2. The Political Economy of International Trade
Chapter 6
The Political Economy of International Trade
This is a test

3. Slide 5-2
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

4. Instruments of Trade Policy
Tariffs
Subsidies
Import quotas
Voluntary export restraints
Local content requirements
Administrative policies
Anti-dumping policies

5. Tariffs 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 don’t develop new skills

6. 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

7. Quotas and Voluntary Restraints
Import quota: government specifies how much of what product can be imported from which countries
Voluntary export restraint: how much of what product can be exported to which countries imposed officially or unofficially
Local Content Requirements
A product’s certain % has to be produced domestically with local raw materials
Used by LDCs to
Achieve technology transfer, skills transfer
Shift manufacturing to a higher technological level
Similar effects to those of import quotas

8. Anti-dumping Policies
Dumping: selling goods in an overseas market
At below their production costs or
Below “fair market value”
Anti-dumping policies punish producers who dump and protect domestic producers
Administrative policies
Bureaucratic rules that make it difficult for imports to enter a country

9. Political Arguments for Intervention
National security
Individual industries and jobs protected
Retaliation
Consumer protection (health, safety)
Furthering foreign policy objectives
Strategic Trade Theory: economists assume perfectly competitive markets.
STT makes different assumptions about the industry environment
industries can support a finite number of firms ww
firm can earn monopoly profits if it can succeed becoming a leader in industry
a national govt. can make its country better off if it adopts trade policies which improve the competitiveness of its firms in such oligopolistic industries
Most global industries are more competitive than this...
US govt. vis-à-vis Japan had political motives behind tolerating MITI’s protectionist policies: military subjugation of Japan as a quid-pro-quo in cold war era.
Econ. development programs: export promotion (MNCs locate there to take advantage), import-substitution (MNCs locate there to capture share of protected local market)
Public Choice Analysis: the public is less likely to rally and “lobby” for its interests than special interest groups are. So, Jones Act of 1920 still in force: US restricts foreign ocean going ships from providing transportation between two US ports. Cruise ships leave Vancouver for Alaska instead of Seattle... Huge loss to US consumers and minimal gain for merchant seamen's union (10:1 ratio).
Economic Arguments for Intervention
Infant industry protection
Strategic trade policy

10. Revised Case for Free Trade
Retaliation and Trade War
Krugman
Strategic trade policy is tantamount to “beggar thy neighbor” policy
How to respond if one’s competitive nation is subsidizing specific industries?
Domestic politics
Governments often do not act in the national interest when they intervene
Politically important groups influence them

11. 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 resolve disputes bilaterally with
China--new WTO member
Japan--old WTO member
Trade blocks proliferating
Anti- free trade movement

12. The Global Trading System
Adam Smith to Great Depression
Britain adopts free trade in 1846
Smoot-Hawley act (US) 1930 aimed at employment protection one cause of the Great Depression
: GATT, Trade Liberalization, Economic Growth
: GATT needs fixing
Uruguay round of GATT negotiations ( )
Creation of WTO with powers to implement trade agreements

13. GATT Pre-WWII protectionism Havana Conference (1947) -> GATT
Smoot-Hawley +57% import tariffs (1930)
UK, France, Italy followed suit
world depression in ‘30s
Havana 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

14. GATT/WTO MFN Exceptions
any 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 LDCs
regional arrangements such as NAFTA
countries still use NTBs, other loopholes (peanut waiver, 1955)

15. 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

16. WTO: Experience WTO as a global policeman -- 146 members by ‘04
: >304 trade cases brought to WTO for decision
Three quarters had been resolved by late 2003 through bilateral consultations
WTO recommendations have been adopted
GATT dealt with 196 cases from !
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

17. “So what” for Business”
Trade barriers affect firm strategy
Government policy has direct impact on a firm’s business