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8/12/2019 Session 3 (i)
1/34
Governments and
Trade
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McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
5-2
Session FocusThe political reality offree tradeis that while nationsare nominally committed to it, they intervene and takeactions to protect the interests of politically important
groups.This session explores the political and economicreasons for intervention; to restrict imports andexpand exports, but, more recently, for socialreasons.
The session describes the range of interventioninstruments used by governments and considers thecase for free trade in light of government actions.
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The 7 Instruments of Trade Policy
AntidumpingDuties
Local
ContentRequirements
Tariffs
VoluntaryExports
Restraints
Subsidies
AdministrativePolicies
ImportQuotas
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Subsidies
Governmentpayment to a
domestic producerCash Grants
Tax Breaks
Low InterestLoans
GovernmentEquity
Participation
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Subsidies
Agriculture
1.Keeps inefficientfarmers in business.
2.Encourages productionof subsidized products.
3.Produce products grownmore cheaply elsewhere.
4.Reduces agriculturetrade.
Helps domestic
producers tocompete internationally.
Paid by taxingindividuals
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Import Quotas and Voluntary ExportRestraints
Direct restrictionon the quantity of a
good that canbe imported intoa country.
Import Quotas
Quota on trade imposed
by the exportingcountry at the request
of the importingcountrys government.
VERs
Helps
producers
Quotarent
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Local Content Requirements
A specificfraction of a
good must bedomestically
produced.
A specific
fraction of agood must bedomestically
produced.
Physicalamount
Value
Widely usedby developingcountries to
develop theirmanufacturing
base.
Used by developedcountries to
protect local jobsand industry from
foreign competition.
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Administrative PoliciesBureaucratic rules designed to make it difficult for importsto enter a country.
Japanese masters in imposing rules.
Tulip bulbs.
Federal Express.
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Antidumping Policies
Selling goods into a foreign market below productioncosts, or
Selling below fair market value.
Used to unload excess production.Or, predatory pricing.
Antidumping policies are used to punish foreign firms.Protect local industry from unfair practices.
Impose countervailing duties.
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Political Arguments for Intervention
FurtherForeign Policy
Objectives
ProtectIndustryand Jobs.
NationalSecurity
Retaliation
ProtectConsumers
ProtectHumanRights
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ProtectIndustryand Jobs.
Most common political argument.
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Retaliation
Risky strategy. If governmentfails to heed warnings and
imposes its own higher tariffs,the result is higher tariffs allaround and a correspondingeconomic loss.
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RetaliationUS Trade Sanctions
0
5
10
15
20
25
1993 95 97 99
New
Sanctions
Afghanistan Italy
Burma Libya
Canada Nigeria
China N. Korea
Cuba Pakistan
India Saudi Arabia
Iran SudanIraq Syria
Yugoslavia
Partial List
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ProtectConsumers
Battleground for biotechnologysuch as hormone-treatedbeef and genetically altered crops.
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FurtherForeign PolicyObjectives
Used to build relations with
another country or punish it(so-called rogue states). Policyis unilateral and easily defeatedby other countries ignoring it.
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ProtectHumanRights
Basis for the use of MostFavored Nation status topersuade China to change itspositions on human rights.
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Economic Arguments for Intervention
InfantIndustry
StrategicTradePolicy
Infant industry is the oldest economicargument for government intervention,dating to 1792 and Alexander Hamilton.
Protect developing countrys new industryfrom developed countries betterestablished industries. Recognized byGATT.
Strategic trade policy can help a
firm gain first mover advantagesor overcome barriers created by adifferent (foreign) first mover.
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Revised Case for Free Trade
Paul Krugman, MIT economist, argues that strategictrade policies can lead to trade wars. The best way tohandle disputes is to work to establish rules that minimizetrade-distorting subsidies - a function of the World
Trade Organization.
He also argues that government intervention usually favorsspecial interest groups that distort the subsidy to theirown ends.
Therefore, a blanket policy of free trade, with exceptionsgranted only under extreme pressure may be the bestpolicy that the country is likely to get.
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Development of the World Trading
System
Intellectual arguments for free trade:
Adam Smithand David Ricardo.Free trade as government policy:
Britains (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 collapseSmoot-Hawley Act (1930)
US had positive trade balance with world
Act imposes tariffs to protect U.S. firms.
Foreign response was to impose own barriersUS exports tumbled
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General Agreement on Tariffs and
Trade
WWII allies wanted international organization in trade arenasimilar 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 grew to 120 nations by the time it wassuperceded by the WTO.
GATT members agreed not to raise tariffs above negotiatedrates.
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GATT Negotiating Rounds
Geneva 1947 23
Annecy 1949 13
Torquay 1950-51 38
Geneva 1956 26Dillon 1960-62 45
Kennedy 1964-67 62
Tokyo 1973-79 99
Uruguay 1986-94 117
9.08.58.07.5
7.06.56.05.55.0
4.54.0
World Trade
World Income
1953-63 1963-73
Annual Growth UnderGATT
%
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Average Reduction in US Tariff Rates1947 - 85
0
20
40
60
80
100
120
Pre-G
eneva
Geneva
Anne
cy
Torquay
Geneva
Dillo
n
Kennedy
Toky
o
IndexPre-GenevaTariff = 100
GATT Negotiating Rounds
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1980-1993: Disturbing Trends
Pressures for greater protectionism:
Japans economic success.Worlds second largest economy.
Worlds largest exporter.
The U.S.s persistent trade deficit.
Many countries had found ways to avoid GATTrestrictions.
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Most comprehensive trade agreement in history.Created the World Trade Organization.
Impacted:
Agriculture subsidies (stumbling block:US/EU).
Applied GATT rules to services andintellectual property.
Strengthened GATT monitoring andenforcement.
Uruguay Round
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Umbrella organization for:
GATT
ServicesIntellectual property
Responsibility for trade arbitration:
Reports adopted unless specifically rejected.
After appeal, fail to comply can result in compensation toinjured country or trade sanctions.
World Trade Organization
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WTO
145 members.Between 1995 and 2000, 213 disputes brought beforethe WTO.Significant victories:
Telecommunications
68 countries (90%) of worldtelecommunications revenuesPledged to open their marketsto fair competition
Financial Services
95% of financial services market102 countries will open, to varyingdegrees, their markets.
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WTO Cancun
Failure of Countries to Agree on Goals
Private Groups & Unions Oppose faceless Organization
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STRUCTURE OF WTOThe MinisterialConference
The General CouncilThe DisputeSettlement BodyThe Trade Policy
Review BodyCouncils for Trade inGoods,Services &TRIPS
Subsidiary Bodies
Committees on
Trade andDevelopment, BOPrestrictions,Budge
t, Finance &Administration
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THE SECRETARIATHeaded by Director General
D-G to be appointed by Ministerial Conference
Other appointments by D-G in accordance withrules framed by Ministerial Conference
Responsibility of the Secretariat to beInternational in character.No authority external
to WTO to direct the activities of the staffincluding Governments of the nations they arecitizens of.
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Salient Features of Uruguay RoundFormation of WTO
IndustrialProducts(Market access)
Agricultural ProductsServices
Textiles & Clothing
Intellectual Property
SubsidiesTechnical Barriers
Anti-Dumping rules
Trade Related InvestmentMeasures
Government Procurement
Safeguard ActionsBalance of PaymentsProvisions
Dispute Settlement
Coherence in Global PolicyMaking
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SubsidiesProhibited-Contingent upon export performance
Actionable-Adverse effect on other countries
Non actionable-Industrial research, Pre-competitive development
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Intellectual PropertyTo grant national treatment
To provide certain minimum standards of
protectionInstitute procedures and remedies under nationallaws