Download - Political Economy of Trade Ch. 6
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The Political Economy of International Trade
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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
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Instruments of Trade Policy
Tariffs
Subsidies
Import quotasVoluntary export
restraints
Local contentrequirements
Administrative policies
Anti-dumping policies
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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 dont
develop new skills
Tariffs
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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
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Import quota: government specifies how much ofwhat product can be imported from which countries
Voluntary export restraint: how much of what product canbe exported to which countries imposed officially orunofficially
Local Content RequirementsA products certain % has to be produced domestically withlocal raw materials
Used by LDCs toAchieve technology transfer, skills transferShift manufacturing to a higher technological level
Similar effects to those of import quotas
Quotas and Voluntary Restraints
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Administrative policies Bureaucratic rules that make it difficult
for imports to enter a country
Dumping: selling goods in an overseas marketAt below their production costs orBelow fair market value
Anti-dumping policies punish
producers who dump and protectdomestic producers
Anti-dumping Policies
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Political Arguments for Intervention
National security Individual industries and jobs
protected
Retaliation
Consumer protection (health, safety)
Furthering foreign policy objectives
Economic Arguments for InterventionInfant industry protection
Strategic trade policy
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Revised Case for Free Trade
Retaliation and Trade War Krugman
Strategic trade policy is tantamount to beggar
thy neighbor policy How to respond if ones competitive nation is
subsidizing specific industries?
Domestic politics
Governments often do not act in the nationalinterest when they intervene
Politically important groups influence them
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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 resolvedisputes bilaterally with
China--new WTO member
Japan--old WTO member
Trade blocks proliferating
Anti- free trade movement
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The Global Trading System
Adam Smith to Great Depression
Britain adopts free trade in 1846
Smoot-Hawley act (US) 1930 aimed atemployment protection one cause of the Great
Depression1947-1979: 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
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GATT
Pre-WWII protectionism Smoot-Hawley +57% import tariffs (1930)
UK, France, Italy followed suit
world depression in 30sHavana 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
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GATT/WTO
MFNany 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
LDCsregional arrangements such as NAFTA
countries still use NTBs, other loopholes (peanutwaiver, 1955)
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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
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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 throughbilateral 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
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So what for Business
Trade barriers affect firm
strategy
Government policy has direct
impact on a firms business