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International Trade Politics and Policies
© Melvin Jameson
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Why trade increases welfare
Local prices converge toward a world price Production is reallocated Each region specializes in its comparative advantage Permits an increase in production of all products © Melvin Jameson
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Winners and Losers from Trade
Producers in exporting country Consumers in importing country Losers Producers in importing country Consumers in exporting country Total gains exceed total losses © Melvin Jameson
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Factor-Price Equalization: Consequences for trade policy
“Stolper-Samuelson Theorem” extends theory of factor price equalization. A country has a comparative advantage in products that intensively utilize abundant factors. Trade increases the (domestic) price of these products and thus the wage of the abundant factor. Thus owners of the relatively abundant factor favor free trade and those of scarce factors oppose it. Particularly when the factors are specialized or immobile. Despite net benefit resulting from trade © Melvin Jameson
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Political Economy of Trade Policy
Typically dominated by producers: Well organized, well defined groups that are very aware of their economic interests. Consumers Economic losses, although large in total, are widely dispersed and individually small. Generally not organized or well-informed © Melvin Jameson
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Trade History Interwar era/Great Depression
Generally characterized by tariffs and protectionism © Melvin Jameson
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A tariff reduces the effects of trade
Volume of trade Degree of price convergence Gains of winners Losses of losers Net benefit of trade Partial transfer to government collecting tariff © Melvin Jameson
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Effect of a Tariff P* = world price T = Tariff A = Gain to Suppliers
C = Tariff Revenue A+B+C+D = Loss to Consumers price Domestic Supply P*+T A C D B Domestic Demand P* Quantity S S’ D’ D © Melvin Jameson
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Dynamic effects of trade barriers
Reduced competitiveness of domestic industry Foreign competitors adjust Direct foreign investment Change product types Substitute more expensive products Seek loopholes in tariff Trade retaliation © Melvin Jameson
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The chicken tax and van stripping
Responses to tariffs The chicken tax and van stripping WSJ 22 September 2009 © Melvin Jameson
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Trade History Post-World War II era
General Agreement on Tariffs and Trade (GATT) (1947 – 1994) Seeking benefits of trade primarily by reducing tariffs Agreed limits to tariffs Rules restricting trade retaliation Steadily growing membership © Melvin Jameson
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Other direct trade restrictions
Quotas Tariff-rate quota Export quotas (“voluntary” export restraint) Subsidies © Melvin Jameson
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Other types of non-tariff Barriers
Domestic content requirements Government procurement policies Social Regulations health, safety, environment Sea transport and freight regulations can be costly and restrictive © Melvin Jameson
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Trade History World Trade Organization (WTO) 1995 – present
Successor organization to GATT Aimed to expand focus beyond tariffs to non-tariff trade barriers. Some success in its initial years. Membership expanded to 159 countries. “Doha round” began 2001 issues included Protection of IP Agricultural subsidies © Melvin Jameson
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Trade History With failure of the Doha round emphasis turned to
Regional trade agreements Previously existing and new Bilateral trade agreements © Melvin Jameson
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Regional Trade Agreements
Types Preferential trade area – reduced tariffs for members Free trade area- zero tariff for members Customs union – common external tariff policy Common market – all factors mobile within Economic Union: Complete economic integration – common currency, regulation, tax policy etc. © Melvin Jameson
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Do regional agreements improve resource allocation?
Not necessarily Trade creation occurs when production shifts from high to low cost location as a result of a trade preference Trade diversion occurs production shifts from a low to a high cost source. © Melvin Jameson
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Trade creation vs. diversion
Policy Home B C Result 0% tariff 35 26 20 Free Trade 100% tariff 52 40 prohibitive tariff 50% tariff 39 30 free trade w/ B trade diversion © Melvin Jameson
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