IB Chapter 7: Gov Policy and International Trade

Retaliation

some argue that goc should use threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game". USe gov used the threat of punitive trade sactions to try to get chinese gov to enforce intellectual property laws. lax enforcement of laws give rise to massice copyright infringements in china that was costing US comps such as microsoft hundreds of millions of dollars per year in lost sales rev. after US threatened to impose 1000% tariffs on range of chinese imports, chinese agreed to tight enforcement on intellectual property regulations. If works, politically movited rational for gov intervention may liberalize trade and bring with it resulting economic gains. risky. country may not back down, instead respond to imposition of punitive tariffs by raising trade barriers of its own. what chinese gov threatened to do when pressured by US, did back down. if gob doesnt back down, results could be higher trade barriers all around & economic loss to all.

Economic Arguments for Intervention

1) The infant industry argument 2) Strategic Trade Policy

Political Arguments for Intervention

1) preserving jobs 2) protecting industries deemed important to national security 2) retaliating agaisnt unfair foreign competition 3) protecting consumers from "dangerous" products 4) furthering the goals of foreign policy 5) advancing the human rights of individuals in exporting countries

Criticism of Infant Industry Argument

1) protection of manufacturing from foreign competition does no good unless protection helps make undustry efficient. protection does little more than foster development of inefficient industries that have little hope of ever competing in world market. Ex: brazel built worlds 10th largest auto industry behind tariffs and quotas. once barriers removed foreign imports soared and industry forcedto face up fact that was inefficient. 2) argument relies on assumption that firms are unable to make efficient long term investemtns by borrowing money from domestic or international capital market. but govs have been required to subsidize long term investments. given development of global capital, this assumption is long longer valid. today if developing country has potential comparative advantage have incentive to endure necessary initial losses in order to make long-run gains without requiring gov protection.

Market Access for Nonagricultural goods and services

Although most developed nations have brought their tariff rates on industrial products down to an average of 3.8 percent of value, exceptions still remain. the bound tariff rates on imports of transportation equipment into the United States, EU, and Japan are 2.7 percent, 4.8 percent, and 0 percent, respectively. A particular area for concern is high tariff rates on imports of selected goods from developing nations into developed nations. In addition, tariffs on services remain higher than on industrial goods. The average tariff on business and financial services imported into the United States, for example, is 8.2 percent, into the EU it is 8.5 percent, and into Japan it is 19.7 percent. Given the rising value of cross-border trade in services, reducing these figures can be expected to yield substantial gains. The WTO would like to bring down tariff rates still further and reduce the scope for the selective use of high tariff rates. The ultimate aim is to reduce tariff rates to zero.Looking further out, the WTO would like to bring down tariff rates on imports of nonagricultural goods into developing nations. Many of these nations use the infant industry argument to justify the continued imposition of high tariff rates; however, ultimately these rates need to come down for these nations to reap the full benefits of international trade. For example, the bound tariff rates of 53.9 percent on imports of transportation equipment into India and 33.6 percent on imports into Brazil, by raising domestic prices, help protect inefficient domestic producers and limit economic growth by reducing the real income of consumers who must pay more for transportation equipment and related services.

Protectionism in Argriculture

Another focus of WTO is high level of tariffs and subsidies in agricultural sector of many economies. Tariff rates on agricultural products among developed nations around 4%. On agricultural products average tariff rates are 21.2% for canada, 15.9% for EU, 18.6% for Japan, and 10.3% for US. implication is that consuemrs in these countries are paying sig higher prices than necessary for agrictulrual products imported from abroad which leaves them with less money to spend on other goods and services. Historically high tariff rates on agricultural reflect a desire to protect domestic agriculture and tradit farming communities from foreign competition. agricultural producers also benefit from substantial subsidies. goc subsidies on average account for 17% of cost of agricultural production in canada, 21% in US, 35% in EU and 59% in Japan. Combination of high tariff barriers and subsidies introduces sig distorion into production of ag products and international trade of those products. net effect to raise prices to consumers, reduce volume of ag trade, adn encourage overproduction of products that are heavily subsidized. fre trade in ag could help jump start economc growth among worlds poore nations and alleviate global poverty

Protecting Intellectual Property

Another issue that has become inc important to the WTO has been protecting intellectual property. The 1995 Uruguay agreement that established the WTO also contained an agreement to protect intellectual property. The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Rich countries had to comply with the rules within a year. Poor countries, in which such protection was generally much weaker, had 5 years' grace, and the very poorest had 10 years. The basis for this agreement was a strong belief among signatory nations that the protection of intellectual property through patents, trademarks, and copyrights must be an essential element of the international trading system. Inadequate protections for intellectual property reduce the incentive for innovation. Because innovation is a central engine of economic growth and rising living standards, the argument has been that a multilateral agreement is needed to protect intellectual property.

Antidumping Actions

Antidumping actions proliferated during the 1990s. WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are being harmed. Unfortunately, the rather vague definition of what constitutes "dumping" has proved to be a loophole that many countries are exploiting to pursue protectionism. abut 4230 antidumping actions to the WTO. India initiated largest # of antidumping actions then EU then US.

WTO: Experience to Date

By 2014, WTO had 159 members, including China, which joined at the end of 2001, and Russia, which joined in 2012. WTO members collectively account for 98% of world trade. Since formation, WTO has remained at the forefront of efforts to promote global free trade. Its creators expressed the belief that the enforcement mechanisms granted to the WTO would make it more effective at policing global trade rules than the GATT had been. The great hope was that the WTO might emerge as an effective advocate and facilitator of future trade deals, particularly in areas such as services. The experience so far has been encouraging, although the collapse of WTO talks in Seattle in late 1999, slow progress with the next round of trade talks (the Doha Round), and a shift back toward some limited protectionism following the global financial crisis of 2008-2009 have raised a number of questions about the future direction of the WTO.

The Future of the WTO: unresolved issues and Doha round

Doha round began in 2001 and is still going on. economic fall after 2001. 4 issues at the forefront 1) Antidumping Actions 2) Protectionism in Agriculture 3) Protecting Intellectual Property 4) Market Access for Nonagricultural Goods and Services

A new round of talks: Doha

In 2001, the WTO launched a new round of talks between member-states aimed at further liberalizing the global trade and investment framework. For this meeting, it picked the remote location of Doha in the Persian Gulf state of Qatar. The talks were originally scheduled to last three years, although they have already gone on for 12 years and are currently stalled. The Doha agenda includes cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of antidumping laws. The talks are currently ongoing.

National Security

gov protects industries that are important to national security. defense-related industreis get this (aerospace, advanced electronics, and semiconductors). not as common as used to be. ex: those who want to protect US semiconductors from foreign competition because defense product dangerous to rely primarily on foreign help persuade the fed goc to support sematech (14 US semiconductor comp 90% of US industry ) semitech to conduct joint research into manyfacturing techniques. gov saw so special that protected by antitrust laws. in 19904 end to semiconductor industry gained market position back.

Expanding Tade Agreements

WTO given role of brokering future agreements to open up global trade in services. The WTO has given role of brokering future agreements to open up global trade in services. The WTO was also encouraged to extend its reach to encompass regulations governing FDI (GATT never did). 2 of first industries targeted for reform were global telecommunication and financial services industry. in 1997 WTO brokered deal to open temecommunication markets to competition allowing foreign operators to purchase ownership stakes in domestic telecommunication providers and establishing set of common rules for fair competition. most of worlds biggest markets were fully liberalized in 1998.

GATT

a mutilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like. from its foundation in 1947 untill supersended by WTO, the FATT membership grew from 10 to 120 nations. the GATT did not attempt to liberalize trade restrictions in one fell swoop; that would have been impossible. rather, tariff reduction was spread over eight rounds.

WTO

acts as an umbrella org that encompasses GATT along with 2 new sister bodies, one on services and other on intellectual property. The WTO's general Agreement on Trade Services (GATS) has taken lead to extending free trade agreemtents to services.The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules. WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. WTO has teeth.

Furthering Foreign Policy Objectives

govs use trade policy to support foreign policy objectives. gov may grant preferential trade terms to country it wants to build strong relations. and can be used to pressure or punish rogue states that do not abide by international law or norms. Iraq labored under extensive trade sanctions after the UN coalition defeated country in gulf war. such pressure might persuade rogue state to mend its ways, or it might hasten a change of gov. in Iraq, seen as way of forcing counrty to compy with several UN resolutions. the US has maintained long-running trade sanctions against Cuba. impoverish cuba in hopes that resulting economic hardship with lead to fall of communist gov and replacement of more democracy. US trade sanctions against Libya and Iran both accused of supporting terrorists. US gov responded by relaxing sanctions.

Infant Industry Argument

by far oldest economic argument for gov intervention. Alexander Hamilton proposed in 1792. according to argument, developing countries have potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. to allow manufactoring to get toehold, gov should temporarily support new industry (with tariffs, import quotas and subsidies) until have grown strong enough to meet international competition. appeal to developing nations and GATT recognized its legit reason for protectionism

1980-1993: Protectionist Trends

during this time, the trading system erected by the GATT came under strain as pressures for greater protectionism increased around the world. There were 3 reasons for the rise in such pressures during the 1980's. 1) economic success of Japan during that time strained world trading system. Japan was in ruins when the GATT was created. by early 1980s it became worlds second largest economy and largest exporter. japans success in such industries as automobiles and semicondutors might have been enough to strain world trading system. things made worse by spread perception in west that despite low tariff rates and subsidies, japanese markets closed to imports and foreign investment by administrative trade barriers. 2) the world trading system strained by persistent trade deficit in worlds largest economy -US. the consequesnce of US deficit included painful adjustments in industries where domestic producers lost market share to foreign competitors. resulting unemployment gave rise to renewed demands in US congress for protection against imports. 3) another reason for greater protectionism was that many countries found ways to get around GATT regulations. Bilateral voluntary export restraints (VERs) circumvent GATT agreements b/c neither importing country nor exporting complains to GATT bureaucracy in Geneva - and w/o a complaint, the GATT bureaucracy can do nothing. exporting countries agreed to VERs to avoid damaging punitive tariffs. VER between japan and US way of defusing growing trade tensions.

1947-1979: GATT, trade liberalization, and economic growth

economic damage caused by the beggar-thy-neighbor trade policies that the Smooth Hawley Act ushered in exerted a profound influence on economic institutions and ideology of post WWII. the US emerged fromthe war both victorious and economically dominant. after debacle of great depression, optinion in US congress swung strongly in favor of free trade. under US leadership, GATT was established in 1947.

WTO as Global Police

first 2 decades in life of WTO suggests that its policing and enforcement mechanisms are having a positive effect. Between 1995 and 2013, more than 400 trade disputes between member countries were brought to the WTO. This record compares with a total of 196 cases handled by the GATT over almost half a century. Of the cases brought to the WTO, three-fourths have been resolved by informal consultations between the disputing countries. Resolving the remainder has involved more formal procedures, but these have been largely successful. In general, countries involved have adopted the WTO's recommendations. The fact that countries are using the WTO represents an important vote of confidence in the organization's dispute resolution procedures.

Opening Case: Sugar Subsidies Drive Candy Makers Abroad

in 1930's height of great depression, US gov helped US sugar industry with a combination of subsidies, price supports, import quotas and tariffs. meant to be temporary, but still in place. in 2008 policies approved for farm bill, the gov guarantees 85% of the market for US producers, primarily farmers growing sugar beets and cane. remaining 15% allocated for imports from certain countries at a preferential tariff rate. sets floor price for sugar. gov purchases excess supply if price falls below to drive price back up. surplus then sold at loss to producers of ethanol. 2013 US sugar harvest required goc to spend $200 mill to prop up sugar prices. 2010-2013 sugar price in US is average 64% and 92% higher than the world price of sugar. This keeps large sugar producing countries like Brazil, India, and Thailand from flooding US market and driving locals out of business. small candy companies have moved production off shore because sugar too expensive. Ex: Spangler Candy Company (Dum Dums) has moved 200 jobs from ohio to juarez mexico, then imported back to US. Adams & Brooks shifted 2/3 of production from cali to mexico. sugar producers spent 20 mill on political lobbying between 2011-2013. republicans didnt like. gov supported intervention.

Country Focus: Trade in Hormone-Treated Beef

in 1970's, scientists discovered how to synthesize certain hormones and use them to accelerate growth rate of livestock animals, reduce fat content, and increase milk production. Bovine Somatotropin (BST) a growth hormone produced by cattle was first synthesized by biotech firm Genentech. Injections of BST used to supplement animals own hormone production and increase growth rate. hormones popular among farmers who found they could cut costs and help satisfy customer demands for leaner meat. concerning saying unnatural and health consequences. EU respinded to concerns in 1989 by banning importation of hormone treated mean and use of growth-promoting hormones in production of livestock. ban was controversial b/c reasonable consensus existed among scientists that hormones posed no health risk. Use of hormones became widestread in countries like australia, canada, new zealand, and US. European ban was unfair barrier. exports of meat to EU fell. US red meat exports declined from 231 mill to 98 mill. Complaints of meat exporters bolstered when Codex Alimentarius approved use of growth hormones. no link to human health problems. US pressed EU to drop ban in 1995. EU refused. canada and US filed formal complaints to WTO. WTO rules that EU ban on hormone-treated beef was illegal because it had no scientific justification 1997. EU did nothing. US imposed punitive sanctions on the EU: tariffs of 125 mill on EU exports to US. EU excepted the tariffs instead of raising the ban. increased imports of US non hormone meat and us lifted tariff. ending longest running trade dispute in history.

The Uruguay round and the World Trade Organization.

in 1986 GATT members embarked on 9th round of negotiations to reduce tariffs, the Uruguay Round dragged on for 7 years before agreement reached in 1993. went in effect in 1995. Uruguay round contained following provisions: 1) tariffs on industrial goods were to be reduced by many than 1/3rd and tariffs were to be scrapped on more than 40% of manufactured goods. 2) average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4% of value, the lowest level in modern history 3) agricultural subsidies were to be substaintially reduced 4) GATT fair trade & market access rules were to be extended to cover a wide range of services 5) GATT rules also were to be extended to provide enhanced protection for patents, copyrights, and trademarks (intellectual property) 6) barriers on trade in textiles were to be sign reduced over 10 years 7) the WTO was to be created to implement the GATT agreement

Protecting Consumers

many govs long regulations to protect consumers from unsafe products. indirect effect often to limit or ban the importation of such product. Ex: in 2003 several countries (japan and s. korea) decided to ban imports of american beef after single case of mad cow disease found in washington state. ban motivated to protect consumers from what was seen to be an unsafe product. these countries accounted for 2 bill of US beef sales, so the ban had a sig impact on US beef producers. after 2 years countries lifted the ban, but placed strict requirements to reduce risk. EU banned sale of importation of hormone treated beeg. ban was motivated by a desire to protect european consumers from health consequences.

Protecting Jobs and Industries

most common political argument for govs. tariffs placed on imports of foreign steel by bush in 2002 designed to protect jobs and industries. many steel producers located in states bush needed to win reelection. political motive underlay establishment of Common Agricultural Policy (CAP) by EU. designed to protect jobs of Europe's politically powerful farmers by restricting imports and guaranteeing prices. these price raises from CAP bad for consumers. rise in steel prices made automobile companies less competitive.

Protecting Human Rights

protecting and promoting human rights in other countries is important element of foreign policy for many democracies. gov uses trade policys to try to improve human rights of trading partners. us had trade sactions against Myanmar, in small part due to poor human rights practices in nation. eased sactions in response to democratic reforms. Western govs did this to South Africa so it would drop apartheid policies.

From smith to the great depression

the theoretical case for free trade dates to the late eighteenth century and the work of adam smith and divid ricardo. free trade as gov policy was first officially embraced by GB in 1846, when british parliament repealed the Corn Laws which placed high tariff on imports of foreign corn. objective to Corn Laws tariff were to raise gov revenuew and protect british cron producers. annual motion in parliament in favor of free trade since 1820's when david ricardo was a member. agr protection debate when effects of a harvest failure in GB were compounded by imminent threat of famine in Ireland. FAced with considerable hardship and suffering among populace, parliment narrowly reversed its long held position. during next 80 years GB one of worlds dominant trading powers pusehd case for trade liberalization, but brit goc was a voice of welderness. only reason brit kept policy for so long was that as worlds largest exporting nation, it had far more to lose from a trade war than did any other country. in 1930's british attempt to stimulate free trade was buried under economic rubble of Great depression. economic problems compounded in 1930s when congress passed Smoot Hawley Act: erected enormous wall of tariff barriers. almost every industry was rewarded with its "made to order" tariff. damaging effect on employemnt abroad. other countries reacted by raising their own tariff barriers. US exports tumbled in response, and world slid further into Great Depression