Trade Policy
Pierre-Louis Vézina
p.vezina@bham.ac.uk
Intro
• Previous chapters have answered the
question, “Why do nations trade?”
• The next ones: “What should a nation’s trade
policy be?”
– Should the UK use a tariff to protect its car
industry against competition from Japan and
South Korea?
– Who will benefit and who will lose? Will the
benefits outweigh the costs?
Intro
• Tariffs are the oldest form of trade policy
• Their true purpose has usually been twofold
– provide government revenue
– protect domestic sectors
Intro
• In the early 19th century, for example, the UK
used tariffs (the famous Corn Laws) to protect
its agriculture from import competition.
• In the late 19th century, both Germany and
the US protected their new industrial sectors
by imposing tariffs on imports of
manufactured goods
Types of Tariffs
• A tariff is a tax on imports
• A specific tariff is levied as a fixed charge for
each unit of imported goods.
– For example, $3 per barrel of oil.
• An ad valorem tariff is levied as a fraction of
the value of imported goods.
– For example, 25% tariff on the value of imported
trucks.
Import Demand Curve
• An import demand curve is the difference
between the quantity that Home consumers
demand minus the quantity that Home
producers supply, at each price:
MD = D – S
Import Demand Curve
Import Demand Curve
Export Supply Curve
• An export supply curve is the difference
between the quantity that Foreign producers
supply minus the quantity that Foreign
consumers demand, at each price.
XS* = S* – D*
Export Supply Curve
World Equilibrium
The Effects of a Tariff
• The independent, LUANDA, 23 APRIL 2014:
• In Luanda’s Jumbo supermarket, a half-litre tub of
imported vanilla ice-cream used to cost $25 (£15),
testament to the Angolan capital’s rank as one of
the world’s most expensive cities.
• With new import tariffs imposed last month, that
price has jumped to $31, enough to make even
wealthy locals and expatriates pause and putting
the treat even further beyond the reach of
millions of poor Angolans struggling to feed their
families.
The Effects of a Tariff
• The independent, LUANDA, 23 APRIL 2014:
• In Luanda’s Jumbo supermarket, a half-litre tub of
imported vanilla ice-cream used to cost $25 (£15),
testament to the Angolan capital’s rank as one of
the world’s most expensive cities.
• With new import tariffs imposed last month, that
price has jumped to $31, enough to make even
wealthy locals and expatriates pause and putting
the treat even further beyond the reach of
millions of poor Angolans struggling to feed their
families.
How does that happen?
The Effects of a Tariff
• A tariff acts like a shipping cost, making sellers
unwilling to ship ice cream unless the Angola
price exceeds the UK price by the amount of
the tariff:
PT – t > P*T
The Effects of a Tariff
• If PT – t < P*T , no ice cream is being shipped
• There is excess demand in Luanda and excess
supply in the UK.
• The price in Luanda will rise and that in the UK will
fall until the price difference is t.
The Effects of a Tariff
Angola
UK
The Effects of a Tariff
• The quantity of imports equals the quantity of
exports when
PT – P*T = t
The Effects of a Tariff
• Because the price in Luanda rises from PW
under free trade to PT with the tariff,
– Luanda producers supply more and Home
consumers demand less, so
– the quantity of imports falls from QW under free
trade to QT with the tariff.
The Effects of a Tariff
• Because the price in the UK falls from PW
under free trade to PT* with the tariff,
– UK producers supply less, and UK consumers
demand more, so
– the quantity of exports falls from QW to QT .
The Effects of a Tariff
• The increase in the price in Luanda is less than
the amount of the tariff and…
• The Angola tariff causes the UK export price to
decline
• Is this really possible?
The Effects of a Tariff in a Small Country
• When a country is “small,” it has no effect on
the foreign (world) price because its demand
is an insignificant part of world demand for
the good.
– The foreign price does not fall, but remains at Pw
– The price in the home market rises by the full
amount of the tariff, to PT = Pw + t .
A Tariff in a Small Country
A Tariff in a Small Country
Back in Angola, the government
imposed higher import tariffs in
March 2014 on hundreds of items,
from garlic to cars.
The stated aim is to try to diversify
the heavily oil-dependent economy
and nurture farming and industry,
sectors which have remained weak.
But this is expected to hike prices
for consumers, hitting the less
privileged sectors of society
especially hard.
Effective Rate of Protection
• The effective rate of protection measures how much
protection a tariff (or other trade policy) provides.
– It represents the change in value that firms in an industry add to the
production process when trade policy changes, which depends on the
change in prices the trade policy causes.
• Effective rates of protection often differ from tariff rates
because tariffs affect sectors other than the protected sector,
causing indirect effects on the prices and value added for the
protected sector.
Effective Rate of Protection
• For example, suppose that cars sell in world markets for $8,000,
and they are made from factors of production worth $6,000.
– The value added of the production process is
$8,000 – $6,000 = $2,000
• Suppose that a country puts a 25% tariff on imported cars so
that home auto assembly firms can now charge up to $10,000
instead of $8,000.
Effective Rate of Protection
• The effective rate of protection for home car assembly firms is
the change in value added:
($4,000 – $2,000)/$2,000 = 100%
• In this case, the effective rate of protection is greater than the
tariff rate.
Effective Rate of Protection
• Now suppose that the country, to encourage
domestic production of car parts, imposes a 10%
tariff on imported parts, raising the cost of parts for
domestic assemblers from $6,000 to $6,600.
• Even though there is no change in the tariff on
assembled cars, this policy makes it less
advantageous to assemble domestically.
Effective Rate of Protection
• Before the tariff it would have been worth
assembling a car locally if it could be done for $2,000
($8,000 - $6,000)
• After the tariff, local assembly takes place only if it
can be done for $1,400 ($8,000 - $6,600).
• The tariff on parts, then, while providing positive
protection to parts manufacturers, provides negative
effective protection to assembly at the rate of -30% (600/2,000).
Costs and Benefits of Tariffs
• A tariff raises the price of a good in the
importing country, so it hurts consumers and
benefits producers there.
• In addition, the government gains tariff
revenue.
• How to measure these costs and benefits?
Consumer Surplus
• Consumer surplus measures the amount that consumers gain
from purchases by computing the difference in the price
actually paid from the maximum price they would be willing
to pay for each unit consumed.
• If, for example, a consumer would have been willing to pay $8
for an ice cream but the price is only $3, the consumer surplus
gained by the purchase is $5.
Consumer Surplus
When the price increases, the
quantity demanded decreases
as well as the consumer surplus.
Producer Surplus
• Producer surplus measures the amount that
producers gain from sales by computing the
difference in the price received from the
minimum price at which they would be willing
to sell.
Producer Surplus
Costs and Benefits of a Tariff for the Importing Country
Costs and Benefits of a Tariff for the Importing Country
Consumers worse off
Producers better off
Government better off
Net Welfare Effects of a Tariff
Change in welfare
due to the tariff is
e – (b + d)
Costs and Benefits of Tariffs
• For a “large” country, whose imports and exports affect world
prices, the welfare effect of a tariff is ambiguous.
• The triangles b and d represent the efficiency loss.
– The tariff distorts production and consumption decisions: producers
produce too much and consumers consume too little.
• The rectangle e represents the terms of trade gain.
– The tariff lowers the Foreign price, allowing Home to buy its imports
cheaper.
Tariffs for the Long Haul
• Tariffs can be fiendishly hard to remove even after economic
conditions have completely changed
• The “Chicken Tax” tariff lasted for so long (47 years, and
counting) that it ended up hurting the producers that had
intensively lobbied to maintain the tariff in the first place!
• This tariff was a retaliation by the US against a tariff on US
chicken imposed by Western Europe in the 1960s.
• The US retaliation, focusing on Germany (one of the main
political forces behind the original chicken tariff), imposed a
25% tariff on imports of light commercial trucks
Tariffs for the Long Haul
• At the time, Volkswagen was a big producer of such vehicles
and exported many of them to the US.
• As time went by, Volkswagen stopped producing those
vehicles, but the US “big three” lobbied to keep the tariff to
protect themselves against Japanese producers
• 40 years later, the latest company to be hit by the
consequences of the tariff is Ford, one of those “big three”
Tariffs for the Long Haul
• Ford produces a commercial van in Europe, the “Transit
Connect,” designed (with its smaller capacity and ability to
navigate old, narrow streets) for Europe.
• The recent spike in fuel prices sharply increased demand in
some US cities for this van.
• In 2009, Ford started selling these vehicles in the US.
– To get around the 25% tariff, Ford installs rear windows, rear seats,
and seat belts prior to shipping . These vehicles are no longer
classified as commercial trucks but as passenger vehicles, subject to
the much lower 2.5% tariff.
– Upon arrival in Baltimore, the rear seats are promptly removed and
the rear windows replaced with metal panels—before delivery to the
Ford dealers
Tariff evasion
• Large tariffs can induce producers to behave in
many creative—though wasteful and
sometimes illegal —ways in order to avoid
them.
Tariff evasion
• Declare rice as mung beans
• Two Philippine companies, Plum Blossom Import-Export Food Corp. and
Full Story Source Marketing were apparently importing rice from Vietnam
and Thailand but misdeclaring it as mung beans to a corrupt customs
agent. Why? White rice imports require an import license from the
National Food Authority and are subject to a 50% duty and 12% VAT. Mung
beans, meanwhile, are zero-rated in both customs duties and VAT under
the ASEAN Free Trade Agreement...
Source: Philippines Daily Inquirer
Tariff evasion
• Evading antidumping duties
• What happens to Chinese steel exporters when the US beefs up its
protection for domestic steel industries with high-profile antidumping
duties?
• The Global Times reports: The US Coalition for Enforcement of
Antidumping and Countervailing Duty Orders said it had gathered
"compelling evidence of how certain manufacturers (in China) are evading
duties"... Chinese manufacturers of steel wire products evade
antidumping duties via third countries...
Tariff evasion
• Undervalue motorcycles:
• 48 brand new Yamaha motorcycles arrived at the Port of
Manila in December 2013
• According to import documents, the motorcycles were "in
knocked-down condition" from Thailand, and valued $212
each
• Customs conducted an inspection and found the motorcycles
were new and came from India!
• The suggested selling price of a brand new Yamaha in India is
$1,812, about 85% higher than the declared value
Tariff evasion
Export Subsidy
• An export subsidy can also be specific or ad valorem:
– A specific subsidy is a payment per unit exported.
– An ad valorem subsidy is a payment as a proportion of the value
exported.
• When the government offers an export subsidy, shippers will
export the good up to the point at which the domestic price
exceeds the foreign price by the amount of the subsidy.
• An export subsidy raises the price in the exporting country,
decreasing its consumer surplus (consumers worse off) and
increasing its producer surplus (producers better off).
Export Subsidy
• Also, government revenue falls due to paying
s XS* for the export subsidy.
• An export subsidy lowers the price paid in importing countries
PS* = PS – s.
• In contrast to a tariff, an export subsidy worsens the terms of
trade by lowering the price of exports in world markets.
Effects of an Export Subsidy
Effects of an Export Subsidy
Welfare loss:
b+d+e+f+g
Europe’s Common Agricultural Program
• The EU has a massive export subsidy program
• The CAP began not as an export subsidy, but
as an effort to guarantee high prices to
farmers by having the EU buy products when
prices fell below support levels
• To prevent this policy from drawing in imports,
it was initially backed by tariffs that offset the
difference between European and world
prices  to make imports more expensive
Europe’s Common Agricultural Program
• Since the 1970s, however, the support prices
set by the EU have turned out to be so high
that Europe—which, under free trade, would
be an importer of most agricultural
products—was producing more than
consumers were willing to buy
Europe’s Common Agricultural Program
• The EU found itself obliged to buy and store
huge quantities of food.
• In 1985, it had stored 780,000 tons of beef,
1.2 million tons of butter, and 12 million tons
of wheat.
• To avoid unlimited growth in these stockpiles,
the EU turned to a policy of subsidizing
exports to dispose of surplus production
Europe’s Common Agricultural Program
The cost of this
policy is almost
$30 billion more
than its benefits
(in 2007).
Europe’s Common Agricultural Program
• So why does the EU continue with this policy?
Europe’s Common Agricultural Program
Europe’s Common Agricultural Program
So why does the EU continue with this policy?
Europe’s Common Agricultural Program
• In the US and Japan, farmers are also
protected:
– Japan’s 1000% tariff on imported rice
– America’s sugar quota
Import Quota
• An import quota is a restriction on the quantity of a good that
may be imported.
• This restriction is usually enforced by issuing licenses or quota
rights.
• A binding import quota will push up the price of the import
because the quantity demanded will exceed the quantity
supplied by Home producers and from imports.
Import Quota
• When a quota instead of a tariff is used to restrict imports,
the government receives no revenue.
– Instead, the revenue from selling imports at high prices goes to quota
license holders.
– These extra revenues are called quota rents.
Effects of the US Import Quota on Sugar
Import Quota
• Quotas on Clothing: Until 2005, quota licenses
granted to textile and apparel exporters were
specified in the Multi-Fiber Agreement
between the US and many other nations.
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9-65
Voluntary Export Restraint
• A voluntary export restraint works like an import quota,
except that the quota is imposed by the exporting country
rather than the importing country.
• These restraints are usually requested by the importing
country.
• The profits or rents from this policy are earned by foreign
governments or foreign producers.
– Foreigners sell a restricted quantity at an increased price.
A Voluntary Export Restraint in
Practice: Japanese Cars
• For much of the 1960s and 1970s, the US car
industry was largely insulated from competition by
the different kind of cars bought by US and foreign
consumers
• US buyers, living in a large country with low gasoline
taxes, preferred much larger cars than Europeans
and Japanese
• In 1979, however, sharp oil price increases and
temporary gasoline shortages caused the U.S. market
to shift abruptly toward smaller cars.
A Voluntary Export Restraint in
Practice: Japanese Cars
• Japanese producers moved in to fill the new
demand.
• As the Japanese market share soared and US output
fell, strong political forces in the US demanded
protection
• Rather than act unilaterally and risk creating a trade
war, the US government asked the Japanese
government to limit its exports
• The Japanese, fearing unilateral US protectionist
measures, agreed to limit their sales
A Voluntary Export Restraint in
Practice: Japanese Cars
• The first agreement, in 1981, limited Japanese
exports to the US to 1.68 million cars.
• The price of Japanese cars in the US rose, with the
rent captured by Japanese firms.
• The US government estimates the total costs to the
US to be $3.2 billion in 1984, primarily in transfers to
Japan rather than efficiency losses.
Local Content Requirement
• A local content requirement is a regulation that requires a
specified fraction of a final good to be produced domestically.
• It may be specified in value terms, by requiring that some
minimum share of the value of a good represent home value
added, or in physical units.
Local Content Requirement
• From the viewpoint of domestic producers of inputs, a local
content requirement provides protection in the same way
that an import quota would.
• From the viewpoint of firms that must buy home inputs,
however, the requirement does not place a strict limit on
imports, but allows firms to import more if they also use more
home parts.
Local Content Requirement
• Local content requirement provides neither government
revenue (as a tariff would) nor quota rents.
• Instead, the difference between the prices of home goods and
imports is averaged into the price of the final good and is
passed on to consumers.
American buses, made in Hungary
• In 1995, sleek new buses began rolling onto the
streets of Miami and Baltimore.
• Probably very few riders were aware that these
buses had been made in Hungary, of all places. Why
Hungary?
• Some clever Hungarian investors’ realised that there
is a loophole in the Buy American Act, originally
passed in 1933.
American buses, made in Hungary
• The Buy American Act affects procurement (purchases by
government agencies, including state and local governments)
by requiring that American firms be given preference.
• A bid by a foreign company can be accepted only if it is at
least 25% below the domestic bid, effectively shutting out
foreign producers in most cases
• “American” products can contain some foreign parts but 51%
of the materials must be domestic.
American buses, made in Hungary
• The Hungarians realized they could set up a production chain
that just met this criterion.
• American axles and tires were shipped to Hungary, where
they were put onto the bus shells; these were then shipped
back to the US, where US-made engines and transmissions
were installed.
• The whole product was slightly more than 51% American, and
these buses were thus legally “American”
• The advantage of the scheme was to use inexpensive
Hungarian labour
Other Trade Policies
• Export credit subsidies
– A subsidized loan to exporters
– US Export-Import Bank subsidizes loans to US exporters.
• Government procurement
– Government agencies are obligated to purchase from home suppliers,
even when they charge higher prices
(or have inferior quality) compared to foreign suppliers.
• Bureaucratic regulations
– Safety, health, quality, or customs regulations can act as
a form of protection and trade restriction.
Doing Business
Doing Business
Country
France
Ireland
Canada
Denmark
Hong Kong
…
Tajikistan
Côte d'Ivoire
Nigeria
Uzbekistan
Central African
Republic
Documents to import
2
2
3
3
3
12
13
13
13
17
Doing Business
Country
Singapore
Denmark
Hong Kong
Estonia
United States
…
Iraq
Chad
Afghanistan
Uzbekistan
South Sudan
Days to import
4
5
5
5
5
82
90
91
104
130
Other Trade Policies
Sanctions, bans, and the politics of trade policies
Other Trade Policies
Sanctions, bans, and the politics of trade policies
• “Western countries” this year imposed sanctions on Russia over the
Ukraine crisis
• One Russian reaction was a ban on farm imports from EU nations
• Russia was the main apple export market for Poland, the leading EU
producer of the fruit.
• The price of Polish apples fell sharply in October, by 77% year-on-year
• Poles have responded by celebrating the forbidden fruit, encouraging
people via a social-media campaign on Facebook and YouTube to “Eat
apples to annoy Putin”
Other Trade Policies
Sanctions, bans, and the politics of trade policies
• Why does Russia’s trade policy affect the price
of apples in Poland?
• Why does Poland react with an applepromotion campaign?
Recap: The Effects of Trade Policy
1. Tariffs generate government revenue; export subsidies drain
it; import quotas do not affect government revenue.
2. All these trade policies create production and consumption
distortions.
3. Large countries can influence foreign prices
Effects of Alternative Trade Policies
Global Trade Alert
Global Trade Alert
Trade Policy in Developing Countries
Trade Policy in Developing Countries
1. Import-substituting industrialization
2. Trade liberalization since 1985
3. Trade and growth: Takeoff in Asia
Import-Substituting Industrialization
• Import-substituting industrialization was a development
strategy adopted by many low- and middle-income countries
before the 1980s.
• The policy aimed to encourage domestic industries by limiting
competing imports  infant industry argument
Import-Substituting Industrialization
• The infant industry argument:
– a potential comparative advantage in some industries
– governments should temporarily support them until they’re strong
enough to compete
Import-Substituting Industrialization
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Effective Protection of Manufacturing
Import-Substituting Industrialization
• Problems with the Infant Industry Argument:
1.
With protection, infant industries may never “grow up”
2.
It may be wasteful to support industries now that will have a
comparative advantage in the future.
Import-Substituting Industrialization
• Import-substituting industrialization in Latin America worked
to encourage manufacturing in the 1950s and 1960s
• But did import-substituting industrialization promote
economic development?
– No, countries adopting these policies grew more slowly than others.
Import-Substituting Industrialization
• Pakistan and India have protected their
manufacturing sectors for decades
• The goods they export, however, are light
manufactures like textiles, not the heavy
manufactures that they protected
– They would have developed their manufactured exports
even if they had never protected manufacturing
Import-Substituting Industrialization
• Import-substitution industrialization involved costs and
promoted wasteful use of resources:
– It involved complex, time-consuming regulations
– It set high tariff rates for consumers, including firms that needed to
buy imported inputs for their products.
– It promoted inefficiently small industries.
Trade Liberalization
• By the mid-1980s, many governments had lost faith in import
substitution and began to liberalize trade.
Trade Liberalization
• Trade liberalization in developing countries occurred along
with a dramatic increase in the volume of trade.
Mexico Abandons Import-Substituting Industrialization
• Mexico’s turn toward free trade in 1980s reversed a halfcentury of history
• Throughout the 1950s and 1960s, trade barriers were high
• Mexican industry produced very little for export
Mexico Abandons Import-Substituting Industrialization
• 1982: Debt crisis
Mexico Abandons Import-Substituting Industrialization
• In 1980, Mexican exports were only 10.7% of GDP—and much
of that was oil.
• Between 1985 and 1988, Mexico drastically reduced tariffs
and removed most of the import quotas that had previously
protected its industry.
• 1994  NAFTA
• By 2008, exports were up to 28.3% of GDP, primarily
manufactures
Mexico Abandons Import-Substituting Industrialization
Trade Liberalization
• Has trade liberalization promoted development? The
evidence is mixed.
– Growth rates in Brazil and other Latin American countries have been
slower since trade liberalization than they were during importsubstituting industrialization.
• But unstable macroeconomic policies and financial
crises contributed to slower growth since the 1980s.
Trade Liberalization
– Other countries like India have grown rapidly since
liberalizing trade in the 1980s, but it is unclear to
what degree liberalized trade contributed to
growth.
– Some economists also argue that trade
liberalization has contributed to income
inequality, as the Heckscher-Ohlin model predicts.
Trade Policy in Developing Countries
• Do countries with lower barriers to trade
experience faster economic progress?
• World Bank, IMF, and the OECD regularly
promulgate advice predicated on the belief
that openness generates predictable and
positive consequences for growth
1975-1994
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Import-Substituting Industrialization
• Kicking Away the Ladder, Ha-Joon Chang
• Based on economic history, all major
developed countries, including the UK,
used interventionist economic policies
to promote industrialization
• Protected national companies until they
had reached a level of development in
which they were able to compete in the
global market
Import-Substituting Industrialization
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Trade and Growth: Takeoff in Asia
• Instead of import substitution, several countries in East Asia
adopted trade policies that promoted exports in targeted
industries.
– Japan, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Thailand,
Indonesia, and China have experienced rapid growth in various export
sectors and rapid economic growth
Asia’s Surging Trade
The Asian Takeoff
Trade and Growth: Takeoff in Asia
• So it is possible to develop through export-oriented
growth.
• However, Latin American nations such as Mexico and
Brazil, which also sharply liberalized trade and shifted
toward exports, did not see comparable economic
takeoffs.
Trade and Growth: Takeoff in Asia
• It’s unclear if the high volume of exports and imports caused
rapid economic growth or was merely correlated with rapid
economic growth.
– High saving and investment rates could have led to both rapid
economic growth in general and rapid economic growth in export
sectors.
– Rapid growth in education led to high literacy and numeracy rates
important for a productive labor force.
– These nations also undertook other economic reforms.
Recap
1. Import-substituting industrialization aimed to promote
economic growth by restricting imports that competed with
domestic products in low- and middle-income countries.
 The infant industry argument
2. Import-substituting industrialization was tried in the 1950s
and 1960s but by the mid-1980s it was abandoned for trade
liberalization.
3. Trade and growth go together, yet the role of trade policy in
growth and welfare is still being debated.
The international political
economy of trade policy
International Negotiations of Trade Policy
• Since 1944, much of the reduction in tariffs
and other trade restrictions has come about
through international negotiations.
International Negotiations of Trade Policy
• Why are there such negotiations?
– Multilateral negotiations help avoid a trade war
between countries, where each country enacts
trade restrictions.
The Problem of Trade Warfare
World Trade Organization
•
In 1947, a group of 23 countries began trade negotiations
under the General Agreement on Tariffs and Trade, or GATT.
•
In 1995, the World Trade Organization, or WTO, was
established as a formal organization for implementing
multilateral trade negotiations (and policing them).
World Trade Organization
World Trade Organization
• 160 members as of 2014
World Trade Organization
•
WTO negotiations address trade restrictions
in at least 3 ways:
1.
Reducing tariff rates through multilateral negotiations.
2.
Binding tariff rates: a tariff is “bound” by having the
imposing country agree not to raise it in the future.
3.
Eliminating nontariff barriers: quotas and export subsidies
(subsidies for agricultural exports are an exception)
World Trade Organization
• The Uruguay Round in 1994:
– Launched the WTO
– agreed that all quantitative restrictions (quotas)
on trade in textiles and clothing as previously
specified in the Multi-Fiber Agreement were to be
eliminated by 2005.
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World Trade Organization
• "Battle in Seattle" in 1999
• Activists tried to shut down the meeting that was
supposed to launch the WTO's new round of trade
talks.
• The activists succeeded. That's why it's the Doha
round, not the Seattle round.
World Trade Organization
• The frequency – and virulence – of anti-WTO
protests have died off gradually since 1999,
perhaps because the round doesn't seem to
be going anywhere
• The Doha negotiations have not yet produced
an agreement.
– Most of the remaining forms of protection are in
agriculture, textiles, and clothing—industries that
are politically well organized.
World Trade Organization
World Trade Organization
• Why the Trade Talks Collapsed
• Wall Street Journal, July 7, 2007
World Trade Organization
• Why the Trade Talks Collapsed
• Wall Street Journal, July 7, 2007
• “In truth, the breakdown of the Doha Round in Potsdam,
Germany, had less to do with India and Brazil's protectionism
than with the US' paralyzing inability to respond to longstanding, worldwide demands for the reduction of its (and the
EU's) agricultural subsidies. Until we confront this central fact,
success will remain beyond our grasp.”
World Trade Organization
• The Doha round is based on the idea of a
single undertaking, which means that, in
effect, "nothing is agreed until everything is
agreed“
• The Economist has more than 100 articles on
the Doha Round since it was launched
• The gridlock analysis goes on…
Do Agricultural Subsidies Hurt
developing countries?
• The US cotton subsidy depresses world cotton
prices and hurts cotton growers in West Africa
• But we learned that an export subsidy raises
the welfare of the importing country, which
gets to buy goods more cheaply.
• So shouldn’t export subsidies by rich countries
actually help poorer countries?
Do Agricultural Subsidies Hurt
developing countries?
• China, which exports manufactured goods and
imports food and other agricultural products,
would be hurt by the removal of agricultural
subsidies.
World Trade Organization
– The WTO is not completely irrelevant…
– The dispute settlement procedure: a formal
procedure where countries in a trade dispute can
bring their case to a panel of WTO experts to rule
upon.
• The panel decides whether member counties are
breaking their agreements.
• A country that refuses to adhere to the panel’s decision
may be punished by the WTO allowing other countries
to impose trade restrictions on its exports.
Testing the WTO’s Mettle
• In 2002 the US imposed 30% tariffs on a range of
steel products.
• The official reason was that the US faced a surge in
imports, and needed time to restructure.
• But the real reason, almost everyone agreed, was
politics: West Virginia, Ohio, and Pennsylvania,
where the steel industry is concentrated, were
widely expected to be crucial “swing states” in the
2004 election.
Testing the WTO’s Mettle
• Europe, Japan, China, and South Korea filed suit against the
US steel tariff with the WTO
• The US complied with the ruling, lifting the steel tariffs in
December 2003
• Most observers believed, that the key motivation was a threat
by the EU, which had received WTO clearance to take
retaliatory action, and was getting ready to impose tariffs on
more than $2 billion in US exports.
• The EU policymakers even targeted their tariffs on goods
produced in—you guessed it—political swing states.
Craft Brewers at the WTO
• "Australia is in a very unfair position because other countries
are providing substantial reduced tax rates for their small
brewers, and that is deemed a government subsidy"
• "We've had quite a few members say they've lost taps at
hotels or fridge space to Sierra Nevada products“
• More here.
World Trade Organization
• Recap
– The WTO’s negotiations are not going anywhere
– The Dispute Settlement Mechanism does help
maintain global cooperation
Preferential Trading Agreements
• Trade liberalization has not stopped since 2001
• Preferential trading agreements
– countries lower tariffs for each other but not for the rest of the world.
• Under the WTO, such discriminatory trade policies are
generally not allowed:
– Each country in the WTO promises that all countries will pay tariffs no
higher than the nation that pays the lowest
• the “most favored nation” (MFN) principle
– An exception is allowed only if the lowest tariff rate is set at zero
Preferential Trading Agreements
•
There are two types of preferential trading agreements in
which tariff rates are set at or near zero:
1.
A free trade area: an agreement that allows free trade
among members, but each member can have its own trade
policy towards non-member countries.
–
An example is NAFTA.
Preferential Trading Agreements
2.
A customs union: an agreement that allows free trade
among members and requires a common external trade
policy towards non-member countries.
–
An example is the European Union.
Do Trade Preferences Have Appeal?
• The EU has slipped into bunches of trouble over the question
of trade preferences for bananas.
• Most of the world’s banana exports come from several small
Central American nations—the original “banana republics.”
Do Trade Preferences Have Appeal?
• Several EU nations have traditionally bought their bananas
instead from their colonies in the Caribbean.
• To protect the island producers, France and the UK have
historically imposed import quotas against the “dollar
bananas” of Central America, which are typically about 40%
cheaper
• Germany, however, has never had Caribbean colonies, and
allowed free entry to dollar bananas.
• The EU common trade policy forced Germany into higherpriced bananas
Do Trade Preferences Have Appeal?
• The Europeans were hurting the interests not only
of Central American nations but also those of a
powerful US corporation
Do Trade Preferences Have Appeal?
• In 1997 the WTO found that Europe’s banana import
regime violated international trade rules
• In 2001, Europe and the US agreed on a plan to
phase out the banana import quotas
• The plan created much distress in Caribbean nations,
which feared losing privileged access to the EU
market.
• In 2005, the EU announced that it would eliminate
import quotas on bananas, but that it would triple
the tariff on bananas that did not come from…
former European colonies
Do Trade Preferences Have Appeal?
• In December 2007 the WTO ruled that
Europe’s latest banana regime, like its
predecessor, was illegal
• Chiquita’s stock price jumped with the news
Preferential Trading Agreements
• Can preferential trading agreements reduce national welfare?
• Yes. Rather than gaining tariff revenue from inexpensive
imports from world markets, a country may import expensive
products from member countries but not gain any tariff
revenue.
Preferential Trading Agreements
• Preferential trading agreements increase national welfare
when new trade is created, but not when existing trade from
the outside world is diverted to trade with member countries.
• Trade creation
– occurs when high-cost domestic production is replaced by low-cost
imports from other members.
• Trade diversion
– occurs when low-cost imports from nonmembers are diverted to highcost imports from member nations.
Trade Diversion in South America
• In 1991, Argentina,
Brazil, Paraguay, and
Uruguay formed
Mercosur
• Within four years, the
value of trade among
the nations tripled
Trade Diversion in South America
• A World Bank report argued that member countries
were being induced to buy expensively produced
manufactured goods from their neighbours rather
than cheaper but heavily tariffed goods from other
countries
• Brazil’s highly protected and somewhat inefficient car
industry had in effect acquired a captive market in
Argentina
Recap
1. Multilateral negotiations make countries agree not to engage
in a trade war.
2. The WTO and its predecessor have reduced tariffs substantially
in the last 50 years, and the WTO has a dispute settlement
procedure for trade disputes.
3. A preferential trading agreement is beneficial for a country if it
creates new trade but is harmful if it diverts existing trade to
higher-cost alternatives.
Spaghetti Bowls as Building Blocs
on the Path to Global Free Trade
• World trade is regulated by a motley assortment of
unilateral, bilateral and multilateral trade
agreements – a ‘spaghetti bowl’ of trade deals
• No one argues that this tangle of trade deals is the
best way to organise world trade.
• Taking the world to global duty-free trade will
require a multilateralisation of the world’s existing
and emerging regionalism.
Trade agreement dominos
• China-ASEAN trade agreement – 1 Jan 2010
• India competes against ASEAN countries with
its exports to China (fruit, vegetables, grains)
– India faces tariffs between 10-12%
– ASEAN countries get (almost) duty-free access
• This forces India to sign a similar agreement
with China
Trade agreement dominos
• Suzuki, the largest foreign carmaker in India,
with annual sales of 1m vehicles, pays around
12% tariffs on parts imported from Japan.
• South Korea’s FTA with India means that
Suzuki’s rival, Hyundai, pays just 1-5%.
• Osamu Suzuki, the Japanese company’s boss,
feels “handicapped”.
– The Economist 2010, Japan’s big companies are
shipping production abroad
The noodle bowl
• Why trade agreements are all the rage in Asia
• The Economist, Sep 3rd 2009
The noodle bowl
• Can you find one reason why trade
agreements are not that amazing for trade?
The noodle bowl
• Can you find one reason why trade
agreements are not that amazing for trade?
•
“Bilateral deals come laden with complicated rules about where products
originate—rules which impose substantial costs of labelling and certification on
firms. The more overlapping deals there are, the more complex the rules and the
higher the costs. Those who follow Asia’s FTA mania refer to this as the “noodle
bowl”. No wonder few firms actually want to use FTAs. An ADB survey of exporters
in Japan, South Korea, Singapore and Thailand in 2007-08 found that only 22%
took advantage of them.”
The noodle bowl
• Customs officers need to impose different
tariffs on the same good from different
nations
• This requires elaborate rules of origin
– These are costly for both customs and
manufacturers— especially with international
supply chains
The noodle bowl
Multilateralise regionalism, i.e.,
harmonize PTA in various ways,
effectively turning the individual
strands in the spaghetti bowl into
“lasagna”
The future of trade policy
The Trans Pacific Partnership
The future of trade policy
• The Transatlantic Trade and Investment
Partnership
The future of trade policy
• 21st century regionalism is not primarily about preferential
market access
• It is about disciplines that underpin the trade-investmentservice nexus
• The basic bargain is “foreign factories for domestic reforms” –
not “exchange of market access”.
• 21st century regionalism is largely about regulation rather
than tariffs
• 21st century regionalism is a threat to the WTO’s role as a rule
writer
Extra Readings
• Baldwin, Richard (2014), “21st century
regionalism and global trade governance”,
VoxEU.org