Trade diversion

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Trade Negotiations;
Regional Integration
Appleyard & Field (& Cobbs): Chapters 17 – 18
Krugman & Obstfeld: Chapters 9 and 11
1
Trade Negotiations
• Bretton Woods Conference (1944)
o
International Bank for Restructuring and Development
(IBRD, later to become the World Bank), International
Monetary Fund (IMF), International Trade
Organization (ITO)
• General Agreement on Tariffs and Trade (GATT) to
promote “freer and fairer” trade (1948)
• U.S. Senate turns ITO down (1950)
2
Multilateral Trade Negotiations
Year
Subjects covered
Number
of
countries
13–26
1947–1961
Several
negotiations
Tariffs
1964–1967
Kennedy
Round
Tokyo
Round
Tariffs and anti-dumping measures
Tariffs, non-tariff measures,
“framework” agreements
102
Uruguay
Round
Tariffs, non-tariff measures, rules,
services, intellectual property, dispute
settlement, textiles, agriculture, creation
of WTO…
123
1973–1979
1986–1993
62
3
World Trade Organization
•
GATT becomes WTO (1995)
1.
2.
Acts as a forum for trade negotiations
Administers trade agreements
1.
2.
3.
Settles trade disputes
Reviews national trade policies
Assists developing countries (technical assistance
and training programmes)
4.
Cooperates with other international
organizations
4
Features of GATT/WTO (1)
• Fixed-rule system
o unambiguous rules are required to move away from a
suboptimal Nash equilibrium
• Multilateralism and non-discrimination
o Most-favoured-nation (MFN) / normal trade relations
(NTR)
o Exceptions: 1) free trade areas and 2) GSP for
developing countries
• Reciprocity
o the process evolves trough mutually balanced
“concessions”
5
Features of GATT/WTO (2)
• Dispute settlement
o GATT had expert panels without authority to enforce
its recommendations
o WTO has a Dispute Settlement Body that can levy fines
on countries
• Transparency
o Tariffs rather than quotas
o WTO’s trade-policy-review mechanism
• Unresolved issues
o agriculture, textiles, shipping, anti-dumping duties,
subsidies, FDI, intellectual property rights…
6
Structure of the WTO
• Ministerial Conference (at least once every two years)
• General Council (ambassadors, several times a year)
o meets also as the Trade Policy Review Body
and the Dispute Settlement Body
• Other:
o Goods Council, Services Council and
Intellectual Property (TRIPS) Council
o Specialized committees, working groups and
working parties
o Secretariat (technical support; no decision-making role)
7
What’s Next?
• The Millenium Round was to be launched in Seattle
(1999), but no agreement was found
• A new round finally started in Doha (2001)
• Issues
o
agriculture, labour standards, environment, intellectual
property, anti-dumping and subsidies, investment,
competition policy, transparency in government
procurement …
• Failure in Cancun (2003)
• “Agreement on framework” (2004)
8
Types of Economic Integration (1)
• Free trade area (FTA)
o
o
no tariffs between the members
each members sets its own tariffs to outside members →
outside countries will use a transshipment strategy if no rules of origin exist
o
e.g. EFTA, NAFTA
• Customs Union
o
free trade area +
common external trade policy
o
e.g. Benelux
o
9
Types of Economic Integration (2)
• Common Market
o
customs union +
free factor movements
o
e.g. European Community
o
• Monetary / Economic Union
o
common markets +
common currency, common institutions and
coordination of economic policy
o
e.g. European Monetary Union
o
10
Static Effects of Economic
Integration
Jacob Viner (1950): The Customs Union Issue. Carnegie Endowment for International
Peace, New York.
• Two kinds of impacts due to integration
o Trade creation: shift from (high-cost) domestic
production to (low-cost) a member production
o Trade diversion: shift from (low-cost) nonmember
production to (high-cost) member production
→ The welfare impact of economic integration is
ambiguous
11
Welfare Impact of
Trade Creation
• Case 1: Member of integrated
of consumer surplus
 loss of producer surplus
 loss of government revenue
(1+τ)PM
decrease of
producer
surplus
tariff
 increase
SD
P
loss of govn’t
revenue
area (country M) is the most
efficient producer of the good
• Before integration, the price in
home country is (1+t)*PM
• After integration, price becomes
PM
PM
 Positive net impact (prior
DD
deadweight losses)
imports before integration
Q
12
imports after integration
Welfare Impact of
Trade Diversion
Case 2: Non-member of integrated
P
area (country O) is the most
efficient producer of the good
DH
• Before integration, the price in home
country is (1+t)*PO
• After integration, the price is PM
 increase of consumer surplus
(P+a+C+b)
 loss of producer surplus (P)
 loss of government revenue
(1+τ)PM
(C+G)
P
a
P
 Government loses C+G, but only C
M
is transferred to consumers
PO
 Net impact is a + b - G
•
SH
b
tariff
C
G
Q
imports before integration
13
imports after integration
Factors Affecting the Net Welfare Impact
of Trade Diversion
Trade diversion is likely to have less adverse impact on welfare
•
1.
2.
3.
4.
the closer the member country’s production cost is to the nonmember’s
the higher the initial tariff
the more elastic supply and demand
the more participating countries in integration
Other possible static effects of integration
•
1.
2.
3.
savings in administrative costs
possibility to improve the collective terms-of-trade
greater bargaining power in trade negotiations
14
Dynamic Effects of
Economic Integration
•
Integration may result different evolution of member
countries’ economies than would otherwise have
occurred
1.
2.
3.
more competition (less monopoly power)
access to larger markets → realization of economies
of scale
greater investment (less restrictions for members + e.g. non-
members are more motivated to “get behind the tariff wall” due to larger
market available)
4.
greater labour mobility
15
Current Trade Blocks
•
•
Andean Community (CAN), Asia-Pacific Economic Cooperation (APEC),
Association of Southeast Asian Nations Free Trade Area (AFTA), Caribbean
Community and Common Market (CARICOM), East African Economic
Community (EAEC), Economic Community of West African States
(ECOWAS), European Economic Area (EEA), European Free Trade
Association (EFTA), European Union (EU), Mercado Comun del Sur
(MERCOSUR or MERCOSUL), Mercado Comun Centro Americano
(MCCA), South Asia Association for Regional Cooperation (SAARC),
Southern African Development Community (SADC)
Proposed: Free Trade Area of the Americas (FTAA), South Asia Free Trade
Agreement (SAFTA)
16
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