1. 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

2. 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

3. Trade and Protectionism
Session 6
Macroeconomic Concepts and Issues
MSc Economic Policy Studies
Alan Matthews

4. 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

5. 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

6. 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

7. Stylised facts about trade
Section 1.
Stylised facts about trade

8. Ireland’s trade profile in goods
Source: WTO Trade Profile

9. Ireland’s trade profile in services
Source: WTO Trade Profile

11. 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

14. EU tariff profile
EU tariff profile WTO source

15. .. But free trade is not popular

16. Review of gains from trade
Section 2.
Review of gains from trade

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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.

29. 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?

30. 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

31. 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

32. 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?

33. 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’)

34. 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.

35. Trade policy instruments
Section 3.
Trade policy instruments

36. 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

37. 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

38. 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

39. 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)

40. 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

41. Section 4.
Trade policy rules

42. 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

43. 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

44. 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

45. 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)

46. WTO dispute settlement
Binding arbitration
Possibility of retaliation
Key US – EU trade disputes

47. 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

48. 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

49. 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

50. 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

51. Section 5
Trade policy issues

52. 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

53. 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

54. 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

55. 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

56. 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

57. 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

58. 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

59. Reading McAleese Chapter 17 Supplementary references:
Bluestein, P 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

60. Class exercises
McAleese Chapter 17
Q.1, 5
Ex 1, 4 6.