The Political Economy of International TradeThe Political Economy of International Trade

Governments and TradeGovernments 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

Instruments of Trade PolicyInstruments of Trade Policy Tariffs Subsidies Import quotas Voluntary export

restraints Local content

requirements Administrative policies Anti-dumping policies

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

TariffsTariffs

SubsidiesSubsidies 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

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 RequirementsA product’s certain % has to be produced domestically with local raw materialsUsed by LDCs to

Achieve technology transfer, skills transferShift manufacturing to a higher technological level

Similar effects to those of import quotas

Quotas and Voluntary RestraintsQuotas and Voluntary Restraints

Administrative policies– Bureaucratic rules that make it difficult

for imports to enter a country

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

Anti-dumping PoliciesAnti-dumping Policies

Political Arguments for InterventionPolitical Arguments for Intervention National security Individual industries and jobs

protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives

Economic Arguments for InterventionEconomic Arguments for InterventionInfant industry protectionStrategic trade policy

Revised Case for Free TradeRevised 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

International Trade Cooperation (!)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

The Global Trading SystemThe Global Trading SystemAdam 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

GATTGATT 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

GATT/WTOGATT/WTOMFN

– 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)

Uruguay Round of GATT negotiationsUruguay 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

WTO: ExperienceWTO: 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

““So what” for Business”So what” for Business”Trade barriers affect firm

strategy

Government policy has direct impact on a firm’s business