How Free Should Trade Be? Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 Fall 2005

How Free Should Trade Be?

Linda YoungPOLS 400International Political EconomyWilson Hall – Room 1122

Fall 2005

Linda Young, POLS 400, International Political Economy

Tension

Between the gains from trade and other national objectives

A trade-off or an imperative?

Case studies:• trade in genetically modified organisms (GMOs)

• agricultural tariffs and subsidies

• government procurement

• right of establishment


Sanitary and Phytosanitary Agreement of the GATT

Import regulations based on science, use risk assessment

Based on international regulations – not likely to be successfully challenged

Higher standards if consistent

Restrictions: least trade-restricting as possible


GMOs

Trade rules and restrictions based on based on the characteristics of the good in question, not the characteristics of the production process

GMOs have same characteristics in the product –indistinguishable, but a different production process


European Union

• De facto moratorium on imports of GMOs– ended recently with some approvals– approved canned sweet corn – first GMO approved

in 5 years, ‘The maize imports, authorised for a period of 10 years "have been subjected to the most rigorous pre-marketing assessment in the world," according to EU Health and Consumer Protection Commissioner David Byrne.’

– October 2004 – EC approved Monsanto’s Round Up Ready maize for human consumption

• Strict process for approval• Huge controversy with consumers, activists,

environmentalists


US Concerns

• Lost export market for corn – most US corn consumed domestically

• Estimate for corn – around 600-700 million bushels of corn sales lost between 1994-2003, at $2.50-3.50/bushel

• Concern over labeling – should the WTO uphold requirements that all products with more than .9 of 1% of GMO material be labeled as such?


The Question

Given uncertainty, should the WTO have allowed the EU to have a moratorium on imports of GMOs?

Should the EU be forced to modify its regulatory process?


Subsidization of Agriculture

The US, EU and Japan all subsidize agricultural production – at high levels

Movement to de-coupled support, but still high levels of production-inducing support

Cotton case as an example

Should developing countries open their borders more?

OECD Producer Subsidy Equivalents (PSEs)by Country

0

10

20

30

40

50

60

70

80

Australia Canada EU Japan US OECD

Per

cen

t

9%

1997

20%

42%

73%

16%

35%

Additional Information

10%

42%48%

69%

30%

45%

1986-88

Outcomes of the Uruguay Round Agreementon Agriculture (URAA)

Developed countries 6 years: 1995–2000

Developing countries 10 years: 1995–2004

Tariffs average cut for all agricultural products minimum cut per product

–36% –15%

–24% –10%

Domestic support total AMS cuts for sector (base period: 1986–88)

–20%

–13%

Exports value of subsidies subsidized quantities (base period: 1986–90)

–36% –21%

–24% –14%

Least-developed countries do not have to make commitments to reduce tariffs or subsidies.

The base level for tariff cuts was the bound rate before January 1, 1995; or, for unbound tariffs, the actual rate charged in September 1986 when the Uruguay Round began.

The other figures were targets used to calculate countries’ legally-binding “schedules” of commitments.

Source

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

EU US Japan Korea Norway Canada

Mil

lio

n U

S d

oll

ars

Green

Blue

Amber

Note: Data relate to 1998-00 for Canada and Korea, 1999-01 for the EU, Norway and the United States, and 2000-02 for Japan. National currency values converted to U.S. dollars at the average exchange rate applicable to the base period for each country. Source: David Blandford, “Disciplines on Domestic Support in the Doha Round,” Trade Policy Issues Paper 1, The International Agricultural Trade Research Consortium and International Food and Agricultural Trade Policy Council, July 2005, p. 14.

Total Domestic Support


WTO Export SubsidyNotifications (Value), 1996

Source

EU84%

South Africa – 9%

United States – 1%

Rest of World – 2%

Switzerland – 4%


What are developing countries worried about?

Small holdings

Production volatility Food security

Barriers to their exports

Poor infrastructure

Cheap, subsidized “dumped” imports


Case Study of Jamaica

Imports grew from 2000 tons/year 1990-1993 to 4,000 in 1995-1998• EU exporters received four million euros per year in subsidies

Jamaica: substitution of skim milk powder for fresh in dairy industry• Devastating local business, many women-owned businesses

Oxfam claims that trade liberalization in Jamaica (1990) resulted in imports of subsidized EU milk powder

Jamaica: Milk Production, Imports and Consumption (1985-2003)

Source: FAOSTAT. Taken from Mario Jales, “Tariff Reduction, Special Products and Special Safe Guards: An Analysis of the Agricultural Tariff Structures of G-33 Countries,” ICTSD, Geneva, Switzerland, June 2005, p. 26.


What Happened?

Liberalization: 1990s as part of structural adjustment• 1992 Jamaican Commodity Trading Corporation lost

import monopoly• Import tariffs reduced• Subsidies for local producers abolished

Imports actually fell

Per capital consumption fell 41%• 86.8 kg/inhab/year 1986-1990 to 48.6 kg/inhab/year

Imports per capita fell by more than consumption

Other factors to blame

Jamaica: Chicken Meat Production, Imports and Consumption (1985-2003)



Jamaican Jerk Chicken

Jamaica: Vegetable Oil Production, Imports and Consumption (1985-2002)



Imports Did Replace Jamaican Production

• Vegetable oil, onions, potatoes

• Many causes at work: high interest rates on farm loans, less investment in farms, adverse weather, no credit to enable planting

• Should developing countries be able to keep high tariffs as long as developed countries have trade-distorting domestic support?


Government Procurement

• Accounts for 20% GDP – OECD estimates 4,733 billion US$– Close to 80% of 1989 goods and services trade

• All levels of government are large purchasers

• Subtract defense then smaller 8-12% GDP


Government Goals

• Value for money: promoted by open and transparent systems

• Desire to keep government dollars in the economy– price preferences– whole or partial import bans– selective tendering favoring foreign suppliers– technical specifications biased to domestic producers


Buy America Act

Passed in 1933 – preference for American goods over foreign

President has authority to waive – reciprocal agreements

US provides access to other countries in specific agreements, but not generally


Social Policy

Discrimination in favor of regions or groups• Quota for suppliers with particular qualifications• Firms hired to provide services may have to hire

an “equal opportunity officer”


Treatment in GATT/WTO

• Discussed since 1947 – excluded government procurement from national treatment

• Tokyo Round in 1981 – 26 members included agreement on government procurement for contracts over SDR 130,000 for central government entities – not inc. defense

• URA in 1996 – plurilateral agreement – European Commission and 12 other countries– Non-discrimination: must give foreign suppliers treat no

less favorable than to own suppliers– Must not treat local supplier less favorably due to a

foreign affiliation and ownership


URA Agreement (con’t)

• US kept small business program as exception

• Canada excluded procurement by provincial and local government

• Positive lists – only what's on the list is covered (different than exceptions)


What’s more important?

Domestic policies – transparency, no corruption, competition

Trade liberalization


Your opinions:

What would it be like to have government goods procured by imports? School lunches from Canada, state highway patrol cars from Japan, and etc?


Foreign Direct Investment (FDI): The Right of Establishment

OECD negotiations 1995 – failed in 1998• OECD like minded countries, not WTO• Developing countries could have signed

Multilateral Agreement on Investment• We discuss foreign direct investment only• Pre-establishment rights, so that governments

could not – Raise barriers to foreign investors seeking

to establish subsidiaries– Could not discriminate once established

Governments could file exceptions


National Treatment of FDI

Draft clause in the OECD “Each contracting party shall accord to investors of another Contracting Party and to the investments, treatment no less favorable than the treatment it accords [in like circumstances] to its own investors and their investment with respect to the establishment, acquisition, expansion, operation, operation, management, maintenance, use, enjoyment, and sale or other disposition of investments”

Source: Edward M. Graham, Fighting the Wrong Enemy, Institute of International Economics, September 2000, p. 58.


Do we need it? FDI is growing anyway

Total stock of FDI increased 6 times between 1985-1998


Examples of Barriers to FDI

Restrictions on foreign ownership• Limiting shares of equity ownership for

non-residents• For example, airlines in EU and North America• Telecommunications in Japan• Iceland bans foreign ownership in fishing and

energy sectors• Mexico (oil sector)


Examples of Barriers to FDI (con’t)

Screening and approval procedures• Stipulations of demonstrating economic benefits

– in Japan, and Mexico for ownership of more than 49%

Constraints on foreign personnel and operational freedom

• Nationals must be majority on board of directors– Insurance companies in EU, financial services

in Canada


FDI Restrictions in OECD Countries, 1998-2000: Breakdown by Type of Restriction1

Documents

How Free Should Trade Be? Linda Young POLS 400 International Political Economy Wilson Hall – Room 1122 Fall 2005