Week 5

SMU Classification: Restricted
ECON113: ECONOMICS OF GLOBALISATION

Week 5: Trade Wars and Trade Talks
Yuan MEI
2022 – 2023 Term 1
1
Recap from Last Week

• Tariffs
▪ Types
▪ Incentives
▪ Trump Tariffs on Steel and Aluminum
• Non-tariff Barriers
▪ Quota
▪ Restrictions
▪ Product standards
▪ Barriers to trade and non-economic goals
• Discussion question: Consider the examples discussed in this

lecture as well as those discussed in the articles on Elearn.
Should trade policies be used to threaten other countries and
achieve non-economic goals?
2
Content
• Smoot – Hawley
• GATT / WTO
▪ History
▪ Reciprocity and non-discrimination
▪ Anti-dumping and countervailing duties
▪ Non-tariff barriers
• Regional trade liberalization
• US-China trade war

▪ Cause
▪ Features
▪ Consequences 3
Great Depression
• One of the world’s worst economic downturn in the 1930s
• Started in the United States but eventually hit the whole

world
▪ Ended the Roaring Twenties
• Worldwide gross domestic product (GDP) fell by an

estimated 15% between 1929 and 1932
▪ Worldwide GDP fell by less than 1% from 2008 to 2009
4
Stock Market Crash
5
Smoot-Hawley Act, 1930

• An Act implementing protectionist trade policies sponsored by
Senator Reed Smoot and Representative Willis C. Hawley
• Goal: protect American jobs and farmers from foreign competition
• Signed into law on June 17, 1930
• Raised U.S. tariffs on over 20,000 imported goods
• A petition was signed by 1,028 economists in the US asking

President Hoover to veto the legislation
▪ Hoover yielded to influence from his own party and business
leaders and signed the bill
6
US Tariff Rate over Time
7
Let’s watch a video.
8
Retaliation
• Smoot-Hawley triggered retaliation from 25 trading partners

▪ Canada increased tariff on timber, logs, and food
products
▪ Spain increased tariff on oranges and grapes
▪ Mexico, Cuba, Australia…
• Foreign exchange controls and currency depreciation to

achieve grater trade surplus
9
Unemployment in the US
Source: Wikipedia
10
Trade Volume after Smoot-Hawley
11
Beggar-Thy-Neighbor
• Protectionist trade policies are beggar-thy-neighbor:

▪ Economic policy through which one country attempts to
remedy its economic problems by means that tend to
worsen the economic problems of other countries
• The consequences can be illustrated by the prisoner dilemma

in game theory
▪ A simple model of two countries
▪ Each country has two choices: high tariffs or low tariffs
12
Prisoner’s Dilemma
High Tariff Low Tariff
High Tariff (5, 5) (11, 3)
Low Tariff (3, 11) (10,10)
• Each entry represent the income of the two countries

▪ (US, Canada)
• Each row represents US’s choice
• Each column represents Canada’s choice
• Equilibrium: neither player (country) has incentive to deviate

13
John Nash
Source: Wikipedia 14
Multilateral Trade Liberalization

• GATT (General Agreement on Tariff and Trade)
▪ A legal agreement between countries
▪ Initiated in 1947 and succeeded by WTO (World Trade

Organization) in 1995
▪ Achieved substantial tariff reductions through rounds of

negotiations
• Two principles of GATT/WTO

▪ Reciprocity
▪ Non-discrimination
• Tariffs: most favored nations
• Non-tariff barriers: national treatment
15
Most Favored Nations
• Most favored nations (MFN)

▪ If GATT members granted lower tariffs to another
member, it had to do the same for all other members
▪ “Favor one, favor all”
▪ One of the two pillars of non-discrimination
▪ MFN tariffs: tariff rate imposed on ALL other member

countries’ imports
• Exceptions: preferential trade agreements (more details later)
16
Trump’s Confusion
Biden personally led the effort to give China permanent,

most-favored nation status, which is a tremendous advantage
for a country to have. Few countries have it. But the United
States doesn’t have it. Never did. Probably never even asked
for it, because they didn’t know what they were doing.
17
GATT’s Success
• 1964-67, Kennedy Round
▪ Focus shifted from product-by-product format to across-
the-board format
▪ Tariffs on manufactured goods cut by average of 35% to
average ad valorem level of 10.3%
• 1973-79, Tokyo Round

▪ Tariff rates cut across board from 7% to 4.7%
▪ Tariffs so low that they are no longer a barrier to trade in
industrial countries
• 1986-1993 – Uruguay Round

▪ Tariffs eliminated entirely in several sectors
▪ “Tariffication”: eliminate quotas and other forms of trade
barriers and only use tariffs instead
18
Changes in World Trade over Time
https://www.wto.org/english/res_e/statis_e/tra
19
de_evolution_e/evolution_trade_wto_e.htm
GATT/WTO Negotiating Rounds
• Doha Round: 2002 –

▪ Goal: further reducing trade frictions
▪ Need from developing countries is acknowledged
▪ Center of debate: large reductions in developing

countries’ industrial tariffs in exchange for greater access
to agricultural markets of rich nations
▪ Last straw: disagreement on Special Safeguard

Mechanism
• A measure designed to protect poor farmers by
allowing countries to impose a special tariff on
certain agricultural goods in the event of an import
surge or price fall
20
Disagreement on Special Safeguard Mechanism
• Disagreement among WTO members over:

1. The amount imports must increase before additional
protection would be permitted;
2. The amount tariffs could be increased; and
3. How long they could be maintained.
• India and some developing countries: additional 30% tariff

triggered by import rise of 10%
• United States and the developed countries: additional 15% tariff

triggered by import rise of 40%
21
2008 Geneva Meeting of Doha Round
• US representative:
▪ “Every country in the room accepted it except one;
subsequently, all of us showed flexibility except one.”
• Indian representative:
▪ “The most important thing was the livelihood security,
the vulnerability of poor farmers, which could not be
traded off against the commercial interests of the
developed countries.”
22
Discussion: what is your opinion

regarding the disagreement on
special safeguard mechanism?
Should the Doha Round of
negotiation be revived?
23
Bound Tariffs
• GATT/WTO member countries negotiate bound tariffs: the

maximum MFN tariff level for a given product
• If one WTO member raises applied tariffs above their bound level,
other WTO members can
▪ take the country to dispute settlement
▪ request compensation in the form of higher tariffs of their own
• The gap between the bound and applied MFN rates is called
the binding overhang or tariff water
▪ Small on average in industrial countries and often fairly large
in developing countries
24
Dumping and Antidumping Duty
• Dumping: a company exports a product at a price lower than

the price it normally charges on its own home market
• WTO does not judge whether dumping is unfair competition,

but disciplines anti-dumping actions
• Anti-Dumping Agreement
▪ allows governments to use antidumping duties against
dumping where there is genuine (“material”) injury to the
competing domestic industry
▪ provides methods to calculate a product’s “normal value”
25
Dumping Charges Against China
• The main way to calculate “normal value” is based on the

price in the exporter’s domestic market
• China is not a market economy when entering WTO
• WTO members were allowed to use other countries’ price

data in calculating China’s costs
▪ Trading partners felt they couldn’t rely on Chinese price
data when determining what Chinese products actually
cost to make.
▪ Antidumping duties from US and EU
• China contended in the WTO and won the majority of cases

26
Countervailing Duty
• WTO disciplines the use of subsidies

▪ One country’s subsidies can hurt a domestic industry in
an importing country or rival exporters from another
country
• Countervailing duty can only be charged after the importing

country has conducted a detailed investigation and shown
that
▪ The subsidy has an adverse effect on its interests
• Least-developed countries and developing countries with

less than $1,000 per capita GNP are exempted
27
GATT/WTO and Non-Tariff Barriers
• “Tariffication”
• National treatment: imported products must be treated the

same as domestic products, at least after entering the
customs territory
▪ The other pillar of the non-discrimination principle
▪ Intended to ensure that tariff reductions would not be

circumvented through the substitution of policy
instruments
▪ Most powerful weapon to deal with regulatory protection

in the GATT era
28
The Case of Brazilian Retreaded Tires
29
The Case of Brazilian Retreaded Tires
• Brazil banned the import of retreaded tires in 2000

▪ Life of a retreaded tire is generally shorter, ultimately leading
to the faster accumulation of waste tires
▪ Brazil claimed that such accumulation of discarded tires
would create health and environmental hazards
• The EC complained: Brazil’s ban was disguised protectionism
• WTO’s ruling:
▪ “The restriction …… has thus operated to the benefit of
domestic retreaders, while the fulfilment of the purpose for
which it has been justified is being significantly undermined”
30
Tuna – Dolphin Case
Source: National Oceanic and Atmospheric Administration 31

• In the Pacific Ocean, yellowfin tuna often swims beneath

schools of dolphins.
• When tuna is harvested with purse seine nets, dolphins are

trapped in the nets.
• In 1990, US banned yellowfin tuna imports from Mexico

because they do not meet the US dolphin protection
standards
• Mexico complained to GATT in 1991
32
• Key questions:
1. can one country tell another what its environmental
regulations should be?
2. do trade rules permit action to be taken against
the method used to produce goods (rather than the
quality of the goods themselves)?
• GATT’s ruling
1. “product” versus “process”: US could not embargo
simply because Mexican regulations on the way tuna
was produced
2. “extra-territoriality”: US cannot take trade action for
the purpose of attempting to enforce its own domestic
laws in another country
33
TBT/SPS Agreement under WTO
• The Technical Barriers to Trade (TBT) Agreement

▪ Ensure that technical regulations, standards, and
conformity assessment procedures are non-
discriminatory and do not create unnecessary obstacles to
trade
• Agreement on the Application of Sanitary and Phytosanitary

Measures (the "SPS Agreement")
▪ regulations must be based on science and should be
applied only to the extent necessary to protect human,
animal or plant life or health
• The use of international standards are encouraged

34
Regional Trade Liberalization
• The impasse of the Doha Round caused many countries to

turn to regional trade agreements
• Definition from the WTO

▪ Regional trade agreements (RTAs) are defined as
reciprocal trade agreements between two or more partners
▪ Include free trade agreements and customs unions
• Exceptions to MFN
▪ RTA members impose lower barriers to trade within group
than with nonmember nations
35
Bound, MFN, and Preferential Tariffs
Source: https://wits.worldbank.org 36
Free Trade Agreements
• Popularized by the success of North American Free Trade

Agreement (NAFTA)
▪ USA, Canada, and Mexico
• (Almost) all tariff barriers removed among member countries
• Example: Cars manufactured in Mexico and exported to the US

▪ Zero tariff if the origin of the car is a NAFTA member country
▪ Regional value content when determining country of origin
• More than 300 today

▪ Covers more than half of international trade
37
Singapore FTAs
Source: ie.enterprisesg.gov.sg/ 38
Mega FTAs
• Characterized by their large membership and shares of world

GDP and world trade
▪ Regional Comprehensive Economic Partnership of East Asia
(RCEP)
▪ the Trans-Pacific Partnership (TPP)
▪ the Trans-Atlantic Trade and Investment Partnership (TTIP)
• Emerged in part, out of frustration with the Doha Round talks
• Include ``beyond-the-border” regulatory and non-tariff measures

in addition to tariffs
▪ Regional value content requirement now easier to fulfil
39
RCEP
https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-
in-force/regional-comprehensive-economic-partnership-rcep/rcep-overview 40
Custom Union
• Custom union: free trade agreements with common external tariffs
41
European Union
• European Union (EU) is more than a custom union
• Free mobility within EU
• All non-tariff barriers eliminated

▪ Mutual recognition: EU countries accept products
lawfully sold in another EU country unless very specific
conditions are met
• Common agricultural policy
• Common currency
42
US-China Trade War
43
Made in China 2025
• Issued by China’s State Council in 2015

▪ Addressing China’s “big yet not powerful” manufacturing
weakness
▪ Highlights green manufacturing and high-end equipment
manufacturing as future directions
• Goal: raising domestic content of core components and

materials to 40% by 2020 and 70% by 2025
▪ Calls for financial and fiscal support from the state
• US is very concerned
▪ 70% “self-sufficiency” may violate WTO rules
▪ Technological transfer for market access hurt US firms
44
45
Source:https://www.timesrecord.com/articles/opinion/cartoon-tariff-man/
46
Five Stages of Trade War
47
Source: PIIE
U.S.-China Phase One Deal (Effective Feb 14, 2020)

• China committed to increase purchases of U.S. products and
services by at least $200 billion over the next two years
▪ $77.7 billion in additional manufacturing purchases
▪ $52.4 billion in additional energy purchases
▪ $37.6 billion in services
▪ $32 billion additional purchases of agriculture products
• Tariffs
▪ Tariff on $120 billion Chinese goods (imposed Sep, 2020) cut
half to 7.5%, 25% tariff on $250 billion worth of Chinese
goods unchanged
▪ No mention of China committing to cut its tariffs
• Commitments by China
▪ Improve property right protection
▪ Eliminate pressure for foreign companies to transfer technology
to Chinese firms in exchange for market access (quid pro quo)
48
Trade War in Biden Administration
• When Joe Biden defeated Donald Trump and became the U.S.
president in Jan 2021, the new administration
▪ Kept the tariffs on Chinese goods imposed by Trump
▪ Expected China to fulfil the Phase One Deal
• No meaningful negotiations with China after Phase One Deal
• July 2022: inflation worsened by the Russia-Ukraine War

▪ Discussed within the Biden administration about removing
tariffs on some Chinese goods and demanding China to do
the same thing
▪ China refused to cooperate
49
Phase One Deal Not Fulfilled
Source: PIIE
50
Some Interesting Facts
51
Source: PIIE
USD – RMB Exchange Rate
Source: xe.com
52
Source: PIIE
53
54
Let’s watch a video.
55

• Vietnam’s trade surplus with the United States in 2019 widened to
$46.98 billion last year from $34.87 billion a year earlier
• However, not all exports from Vietnam are “made in Vietnam”

▪ Illegitimate transshipment: shipments of products from China
that pass through Vietnam and are relabeled as Vietnamese to
avoid U.S. tariffs.
▪ Rules of origin are not strictly enforced
• Example: Vietnamese electronics maker Asanzo

▪ Televisions were almost entirely made from Chinese imports
▪ One of the most important tasks of the workers in the Vietnam
plant was to remove "made in China" from a sticker placed on
every LCD panel imported from China
56
Who is paying?
57
Americans are paying!

• Fajgelbaum, Goldberg, Kennedy, Khandelwal (2019)
▪ Complete pass-through of U.S. tariffs
▪ Imports from targeted countries declined 31.5% within
products, while targeted U.S. exports fell 11.0%
▪ Tradeable-sector workers in heavily Republican counties
were the most negatively affected by the trade war
• Amiti, Redding and Weinstein (2019)

▪ Full incidence of the tariff falls on domestic consumers
▪ A reduction in U.S. real income of $1.4 billion per month
by the end of 2018
• Amiti, Redding and Weinstein (2020)

▪ Using another year of data including significant
escalations in the trade war, we find that U.S. tariffs
continue to be almost entirely borne by U.S. firms and
consumers 58
Quiz Time
https://www.wooclap.com/ECON113L5
After Class Discussion
• Discussion question: What do you think of the US-China trade

war? Is it benefiting or hurting the interests of Singapore and
other Southeast Asian Countries?
• Please read this week’s supplementary materials on Elearn
• Discussion at the beginning of next week’s class
60

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SMU Classification: Restricted

ECON113: ECONOMICS OF GLOBALISATION

2022 – 2023 Term 1

Recap from Last Week

• Discussion question: Consider the examples discussed in this

• Regional trade liberalization

• US-China trade war

• One of the world’s worst economic downturn in the 1930s

• Started in the United States but eventually hit the whole

• Worldwide gross domestic product (GDP) fell by an

Stock Market Crash

Smoot-Hawley Act, 1930

• Goal: protect American jobs and farmers from foreign competition

• Signed into law on June 17, 1930

• Raised U.S. tariffs on over 20,000 imported goods

• A petition was signed by 1,028 economists in the US asking

US Tariff Rate over Time

Let’s watch a video.

• Smoot-Hawley triggered retaliation from 25 trading partners

▪ Spain increased tariff on oranges and grapes

▪ Mexico, Cuba, Australia…

• Foreign exchange controls and currency depreciation to

Trade Volume after Smoot-Hawley

• Protectionist trade policies are beggar-thy-neighbor:

• The consequences can be illustrated by the prisoner dilemma

▪ Each country has two choices: high tariffs or low tariffs

• Each entry represent the income of the two countries

• Each row represents US’s choice

• Each column represents Canada’s choice

• Equilibrium: neither player (country) has incentive to deviate

Multilateral Trade Liberalization

▪ Initiated in 1947 and succeeded by WTO (World Trade

▪ Achieved substantial tariff reductions through rounds of

• Two principles of GATT/WTO

Most Favored Nations

• Most favored nations (MFN)

▪ “Favor one, favor all”

▪ One of the two pillars of non-discrimination

▪ MFN tariffs: tariff rate imposed on ALL other member

• Exceptions: preferential trade agreements (more details later)

Biden personally led the effort to give China permanent,

• 1973-79, Tokyo Round

• 1986-1993 – Uruguay Round

Changes in World Trade over Time

GATT/WTO Negotiating Rounds

• Doha Round: 2002 –

▪ Need from developing countries is acknowledged

▪ Center of debate: large reductions in developing

▪ Last straw: disagreement on Special Safeguard

Disagreement on Special Safeguard Mechanism

• Disagreement among WTO members over:

• India and some developing countries: additional 30% tariff

• United States and the developed countries: additional 15% tariff

2008 Geneva Meeting of Doha Round

Discussion: what is your opinion

• GATT/WTO member countries negotiate bound tariffs: the

Dumping and Antidumping Duty

• Dumping: a company exports a product at a price lower than

• WTO does not judge whether dumping is unfair competition,

Dumping Charges Against China

• The main way to calculate “normal value” is based on the

• China is not a market economy when entering WTO