Y376 International Political Economy January 25, 2012

Pioneers of Trade Theory Adam Smith, The Wealth of Nations (1776) – first defense of free market policies David Ricardo, Principals of Political Economy and Taxation (1817) - introduced theory of comparative advantage

Graphical Version of Ricardian Theory

Heckscher-Ohlin Model Basic model: two countries, two goods, two factors of production (Ricardo only had one) Differences in factor endowments lead to “gains from trade” Both countries will be better off if they specialize in producing goods which require a relatively abundant factor and then trade with another country For maximum benefit, the other country should have a very different factor endowment

Let’s Play the Trade Ruler Game! nomics/trade/game/ruler.htmlhttp://nobelprize.org/educational_games/eco nomics/trade/game/ruler.html

History of U.S. Trade Policy Smoot-Hawley Tariff of 1930 Depression High Tariffs FDR (espec. Cordell Hull) favors free trade for post WW2 periodCordell Hull Congress rejects International Trade Organization treaty proposed initially at Bretton WoodsInternational Trade Organization The GATT becomes the main trade regimeGATT

Source: U.S. International Trade Commission; U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States; and Statistical Abstract of the United States, various years. Figure 3-1. Average U.S. Tariff Rates on Dutiable Imports, , in Percentages

Overall Tariff Levels and Trade/GNP,

Source: International Monetary Fund, Direction of Trade Statistics Yearbook (various years). Figure 3-2. Growth in World Exports, , in Billions of Current Dollars

Figure 3-3. Trade/GDP in the US, Britain, Germany, France, and Japan, , in Percentages Sources: World Bank, World Development Indicators 2001 CD-ROM (Washington, D.C.: World Bank, 2001): OECD.Stat,

Interregional Trade Flows, 1990

Main Rules of the GATT Nondiscrimination among members of the GATT –most favored nation (MFN) principlemost favored nation (MFN) principle –tariffs must be adjusted to reflect MFN levels Participation in multilateral trade negotiations to lower tariffs and nontariff barrierstariffsnontariff barriers A tariff is a tax that is charged on the value of imported goods.

Multilateral Trade Negotiations 1947 Geneva 1949 Annecy 1950 Torquay 1956 Geneva Dillon Kennedy Tokyo Uruguay Doha Biggest tariff reductions occurred in the Kennedy Round. Tokyo Round began discussions of non-tariff barriers. Uruguay Round established the basis for the World Trade Organization.

Main Issues in the Tokyo Round Tariffs Conflict resolution; dispute settlement Nontariff barriers: –subsidies –government procurement –standards –custom valuation –licensing

Example of a Subsidies Dispute: Airbus vs. Boeing This is a Boeing 777 This is an Airbus 300 Latest WTO ruling (video)

Main Issues in the Uruguay Round Agriculture (mainly subsidies) Trade in Services Trade-related Intellectual Property (TRIPs) Trade-related Investment Measures (TRIMs)Trade-related Investment Measures (TRIMs) French farmers protesting the Maastricht Treaty inEurope.

Multilateral Trade Negotiations: The Doha RoundDoha Round Begun in early 2000 Major conferences so far: –2001 Doha (Qatar) –2003 Cancun –2004 Geneva –2005 Hong Kong –2006 Geneva –2007 Potsdam –2008 Geneva Pascal Lamy Pascal Lamy calls time out on Doha Round in 2006

Main Issues Main Issues in the Doha Round Timing of implementation of Uruguay Round agreements, espec. Agriculture, services, regional agreements, TRIPs/TRIMs Reductions in agricultural subsidies and textile/apparel tariffs in the rich industrialized countries

Main Issues in the Doha Round Timing of implementation of Uruguay Round agreements, espec. Agriculture, services, regional agreements, TRIPs/TRIMs Reductions in agricultural subsidies and textile/apparel tariffs in the rich industrialized countries