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 6 Macroeconomic Concepts and Issues MSc Economic Policy Studies Alan 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

Stylised facts about trade 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

EU tariff profile EU tariff profile WTO source

.. But free trade is not popular

Review of gains from trade 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. 12

International Trade in an Exporting Country... Price of Steel Domestic supply World price Price after trade Price before trade Domestic demand Quantity of Steel 14

How Free Trade Affects Welfare in an Exporting Country... Price of Steel Domestic supply A Exports Price after trade World price D B Price before trade C Domestic demand Quantity of Steel 14

How Free Trade Affects Welfare in an Exporting Country... Price of Steel Domestic supply A Consumer surplus before trade B Price after trade World price Price before trade C Producer surplus before trade Domestic demand Quantity of Steel 14

How Free Trade Affects Welfare in an Exporting Country... Price of Steel Domestic supply A Consumer surplus after trade Exports Price after trade World price D B Producer surplus after trade Price before trade C Domestic demand Quantity of Steel 14

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. 20

International Trade and the Importing Country... Price of Steel Domestic supply Price before trade World Price Price after trade Domestic demand Quantity of Steel 21

How Free Trade Affects Welfare in an Importing Country... Price of Steel Domestic supply A Price before trade B D World Price Price after trade C Imports Domestic demand Quantity of Steel 21

How Free Trade Affects Welfare in an Importing Country... Price of Steel Domestic supply A Consumer surplus before trade Price before trade B Producer surplus before trade World Price Price after trade C Domestic demand Quantity of Steel 21

How Free Trade Affects Welfare in an Importing Country... Price of Steel Domestic supply A Consumer surplus after trade B D Price before trade World Price Price after trade C Producer surplus after trade Imports Domestic demand Quantity of Steel 21

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 Absolute advantage Production per person per working day UK more efficient in clothing, Portugal in wine Comparative advantage 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

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.

Trade policy instruments 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 Price SH DH Pw' A B C D Pw Assumptions: Country is assumed to be small in the sense that changes in its import demand have no effect on the world price. As a result of the tariff, the domestic price increases from Pw to Pw'. Imports fall from Q1Q2 to Q3Q4. Society is poorer by the extent of the two triangular areas. Exercise Show how the two triangles are derived as the difference between the gains to producers and the government and the losses to consumers from imposing a tariff. Q2 Q4 Q3 Q1 Quantity .. lower tariffs improve welfare

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 Reciprocity 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 Transparency Safety valves 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.