Let me introduce myself…
• Professor Alan Matthews
• Professor Emeritus of
European Agricultural
Policy in the Department
of Economics
• Former Director, Institute
for International
Integration Studies
• Particular research
interests in agriculture,
trade and development
Outline for my course
contribution
•
•
•
•
Trade and protectionism
Balance of payments and exchange rates
Green growth: growth and environment
Addressing imbalances: Future issues for
the global economy
• [Role of the financial system]
Rafique Mottiar
Trade and Protectionism
Session 4
Macroeconomics and the International
Economy
MSc Economic Policy Studies
Alan Matthews
The policy context
• The WTO Doha Round of multilateral trade
negotiations
• New EU trade policy late 2010
• Focus now on bilaterals and
‘megaregionals’
• Commodity market turmoil
• Challenges/opportunities for Ireland?
Learning objectives
• Describe some of the stylised facts about trends in
international trade
• Review our understanding of the gains from trade
• Identify barriers to trade and trade protectionism
• Explain the role of the WTO in setting trade rules
and encouraging further trade liberalisation
• Describe significance of new generation of
regional trade agreements
• Discuss Ireland’s trade policy objectives in the
context of the global economic crisis
Section 1.
Stylised facts about trade
Global trade – stylised facts
• Most trade takes place between the North America, Europe
and East Asia
• Some developing countries now important suppliers of
manufactured exports
• Shift in importance from commodities to goods to services
• Significance of intra-industry trade
• Success of multilateral system in liberalising trade in
goods…
• .. But paradoxical increase in interest in RTAs
• .. And growing hostility to further trade liberalisation
Source: WTO
International Trade
Statistics 2012
Ireland’s export profile
Structure of Irish merchandise trade
Source: WTO Trade Profiles
Structure of Irish services trade
Source: WTO Trade Profiles
.. But free trade is not popular
Section 2.
Review of gains from trade
The various gains from trade
• Traditional gains
– Comparative advantage
– Variety of products
• Modern extensions
–
–
–
–
Competition and contestability
Economies of scale and scope
Innovation and R&D
Product and quality improvement
World Price and Comparative
Advantage
If a country has a comparative advantage, then the
domestic price will be below the world price, and
the country will be an exporter of the good.
If the country does not have a comparative
advantage, then the domestic price will be higher
than the world price, and the country will be an
importer of the good.
International Trade in an Exporting
Country...
Price
of Steel
Domestic
supply
Price after
trade
World
price
Price before
trade
Domestic
demand
0
Quantity
of Steel
How Free Trade Affects Welfare in an
Exporting Country...
Price
of Steel
Domestic
supply
A
Price after
trade
Price before
trade
Exports
B
D
World
price
C
Domestic
demand
0
Quantity
of Steel
How Free Trade Affects Welfare in an
Exporting Country...
Price
of Steel
A
Price after
trade
Price before
trade
Consumer surplus
before trade
B
World
price
C
Producer surplus
before trade
0
Domestic
supply
Domestic
demand
Quantity
of Steel
How Free Trade Affects Welfare in an
Exporting Country...
Price
of Steel
Consumer surplus
after trade
A
Price after
trade
Price before
trade
Exports
B
D
World
price
C
Producer surplus
after trade
0
Domestic
supply
Domestic
demand
Quantity
of Steel
How Free Trade Affects Welfare in an
Exporting Country
The analysis of an exporting country yields
two conclusions:
Domestic producers of the good are better off,
and domestic consumers of the good are worse
off.
Trade raises the economic well-being of the
nation as a whole, i.e., the potential size of the
cake for redistribution.
International Trade and the Importing
Country...
Price
of Steel
Domestic
supply
Price before
trade
Price after
trade
World
Price
Domestic
demand
0
Quantity
of Steel
How Free Trade Affects Welfare in an
Importing Country...
Price
of Steel
Domestic
supply
A
Price before
trade
Price after
trade
0
B
C
D
Imports
World
Price
Domestic
demand
Quantity
of Steel
How Free Trade Affects Welfare in an
Importing Country...
Price
of Steel
Consumer surplus
before trade
Domestic
supply
A
Price before
trade
Price after
trade
0
B
C
Producer surplus
before trade
World
Price
Domestic
demand
Quantity
of Steel
How Free Trade Affects Welfare in an
Importing Country...
Price
of Steel
A
Price before
trade
Price after
trade
0
B
C
Consumer surplus
after trade
D
Imports
Producer surplus
after trade
Domestic
supply
World
Price
Domestic
demand
Quantity
of Steel
How Free Trade Affects Welfare in an
Importing Country
The analysis of an importing country yields
two conclusions:
– Domestic producers of the good are worse off,
and domestic consumers of the good are better
off.
– But N.B.
– trade raises the economic well-being of the
nation as a whole because the gains of
consumers exceed the losses of producers.
The Gains and Losses from
Free International Trade
• The gains of the winners exceed the losses
of the losers.
• The net change in total surplus is positive.
• This is the basis for the pro-trade stance of
economists
• So… trade is beneficial, but what is the
basis for trade?
Efficiency gains from trade
Absolute advantage
Production per person per working day
Portugal England
Wine
6
3
Clothing
4
7
UK more efficient in clothing, Portugal in wine
Comparative advantage
Portugal England
Wine
6
3
Clothing
4
3
Portugal more efficient producer of both clothing and wine – but trade
still mutually beneficial because of differences in relative costs. Wine is
more expensive in the UK, clothing is more expensive in Portugal
Comparative advantage in action
• England
–
–
–
–
–
Two workers reallocated from wine to clothing implies
-6W + 6C
Clothing is exported to Portugal in exchange for wine
-6C + 9W
Net result: -6W + 9W = +3W
• Portugal
–
–
–
–
–
Exports 9W in exchange for 6C from England:
-9W + 6C
To produce 9W it must give up 6C in domestic product
+9W – 6C
Net result: 0
Gains from trade again
Comparative cost trade theories
• Differences in technology (labour productivity Ricardo)
• Differences in domestic endowments (HeckscherOhlin)
– factor price equalisation
– remuneration increases for the factor that is employed
most intensively in the commodity whose price
increases
– empirical performance in explaining trade flows?
Further sources of trade gains
• Gains from enhanced competition and contestability
of markets
– reduced X-inefficiency (‘cold shower’ effect)
• Gains from exploiting economies of scale (“Smithian
gains”)
• Gains from greater product variety
– Intra-industry trade
• Growth effects
– Gains from the stimulus to investment and thus economic
growth
– Technological spillovers and productivity effects
• Political arguments for free trade (avoidance of ‘rentseeking’)
Empirical evidence on trade
gains/costs of protection
• Empirical estimates of the classical gains from
trade (and thus the cost of limiting trade) are quite
limited, rarely more than 0.5% of GNP
• Much greater welfare effects arise if account is
taken of modern sources of gains from trade
• The costs of trade policy intervention can be quite
high if political economy considerations are
factored in.
Section 3.
Trade policy instruments
Arguments for protectionist trade
policy
• Tariffs as a source of revenue
• Optimum tariff argument (for large countries)
• Industrial policy considerations
– infant industry argument (learning economies)
– external benefits: the strategic industry argument
• Strategic trade theory (profit-shifting) argument
• Non-trade concerns (e.g. food security, rural environment)
• Protection against ‘unfair’ competition due to lower costs or
standards
• Concerns over unemployment and adjustment costs
http://economics.about.com/od/internationaltrade/a/The-Arguments-Against-Free-Trade.htm
Trade policy instruments
•
•
•
•
•
Tariffs (specific, ad valorem and variable)
Quotas (what happens to rents)
Voluntary export restraints
Contingent protection (anti-dumping)
Beyond-the-border barriers (regulatory
regimes)
– (evidence from the EU single market)
• Trade facilitation measures
Partial equilibrium analysis of
tariffs
Price
SH
DH
Pw'
A
B
C
D
Pw
Q2
Q4
Q3
Q1
Quantity
.. lower tariffs improve welfare
Why is trade policy
controversial?
• Trade and unemployment (trade costs jobs)
• Trade and income distribution (distribution
within countries)
• Trade and convergence (distribution of
income between countries)
• Trade and environment (pollution haven
hypothesis)
• Trade and labour standards (race to the
bottom)
More reasons why trade policy is
controversial
• Trade and consumer non-trade concerns
• Trade and public services
• Debates about trade rules
– Multilateral versus regional approaches
– Governance arrangements for trade policymaking and role of the WTO
– Unfair rules for developing countries.
Section 4.
Trade policy rules
EU trade policy making
• Common Commercial Policy
– Qualified majority voting..except when unanimity required in
internal decisions, plus cultural and audiovisual services [social,
education, health services]
• Council – approves mandate for trade negotiations and
outcome
• Article 133 Committee
• European Parliament – following Lisbon Treaty must be
consulted on progress of negotiations and has power of
assent on ‘take it or leave it’ basis. Decides trade
regulations using Ordinary Legislative Procedure.
• Commission – conducts negotiations under the Council
mandate
World Trade Organisation
• Established 1995
• One member, one vote – principle of consensus
• Sets rules, monitors rules and acts as forum for further trade
liberalisation
• General Agreement on Tariffs and Trade (GATT 1994)
– Multilateral Trade Agreements, including
•
•
•
•
•
Agreement on Technical Barriers to Trade
Agreement on Agriculture
Agreement on Sanitary and Phytosanitary Standards
Agreement on Textiles and Clothing
Agreements on Subsidies and Anti-Dumping (measures against unfair
trade)
– Plurilateral Trade Agreements
• General Agreement on Trade and Services (GATS)
• Trade-Related Aspects of Intellectual Property Rights
WTO general norms (1)
• Non-discrimination
– Most Favoured Nation (MFN) treatment of like
products (BUT exceptions for free trade
arrangements)
– National treatment
• Reciprocity
– the political economy justification for
multilateral trade negotiations
WTO general norms (2)
• Enforced commitments
– tariff bindings and Schedules
• Transparency
– Trade Policy Review Mechanism
• Safety valves
– restrictions in the case of serious balance-of-payments
difficulties or to support infant industries
– Article XX - general exceptions allowing trade
restrictions
• Disciplines on unfair trade practices (subsidies)
• Disciplines on technical barriers to trade
(standards, food safety)
WTO dispute settlement
• Binding arbitration
• Possibility of retaliation
• Key US – EU trade disputes
Achievements of the Uruguay Round
• Eighth negotiating round
• Extended GATT disciplines to agriculture
and services
• Completed as a single undertaking
• But with principle of special and differential
treatment for developing countries
Agreement on Agriculture
• Agriculture was previously outside GATT
disciplines
• Introduced a three pillar structure
– Market access
– Export subsidies
– Domestic support
• Included a rendez-vous clause
• Food safety and technical barriers covered by
separate Agreements
GATS as a framework agreement
• General obligations
– MFN treatment: applies across all sectors regardless whether
specific commitments have been made unless specific exemptions
notified initially
• Specific commitments related to specific sectors
– These relate to three areas (i) market access (ii) national treatment
and (iii) other commitments
– Commitments only apply to sectors scheduled and may prescribe
conditions and qualifications
• Understanding that periodic negotiations will be
undertaken to progressively liberalise trade in services
Problems of services negotiations
• Market access barriers are entirely regulatory - not
traditional border barriers
• Market access is not divisible (like tariffs) - all or
nothing
• Difficult to quantify concessions for the purpose
of determining reciprocity
• Developing countries are net importers of services
- saw few possibilities for export gains
Section 5
Trade policy issues
EU trade policy
• Global Europe 2006
– Strong commitment to multilateral WTO process
– Marked end of de facto moratorium on
competitiveness-oriented FTAs
– Negotiations launched with Korea, India and ASEAN
in 2007, with Canada 2009 and Mercosur 2010.
– Korea FTA now approved , also Peru, Columbia,
Central America
– Reformulation of ‘development’ trade agreements
• EBA, EuroMed, GSP, EPAs
EU focus on non-tariff barriers
•
•
•
•
•
•
Regulatory issues
Intellectual property rights
Government procurement
Foreign investment protection and liberalisation
Services
Link with the Single Market
– Implementation of the Services Directive
• Export restrictions on raw materials and energy
• Keep focus on the big trading partners without agreements
– US, China, Russia, Japan, India, Brazil – which account
for 50% of EU trade
WTO Doha Round
• Unfinished business from Uruguay Round
• The Doha Development Round 2001
– Seattle, Doha, Cancun, Hong Kong, Geneva
• Covers agriculture, manufactures, services,
rules
• Negotiations to date – role of developing
countries
What’s on the table?
• Significant further reductions in
manufacturing tariffs, but disagreement on
the balance between developed and
developing countries
• Ambitious cuts in agricultural tariffs and
subsidies, but with flexibilities
• Disappointing offers in services to date
• Some progress on rules issues
Regionalism
• Appears to liberalise trade, so what is the
problem?
• Inherently discriminatory, and therefore inefficient
due to trade diversion costs
• Role of rules of origin
• But when tariffs are low, trade diversion costs
insignificant
• Reduced regulatory barriers are inherently nondiscriminatory
Illustrating Viner's trade creation
and trade diversion effects
Country
Price = unit costs
Price including 100 per cent
tariff
Price including 50 per cent tariff
A
(Home)
35
-
B
(Partner)
25
50
C
(World)
20
40
-
37.5
30
Trade creation: the welfare change due to the replacement
of (higher-cost) domestic production of import goods by
(lower-cost) imports
Trade diversion: the welfare change due to the replacement
of imports from a low cost source by imports from a high
cost source
Trade creation and diversion small country in a small union
Price
SH
D
PU(1+t)=PU'
H
SU
'
SW'
PW(1+t)=PW'
a
PU
x
b
y
SU
z
PW
S
W
B C
D
E
Quantity
EU objectives in the Doha Round of
WTO trade negotiations
• To further liberalise access to overseas markets for EU
goods and particularly services
• To strengthen coverage of WTO rules in areas such as
investment, competition, transparency in government
procurement, intellectual property and trade facilitation.
• To ensure more assistance is provided to developing
countries to help their integration into the world economy
• To get the WTO to focus more on issues of public concern
such as the environment, animal welfare and food safety
EU and Irish interests in the
Doha Round
• Market access
– But will we gain enough on non-agriculture and services to offset
problems for agriculture?
• Improved rules
– What would be gains from extending rule to investment, competition,
trade facilitation, procurement?
• The development agenda
– Coherence with development objectives
• Addressing public concerns
– Incorporating environmental and public health concerns into trade rules
Trade policy today
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•
•
•
•
•
Can creeping protectionism be avoided?
The role of China
What to do about the Doha Round?
Agricultural protectionism
The EU’s strategy of bilateral RTAs
Addressing governance deficiencies in the
WTO
• The developing country agenda
Reading
• McAleese Chapter 17
• Supplementary references:
• Brulhart, M and Matthews, A., EU external trade
policy, in El-Agraa, A. ed., The European Union:
Politics and Economics, Cambridge University
Press
• Policy documents on WTO, EU and Irish trade
policy on course website