The Political Economy of International

Trade
Chapter 5

© McGraw Hill Companies, Inc., 2000

 EU-US and Beef
 1989 - EU bars growth hormone treated beef.
 US exports decline form $231mm in ‘88 to
$98mm in ‘94.
 With other countries, US files complaint to WTO.
 US wins (1998) - WTO Panel
declares ban to be illegal.
 EU reluctant to comply and
appeals, but loses the appeal.
 1999 - US threatens to raise
tariffs on hundreds of EU products.
© McGraw Hill Companies, Inc., 2000 5-1
 US Targets EU
 Beef  Soups and Broths
 Pork  Truffles
 Sausages  Mineral Water
 Corned Beef  Cut Flowers
 Roquefort Cheese  Yarn
 Chocolate Products  Electric Hair Clippers
 Mustards  Motorcycles and
 Chewing Gum Mopeds
© McGraw Hill Companies, Inc., 2000 5-2
 Trade Policy and Politics
Protecting jobs and industries:
emerging industries.
Increasing exports.
National security.
Retaliation.
International product domination:
New trade theory and subsidies.
© McGraw Hill Companies, Inc., 2000 5-3
 Instruments of Trade Policy
Tariffs
Tariffs - oldest form of trade policy
Specific
ad valorem
Good for government
Good for producers
But reduces efficiency
Bad for consumers
© McGraw Hill Companies, Inc., 2000 5-4
 Instruments of Trade Policy
Subsidies
A payment to a domestic producer.
Cash grants
low-interest loans
tax breaks
government equity participation in the
company
• Airbus
Subsidy revenues generated from taxes.

© McGraw Hill Companies, Inc., 2000 5-5

 Subsidies
(Cash Value)
7
6
5
4
3
Percent
2
1
0
IDC

Japan

Sweden

Ireland
US

W. Ger.
UK

© McGraw Hill Companies, Inc., 2000 5-6

 Subsidies to EC Manufacturers
(Percent of Value Added)
% 16
14
12
10
8
6
4
2
0

Belgium
Spain
Holland

Ireland
GB
Germany
Luxembourg

Italy
France

Greece
Portugal

© McGraw Hill Companies, Inc., 2000 5-7

 Instruments of Trade Policy
Import Quotas and
Voluntary Export Restraints
Import Quota:
Restriction on the quantity of some good
imported into a country.
Voluntary Export Restraint (VER):
Quota on trade imposed by exporting country,
typically at the request of the importing
country.

© McGraw Hill Companies, Inc., 2000 5-8

 Results of Japanese VERs
Benefits producers by limiting import
competition
Japan - limited to 1.85 mm vehicles/year
Cost to consumers - $1B/year between ‘81 - 85.
Money went to Japanese producers
in the form of higher prices.

© McGraw Hill Companies, Inc., 2000 5-9

 Instruments of Trade Policy
Local Content Requirements
 Requires some specific fraction of a good to be
produced domestically.
Percent of component parts.
Percent of the value of the good.
 Initially used by developing countries to help shift
from assembly to production of goods.
 Developed countries (US) beginning to implement.
 For component part manufacturer, LCR acts the
same as an import quota.
 Benefits producers, not consumers.
© McGraw Hill Companies, Inc., 2000 5-10
 Instruments of Trade Policy
Antidumping Policies
Defined variously as:
Selling goods in a foreign market below
production costs.
Selling goods in a foreign market below fair
market value.
Result of:
Unloading excess production.
Predatory behavior.
Remedy: seek imposition of tariffs.
© McGraw Hill Companies, Inc., 2000 5-11
 Instruments of Trade Policy
Administrative Policies
Bureaucratic rules designed to make it
difficult for imports to enter a country.
Japanese ‘masters’ in imposing rules.
Tulip bulbs.
Federal Express.

© McGraw Hill Companies, Inc., 2000 5-12

 Annual Cost to American
Consumers for Import Protection
$ Millions
30
Textiles
25

20
Consumer Losses
15 Producer Gains

10
Automobiles Dairy
5
Meat Sugar
0

© McGraw Hill Companies, Inc., 2000 5-13

Political Arguments for Intervention
Protecting jobs and industries.
VERs.
National security.
Defense industries - semiconductors.
Retaliation.
Protecting consumers.
Furthering foreign policy objectives.
Helms-Burton Act.
Protecting human rights.
MFN.
© McGraw Hill Companies, Inc., 2000 5-14
 National Security
World Semiconductor Production
60

50

40
Japan
30
USA
20

10

0
1974 76 78 80 82 84 86 88

© McGraw Hill Companies, Inc., 2000 5-15

 Retaliation
US Trade Sanctions
Partial List
 Afghanistan Italy
25
 Burma Libya
20
 Canada Nigeria
15  China N. Korea
New
10 Sanctions  Cuba Pakistan
5  India Saudi Arabia
 Iran Sudan
0
98
95

97
1993

 Iraq Syria
© McGraw Hill Companies, Inc., 2000
 Yugoslavia
5-16
 Retaliation
Helms-Burton Act
1996.
Allows American to sue foreign firms that
use property in Cuba confiscated from them
after the 1959 revolution.
Backlash
Violates a state’s sovereignty.
Also passed the D’Amato Act - Libya and
Iran.
© McGraw Hill Companies, Inc., 2000 5-17
 Economic Arguments for
 Infant industry. Intervention
 Oldest argument - Alexander Hamilton, 1792.
 Protected under the WTO.
 Only good if it makes the industry efficient.
• Brazil auto-makers - 10th largest - wilted when protection eliminated.
 Requires government financial assistance.
• If a good investment, global capital markets would invest.
 Strategic trade policy.
 Government helps raise national income if first-mover
advantage successful.
 Government intervention may help domestic firms overcome
first-mover advantage of foreign firms.
© McGraw Hill Companies, Inc., 2000 5-18
 The Impact of Subsidies
(Airbus versus Boeing)
Airplane Orders
800
700
600
500
Boeing
400
Airbus
300
200
100
0
85 86 87 88 89 90 91 92 93 94 95 96 97

© McGraw Hill Companies, Inc., 2000 5-19

 Development of the World
Trading System

Intellectual arguments for free trade:

 Adam Smith and David Ricardo.
Free trade as government policy:
Britain’s (1846) repeal of the Corn Laws.
Britain continued free trade policy.
Fear of trade war.

© McGraw Hill Companies, Inc., 2000 5-20

 World War I to World War II
1918 - 1939

Great Depression
US stock market collapse
Smoot-Hawley (1930)
• US had positive trade balance with world
• Foreign response was to impose own barriers
• US exports tumbled

© McGraw Hill Companies, Inc., 2000 5-21

 General Agreement on Tariffs
and Trade
 WWII allies want international organization in trade
arena similar to UN in political arena.
 GATT proposed by US in 1947 as step toward ITO.
1948: Havana Conference.
Failed charter for the International Trade
Organization.
 GATT
19 original members
© McGraw Hill Companies, Inc., 2000 5-22
 GATT
Multilateral agreement: objective is to
liberalize trade by eliminating tariffs, subsidies,
import quotas, etc.
Used ‘rounds’ to gradually reduce trade
barriers.
Generalized System of Preferences
MFN status
Products of LDCs are given duty free
access to IDCs.
© McGraw Hill Companies, Inc., 2000 5-23
 GATT Negotiating Rounds
Growth Under GATT
Geneva 947 23 9.0 %
8.5
Annecy 1949 13 8.0
Torquay 1950-51 38 7.5
7.0
Geneva 1956 26 6.5
6.0
Dillon 1960-62 45 5.5
Kennedy 1964-67 62 5.0
4.5
Tokyo 1973-79 99 4.0
1953-63 1963-73
Uruguay 1986-94 117 World Trade
World Income
© McGraw Hill Companies, Inc., 2000
5-24
 Average Reduction in US Tariff
Rates 1947 - 85
120

Index 100
Pre-Geneva 80
Tariff = 100
60

40

20

Figure 5.1
GATT Negotiating Rounds
© McGraw Hill Companies, Inc., 2000 5-25
 GATT- Disturbing Trends
1980 - 1990s

Increase power of Japan’s economic

machine.
US trade deficit.
GATT circumvented by many
countries.
VERs

© McGraw Hill Companies, Inc., 2000 5-26

 Uruguay Round
Most comprehensive trade agreement in
history.
Created the World Trade Organization.
Impacted:
Agriculture subsidies (stumbling block: US/EU).
Applied GATT rules to services and intellectual
property.
Strengthened GATT monitoring and
enforcement.

© McGraw Hill Companies, Inc., 2000 5-27

 Leading Exporters of Services
90
80
70
$Billions 60
50
40
30
20
10
0
Belgium

Spain

USA
Holland

Japan
Austria

GB
Italy

Germany

© McGraw Hill Companies, Inc., 2000 France 5-28

 GATT Criticisms
Economic theories don’t fit the ‘real world’
model.
US global preeminence has declined.
Shift from cutting tariffs to eliminating
non-tariff barriers angered countries.
‘National Treatment’ or ‘Most Favored
Nation’ status results in inequalities.
© McGraw Hill Companies, Inc., 2000 5-29
 Impact of GATT
Currently, >120 members.
Represents 90% of world trade.
9 of 10 disputes satisfactorily settled.
Tariff reduction from 40% to 5%.
Trade volume of manufactured goods has
increased 20 times.

© McGraw Hill Companies, Inc., 2000 5-30

 World Trade Organization
Umbrella organization for:
GATT
Services
Intellectual property
154 Rue de Lausanne, Geneva
Responsibility for trade arbitration:
Reports adopted unless specifically rejected.
After appeal, fail to comply can result in
compensation to injured country or trade
sanctions.
© McGraw Hill Companies, Inc., 2000 5-31
 WTO -World Policeman?
104 disputes brought to WTO in first three
years.
196 handled by GATT during its 50 year
history.
US is biggest WTO user - 34 disputes.
Big wins - beef - bananas
Big loss - Kodak

© McGraw Hill Companies, Inc., 2000 5-32

 WTO - Leading Victories
Telecommunications
68 countries (90%) of world
telecommunications revenues
Pledged to open their markets
to fair competition
Financial Services
95% of financial services market
102 countries will open, to
varying degrees, their markets.
© McGraw Hill Companies, Inc., 2000 5-33
 Sovereignty an Issue?

Still protected
No change to rights or obligations w/o US
consent
No US laws changed by WTO

© McGraw Hill Companies, Inc., 2000 5-34