I NCOME DISTRIBUTION AND TRADE POLICY. I NTERNATIONAL NEGOTIATIONS AND TRADE POLICY Subject: International Economics Dominika Droppová Sabína Gašparová

I NCOME DISTRIBUTION AND TRADE POLICY What is the trade policy aboute? - Reality vs Asset Review: - Electoral Competition - Collective Action - Modeling the Political Process - Who Gets Protected ?

E LECTORAL C OMPETITION Assumption - Two competing parties. - Policy can be described along a single dimension (tariff rate). - Voters differ in the policies they prefer. For example: - One country: - export - skill-intensive goods - import - labor-intensive goods - Voters: - voters with high skill levels will favor low tariff rates - voters with low skills will be better off if the country imposes a high tariff

COLLECTIVE ACTION The problem of collective action: The group as a whole has bigger interest to press for favorable policies than individuals. This problem can best be overcome when a group is small and organized. Explain why policies that not only seem to produce more costs than benefits but that also seem to hurt far more voters than they help can nonetheless be adopted.

MODELING THE POLITICAL PROCESS While politicians may win elections partly because they advocate popular policies, a successful campaign also requires money... Politicians will not ignore overall welfare, but they will be willing to trade off some reduction in the welfare of voters in return for a larger campaign fund. As a result, well-organized groups—that is, groups that are able to overcome.

W HO GETS PROTECTED ? Many developing countries traditionally have protected a wide range of manufacturing, in a policy known as import-substituting industrialization. Much protectionism is concentrated in just two sectors: - agriculture, - clothing.

I NTERNATIONAL NEGOTIATIONS AND TRADE POLICY From the mid-1930s until about 1980, the United States and other advanced countries removed tariffs and some other barriers to trade. The great postwar liberalization of trade was achieved through international negotiation. It means that governments agreed to engage in mutual tariff reduction reduced protection for each country’s import- competing industries to reduced protection by other countries against that country’s export industries.

THE ADVANTAGES OF NEGOTIATION Two reasons why it is easier to lower tariffs as part of a mutual agreement than to do so as a unilateral policy: - mutual agreement helps mobilize support for freer trade, - negotiated agreements on trade can help avoid trade wars. For example: Two countries (Japan, United States) ilustrated examples on mutual agreement and trade wars.

THIS SITUATION IS KNOWN AS A P RISONER ’ S DILEMMA.

I NTERNATIONAL T RADE A GREEMENTS : A B RIEF H ISTORY Multilateral negotiations began soon after the end of World War II. There are two the most important organizations: - General Agreement on Tariffs and Trade ( GATT ), - World Trade Organization ( WTO ). Create GATT-WTO approach (system): - the principal ratchet in the system is the process of binding.

Trade round process - large group of countries get together to negotiate a set of tariff reductions and other measures to liberalize trade There are 8 trade rounds: - the first five trade rounds under the GATT took the form of “parallel” bilateral negotiations - the sixth multilateral trade agreement, known as the Kennedy Round - the seventh multilateral trade agreement, known as the Tokyo Round - the last of which the Uruguay Round (results of the Uruguay Round are not that easy to summarize. The most important results make two groups: trade liberalization and administrative reforms).

TRADE LIBERALIZATION Liberalize trade in: - agriculture - cloting World trade in agricultural and textiles products has been highly distorted.

ADMINISTRATIVE REFORMS How different is the WTO from the GATT? The GATT’s neglect of trade in services became an increasingly glaring omission, because modern economies have increasingly focused on the production of services rather than physical goods. The WTO agreement includes rules on trade in services (the General Agreement on Trade in Services, or GATS) The most important new aspect of the WTO, however, is generally acknowledged to be its “dispute settlement” procedure. The WTO contains a much more formal and effective procedure

T HE D OHA D ISAPPOINTMENT It´s the ninth major round of world trade negotiations preferential trading agreements free trade area customs union trade creation vs trade diversion

Thank you for attention