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Let me introduce myself…
• Professor Alan Matthews• Professor Emeritus of
European Agricultural Policy in the Department of Economics
• Former Director, Institute for International Integration Studies
• Particular research interests in agriculture, trade and development
Outline for my half course
• Trade and protectionism
• Regaining international competitiveness
• Shaping the EU budget
• EU climate change policy
• Future issues for the global economy
Trade and Protectionism
Session 6Macroeconomic Concepts and Issues
MSc Economic Policy StudiesAlan Matthews
The policy context
• The WTO Doha Round of multilateral trade negotiations– Completed this year?– Richard Baldwin’s VoxEU commentary
• New EU trade policy late 2010– Trade, Growth and World Affairs
• Commodity market turmoil
• Challenges/opportunities for Ireland
The debate on protectionism
• BBC News on the dangers of trade protectionism• Financial Times website on new protectionism• Wall Street Journal “Nations rush to establish new
barriers to trade” 6 Feb 2009• David McWilliams on protectionism
– (start at 3.30 mins)
• Paul Krugman on the second-best case for protectionism
Learning objectives
• Describe some of the stylised facts about trends in international trade
• Review our understanding of the gains from trade• Identify barriers to trade and trade protectionism• Explain the role of the WTO in setting trade rules
and encouraging further trade liberalisation• Discuss Ireland’s trade policy objectives in the
context of the global economic crisis
Section 1.
Stylised facts about trade
Ireland’s trade profile in goods
Source: WTO Trade Profile
Ireland’s trade profile in services
Source: WTO Trade Profile
Global trade – stylised facts
• Most trade takes place between the North America, Europe and East Asia
• Some developing countries now important suppliers of manufactured exports
• Shift in importance from commodities to goods to services• Significance of intra-industry trade• Success of multilateral system in liberalising trade in
goods…• .. But paradoxical increase in interest in RTAs• .. And growing hostility to further trade liberalisation
.. But free trade is not popular
Section 2.
Review of gains from trade
The various gains from trade
• Traditional gains– Comparative advantage– Variety of products
• Modern extensions– Competition and contestability– Economies of scale and scope– Innovation and R&D– Product and quality improvement
World Price and Comparative Advantage
If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an exporter of the good.
If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an importer of the good.
Priceof Steel
0 Quantityof Steel
Domesticdemand
International Trade in an Exporting Country...
Domesticsupply
Worldprice
Price after trade
Price before trade
Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
How Free Trade Affects Welfare in an Exporting Country...
Domesticsupply
Price after trade
Price before trade
A
B
C
D
Exports
Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
How Free Trade Affects Welfare in an Exporting Country...
Domesticsupply
Price after trade
Price before trade
A
Consumer surplusbefore trade
B
C
Producer surplusbefore trade
Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
How Free Trade Affects Welfare in an Exporting Country...
Domesticsupply
Price after trade
Price before trade
A
Consumer surplusafter trade
C
B
Producer surplusafter trade
D
Exports
How Free Trade Affects Welfare in an Exporting Country
The analysis of an exporting country yields two conclusions:
Domestic producers of the good are better off, and domestic consumers of the good are worse off.
Trade raises the economic well-being of the nation as a whole, i.e., the potential size of the cake for redistribution.
International Trade and the Importing Country...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domestic demand
World Price
Price after trade
Price before trade
How Free Trade Affects Welfare in an Importing Country...
Priceof Steel
0 Quantityof Steel
Domesticsupply
World Price
Domestic demand
Price after trade
Price before trade
A
B
C
D
Imports
How Free Trade Affects Welfare in an Importing Country...
Priceof Steel
0 Quantityof Steel
Domesticsupply
World Price
Domestic demand
Price after trade
Price before trade
A
Consumer surplusbefore trade
C
B
Producer surplusbefore trade
How Free Trade Affects Welfare in an Importing Country...
Priceof Steel
0 Quantityof Steel
Domesticsupply
World Price
Domestic demand
Price after trade
Price before trade
A
Consumer surplusafter trade
B D
CProducer surplus
after trade
Imports
How Free Trade Affects Welfare in an Importing Country
The analysis of an importing country yields two conclusions:– Domestic producers of the good are worse off,
and domestic consumers of the good are better off.
– But N.B. – trade raises the economic well-being of the
nation as a whole because the gains of consumers exceed the losses of producers.
The Gains and Losses from Free International Trade
• The gains of the winners exceed the losses of the losers.
• The net change in total surplus is positive.
• This is the basis for the pro-trade stance of economists
• So… trade is beneficial, but what is the basis for trade?
Efficiency gains from trade
Production per person per working dayAbsolute advantage
Comparative advantage
UK more efficient in clothing, Portugal in wine
Portugal more efficient producer of both clothing and wine – but trade still mutually beneficial because of differences in relative costs. Wine
is more expensive in the UK, clothing is more expensive in Portugal
Portugal England Wine 6 3 Clothing 4 7
Portugal England Wine 6 3 Clothing 4 3
Comparative advantage in action
• England– Two workers reallocated from wine to clothing implies– -6W + 6C– Clothing is exported to Portugal in exchange for wine– -6C + 9W– Net result: -6W + 9W = +3W
• Portugal– Exports 9W in exchange for 6C from England:– -9W + 6C– To produce 9W it must give up 6C in domestic product– +9W – 6C– Net result: 0
Comparative cost trade theories
• Differences in technology (labour productivity - Ricardo)
• Differences in domestic endowments (Heckscher-Ohlin)– factor price equalisation
– remuneration increases for the factor that is employed most intensively in the commodity whose price increases
– empirical performance in explaining trade flows?
Further sources of trade gains
• Gains from enhanced competition and contestability of markets – reduced X-inefficiency (‘cold shower’ effect)
• Gains from exploiting economies of scale (“Smithian gains”)
• Gains from greater product variety– Intra-industry trade
• Growth effects– Gains from the stimulus to investment and thus economic
growth– Technological spillovers and productivity effects
• Political arguments for free trade (avoidance of ‘rent-seeking’)
Empirical evidence on trade gains/costs of protection
• Empirical estimates of the classical gains from trade (and thus the cost of limiting trade) are quite limited, rarely more than 0.5% of GNP
• Much greater welfare effects arise if account is taken of modern sources of gains from trade
• The costs of trade policy intervention can be quite high if political economy considerations are factored in.
Section 3.
Trade policy instruments
Arguments for protectionist trade policy
• Tariffs as a source of revenue• Optimum tariff argument (for large countries) • Industrial policy considerations
– infant industry argument (learning economies)– external benefits: the strategic industry argument
• 'Strategic trade' (profit-shifting) argument• Non-trade concerns (e.g. food security, rural environment)• Protection against ‘unfair’ competition due to lower costs or
standards• Concerns over unemployment and adjustment costs
Trade policy instruments
• Tariffs (specific, ad valorem and variable)
• Quotas (what happens to rents)
• Voluntary export restraints
• Contingent protection (anti-dumping)
• Beyond-the-border barriers (regulatory regimes)– (evidence from the EU single market)
• Trade facilitation measures
Partial equilibrium analysis of tariffs
Q2 Q4 Q3 Q1
Pw
Pw'
Price
Quantity
SH DH
.. lower tariffs improve welfare
A B C D
Why is trade policy controversial?
• Trade and unemployment (trade costs jobs)• Trade and income distribution (distribution
within countries)• Trade and convergence (distribution of
income between countries)• Trade and environment (pollution haven
hypothesis)• Trade and labour standards (race to the
bottom)
More reasons why trade policy is controversial
• Trade and consumer non-trade concerns
• Trade and public services
• Unfair rules for developing countries.
• Multilateral versus regional approaches
• Governance arrangements for trade policy-making and role of the WTO
Section 4.
Trade policy rules
EU trade policy making• Common Commercial Policy
– Qualified majority voting..except when unanimity required in internal decisions, plus cultural and audiovisual services [social, education, health services]
• Council – approves mandate for trade negotiations and outcome
• Article 133 Committee• European Parliament – following Lisbon Treaty must be
consulted on progress of negotiations and has power of assent on ‘take it or leave it’ basis. Decides trade regulations using Ordinary Legislative Procedure.
• Commission – conducts negotiations under the Council mandate
World Trade Organisation• Established 1995• One member, one vote – principle of consensus• Sets rules, monitors rules and acts as forum for further trade
liberalisation
• General Agreement on Tariffs and Trade (GATT 1994)– Multilateral Trade Agreements, including
• Agreement on Technical Barriers to Trade• Agreement on Agriculture• Agreement on Sanitary and Phytosanitary Standards• Agreement on Textiles and Clothing• Agreements on Subsidies and Anti-Dumping (measures against unfair
trade)
– Plurilateral Trade Agreements• General Agreement on Trade and Services (GATS)• Trade-Related Aspects of Intellectual Property Rights
WTO general norms (1)
• Non-discrimination– Most Favoured Nation (MFN) treatment of like
products (BUT exceptions for free trade arrangements)
– National treatment
• Reciprocity– the political economy justification for
multilateral trade negotiations
WTO general norms (2)
• Enforced commitments– tariff bindings and Schedules
• Transparency– Trade Policy Review Mechanism
• Safety valves– restrictions in the case of serious balance-of-payments
difficulties or to support infant industries– Article XX - general exceptions allowing trade
restrictions• Disciplines on unfair trade practices (subsidies)• Disciplines on technical barriers to trade
(standards, food safety)
WTO dispute settlement
• Binding arbitration
• Possibility of retaliation
• Key US – EU trade disputes
Achievements of the Uruguay Round
• Eighth negotiating round
• Extended GATT disciplines to agriculture and services
• Completed as a single undertaking
• But with principle of special and differential treatment for developing countries
Agreement on Agriculture
• Agriculture was previously outside GATT disciplines
• Introduced a three pillar structure– Market access
– Export subsidies
– Domestic support
• Included a rendez-vous clause• Food safety and technical barriers covered by
separate Agreements
GATS as a framework agreement
• General obligations– MFN treatment: applies across all sectors regardless whether
specific commitments have been made unless specific exemptions notified initially
• Specific commitments related to specific sectors– These relate to three areas (i) market access (ii) national treatment
and (iii) other commitments
– Commitments only apply to sectors scheduled and may prescribe conditions and qualifications
• Understanding that periodic negotiations will be undertaken to progressively liberalise trade in services
Problems of services negotiations
• Market access barriers are entirely regulatory - not traditional border barriers
• Market access is not divisible (like tariffs) - all or nothing
• Difficult to quantify concessions for the purpose of determining reciprocity
• Developing countries are net importers of services - saw few possibilities for export gains
Section 5
Trade policy issues
EU trade policy
• Global Europe 2006– Strong commitment to multilateral WTO process
– Marked end of de facto moratorium on competitiveness-oriented FTAs
– Negotiations launched with Korea, India and ASEAN in 2007, with Canada 2009 and Mercosur 2010.
– Korea FTA now approved , also Peru, Columbia, Central America
– Reformulation of ‘development’ trade agreements• EBA, EuroMed, GSP, EPAs
EU focus on non-tariff barriers
• Regulatory issues
• Intellectual property rights
• Government procurement
• Foreign investment protection and liberalisation
• Services
• Link with the Single Market– Implementation of the Services Directive
• Export restrictions on raw materials and energy
• Keep focus on the big trading partners without agreements – US, China, Russia, Japan, India, Brazil – which account for 50% of EU trade
WTO Doha Round
• Unfinished business from Uruguay Round
• The Doha Development Round 2001– Seattle, Doha, Cancun, Hong Kong, Geneva
• Covers agriculture, manufactures, services, rules
• Negotiations to date – role of developing countries
What’s on the table?
• Significant further reductions in manufacturing tariffs, but disagreement on the balance between developed and developing countries
• Ambitious cuts in agricultural tariffs and subsidies, but with flexibilities
• Disappointing offers in services to date
• Some progress on rules issues
EU objectives in the Doha Round of WTO trade negotiations
• To further liberalise access to overseas markets for EU goods and particularly services
• To strengthen coverage of WTO rules in areas such as investment, competition, transparency in government procurement, intellectual property and trade facilitation.
• To ensure more assistance is provided to developing countries to help their integration into the world economy
• To get the WTO to focus more on issues of public concern such as the environment, animal welfare and food safety
EU and Irish interests in the Doha Round
• Market access– But will we gain enough on non-agriculture and services to offset
problems for agriculture?
• Improved rules– What would be gains from extending rule to investment, competition,
trade facilitation, procurement?
• The development agenda– Coherence with development objectives
• Addressing public concerns– Incorporating environmental and public health concerns into trade
rules
Trade policy today
• Can creeping protectionism be avoided?
• The role of China
• What to do about the Doha Round?
• Agricultural protectionism
• The EU’s strategy of bilateral RTAs
• Addressing governance deficiencies in the WTO
• The developing country agenda
Reading
• McAleese Chapter 17
• Supplementary references:• Bluestein, P. 2008. How WTO’s Doha Round
negotiations went awry in July 2008, Brookings• Brulhart, M and Matthews, A., EU external trade
policy, in El-Agraa, A. ed., The European Union: Politics and Economics, Cambridge University Press
Class exercises
McAleese Chapter 17
Q.1, 5
Ex 1, 4 6.
