The Political Economy of International Trade

1. The Political Economy of International Trade

2. 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

3. Instruments of Trade Policy • Tariffs • Subsidies • Import quotas • Voluntary export restraints • Local content requirements • Administrative policies • Anti-dumping policies

4. Tariffs • 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 don’t develop new skills

5. 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

6. Quotas and Voluntary Restraints • Import quota: government specifies how much of what product can be imported from which countries • Voluntary export restraint: how much of what product can be exported to which countries imposed officially or unofficially Local Content Requirements • A product’s certain % has to be produced domestically with local raw materials • Used by LDCs to • Achieve technology transfer, skills transfer • Shift manufacturing to a higher technological level • Similar effects to those of import quotas

7. Anti-dumping Policies Dumping: selling goods in an overseas market • At below their production costs or • Below “fair market value” • Anti-dumping policies punish producers who dump and protect domestic producers • Administrative policies • Bureaucratic rules that make it difficult for imports to enter a country

8. Political Arguments for Intervention • National security • Individual industries and jobs protected • Retaliation • Consumer protection (health, safety) • Furthering foreign policy objectives Economic Arguments for Intervention Infant industry protection Strategic trade policy

9. Revised Case for Free Trade • Retaliation and Trade War • Krugman • Strategic trade policy is tantamount to “beggar thy neighbor” policy • How to respond if one’s competitive nation is subsidizing specific industries? • Domestic politics • Governments often do not act in the national interest when they intervene • Politically important groups influence them

10. 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 resolve disputes bilaterally with • China--new WTO member • Japan--old WTO member • Trade blocks proliferating • Anti- free trade movement

11. The Global Trading System • Adam Smith to Great Depression • Britain adopts free trade in 1846 • Smoot-Hawley act (US) 1930 aimed at employment protection one cause of the Great Depression • 1947-1979: 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

12. GATT • Pre-WWII protectionism • Smoot-Hawley +57% import tariffs (1930) • UK, France, Italy followed suit • world depression in ‘30s • Havana 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

13. GATT/WTO • MFN • any 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 LDCs • regional arrangements such as NAFTA • countries still use NTBs, other loopholes (peanut waiver, 1955)

14. 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

15. 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 through bilateral 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

17. “So what” for Business” • Trade barriers affect firm strategy • Government policy has direct impact on a firm’s business