Free Trade? Fair Trade? (based on chapter 3 of Stiglitz)

Free Trade? Fair Trade?

(based on chapter 3 of Stiglitz)

Agriculture Subsidies

• “The aggregate agriculture subsidies of the US, EU, and Japan (including hidden subsidies, such as water), if they do not actually exceed the total income of sub-Saharan Africa, amount to at least 75% of that region’s income.” (Stiglitz, MGW, p.85)

• “The US is the world’s largest cotton exporter, Some 25,000 very rich cotton farmers get to divide $3 billion to $4billion in subsidies” (Stiglitz MGW, p.85)

Sub-Sahara Africa isn’t tiny!

Tariff Escalation

• Can agricultural countries can the fruit and vegetables they grow and earn more than they make from exporting raw produce?

• No, because developed countries design their tariffs in a way that discourages this by placing higher tariffs on manufactured goods than on raw materials.

Tariff Escalation

• Suppose EU does not produce orange but has an orange processing industry.

• It sets zero tariff rate on orange but 25% tariff rate on processed orange (e.g., orange juice).

• Suppose orange is the only input to juice and one kg of orange makes one cup of juice.

• Suppose world prices are $1 and $2 respectively.

• The effective rate of protection on juice is 50%.

Service Trade

• The Uruguay Round expanded trade negotiations into the area of services.

• It covered liberalization in services such as banking, insurance, and information technology, while leaving unskilled services, such as shipping and construction, off the agenda.

• The US, and some other 40 countries, have laws requiring the use of local ships for transporting goods domestically.

Service Trade

• The Jones Act of 1920 requires not only the ships be owned by Americans but that they be built in American shipyards and manned by Americans.

• It was estimated that as far as 1986, the Jones Act cost the America US$250,000 for every job in the shipping industry it saved.

Nontariff Barriers: Safeguards

• Safeguards—temporary tariffs that are supposed to help a country adjust as it faces an unanticipated large increase in the level of imports, a “surge.”– a real increase in imports (an absolute increase), or– an increase in the imports’ share of a shrinking

market, even if the import quantity has not increased (relative increase).

• Safeguards are usually seen as responses to fair trade behavior, as opposed to responses to unfair trade practices such as dumping or subsidy

• Supposed to be used only in very specific circumstances, with compensation (or accepting retaliation from exporting countries), and on a universal basis, i.e. a member restricting imports for safeguard purposes will have to restrict imports from all other countries.


• According to the WTO statistics,

• Since 1995, India reported the largest number of measures (9), followed by Chile and Turkey (7 each), followed by Jordon and the US (6 each).

• Source: http://www.wto.org/english/tratop_e/safeg_e/safeg_e.htm

95-07 02 03 04 05 06 07

Investigation notified

159 34 15 14 7 13 4

imposed 82 14 15 6 6 7 4

http://www.wto.org/english/tratop_e/safeg_e/safeg_e.htm


• A safeguard measure should not last more than four years, extendable up to eight years. Measures imposed for more than a year must be progressively liberalized.

• The exporting country, in absence of compensation, has to wait for three years after the measure was introduced before it can retaliate— e.g., if it is taken as a result of an increase in the quantity of imports from the exporting country.

• Exceptions to this non-discriminatory rule are provided for in the Agreement on Safeguards itself as well as in some ad hoc agreements. In this last respect it is worthwhile noting that China has accepted that discriminatory safeguards may be imposed on its exports to other WTO members until 2013.


• But they are frequently abused by developed countries

• E.g. Safeguard protection by the US and European countries from the surge of textile imports after the elimination of textile quota in January 2005

• The use was not justified because during the ten-year transition period they should have gradually phased out protection

Nontariff Barriers: Anti-Dumping Duties

• In international trade law, dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is – Either below the price it charges in its home market– Or below its costs of production.

• A standard technical definition of dumping is the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market.

• Anti-dumping duties—designed to offset injurious dumping

• (Countervailing duties—designed to offset injurious subsidization)


• The WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry.

• In the US, domestic firms can file an antidumping petition to the Department of Commerce, which determines “less than fair value” and the International Trade Commission, which determines “injury.”

• If the domestic industry is able to establish it is being injuried by the dumping, then antidumping duties are imposed on goods imported from the dumpers’ country at a percentage rate calculated to counteract the dumping margin.


• Dumping in the form of price discrimination needs not be bad, and is seen as a normal business practice for domestic products

• No firms will sell below costs for a long period of time unless it can drive out competitors. (That is, predatory pricing)

• Anti-trust law is to take care of this.• Schizophrenic in treating domestic

competition and foreign competition


• Under American law, for charges of predatory pricing to be sustained, it has to be shown that there must be the prospect not only of monopolization but also of maintaining that monopoly long enough to recoup the losses.

• But American law on competition from international firms does not recognize this basic economic logic.

• In the case of non-market economy (e.g., China), the costs used to calculate whether goods are being dumped are not the actual costs, but what the costs would be in some surrogate country.

• A classic case: In the 80’s, the US levied dumping duties against Polish golf carts , using Canada as the surrogate country. But Canada did not produce golf carts!

Proposed remedies made by J. Stiglitz

• Restricting bilateral free trade agreements• 3-tiered system—a country allows free trade for

goods from less developed countries and is able to have protection against goods from more developed countries

• The agenda should remain narrowly focused• Improve openness in negotiation• Improve the dispute settlement mechanism—

allowing successful complainant countries to sell their retaliation rights

Is free trade necessarily good?

• Developed countries underwent a stage of protectionism before they began to embrace freer trade

• Documented in Chang Ha-Joon (2002), Kicking Away the Ladder: Development Strategy in Historical Perspective

• This history is not honestly told to developing countries• An infant industry needs protection before maturing

enough to compete with foreign firms (infant industry argument)

• Counterargument: under protection, the industry never gets mature because of private interest lobbying!

• Remedy: same tariff rate across the board

External Economies suggest that some government protection may be good


• Restricting bilateral free trade agreements– After Cancun failure, the US announce it would push

for bilateral trade agreements. – US has signed bilateral free trade agreements with

Jordan (2001), Australia (2004), Chile (2004), Singapore (2004), Bahrain (2006), Morocco (2006), Oman (2006), Korea (pending), and Peru (2008)

– But in bilateral bargaining, the balance of power between the US and the developing countries is even more lopsided, and the agreements signed so far reflect that.


– US has succeeded in getting some provisions into bilateral agreements that if failed to get into the Doha Round of talks, such as strengthened intellectual property rights and capital market liberalization.

– Sometimes developing countries signed these agreements under illusion, and sometimes out of fear.

– Bilateral trade agreements should be strongly discouraged, at the minimum, an independent international panel should judge a bilateral agreement lead to more trade diversion than trade creation. If it does, the agreement should not be allowed.

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Free Trade? Fair Trade? (based on chapter 3 of Stiglitz)