International Trade
Trade Political Analysis and WTO policy
International Economic Policy
Finance and Development (LM-81), a.a. 2015-2016
Prof. Emanuele Ragusi
Presentation taken from Reinert , K.A. (2012) An Introduction to International Economics, Instructor Materials
Chapter 6-7
Chapter 6: Trade Policy
Analysis
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge University
Press 2012
Introduction




Reasons to expect landowners in Japan might
oppose the import of rice from another country
Opposition to imports exists despite overall
gains to Japan from these imports
Trade policy analysts and international affairs
professionals are often called upon to assess
impacts of government interventions in
international trade
Purpose of chapter is to understand how the
assessments are made
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.1: Absolute Advantage and Trade in
the Rice Market
Kenneth A. Reinert, Cambridge University
Press 2012
Absolute Advantage Revisited

In moving from autarky to trade in Figure 6.1,
there is a reduction in domestic quantity
supplied in Japan

Japanese rice-producing firms would lobby
Japanese government to oppose decrease in
domestic quantity supplied


Demand protection from Vietnam exports
Protective policies are widespread in world
economy
Kenneth A. Reinert, Cambridge University
Press 2012
Trade Policy Measures

A country can grant import protection to a
sector of its economy in form of either

Tariffs: a tax on imports




Specific tariff is a fixed tax per physical unit of the import
Ad valorem tariff is a percentage tax applied to the value
of the import
Non-tariff measures
Governments employ both types of tariffs
Kenneth A. Reinert, Cambridge University
Press 2012
Table 6.1: Nontariff Measures

Tax-Like Measures


Cost-Increasing Measures


Standard and technical regulations and others
Quantitative Measures


Anti-dumping duties, countervailing duties and
others
Quotas, tariff rate quotas and others
Government Procurement Practices
Kenneth A. Reinert, Cambridge University
Press 2012
A Tariff



For our graphical analysis in this chapter, it is
much simpler to consider a specific tariff
Basic results also apply to an ad valorem tariff
A tariff increases domestic price of imported
product above world price

In the case of Japanese rice, domestic price is many
times larger than world price

Causes an increase in Japan’s production of rice which is
desired effect from Japanese rice farmers


Domestic consumption of rice falls
Imports fall
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.2: A Tariff on Japan’s Imports of
Rice
Kenneth A. Reinert, Cambridge University
Press 2012
Tariff Effects


Welfare and revenue effects also occur from the
tariff
Consumer surplus of Japanese households fell


Producer surplus of Japanese firms has increased


Japanese rice consumers are paying more and
consuming less
Japanese rice producers are receiving more for their
product and producing more
Japanese government is receiving revenue from
import tax
Kenneth A. Reinert, Cambridge University
Press 2012
Net Welfare Effects

Summarizes welfare impact of policy for the
country as a whole


From an economic standpoint, tariff hurts
Japanese society as a whole
Although it benefits producers and government,
losses imposed on consumers outweigh benefits
Kenneth A. Reinert, Cambridge University
Press 2012
Terms of Trade Effects

When Japan imposes a tariff on its imports
from Vietnam, amount of these imports
decreases

As Japan’s imports of rice decrease, there will be
excess supply in the world market for rice


Will cause the world price to fall
Since Japan is importing rice, this is a good thing for this
country
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.3: The Terms-of-Trade Effects of
Japan’s Tariffs
Kenneth A. Reinert, Cambridge University
Press 2012
A Quota



Import quota—a quantitative restriction on
imports
Type of non-tariff measure
A quota results in a shortage of a good
relative to initial situation without quota,
causing price of good to rise


Known as quota premium
Consumer surplus falls and producer surplus
increases
Kenneth A. Reinert, Cambridge University
Press 2012
Figure 6.4: A Quota on Japan’s Rice Imports
Kenneth A. Reinert, Cambridge University
Press 2012
A Quota





Policy usually administered via a system of import
licenses
Quota has restricted supply of import licenses
Extra value of the right to import an amount of a
good is known as quota rents (area C)
Who receives rents depends on how the quota
licenses are allocated
Allocated to domestic importers


Quota rents accrue to importers and remain in Japan as a
gain
Allocated to foreign exporters

Quota rents accrue to exporters and leave Japan as a loss
Kenneth A. Reinert, Cambridge University
Press 2012
Summary of Trade Policies

Tariff


Tariff with terms of trade effects


Ambiguous net welfare effect due to terms of trade gain (fall in
world price) potentially outweighing efficiency loss
Domestic-allocated quota


Unambiguous net welfare loss due to consumer surplus loss
outweighing gains in producer surplus and government revenue
Unambiguous net welfare loss due to consumer surplus loss
outweighing gains in producer surplus and quota rents
Foreign-allocated quota

Unambiguous net welfare loss that exceeds that of domesticallocated quota case
Kenneth A. Reinert, Cambridge University
Press 2012
Comparative Advantage Models



In many instances, the effects of trade
policies go beyond a single sector
In these cases, trade policy analysts turn to
trade policy models based on comparative
rather than absolute advantage
The central insight of these models is that a
protective measure in one sector acts as an
implicit tax on production in other sectors
Kenneth A. Reinert, Cambridge University
Press 2012
Chapter 7: World Trade
Organization
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge University
Press 2012
Introduction




Chapter covers key aspects of the World
Trade Organization (WTO)
Covers the General Agreement on Tariffs and
Trade (GATT) and trade in goods
Addresses trade in services and intellectual
property
Discusses dispute settlement, the
environment and the Doha Round
© Kenneth A. Reinert, Cambridge University
Press 2012
The General Agreement on Tariffs and
Trade

In 1944, the United States and Britain held a conference
(Bretton Woods) that established:



International Bank for Reconstruction and Development (World
Bank)
International Monetary Fund
In 1945, the United States attempted to launch idea of
an International Trade Organization (ITO)




London—twenty-three founding members were present and
signed General Agreement on Tariffs and Trade (GATT)
In 1948 ITO charter was agreed to at a United Nations
Conference
In 1950 US announced it would not seek US Congressional
ratification of Havana Charter, effectively terminating ITO plan
Vehicle for post-war trade negotiations became GATT
© Kenneth A. Reinert, Cambridge University
Press 2012
The General Agreement on Tariffs and
Trade


Between 1946 and 1994, the GATT provided a
framework multilateral trade negotiations
Rounds reduced tariffs among member countries in
many (but not all) sectors



Weighted average tariff on manufactured products imposed
by industrial countries fell from 20% to 5%
However GATT suffered from what some defects that
limited its effectiveness
A number of these defects were addressed in the
Marrakesh Agreement at the end of the Uruguay Round
of multilateral trade negotiations
© Kenneth A. Reinert, Cambridge University
Press 2012
Non-Discrimination Principle


Non-discrimination has two elements
Most-favored nation (MFN) applying to border
measures


Each member must grant treatment to all other members
as favorable as it extend to any individual member country
National Treatment (NT) applying to behind-theborder measures

Foreign goods within a country should be treated no less
favorably than domestic good with regard to tax policies
and other regulations
© Kenneth A. Reinert, Cambridge University
Press 2012
General Prohibition of Quotas

A second important GATT principle

General prohibition of quotas or quantitative
restrictions on trade



Reflects a longstanding view that price distortions
(tariffs) are preferred to quantity distortions in
international markets
Quantitative restrictions were one of the most significant
impediments to trade prior to GATT
Exceptions are allowed
© Kenneth A. Reinert, Cambridge University
Press 2012
Tariff Bindings and Fair Trade

Tariffs are bound at an agreed-upon level often above applied
levels



Levels may not be increased in the future
Applied rates below bound rates may be increased
GATT introduced stipulations with regard to subsidies,
countervailing duties, and antidumping duties

Use of subsidies is not supposed to harm trading interests of
other members


If subsidies cause “material injury” or “threat thereof” to a domestic industry of
another country, that country can apply countervailing duties or tariffs on its
imports of the product from the subsidizing country
“Dumped goods are defined as exports sold below those charged
by the exporter in its domestic market

It dumped goods cause “material injury” or “threat thereof” to a domestic
industry of another country, that country can apply anti-dumping duties or
tariffs on its imports of the product from the dumping country
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 7.1: GATT/WTO Rounds of
Multilateral Trade Negotiations
Name of Round
Years
Number of
Countries
Auspices
Geneva
1947
23
GATT
Annecy
1949
29
GATT
Torquay
1950-1951
32
GATT
Geneva
1955-1956
33
GATT
Dillon
1960-1961
39
GATT
Kennedy
1963-1967
74
GATT
Tokyo
1973-1979
99
GATT
Uruguay
1986-1994
117
GATT
Doha
2001-
Over 150
GATT
Source: WTO
© Kenneth A. Reinert, Cambridge University
Press 2012
The World Trade Organization

The Marrakesh Agreement created the WTO and
included the WTO “tripod”




General Agreement on Tariffs and Trade (GATT 94) on trade in
goods
General Agreement on Trade in Services (GATS)
Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS)
Included a WTO charter



Established WTO as a legal international organization
Stipulated that “WTO shall provide the common institutional
framework for the conduct of trade relations among its members”
Defined the functions of WTO
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 7.2: Administrative Structure of
the WTO
Body
Composition
Ministerial Conference
Representatives of all members
General Council
Representatives of all members
Council for Trade in Goods
Representatives of all members
Council for Trade in Services
Representative of all members
Council for Trade-Related Aspects of
Intellectual Property Rights
Representatives of all members
Dispute Settlement Body
Representatives of all members
Dispute Settlement Panels
Three or five well-qualified governmental
and/or nongovernmental individuals
Appellate Body
Seven persons, three of whom serve on
any once case
Secretariat
Director General and staff
© Kenneth A. Reinert, Cambridge University
Press 2012
GATT: Agreement on Agriculture

Agreement on Agriculture addressed three issues

Market access


Replaced quotas with a system of bound tariffs (tariffication)
and tariff-reduction commitments
Domestic support

Distinction was made between



Export subsidies


“Green box” measures—are exempt from any reduction
commitments
“Amber box” measures—are not exempt
Use was not eliminated but limited to specified situations
Represented a change in rules with little actual
liberalization
© Kenneth A. Reinert, Cambridge University
Press 2012
Trade in Services

General Agreement on Trade in Services (GATS)—
significant outcome of Uruguay Round



Represented first time services were brought into a multilateral
trade agreement
Negotiations were difficult due to fact that trade in services is less
tangible than trade in goods
Defined trade in services as occurring in one of four
modes




Mode 1:
Mode 2:
Mode 3:
Mode 4:
Cross-border trade
Movement of consumers
Foreign direct investment or FDI
Movement of natural persons
© Kenneth A. Reinert, Cambridge University
Press 2012
Trade in Services

Cross-border trade

Mode of supply that does not require physical movement of
producers or consumers


Movement of consumers

Consumer travels to the country of producer


For example, tourism services
Foreign direct investment

Services that require a commercial presence by producers in
country of the consumers


For example, Indian firms provide medical transcription services to
US hospitals via satellite technology
For example, financial services
Temporary movement of natural persons

Non-commercial presence by producers

For example, consulting, construction, and instructional services
© Kenneth A. Reinert, Cambridge University
Press 2012
GATS Protocols




Second GATS Protocol: Revised Schedules of
Commitments on Financial Services, 1995
Third GATS Protocol: Schedules of Specific
Commitments Relating to Movement of Natural
Persons, 1995
Fourth GATS Protocol: Schedules of Specific
Commitments Concerning Basic
Telecommunications, 1997
Fifth GATS Protocol: Schedules of Specific
Commitments and Lists of Exemptions from Article II
Concerning Financial Services, 1998
© Kenneth A. Reinert, Cambridge University
Press 2012
Intellectual Property


An asset in the form of rights conferred upon a product
of invention or creation by a country’s legal system
Agreement on Trade-Related Aspects of Intellectual
Property Rights


Most contentious aspect of Marrakesh Agreement
Defined intellectual property as belonging to one of six categories







Copyrights
Trademarks
Geographical indications
Industrial designs
Patents
Layout designs of integrated circuits
Applied the principle of nondiscrimination to intellectual property
© Kenneth A. Reinert, Cambridge University
Press 2012
TRIPS Agreement

Sets out obligations for members

Copyrights


Trademarks



Members must protect “independently created industrial designs that are new
or original”
Patents


Members must provide legal means to prevent false use of geographical
indications
Industrial designs


Goods and services are to be protected for a term of no less than seven years
Provisions for the registration of trademarks must be made and are renewable
indefinitely
Geographical indications


Members must comply with 1971 Berne Convention on copyrights
Exceptions exist and include protection of public order, human, animal, and
plant life
Layout designs of integrated circuits

Distribution of protected layout designs is forbidden
© Kenneth A. Reinert, Cambridge University
Press 2012
TRIPS Agreement


Citizens and firms in developed countries own most
of the world’s IP
Developing countries currently often have less IP
protection than developed countries


Raises cost of many goods and services to
developing countries


Especially in the case of patents
Represents a transfer from developing country consumers to
developed country producers
Issues have also been raised about the impact of
new pharmaceutical patents on access to medicines
© Kenneth A. Reinert, Cambridge University
Press 2012
Dispute Settlement



Marrakesh Agreement included an
Understanding on Rules and Procedures
Governing the Settlement of Disputes
Original GATT was unclear about resolution
of disputes—Marrakesh Agreement
attempted to clarify dispute settlement
procedures
WTO includes councils on trade in goods and
services as well as a council on TRIPs

Should help minimize occurrence of disputes
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 7.2: Dispute Settlement
© Kenneth A. Reinert, Cambridge University
Press 2012
Dispute Settlement

If the consultation process fails to settle a dispute
within 60 days, the complaining member may
request the establishment of a panel


Composed of three or five “well-qualified governmental or
non-governmental individuals”
Function is to assist DSB in dispute settlement process



Consults the parties involved and provides DSB with a written
report of its findings
DSB has 60 days to adopt report by consensus unless a party
to dispute decides to appeal
The appeal of a panel report is referred to an appellate
body


Reviews the appeal and submits its report to the DSB
Any DSB member can effectively insist on the adoption of the
appellate body report
© Kenneth A. Reinert, Cambridge University
Press 2012
Dispute Settlement



Dispute settlement procedure applies to all aspects
of the Marrakesh Agreement
Improves procedures of old GATT
Effectiveness of procedures depends on members’
commitment to it

A country has option of ignoring outcome of the
dispute settlement process

Complaining member has right to impose retaliatory tariffs on
a volume of imports from the other country determined by the
DSB
© Kenneth A. Reinert, Cambridge University
Press 2012
The Environment


In 1991, the GATT reactivated a long-dormant Working
Group on Environmental Measures and International
Trade (EMIT)
GATT dispute resolution panel issued its controversial
opinion in the now-famous tuna-dolphin case


Ruled against US law banning imports of Mexican tuna that
involved dolphin-unsafe fishing practices
Argued import ban violated general prohibition against quotas
and United States had not attempted to negotiate cooperative
agreements on dolphin-safe tuna fishing

US environmental community reacted strongly against the GATT
panel ruling, casting the GATT as anti-environment
© Kenneth A. Reinert, Cambridge University
Press 2012
Committee on Trade and the
Environment


EMIT was replaced by Committee on Trade and the
Environment
Most developing country members of WTO have taken a
dim view of the work of CTE



Fear the possibility of further protection against their exports in
the form of “green protection”
Often view environmental matters having no place in the WTO
Many trade economists support the developing-country
view that environmental issues represent an “intrusion”
into WTO trade agenda

They do, however, support the use of multilateral environmental
agreements and perhaps even an World Environmental
Organization
© Kenneth A. Reinert, Cambridge University
Press 2012
Committee on Trade and the
Environment

In 1999, WTO formally took up trade and
environment issue


Report argued increased trade can have both positive
and negative impacts on the environment
Emphasized trade-driven growth cannot always be
counted upon to deliver improvements in
environmental quality through increased incomes


Consequently, these higher incomes must be “translated into
higher environmental quality” through mechanism of
international cooperation
Also emphasized that government subsidies to polluting and
resource-depleting sectors can exacerbate the environmental
consequences of trade
© Kenneth A. Reinert, Cambridge University
Press 2012
The Doha Round





Launched in Doha, Qatar in 2001
Progress has been very uneven, with a noted failure
at the 2003 Cancun Ministerial Meeting
July 2004, October 2005 and July 2008 negotiations
made some progress on contentious agricultural
issues
A “final countdown” to conclude the Round by the
end of 2011 was missed
Significant issues remain in agriculture and in “nonagricultural market access” (NAMA)
© Kenneth A. Reinert, Cambridge University
Press 2012