1 ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich

2 Lecture 22: April 2 Ch. 9, 10, 12

3 Non-Tariff Measures (NTMs) Procurement Preferences –Preferential price advantage given to domestic suppliers – government will buy from domestic supplier as long as price is no more than X% greater than that of foreign supplier  similar to tariff –Similar to restrictive quota or tariff when foreign suppliers prevented from bidding Red Tape Barriers –Health and safety standards – infected cattle, SARs –Customs classifications –Harassment potential

4 Non-Tariff Measures (NTMs) Domestic taxes and terms of trade –Carbon taxes in US and world price of oil Changing environmental rules to allow the use of fracking technologies for oil and gas

5 Non-Tariff Measures (NTMs) Contingency Protection –Security of access issue related to FTA –Countervailing duties – in case of subsidies; definition of subsidies –Anti-dumping – predatory, sporadic, persistent (price discrimination) –Balance of payments, employment safeguards

6 Non-Tariff Measures (NTMs) Countervailing duties –Definition of subsidies – health care system, education, etc. –Value of subsidies –Terms of trade –Costs to domestic industry – distinct from economic shocks, competition –Magnitude of tariff to level playing field –Duration of protection

7 Non-Tariff Measures (NTMs) Anti-dumping –Distinguish among predatory, sporadic, persistent –Does nature of dumping matter? –Degree of dumping – price differential –Costs to domestic industry – distinct from economic shocks, competition –Magnitude of tariff to level playing field –Duration of protection

8 Non-Tariff Measures (NTMs) Safeguards –Flexible exchange rates as shock absorber –Global shock or country-specific shock –Herd effect – pace of outsourcing accelerates –Costs to domestic industry – labor adjustment policies, unemployment insurance, training programs –Magnitude of tariff –Duration of protection

9 Non-Tariff Measures (NTMs) Unfair Trade (S. 301) –3 rd country and home country effects –Definition of unfair trade – wide ranging and ambiguous –Harassment – who pays for investigation and legal proceedings (asymmetric costs of fighting complaints) –Ambiguous interpretation of law – susceptibility to political pressures Definition of injury (threshold for injury for retaliation), causation (links between cause and effect, external variables) –US domestic laws including trade remedy laws supersede international obligations of US

10 Non-Tariff Measures (NTMs) Foreign investment restrictions –Rights of establishment – limits on foreign investment and control (airlines, telecommunications, broadcasting, cable, banks) –Performance requirements –National treatment

11 Canada-US FTA Gains from trade –Traditional: comparative advantage, new products –Larger markets: economies of scale, plant economies (specialization), learning curves –Increased competition: new products, higher quality, lower prices (border shopping), efficiency –Minimize trade disputes – less likely to be side-swiped when trading partner initiates trade dispute against other countries; dispute resolution mechanism fairer and quicker in resolving trade disputes Consider softwood lumber under NAFTA, subsidies for regional jets

12 Canada-US FTA Losses –Income losses for owners of relatively abundant resources Implications for income inequality – skilled vs. unskilled workers; owners of capital vs. workers –Adjustment to new trade patterns – unemployment during transition –Race to the bottom – “Right to work” laws in the US; lower minimum wage rates

13 Canada-US FTA Argument in favor of FTA with US based on Canada exploiting economies of scale and gaining secure access to US market (required to encourage investment in Canada and restructuring) –Productivity levels in Canada 25% below US because Canadian branch plant replica of US Same number of varieties and shorter production runs; Less competition thus X-inefficiency and less incentive to innovate –Plant economies of scale Standard internal economies of scale and per unit costs decrease with reduction in number of products produced in each plant

14 Canada-US FTA Problems with argument: –If economies of scale so important why did some firms not specialize and drive competitors out of the market? –Tariff barriers had been declining since 1947 – what if management a problem? –Security of access limited incentives to restructure

15 FTA, NAFTA Objectives –Eliminate barriers to trade in goods and services –Expand liberalization of conditions for cross-border investments –Dispute resolutions – more binding, more effective enforcement –Facilitate conditions for fair competition (labor and environment codes) –Rules of origin: 50% of value added (62.5% for autos) must originate in free trade area –Eliminates import and export restrictions on energy products, no price discrimination between domestic and foreign consumers of energy products –National treatment Trade in services – subject to regulation (professional services); labor mobility; foreign ownership restrictions (financial services, broadcasting, transportation)

16 NAFTA Ch. 11 Allows companies to sue any of the NAFTA governments for violation of that government’s commitments under the agreement Allows company to sue if it believes it has experienced either expropriation or government conduct tantamount to nationalization or expropriation – any regulation or policy change that reduces a firm’s profits and value

17 GATT GATT/WTO [General Agreement on Tariffs and Trade/World Trade Organization] –3 basic principles Nondiscrimination (MFN) – preferential trading arrangements violate this principle; NAFTA an example of preferential trading arrangement Elimination of quotas (except for balance of payments problems) – international system of quotas in textiles, proliferation of VERs, exploitation of escape clause Consultation to solve trade disputes – weak enforcement mechanism; US domestic laws supersede GATT, NAFTA –As Tariffs , NTMs  because D for protection constant –NTMs higher cost form of protection –Canada essentially bystander in MTNs – EU, US and Japan dictated outlines of agreements

18 GATT 9 Rounds of multilateral trade negotiations – Kennedy, Tokyo, Uruguay and Doha rounds addressed NTMs as first 5 focused on tariffs only –Tokyo, Uruguay and Doha also attempted to extend trade rules to services and establish investment rules –WTO created to replace GATT secretariat Responsible for enforcement of agreement and dispute resolution More formal procedures with tighter deadlines –GATS (General Agreement on Trade in Services) –TRIPS (Agreement on Trade-Related Aspects of Intellectual Property

19 GATT Difficulties in reducing NTMs –Definition of subsidies –Escape clause provisions –Dispute settlement mechanism with effective enforcement – market power of different countries –Trade-offs: Problems in measuring concessions –North-South issues: need to develop economies –Agriculture sector and political importance of farmers Major problem for Doha Round

20 Agriculture Support Government support, 2008: % of gross farm receipts Canada: 13.0% Australia: 5.9% Brazil: 5.0% China: 8.6% EU27: 24.9% Japan: 47.8% Russia: 10.8% S. Korea: 51.7% Mexico: 13.1% Turkey: 24.5% US: 6.8%

21 GATT GATT includes articles on anti-dumping (Article 6), countervail (Article 16) and escape clause (Article 19) –Dumping: export price below domestic market price (below cost of production or normal home market price) –Escape clause: temporary protection to limit imports causing serious injury to domestic producers –Countervail: tariffs to offset effects of subsidies –Problems: defining subsidies, determining existence of dumping, measuring degree of dumping, measuring injury, determining causation

22 GATT and US Trade Laws US contingency protection legislation – countervail, anti-dumping, escape clause and unfair trade (S. 301) –First three deal with imports, unfair trade deals with exports as well –US definitions of injury and causation differ from spirit and letter of GATT –Unfair trade not part of GATT – trade panel has found S. 301 to violate GATT Issue of sovereignty for US