INT TRADE & FINANCE_Lecture 9 (1)

International Trade and Finance

• Professor: G. Bustos

• Institution: University School of Politics, Economics & Global Affairs

Class Schedule and Topics

• Session 1-2: Intro to Intl Trade and FinanceDates: Jan 8-15, 2025Assignments:

• Session 3-4: Comparative Advantage / Income DistributionDates: Jan 22-23, 2025

• Session 5-6: Firms in the Global Economy (I-II)Dates: Jan 29-30, 2025

• Session 7-8: Globalization Paradox (I-II)Dates: Feb 5-9, 2025

• Session 9-10: Intl Trade Policy (I)Dates: Feb 12-19, 2025

• Session 11-12: Intl Trade Policy (II)Dates: Feb 20-26, 2025

• Session 13-14: Review / Mid-Term ExamDate: Mar 4-5, 2025Exam Date: March 5

• Session 15-16: National Accounting / Balance of Payments (I-II)Dates: Mar 12-13, 2025

• Session 17-18: Exchange rates & Foreign Exchange MarketsDates: Mar 19-27, 2025Assignments: Individual Paper due Mar 21

• Session 19-20: Exploring International Markets / Intl ContractsDate: Apr 2, 2025

• Session 21-22: Documents Intl Trade / Methods of SettlementDate: Apr 9, 2025

• Session 23-24: Export Insurance / Financial CrimeDate: Apr 23, 2025

• Session 25-26: Group PresentationsDates: Apr 24-May 8, 2025

• Session 27-28: Group PresentationsDates: Apr 24-May 8, 2025

• Session 29-30: Final ExamDate: May 13, 2025

Lecture 9: International Trade Policy (II)

1. The Case for Free Trade

• Hong Kong: No tariffs or import quotas, showcasing a unique economic model.

• Cost-Benefit Analysis of Tariffs: Modest costs for protectionism (~1% of GDP).

• Free Trade Gains: More significant for developing countries versus advanced economies.

• Economies of Scale: Free trade encourages industry concentration, enhancing productivity.

• Innovation and Learning: Free trade incentivizes new export ventures and competition.

• Import Quotas vs Tariffs: Quotas can exacerbate costs through economic rent-seeking.

2. National Welfare Arguments Against Free Trade

• Optimum Tariff: Large countries can benefit from tariffs by affecting foreign prices.

• Terms of Trade: Useful for large countries; limited relevance for small countries.

• Domestic Market Failures: Failures in labor or capital markets can justify intervention.

• Theory of the Second Best: Assumes multiple markets need to function efficiently for a hands-off policy to be beneficial.

3. Income Distribution and Trade Policy

• National Welfare vs. Specific Groups: Trade policy affects groups differently, complicating welfare calculations.

• Median Voter Model: Political competition influences policy preferences based on voter interests.

• Collective Action Problems: Group interests conflict with individual incentives for advocacy.

• Historical Context: Many developing countries have pursued import-substituting industrialization.

• Advanced Countries' Focus: Protectionism mainly in agriculture and textiles to shield politically powerful sectors.

4. International Negotiations and Trade Policy

• Interest Group Politics: National welfare is often overshadowed by political lobbying.

• Historical Trade Liberalization: Post-World War II saw significant tariff reductions through negotiations.

• Mutual Agreements: Facilitate support for free trade and avoid trade wars.

• Smoot-Hawley Act: Increased tariffs in 1930, contributing to the Great Depression.

• GATT/WTO Formation: GATT established in 1947; WTO formed in 1995 to regulate trade and prevent barriers.

• Binding Tariff Process: Prevents countries from raising tariffs unexpectedly.

Conclusion

• Trade rounds since GATT have made significant impacts but estimating specific outcomes remains complex.

• China's WTO accession in 2001 marked a pivotal moment in global economic integration.