Week/Lecture 8: International Trade and Domestic Politics
Pioneers of Trade Theory
Adam Smith:
The Wealth of Nations (1776) advocated for free market policies.
David Ricardo:
Principles of Political Economy and Taxation (1817) introduced the theory of comparative advantage.
Heckscher-Ohlin Model
Basic model involves two countries, two goods, and two factors of production.
Differences in factor endowments lead to gains from trade.
Countries should specialize in producing goods that require a relatively abundant factor.
For maximum benefit, countries should trade with another country that has a very different factor endowment.
A Brief History of U.S. Trade Policy
Smoot-Hawley Tariff of 1930:
High tariffs during the Depression (1929-1933).
Franklin D. Roosevelt (1933-1945):
Favored free trade for the post-WWII era.
1947:
Congress rejects the International Trade Organization treaty initially proposed at Bretton Woods.
The GATT becomes the central trade regime.
Introduction to Trade Policy
Trade policy is a key aspect of domestic politics.
Tariffs, quotas, and non-tariff barriers are important issues for various economic groups.
The chapter examines the evolution of governance in the international trading system in the face of domestic and global political constraints.
The Smoot-Hawley Tariff Act of 1930 was the most protectionist law of the century.
Although Franklin D. Roosevelt (1933-1945) favored free trade for the post-WWII period, protectionism and the disintegration of world trade were at the center of trade policies.
In the 1930s, a common interest in an open trading order and a realization that states would have to cooperate to achieve and maintain that order created a common interest.
1947—Congress rejects the Truman administration's International Trade Organization treaty (the Havana Charter) initially proposed at Bretton Woods.
The General Agreement on Tariffs and Trade (GATT) - I
The General Agreement on Tariffs and Trade (GATT) was signed by attendees of the Havana conference in 1947.
The first trade “round” was held in Geneva that same year.
Intended initially to be a treaty operating under the umbrella of the ITO, the GATT, by default, became the world’s trade regime.
The principles are as follows:
Trade would allow countries to specialize according to the principle of comparative advantage.
All member states agreed to adhere to the most-favoured-nation (MFN) principle:
Any advantage, favour, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.
National Treatment: A rule designed to prevent discrimination against foreign products after they enter a country.
Under GATT rules, a country must give imports the same treatment as it gives products made domestically in such areas as taxation, regulation, transportation, and distribution.
The General Agreement on Tariffs and Trade (GATT) - II
Dumping and subsidies are often attacked politically as “unfair” trade practices, and hence, the GATT needed to address this issue by including restrictions on them in the overall regime.
Subsidies are government payments made to domestic producers to offset their production and sale costs partially.
Dumping is defined as pricing “below regular market price“.
One of the most essential rules in the GATT’s commercial code prohibited the use of quantitative restrictions, such as import quotas, except for temporary balance-of-payments or national security reasons.
There were, however, essential departures from these rules.
Provisions in the original GATT treaty and amendments made in the 1950s established a separate regime for agricultural trade.
In 1955, for example, the United States obtained a waiver under GATT rules that allowed it to impose quotas on agricultural products.
The U.S. Leadership
West and Western security in the face of Soviet aggression.
The tremendous postwar economic strength of the United States and the lure of foreign markets were a further reason for U.S. interest in leading trade liberalization.
In the two decades following World War II, the United States led the system by helping Europe and Japan rebuild production and pushing for trade liberalization.
In the early years, the Marshall Plan, or the European Recovery Program, was the tool of U.S. leadership in Europe.
The United States did not impose controls, and Europe and Japan immediately benefited from the tariff reductions.
The United States accepted such asymmetrical benefits because of a commitment to European and Japanese recovery because it expected to benefit from the reductions when the exchange controls were removed.
Multilateral Trade Negotiations
1947 Geneva
1949 Annecy
1950 Torquay
1956 Geneva
1960-61 Dillon
1962-67 Kennedy
1973-79 Tokyo
1986-93 Uruguay
2001- Doha
The most considerable tariff reductions occurred in the Kennedy Round.
Tokyo Round began discussions of non-tariff barriers.
The Uruguay Round established the basis for the World Trade Organization (WTO).
Interdependence Period (1971-1989)
After 1967, essential changes in the international trading system began to emerge and undermine the GATT management system and the liberal international trading order created by the GATT.
Over the next two decades, structural changes led to domestic political challenges to global trade management and new forms of protection.
The features of this period in terms of trade policies are as follows:
A surge in trade among the developed market economies due to economic growth, trade liberalization, decreasing transportation costs, and broadening business horizons.
Growing convergence of the developed countries’ economies:
The rapid accumulation of physical and human capital, the transfer of technology, and the growing similarities of wages narrowed the differences in factor endowments, which are the basis for comparative advantage and trade.
Growth of intra-industry trade and multinational corporations:
Intra-industry trade is the trade that occurs across national boundaries but within the same industry.
For example, when the U.S. sells auto parts to Japan, Japan also sells auto parts to the U.S.
A shift in manufacturing from the industrialized nations to the newly industrialized countries (NICs) (e.g., Taiwan, South Korea, Mexico, and Brazil) due to the rising labor productivity, lower labor costs, and aggressive export policies.
The 1970s was the era of stagflation (from 1974 to 1979), i.e., slow growth combined with rampant inflation.
Stagflation increased pressures on governments to adopt policies of trade restrictions.
The floating exchange rate system also contributed to growing protectionism.
Interdependence Period in Europe
In the 1970s and 1980s, the rise of Japan and the European Union and the relative decline of the United States complicated the trade management system.
In this period, the European Union emerged as the world’s largest trading bloc.
The EU established a customs union with free internal trade in goods, a standard external tariff, and a common agricultural policy.
In the 1980s, EU attention focused on the new policy of completing the creation of a common internal market by 1992.
The EU’s Common Agricultural Policy (CAP) blocked imports into the community and artificially stimulated competition in other markets.
The EU also entered into new preferential trading arrangements, which were explicitly outlawed under the GATT rule of non-discrimination.
The first was an agreement in 1958 with the then-French colonies in Africa.
In the 1990s, the EU negotiated preferential contracts with most of the Mediterranean Basin, much of Africa, and even with some developed countries of Western Europe.
The thrust of the internal market program was decidedly liberal, based on efforts to remove nontariff barriers to free trade.
In the 1980s, essential sectors were still excluded under GATT rules and processes.
One was agriculture.
Agriculture was subject to a separate GATT regime and did not benefit from the liberalization process of the postwar era.
At this stage, GATT could not restrain the agricultural trade war because its rules gave special treatment to domestic agricultural programs and export subsidies.
The New Protectionism
The result of structural changes in the global trading economy was a surge in new protectionist policies in developed countries.
The new protectionism took several forms:
Nontariff barriers (NTBs) to trade:
The GATT had been designed to liberalize trade by removing quotas and tariffs.
However, the significant remaining barriers to trade were nontariff barriers such as government procurement policies, customs procedures, health and sanitary regulations, national standards, and a broad range of other laws and regulations that discriminate against imports or offer assistance to exports.
Regional policy, agricultural policy, and consumer and environmental protection are other examples of non-tariff measures that have trade-distorting consequences.
Voluntary restraint agreements (VRAs), also known as voluntary export restraints (VERs):
The GATT also permitted countries to impose duties to offset foreign subsidies of exported products.
For example, Steel was the first significant industry subjected to VRAs among developed market economies.
The GATT regime became increasingly irrelevant in the face of the new protectionism.
The GATT had been designed to manage import restrictions, especially quantitative restrictions and tariffs, not non-tariff barriers and voluntary export controls.
Furthermore, countries often preferred politically negotiated bilateral solutions to the GATT’s multilateral rules and procedures.
Therefore, a new round was needed.
Main Issues in the Tokyo Round (1973-1979)
Tariffs
Conflict resolution; dispute settlement
Nontariff barriers:
Subsidies
Government procurement
Standards
Custom valuation
Licensing
Globalisation Period (1989-Present)
The forces of globalisation had transformed the trading system.
International trade increased dramatically, creating ever greater interdependence.
Furthermore, trade was transformed by increased service trade, trade-related intellectual property, and new investments in high-technology industries.
Globalization created conflicting political demands:
On the one hand, there were calls for expansion of trade liberalization and international management of old and new trade issues.
On the other hand, many groups demanded protection and a halt to the forces of globalisation.
New Forms of Trade:
Services differed from goods in that they could not be stored and required some form of direct relationship between the buyer and seller.
Producer services—banking, securities trading, insurance, law, advertising, accounting, and data processing—were used in the intermediate production of manufactured goods and other services and were more frequently traded internationally.
Intellectual property was another new trade issue in the late 1980s.
The technology could sometimes be easily and quickly copied and used to produce products at a much lower cost than that incurred by the developer, thus undermining the competitive ability of the firm that developed the technology.
To encourage the development of technology, most developed countries protect the developer of technology through patent, trademark, and copyright laws.
Trade-related investment measures (TRIMs):
Trade and investment issues began to merge in this period.
Some developed countries also pressed for GATT rules to eliminate trade-restrictive and trade-distorting effects of government investment policies and practices.
The New Regionalism
Another change in the trading system that began in the 1980s was the move away from multilateralism toward bilateral and regional arrangements.
Many countries turned to alternative trade agreements as multilateral reform seemed to stall (due to the Uruguay Round).
The EU, the largest regional trading bloc, continued to expand, taking in the former EFTA countries and reaching agreements with many Central and Eastern European countries on association and possible eventual membership in the EU.
At the same time, the United States moved in the direction of regional agreements for the Americas and the Pacific Rim.
The NAFTA agreement was signed in December 1992.
NAFTA provided for:
1) eliminating tariffs and other trade barriers on manufactured goods (textiles, autos, and auto parts).
2) It was intended to eliminate tariffs and other trade barriers to agricultural trade gradually.
3) NAFTA also included significant agreements for liberalizing service trade, including special land transportation and financial services provisions.
4) It provided for a liberal investment regime and opened several previously reserved sectors to foreign direct investment.
5) The agreement also increased intellectual property protection in Mexico.
Many countries in Latin America and the Caribbean were already removing trade barriers.
For example, Argentina, Brazil, Paraguay, and Uruguay formed a customs union known as Mercosur.
Movement toward regional trade liberalization was also occurring in the Asian and Pacific region.
In 1992, the six members of the Association of South East Asian Nations (ASEAN)—Brunei, Indonesia, Malaysia, Singapore, the Philippines, and Thailand.
Bilateralism also increased during this period.
The U.S. and Japanese governments negotiated numerous bilateral accords under the Mercosur.
Types of Regional Integration
Regional cooperation agreements
Free trade areas
Customs unions
Common markets (Example, European Union (EU))
Important Regional Trade Agreements
Europe:
European Union (EU)
European Free Trade Association (EFTA)
North America:
North American Free Trade Agreement (NAFTA)
Latin America and the Caribbean:
Latin American Integration Association (LAIA)
Andean Common Market (ANCOM)
Central American Common Market (CACM)
Southern Cone Common Market (Mercosur)
Caribbean Community (CARICOM)
Africa:
Arab Maghreb Union (UMA)
Economic Community of Central African States (ECCAS)
Central African Customs and Economic Union (CACEU)
Economic Community of West African States (ECOWAS)
West African Economic Community (CEAO)
Southern African Development Community (SADC)
Asia:
Association of South-East Asian Nations (ASEAN)
Asia Pacific Economic Cooperation (APEC)
Economic Cooperation Organization (ECO)
South Asian Association for Regional Cooperation (SAARC)
Middle East:
Gulf Cooperation Council (GCC)
Main Issues in the Uruguay Round (1986-1993)
Subsidies (Agriculture mainly)
Concerns of developing countries include tropical products, natural resource-based products, textiles, and clothing.
This was important due to the developing countries' increasingly active role in the GATT.
Trade in Services
Trade-related Intellectual Property (TRIPs)
Trade-related Investment Measures (TRIMs)
The Uruguay Round negotiations, which began in 1987, marked a new effort by the developed countries to devise new rules and institutions for managing the new global trading system.
Between December 1 and December 15, 1993, negotiations were conducted earnestly to complete the Uruguay Round.
Several breakthroughs occurred on contentious issues, including agricultural subsidies, audio-visual services (film and television), and financial services.
The Marrakesh Agreement in 1995
The agreement established a new entity called the World Trade Organization (WTO) in Geneva
The Marrakesh agreement also provided for
further cuts in tariffs,
significant reductions in agricultural subsidies,
elimination of textile and apparel quotas over ten years,
new trade rules for services,
new trade rules for intellectual property (General Agreement on Trade in Services (GATS)
new trade rules for trade-related investment, trade-related aspects of intellectual property rights (TRIPs), and agriculture.
The agreement also meaningfully extended the world trade regime to agriculture for the first time.
(GATS) and (TRIPs) are the framework agreements containing the general rules and disciplines.
Multilateral Trade Negotiations: The Doha Round
Begun in early 2000
Major conferences so far:
2001 Doha (Qatar)
2003 Cancun (Mexico)
2004 Geneva (Switzerland)
2005 Hong Kong
2006 Geneva (Switzerland)
2007 Potsdam (Germany)
2008 Geneva (Switzerland)
2015 Nairobi (Kenya):
On 19 December 2015, a WTO meeting in the Kenyan Capital led to an agreement for developed countries to end export subsidies immediately and for developing countries to follow by the end of 2019.
Main Issues in the Doha Round (2001-?)
Timing of implementation of Uruguay Round agreements, especially Agriculture, services, regional agreements, TRIPs/TRIMs
Reduced agricultural subsidies and textile/apparel tariffs in the wealthy industrialized countries.
Doha Development Round, reflecting the belief of the developing countries that the Uruguay Round had not dealt adequately with issues that concerned them.
The governments of the industrialized countries wanted lower tariffs on industrial products in the emerging market economies (especially Brazil, China, and India).
They were willing to commit to agricultural trade liberalization to secure these concessions.
The United States, the EU, Brazil, and India negotiated through the winter of 2006 and spring of 2007 but could not reach an agreement.
The negotiations broke down again in Potsdam, Germany, in June 2007.
The United States government blamed the governments of Brazil and India for the breakdown.
Conclusions
The multilateral trade regime represented by the WTO resulted from a series of efforts beginning immediately following World War II to create multilateral institutions to foster an open, liberal trading system.
During the Bretton Woods System, these efforts were primarily initiatives of the U.S. government.
Despite the challenges of interdependence, the Tokyo Round successfully expanded and modernized the trading regime.
Similarly, during globalization, the Uruguay Round successfully addressed old and new challenges, including agriculture, non-tariff barriers, new trade issues, and the growing potential for regionalizing world trade.
Serious differences existed and continue to exist over essential issues like agriculture, services, telecommunications, intellectual property, anti-dumping, and non-tariff barriers.
The Doha Round and its successors would have to address these issues.