TRADE AND GLOBALIZATION

1. TRADE AND GLOBALIZATION

2. TRADE LIBERALIZATION • HAS BECOME THE FOCAL POINT OF CRITICS OF GLOBALIZATION—SEATTLE RIOTS • BUT HAS, AT THE SAME TIME, BECOME CENTRAL TO BOTH DEMOCRATIC AND REPUBLICAN ADMINISTRATIONS • NAFTA AND URUGUAY ROUND VIEWED AS GREAT ACHIEVEMENTS OF CLINTON • FTAA AND DOHA HAVE BECOME CENTRAL TO BUSH

3. OUTLINE • EVALUATING ARGUMENTS FOR TRADE LIBERALIZATION • DOES IT PRODUCE GROWTH? • DOES IT REDUCE POVERTY? • DOES IT CREATE INEQUALITY? • WHY IS THERE SUCH OPPOSITION TO TRADE LIBERALIZATION? • THE IMBALANCES OF PREVIOUS ROUNDS OF TRADE NEGOTIATIONS AND PROSPECTS FOR THE “DEVELOPMENT ROUND”—KEY ISSUES • POLITICS AND PROCESSES OF TRADE NEGOTIATIONS

4. ADVOCATES OF TRADE LIBERALIZATION • ECONOMISTS HAVE LONG ARGUED THAT FREE TRADE IS PARETO IMPROVING • EVEN “UNILATERAL DISARMAMENT” IS DESIRABLE • “CORRECT ARGUMENT”: INCOMES ARE INCREASED BY TAKING ADVANTAGE OF COMPARATIVE ADVANTAGE AND ECONOMIES OF SCOPE • Trade liberalization is good because it improves incentives - Trade barriers often can be a source of monopoly. • BAD ARGUMENT: TRADE CREATES JOBS • EMPLOYMENT RESPONSIBILITY OF MONETARY AND FISCAL POLICY

5. UNFORTUNATELY, MOST GOVERNMENTS BELIEVE “TRADE IS GOOD, BUT IMPORTS ARE BAD” • IMPORTS DESTROY JOBS • AND US OFTEN SEEMS TO BELIEVE THAT IF ANY OTHER COUNTRY UNDERCUTS US, IT MUST BE ENGAGED IN UNFAIR TRADE PRACTICES • DOES NOT UNDERSTAND PRINCIPLES OF COMPARATIVE ADVANTAGE

6. PUZZLE IF TRADE IS, IN PRINCIPLE, PARETO IMPROVEMENT —WHY IS THERE SO MUCH OPPOSITION ---WHY DOES NOT THE U.S. LIBERALIZE UNILATERALLY

7. UNILATERAL LIBERALIZATION • EACH COUNTRY BELIEVE IT CAN USE TRADE NEGOTIATIONS TO PRESSURE OTHERS TO OPEN THEIR MARKETS UP—ENHANCING PROFITS AND INCOME

8. INTERNAL OPPOSITION • WHILE WINNERS COULD IN PRINCIPLE COMPENSATE LOSERS, COMPENSATION IS SELDOM MADE, • TRADE LIBERALIZATION DOES MAKE SOME PEOPLE WORSE OFF • BUT MORE IMPORTANTLY CONDITIONS UNDER WHICH TRADE LIBERALIZATION IS WELFARE ENHANCING IS HIGHLY RESTRICTIVE • AND TYPICALLY NOT SATISFIED IN DEVELOPING COUNTRIES

9. GAINS TO TRADE • WHILE IMPORTANT, ALMOST SURELY EXAGERRATED • MUCH OF “PRODUCTION” TODAY IS IN SERVICE SECTOR • SERVICE SECTOR REQUIRES LOCAL KNOWLEDGE

10. WHY TRADE LIBERALIZATION MAY NOT IMPROVE WELFARE • EXPOSES COUNTRIES TO MORE RISKS • WITH QUOTAS COUNTRIES LESS BUFFETED BY EXTERNAL PRICE SHOCKS • MARKETS FOR RISK IMPERFECT • ESPECIALLY IN DEVELOPING COUNTRIES • RESULT IS THAT WELFARE CAN ACTUALLY BE REDUCED • GREATER RISK IMPOSES PARTICULARLY HIGH COSTS ON POOR, ESPECIALLY IN COUNTRIES WITHOUT A SAFETY NET

11. DOES TRADE LIBERALIZATION PROMOTE GROWTH? • STANDARD ARGUMENT IS THAT IT INCREASES EFFICIENCY—ONE TIME GAIN, BUT NOT NECESSARILY SUSTAINED HIGHER GROWTH RATES • MISLEADING ECONOMETRIC STUDIES SUGGEST THAT “GLOBALIZATION” OR “OPENNESS” ASSOCIATED WITH GROWTH

12. PROBLEMS WITH ECOOMETRIC STUDIES • CAUSATION—DOES GROWTH CAUSE TRADE OR VICE VERSA? • CONFUSES ENDOGENOUS VARIABLES WITH EXOGENOUS VARIABLES • BETTER TO LOOK AT TARIFFS • DOES TRADE LIBERALIZATION LEAD TO FASTER GROWTH? • ANSWER: PROBABLY NOT IN GENERAL

13. WHY TRADE LIBERALIZATION MAY NOT LEAD TO GROWTH? UNLESS NEW JOBS ARE CREATED, LABOR MOVES FROM LOW PRODUCTIVITY IMPORT COMPETING SECTORS INTO UNEMPLOYMENT, NOT HIGH PRODUCTIVITY EXPORT SECTORS --With IMF austerity programs, high interests rate, difficult to create jobs --result is that there is increased unemployment

14. WHY TRADE LIBERALIZATION MAY BE BAD FOR GROWTH? • IF LIBERALIZATION IS ASSOCIATED WITH GREATER VOLATILITY, THEN “RISK PREMIUM” IN COUNTRY INCREASES, DISCOURAGING INVESTMENT • Replacing quotas with tariffs may actually expose countries to more volatility

15. WHY TRADE LIBERALIZATION MAY BE BAD FOR GROWTH (3)? • TRADE LIBERALIZATION MAY SQUELCH DOMESTIC FINANCIAL INSTITUTIONS • INTERNATIONAL BANKS MAY BE LESS INTERESTED IN LENDING TO SMALL AND MEDIUM SIZED LOCAL BUSINESSES • WHICH ARE PIVOTAL FOR SUCCESS

16. WHY TRADE LIBERALIZATION MAY BE BAD FOR GROWTH (4)? • IMBALANCED TRADE AGENDA RESULTS NOT ONLY IN ADVANCED INDUSTRIAL COUNTRIES GARNERING LION’S SHARE OF BENEFITS, BUT POOREST COUNTRIES ARE ACTUALLY WORSE OFF • SUB-SAHARAN AFRICA’S INCOME WENT DOWN AS A RESULT OF THE URUGUAY ROUND

17. HOW DOES AN IMBALANCED TRADE REGIME HURT DEVELOPING COUNTRIES? • IN URUGUAY ROUND, DEVELOPING COUNTRIES WERE FORCED TO ABANDON SUBSIDIES AND TRADE RESTRICTIONS, BUT DEVELOPED COUNTRIES DID NOT RECIPROCATE (AGRICULTURE) • Average European cow gets a subsidy as large as the subsistence income of billions in developing world

18. --total subsidies exceed income of sub-Saharan Africa --subsidies induce farmers to produce more, higher production lowers global price

19. COTTON • U.S. subsidies exceed value of cotton produced • Benefit 25,000 well off American farmers • Hurt 10 million poor African farmers • Lowering incomes of some African countries by as much as 1 to 2% • More than U.S. foreign assistance to those countries

20. IMPACTS ON POVERTY • BECAUSE TRADE LIBERALIZATION—DONE THE WRONG WAY (TOO FAST, WITHOUT ACCOMPANYING JOB CREATION INITIATIVES) - CAN CREATE UNEMPLOYMENT AND INSTABILITY. IT CAN ALSO INCREASE POVERTY • COST OF INSTABILITY PARTICULARLY BORNE BY POOR

21. TRADE AND INEQUALITY • Basic argument -- given the technology, trade increases demand of the relatively abundant factor and hence increase the price of that abundant factor, lowers price of relatively scarce factor • In the US, unskilled labor is relatively scarce – contributes to higher wage inequality • In developing countries – should work the other way • Perhaps, the impact of technology dominates the outcome

22. II. THE GLOBAL POLICY DEBATE • DOHA CALLED “DEVELOPMENT ROUND” • INTENDED TO RECTIFY IMBALANCES OF THE PAST • CONCERN— DID DOHA LIVE UP TO ITS PROMISES? • PROBLEMS IN TRADE NEGOTIATIONS ILLUSTRATE MANY OF PROBLEMS WITH GLOBALIZATION

23. IMBALANCES • AGRICULTURE • SERVICES— • FINANCIAL SERVICES, U.S. COMPARATIVE ADVANTAGE, LIBERALIZED, NOT MARITIME OR CONSTRUCTION SERVICES • PARTICULARLY IMPORTANT AS IMPORTANCE OF SERVICE SECTOR INCREASES

24. IMBALANCES • FOCUS ON CAPITAL (FINANCIAL SERVICES), NOT LABOR; ON SKILLED LABOR INTENSIVE GOODS/SERVICES MORE THAN UNSKILLED LABOR INTENSIVE • Skilled workers can move across borders more easily than unskilled workers • Asymmetries affect wage bargaining, taxation, therefore degree of inequality • Gains to global efficiency far greater from labor mobility than from capital mobility • Imbalances in abilities to bargain and effectively implement policies in ways which work to their advantage

25. OTHER ISSUES • NON-TARIFF BARRIERS • GOING BEYOND TRADITIONAL TRADE ISSUES • INTELLECTUAL PROPERTY RIGHTS • INVESTMENT PROTECTIONS • FINANCIAL SERVICES • CAPITAL MARKETNON TARIFF BARRIERSRALIZATION • PROCESSES OF TRADE NEGOTIATIONS

26. TRADITIONAL ISSUES • AGRICULTURE • EU and US both blame each other • Matters have become worse since 1994 • Progress may only be to return to levels of 1994 • INDUSTRY • Will textile quotas really be eliminated? • Meanwhile, strong demands for developing country elimination of tariffs on other manufactured goods • Issues of “tariff escalation” remain

27. NON-TARIFF BARRIERS • As tariff barriers are reduced, protectionist sentiments look for non-tariff barriers • Dumping duties, countervailing duties, phyto-sanitary conditions • Even less transparent than tariff barriers • US among worse users and abusers

28. DUMPING DUTIES • Supposed to attack “unfair” trade practice—charging below cost • But why would a firm charge below cost? • Only to establish market power • “Predatory pricing” • But double standard: one for goods domestically produced, another for foreign produced goods

29. DUMPING DUTIES • If anti-trust (domestic) standards were used, virtually no cases of dumping would prevail • If “trade” standard is used, most American firms would be found guilty of predating • Implementation particularly “unfair”— • Commerce Department acts as prosecutor, judge and jury • Best information available often results in temporary duties that do irreparable harm • Problems even worse with non-market economies (China) • Surrogate country methodology--Polish Golf carts

30. DISCUSSION IN DEVELOPMENT ROUND FOCUSED ON “FINE TUNING” –NOT FUNDAMENTAL REFORM, SYMMETRIC TREATMENT • US REFUSES TO ENTER MEANINGFUL DISCUSSIONS IN FTAA, SAYING THESE WILL BE DISCUSSED IN DOHA NEGOTIATIONS! • LIMITS GAINS THAT DEVELOPING COUNTRIES WOULD REAP FROM FREE TRADE AGREEMENTS (CHILE—WINE, SALMON)

31. HEALTH AND DISEASES • Used to keep out agricultural goods from abroad • Mexican avocadoes

32. INTELLECTUAL PROPERTY RIGHTS • INTELLECTUAL PROPERTY RIGHTS DIFFERENT FROM ORDINARY TRADE ISSUE—SHOULD NOT BE IN WTO • Gains of developed countries at expense of less developed countries • Argument: necessary to promote innovation • Exaggerates importance of intellectual property • Most research is produced by the academia and the academia is not protected by intellectual property • Mathematical theorems not protected

33. INTELLECTUAL PROPERTY RIGHTS ISSUES • May have adverse effects on innovation • “patents privatize what is a public good.” • Intellectual property rights increase the price of knowledge—the most important input into research • Intellectual property rights should balance concerns of users with those of producers • TRIPS is unbalanced—reflects interests of drug companies • In the 19th century intellectual property was not well protected in the United States, and US stole ideas from abroad. Is U.S. “pulling ladder up after itself”?

34. INTELLECTUAL PROPERTY RIGHTS ISSUES Highly charged issues in developing countries • Access to life savings medicines become critical issue • US lone hold-out • Bio-piracy • Proposed remedies put undue burdens on developing countries

35. FINANCIAL SERVICES • NOT CLEAR THAT DEVELOPING COUNTRIES GAIN • MAY BE ABLE TO PROTECT THEMSELVES THROUGH CRA REQUIREMENTS • BUT SOME QUESTION WHETHER THESE ARE ALLOWED, EVEN IF THEY ENTAIL NATIONAL TREATMENT • ILLUSTRATE—NATIONAL TREATMENT NOT NECESSARILY “FAIR” TREATMENT

36. GOING BEYOND TRADITIONAL TRADE ISSUES • USING TRADE NEGOTIATIONS TO GET WHAT THEY COULD NOT GET IN OTHER FORA • CAPITAL MARKET LIBERALIZATION: • IMF RECOGNIZES RISKS • YET US IS NOW INSISTING THAT IT BE PART OF WTO INVESTMENT AGREEMENT • AND PART OF FREE TRADE AGREEMENTS (CHILE) • OVERWHELMING EVIDENCE THAT IT IS BAD FOR DEVELOPING COUNTRIES

37. INVESTMENT PROTECTIONS • OECD AGREEMENT FAILED • PROBLEMS WITH NAFTA AGREEMENT • KEY ISSUE: WHAT SHOULD BE IN INTERNATIONAL AGREEMENTS? • Issues of externalities • Argument is that investment protections are good for developing countries—attract investment • But if true, do not need to be imposed, developing countries will have incentive to provide appropriate protections • Risk of intruding on concerns of national sovereignty

38. LINKAGES--ENVIRONMENT • Trade policy can affect environment • Be used to enforce environmental agreements • Montreal convention • Especially important, given lack of other enforcement mechanisms • Worry that trade ministers put too little emphasis on environment • Current uncertainties in “WTO” law • Shrimp-Turtle case recognized importance of environment • Could principle be extended to force US to recognize importance of global warming?

39. LINKAGES--LABOR • Developing countries worry about new trade barriers, demands (blue tariffs) • Developed countries worry about unfair competition • Growing consensus—core labor standards • Not imposing particular measures • Different from NAFTA approach—each country must enforce own standards—exploits gap between “legal aspirations” and reality

40. III. BARGAINING AND IMPLEMENTATION ISSUES • DEVELOPING COUNTRIES ARE AT A DISADVANTAGE IN BOTH BARGAINING AND IMPLEMENTATION • DUMPING, INTELLECTUAL PROPERTY RIGHTS • PROBLEMS EXACERBATED BY LACK OF TRANSPARENCY AND EXERCISE OF ECONOMIC POWER • UNFAIR OUTCOMES, EVEN THOUGH EACH COUNTRY HAS A SINGLE VOTE

41. In U.S. trade agreements are increasingly pushed by exporters (Boeing) and those that rely on inexpensive imports (users of steel, retailers) • Irony of U.S. position: • Soon, competing against China’s manufacturing sector will be a lost war • US bargaining lowering manufacturing tariffs mainly benefits China • But will U.S. abide by rule of law?

42. Cyclical movements in protectionist sentiments—grow with economic downturn, blame others for US problems • Already evident in pressure on China to devalue • Though trade deficit related to US macro-mis-mangement

43. In developing country, growing sentiment that “no agreement is better than a bad agreement.” • But while there is widespread opposition to WTO, they benefit from “rule of law” –otherwise, outright exercise of economic power might have resulted in an even more imbalanced trade regime

44. Still, what has happened in trade, illustrates basic discontent with globalization—rules of the game have been made by advanced industrial countries, for their interests, or for the interests of special interests within their country, at the expense of the developing world

45. CONCLUSIONS • Fundamental reforms are required if more equitable, more efficient outcomes are to be achieved • Important for long run economic progress • Will require fundamental changes in approach • More open and more transparent processes • Approaching international agreements with perspectives that we approach domestic policy • Not just what I can get for myself • But also what is fair?