The Political Economy of International Trade Chapter 6 The Political Economy of International Trade This is a test

Slide 5-2 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

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

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

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

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

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

Political Arguments for Intervention National security Individual industries and jobs protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives Strategic Trade Theory: economists assume perfectly competitive markets. STT makes different assumptions about the industry environment industries can support a finite number of firms ww firm can earn monopoly profits if it can succeed becoming a leader in industry a national govt. can make its country better off if it adopts trade policies which improve the competitiveness of its firms in such oligopolistic industries Most global industries are more competitive than this... US govt. vis-à-vis Japan had political motives behind tolerating MITI’s protectionist policies: military subjugation of Japan as a quid-pro-quo in cold war era. Econ. development programs: export promotion (MNCs locate there to take advantage), import-substitution (MNCs locate there to capture share of protected local market) Public Choice Analysis: the public is less likely to rally and “lobby” for its interests than special interest groups are. So, Jones Act of 1920 still in force: US restricts foreign ocean going ships from providing transportation between two US ports. Cruise ships leave Vancouver for Alaska instead of Seattle... Huge loss to US consumers and minimal gain for merchant seamen's union (10:1 ratio). Economic Arguments for Intervention Infant industry protection Strategic trade policy

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

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 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

GATT Pre-WWII protectionism Havana Conference (1947) -> GATT 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/WTO MFN Exceptions 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 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: 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” Trade barriers affect firm strategy Government policy has direct impact on a firm’s business