1. The Political Economy of International Trade
Chapter 7
The Political Economy of International Trade

2. Leading exporters and importers in world merchandise trade in 2012
(Billion dollars and percentage)
Rank
Exporters
Value
Share
Annual Percentage change
Importers
Annual percentage change 1
China
2014
11,1 8
United States
2336
12,6 3 2
1546
8,4 4
1818
9,6
Germany
1407
7,6 -5
1167
6,3 -7
Japan
799
4,3 -3
Jaoan
886
4,8 5
Netherlands
656
3,6 -2
United Kingdom
690
3,7 6
France
569
3,1
674 -6 7
Korea, Republic of
548 -1
591
3,2
Russian Federation
529
2,9
Hong Kong, China
553 9
Italy
501
2,7 -4
520
2,8 10
493
India
490
2,6

3. Leading exporters and importers in world merchandise trade in 2013
(Billion dollars and percentage)
Rank
Exporters
Value
Share
Annual percentage change
Importers 1
China
2209
11,7 8
United States
2329
12,3 2
1580
8,4
1950
10,3 7 3
Germany
1453
7,7
1189
6,3 4
Japan
715
3,8
-10
833
4,4 -6 5
Netherlands
672
3,6
France
681 6
580
3,1
United Kingdom
655
3,5 -5
Korea, Republic of
560
3,0
Hong Kong, China
622
3,3 12
542
2,9 15
retained imports
141
0,7 9
536
2,8
590
domestic exports 20
0,1
-11
516
2,7 -1
re-exports 10
Russian Federation
523
Italy
477
2,5 -2 11
518
Canada a
474
Belgium
469
India
466 13
Canada
458
2,4
451

4. Some data on international trade, 2013
The value of world exports in 2013 is equal to 17,860$ trillion while that of world imports is equal to 17,005$
Italy’s exports as share of GDP has increased from 2009 to 2013 (from 22% to over 25%)
Exports for Germany account for 51% of GDP (42% in 2009)
Other countries (e.g. China, UK, France) show more stable level of exports, with smaller increases

5. What Is The Political Reality Of International Trade?
Free trade occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country
many nations are nominally committed to free trade, but intervene to protect the interests of politically important groups
The Opening Case: U.S. Tariffs on Tire Imports from China explores the implications of U.S. tariffs on imported tires. The tariffs were implemented after intense lobbying by union workers. However, not only did the WTO rule that the tariffs violated trade agreements, they also caused tire prices in the United States to rise significantly.

6. How Do Governments Intervene In Markets?
Governments use various methods to intervene in markets including
Tariffs - taxes on imports that effectively raise the cost of imported products relative to domestic products
Specific tariffs - as a fixed charge for each unit of a good imported
Ad valorem tariffs - as a proportion of the value of the imported good
LO1: Identify the policy instruments used by governments to influence trade flows.
Tariffs are the oldest form of trade policy; they fall into two categories:
Specific tariffs are levied as a fixed charge for each unit
Ad valorem tariffs are levied as a proportion of the value of the imported good

7. How Do Governments Intervene In Markets?
Tariffs
increase government revenues
increase domestic sales and jobs (maybe!)
force consumers to pay more for certain imports
are pro-producer and anti-consumer
price increases lead to income reduction
reduce the overall efficiency of the world economy
Tariffs are good for government because they generate revenue.
But, while they protect domestic producers but they reduce efficiency, and create higher prices for consumers.

8. How Do Governments Intervene In Markets?
Subsidies - government payments to domestic producers
Subsidies help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of subsidies
EU pays $55 billion a year in farm subsidies
US cotton farmers received $12 billion between 1999 and 2002
Very common in the automotive industry (US and China)
Subsidies are government payments to domestic producers. They can be in the form of:
Cash grants
Low-interest loans
Tax breaks
Government equity participation in the company
Subsidy revenues are generated from taxes.
Subsidies encourage over-production, inefficiency and reduced trade.

9. How Do Governments Intervene In Markets?
Import Quotas - restrict the quantity of some good that may be imported into a country
Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
A quota rent - the extra profit that producers make when supply is artificially limited by an import quota
Sugar imports from Brazil, Thailand, Australia are controlled by TRQ in US and EU

10. How Do Governments Intervene In Markets?
Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government
Japanese government limited car exports to US to less than 2 million vehicles per year in 1980’s
Import quotas and voluntary export restraints
benefit domestic producers
raise the prices of imported goods
Country Focus: Subsidized Wheat Production in Japan explores the subsidies Japan continues to pay its wheat farmers. Tens of thousands of Japanese farmers continue to grow wheat despite the fact that the wheat grown in North America, Argentina, and Australia is far cheaper and of superior quality. The Japanese farmers stay in business thanks to the hefty subsidies paid by the Japanese government. As a result, wheat prices in Japan are substantially higher than they would be if a free market were allowed to operate.

11. How Do Governments Intervene In Markets?
Local Content Requirements - demand that some specific fraction of a good be produced domestically
benefit domestic producers
consumers face higher prices
Administrative Policies - bureaucratic rules designed to make it difficult for imports to enter a country
polices hurt consumers by limiting choice

12. How Do Governments Intervene In Markets?
Antidumping Policies – aka countervailing duties - punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition
dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value
enables firms to unload excess production in foreign markets
may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices
Management Focus: U.S. Magnesium Seeks Protection explores the dumping charged levied by U.S. Magnesium against Chinese and Russian producers. According to U.S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium significantly below market value in an effort to drive U.S. Magnesium out of business. The company failed a complaint with the International Trade Commission (ITC) which ultimately ruled in favor of U.S. Magnesium.

13. Discussion question
You are an employee of an U.S. firm that produces personal computers in Thailand and then exports them to the U.S. and other countries for sale.
The personal computers were originally produced in Thailand to take advantage of relatively low labor costs and a skilled workforce. Other possible locations considered at that time were Malaysia and Hong Kong.
The U.S. government decides to impose ad valorem tariffs on imports of computers from Thailand to punish the country for administrative trade barriers that restrict U.S. exports to Thailand.
How do you think your firm should respond? What does this tell you about the use of targeted trade barriers?

14. Why Do Governments Intervene In Markets?
There are two main arguments for government intervention in the market
Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
Economic arguments - concerned with boosting the overall wealth of a nation – benefits both producers and consumers
LO2: Understand why governments sometimes intervene in international trade.

15. What Are The Political Arguments For Government Intervention?
Protecting jobs - the most common political reason for trade restrictions
results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than consumers
How much does it cost?
1984 U.S. consumers paid $42,000 annually for each textile job that was preserved by import quotas, a sum that greatly exceeded the average earnings of a textile worker
Restricting foreign imports cost $105,000 annually for each automobile worker's job that was saved, $420,000 for each job in TV manufacturing, and $750,000 for every job saved in the steel industry
Less than 10,000 jobs saved in the steel industry in 2002 but reduction in US national income was of about $1 billion

16. What Are The Political Arguments For Government Intervention?
Protecting industries deemed important for national security - industries are often protected because they are deemed important for national security
aerospace or semiconductors
domestic food production is often considered necessary for national security in case of war

17. What Are The Political Arguments For Government Intervention?
Retaliation for unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers
if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
Protecting consumers from “dangerous” products – limit “unsafe” products
US Foreign Manufacturers Legal Accountability Act
1,800 unsafe products were banned by EU in 2011 (27% clothing, 21% toys, ecc..)
Country Focus: Trade in Hormone-Treated Beef describes the trade battle between the United States and the European Union over beef from cattle that have been given growth hormones. It outlines the basic issues that led to the dispute, and shows how the World Trade Organization has treated the case.

18. What Are The Political Arguments For Government Intervention?
Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with
trade policy can also be used to punish rogue states (e.g., US against Iran and Lybia)
The U.S. has used trade policy against countries like Libya, Iran, Iraq, North Korea, and Cuba.

19. What Are The Political Arguments For Government Intervention?
Protecting the environment – international trade is associated with a decline in environmental quality
concern over carbon dioxide causing global warming
enforcement of environmental regulations
Protecting the human rights of individuals in exporting countries – through trade policy actions
US granting China MFN status in 1999 (when China was out of WTO and had poor HR records)
EU included clauses on labor rights with Peru and Colombia:

20. EU’s policy of human rights clauses in trade agreements: components
Human rights clauses are composed by two main parts:
“essential elements” clause”, that is an obligation to comply with human rights
“non-execution” (or “non-fulfilment”) clause, which serves as enforcement of the “essential elements” clause, and which permits one party to take ‘appropriate measures’ if the other party violates the essential elements clause

21. EU’s policy of human rights clauses in trade agreements: details
The standard ‘essential elements’ states as follows:
“respect for democratic principles and fundamental human rights, as laid down in the Universal Declaration of Human Rights, and for the principle of the rule of law, underpins the internal and international policies of both Parties and constitutes an essential element of this Agreement”

22. What Are The Economic Arguments For Government Intervention?
The infant industry argument - an industry should be protected until it can develop and be competitive internationally
accepted as a justification for temporary trade restrictions under the WTO
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil auto-makers - 10th largest - wilted when protection was eliminated.
Requires government financial assistance.
Today if the industry is a good investment, global capital markets would invest.

23. What Are The Economic Arguments For Government Intervention?
Question: When is an industry “grown up” ?
Critics argue that if a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds without additional support from the government
during the 1980s Brazil enforced strict controls on the import of foreign computers in an effort to nurture its own "infant" computer industry,but the industry never matured
the technological gap between Brazil and the rest of the world actually widened, while the protected industries merely copied low-end foreign computers and sold them at inflated prices
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil auto-makers - 10th largest - wilted when protection was eliminated.
Requires government financial assistance.
Today if the industry is a good investment, global capital markets would invest.

24. What Are The Economic Arguments For Government Intervention?
Strategic trade policy - first mover advantages in industries with high economies of scale where the world market supports few firms
governments can help firms from their countries attain these advantages (e.g., Boeing and the US government)
governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage (e.g., Airbus and the European governments)
Strategic trade policy suggests that:
government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies
governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms

25. How Has The Current World Trading System Emerged?
Until the Great Depression of the 1930s, most countries had some degree of protectionism
Smoot-Hawley Act (1930)
After WWII, the U.S. and other nations realized the value of freer trade
established the General Agreement on Tariffs and Trade (GATT) - a multilateral agreement to liberalize trade through 8 rounds of negotiations involving 120 nations
LO4: Describe the development of the world trading system and the current trade issues.
GATT - multilateral agreement established in 1948 under U.S. leadership.
Objective is to liberalize trade by eliminating tariffs, subsidies, and import quotas.
Nineteen original members grew to 120.

26. How Has The Current World Trading System Emerged?
In the 1980s and early 1990s protectionist trends emerged
Japan’s perceived protectionist policies using administrative trade barriers
persistent US trade deficits and unemployment led to increasing demand for protectionism
increased use of non-tariff barriers that got around GATT

27. How Has The Current World Trading System Emerged?
The WTO (1995) encompassed GATT along with two sisters organizations
the General Agreement on Trade in Services (GATS)
Telecom and financial services have undergone an extensive liberalization process and opening to foreign competition
the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)
working to develop common international rules for intellectual property rights

28. How Has The Current World Trading System Emerged?
The WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services
153 members in 2011
so far, the WTO’s policing and enforcement mechanisms are having a positive effect
most countries have adopted WTO recommendations for trade disputes
an arbitration panel files reports that are automatically adopted by WTO and are effective against violating countries unless there is consensus to reject them
if a country does not comply with the recommendation, trading partners can impose trade sanctions
The WTO:
had 153 members in 2011
resolved more than 400 disputes between 1995 and 2010
three fourths of the disputes are settled by informal consultation
Because members believe that the protection of intellectual property rights is an essential element of the international trading system, TRIPS obliges WTO members to grant and enforce patents lasting at least 20 years, and copyrights lasting 50 years.

29. What Is The Future Of The World Trade Organization?
The WTO launched a new round of talks at Doha, Qatar, in 2001 that is still going on
The agenda includes
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
Country Focus: Estimating the Gains from Trade for America explores the results of a study by the Institute for International Economics. The study, which estimated the gains to the American economy from free trade, found that America’s GDP was more than 7 percent higher as a result of reductions in trade barriers than it would have been if the barriers remained. The study also estimated that if tariffs were reduced to zero, significant gains would still result.