1. 1 ECONOMICS 3150B Fall 2015 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

2. 2 Lecture 21: December 1 Ch. 9

3. 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. 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. 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. 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. 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. 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. 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 –S. 421 amendment to Trade Act of 1974 – applies only to China: tariffs can be applied if there is surge in imports from China that causes ”market disruption” in a US industry

10. 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. 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. 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. 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. 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. 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. 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. 17 Regional Free Trade Agreements Andean community, May 1988: customs union; goods Canada-Chile, July 1997: FTA; goods & services Canada- Colombia, August 2011: FTA; goods & services Canada-Israel, January 1997: FTA; goods Canada-Jordan, October 2012: FTA; goods Canada-Peru, August 2009: FTA; goods & services Canada-South Korea, January 2015: FTA; goods & services Caribbean Community and Common Market, August 1973 (goods), July 2002 (services): customs union Central American Common Market, June 1961: customs union; goods Central European FT Agreement, May 2007: FTA; goods Common market for Eastern & Southern Africa, December 1994: customs union; goods

18. 18 Regional Free Trade Agreements Commonwealth of Independent States, December 1994: FTA; goods East African Community, July 2000 (goods), July 2010 (services): customs union Economic and monetary community of Central Africa, June 1999: customs union goods Economic community of West African States, July 1993: customs union; goods Eurasian Economic community, January 2015: FTA; goods & services Gulf Cooperation council, January 2003: customs union; goods Pan-Arab FT Area, January 1998: FTA; goods South Asian FT Agreement, January 2006: FTA; goods

19. 19 Regional Free Trade Agreements South Asian Preferential Trade Arrangement, December 1995: PSA; goods Southern Common Market (MERCOSUR), November 1991 (goods), December 2005 (services): customs union US bilaterals – Australia (January 2005); Bahrain (August 2006); Chile (January 2004); Colombia (May 2012); Irael (August 1985); Jordan (December 2001); Morocco (January 2006); Oman (January 2009); Panama (October 2012); Peru (February 2009); Singapore (January 2004)

20. 20 Regional Free Trade Agreements RTAs in force -- 408 –Customs unions – 18 –Customs union, accessions – 8 –Economic integration agreements – 127 –Economic integration agreements, accessions – 5 –FTA – 234 –FTA, accessions – 2 –Partial scope agreements -- 14

21. 21 Regional Free Trade Agreements Importance of rules of origin in RTAs other than customs unions and common markets Side agreements on labour and/or environment –Labour standards: occupational health & safety, child labour, minimum wages, right to unionize –Extra-territorial application of laws –Enforcement –Information (Internet) and consumer actions –Compare to domestic rules on corrupt practices

22. 22 Trans Pacific Partnership When it became clear, more than a decade ago, that the Doha round of global trade talks were foundering, countries began to negotiate new bilateral and multilateral agreements to keep the dream of globalized free trade alive –The most important of these talks is the Trans-Pacific Partnership, involving the United States and 11 other Pacific countries. They are (by size of their economy) Japan, Canada, Australia, Mexico, Malaysia, Singapore, Chile, Peru, New Zealand, Vietnam and Brunei TPP matters for two reasons: –It’s an ambitious accord that goes beyond free trade in goods to include services and agricultural support –Encompassing nearly 40 per cent of the world’s gross domestic product

23. 23 Trans Pacific Partnership Mexico and the United States are part of the TPP, the new pact will be a new NAFTA Canadian government insists it can be part of the TPP while still retaining supply management –Protects dairy and poultry farmers from foreign competition through a system of internal quotas and external tariffs –Joining the TPP will mean at least weakening supply management, exposing the dairy and poultry industries to foreign competition –Not surprisingly, those industries strongly oppose Canada joining the TPP if it undermines supply management.