Arguments for Intervention

• Political arguments for intervention:1. Protecting jobs and industries (Bush raised steel tariffs as it helped him

win votes for election in states that had a steel industry)• National security• Retaliation• Protecting consumers: • Furthering foreign policy objectives: Japan, Korea, Germany• Protecting Human rights: Carpet and sports industry

Economic arguments for intervention

1. Infant industry argument: many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries.

2.Strategic Trade Policy: 1. A government can help raise national income if it can somehow

ensure that the firm or firms to gain first-mover advantages in such an industry are domestic rather than foreign enterprises.

2. It may pay government to intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign firms that have already reaped FMA

20th century trade

• Britain in the 19th century was the largest exporter. • Did away with the CORN LAWS (made to protect

local corn producers) • By 1930’s Great Depression occurred in which

economy failed to rise up after WWI. • In USA Smoot-Hawley Act was passed to erect

huge tariff barriers• Other nations retaliated. • “Beggar thy neighbor” approach

GATT

• After WWII: USA emerged victorious – militarily as well as economically.

• GATT established in 1947 – 1979)• It was a multilateral agreement whose objective was

to liberalize trade by eliminating tariffs, subsidies, import quotas and like (reductions were made in eight different rounds).

• Grew from 19 to 120 members by the time it was suspended by the WTO

• Economy grew throughout much of GATT period

Rise of Japan

• By 1980’s the trading system of GATT came under strain for greater protectionism. o Economis success of Japan (at WWII, beginning of GATT

Japan was in shambles. By 1980’s it was the 2nd biggest economy)

o USA was in persistent trade deficits. (including a 45$ billion trade deficit with Japan)

o Many nations found ways to get around GATT [ Between Japan and USA. VERs. Value of imports affected by VERs in USA incraesed by 23% between 1981 – 1986 – exporting countries agreed to VERs (non-tariff barriers) so they wouldn’t have to face more punishing tariffs).

Uruguay Round

• Most ambitious round• GATT previously covered only goods and

commoditieso UR covered trade in services as well

• Dragged for 7 years before agreement reached in 1993.

• Aside from many other tariff reductioins, WTO would be created to implement the GATT round

WTO

• WTO was armed with an arbitration panel that can ordain compensation for nations that have been wrong. WTO was given TEETH (something that GATT did not have). o The arbitration panel’s verdict is binding

• Has 148 members.

WTO’s successes

• 1997 WTO brokered deal to get countries to open the telecom markets

• December 1997 an agreement to liberalize cross-border trade in financial services.

Hurdles for WTO

• EU and US could not agree whether to endorse the aim of ultimately eliminating subsidies on agri exporters. o EU had strong farmers lobbies and long history of subsidies to

farmers was unwilling to agree• US wanted to write ‘basic labor rights’ into the law of

the world trading system. o US wanted WTO to allow governments to impose tariffs on

goods imported from countries that did not abide by what the US saw as fair labor practices.

o Developing countries rejected such attempts

Disputes from groups

A variety of groups such as:• Environmentalists (concerned over deforestation)• Human Rights groups (failure to protect from child

labor)• Labor unions (loss of jobs)

Rejected WTO saying it was an undemocratic institution that usurped rights of nations (their sovereignty).

Issues

• Anti-dumping policies: as WTO allows leeway for countries to impose them, but local businesses often use their political process to protect themselves from competition (even fair competition).

• Protectionism in Agriculture: non-agri tariffs are often 10 times lower than agri-tariffs that developed nations put up

• Protecting Intellectual Property• Expanded market access: South Korea for

example kept high rates for importing transportation equipment and electrical machinery

Doha Rounds

• Talks to help resolve the issues from the previous slide.

Lecture IV: Case Studies